How India’s Nirav Modis Deceive Their Way into the Diamond Market

Banking fraud, under the table commissions, inflated LoUs and black money – how diamond traders tap into the market.

Nirav Modi is the main accused in an alleged fraud of over Rs 12,600 crore in Punjab National Bank.

(Photo Courtesy: Facebook/Nirav Modi)

Video Editor: Purnendu Pritam
Camera: Abhay Sharma
Actor: Jaivardhan Channey

“You can get a Letter of Undertaking from a bank under three circumstances – either you know someone in the BJP, or you know someone in the Congress, or you know someone higher-up in the bank,” says Jaspreet Singh (name changed) a Delhi-based jeweller who’s been running his family business for the last 35 years.

Between Nirav Modi and his mentor-uncle Mehul Choksi, they probably knew someone in all three places, which helped them get LoUs worth Rs 12,600 crore without fulfilling any necessary banking requirements. The bottom line, however, is Rs 12,600 crore of taxpayers’ money being risked.

While this was the first of its kind fraud, admitted to and exposed by the Punjab National Bank itself, it came as no shock to those in the diamond trade.

“Everything runs on goodwill and cash,” says the 57 year-old Singh, who deals primarily in diamond jewellery. “What Nirav Modi did, is not an usual practice in the diamond market. But there are very few Nirav Modis who get LoUs at the drop of a hat.”

(Photo: Harsh Sahni/The Quint)

Tu Janta Nahi Main Kaun Hoon?

An aam aadmi will have to jump through hoops to get a Letter of Undertaking from a bank.

When I approached a bank to get an LoU, I was asked to give details of my company’s financial transactions over three years, property papers, details of foreign-based diamond company etc. And then I had to wait for another month.

Jaspreet Singh, Diamond Trader

Compare the generosity bestowed upon Nirav Modi and Mehul Choksi. 293 LoUs, worth a staggering Rs 12,600 crore were issued by the Punjab National Bank in 2017-2018 alone! That’s not all. These LoUs were issued way beyond the sanctioned credit limit and without margin (security) money being deposited with the bank.

That Nirav Modi is well-connected in the political, corporate circles is not unknown. “It would’ve been a cakewalk for him,” says Jaspreet Singh .

Nirav Modi(Photo Courtesy: Screengrab of ad)

Under the Table, 2% Cut

Where one falls short of contacts, influence or necessary paper work, a 2% commission to a pliant bank employee also does the trick.

Say, you’re a businessman, looking for LoUs worth Rs 100 crore. But you simply don’t have enough property or cash to put up as a bank guarantee. What is the way out?

A diamond merchant who wasn’t very old in the business did not have much goodwill for his fellow traders to bank on. His only option was to go to the bank, except he needed an LoU worth Rs 5 crore and the property he owned is worth only Rs 3 crore. Ordinarily, no bank would issue an LoU to him. So, the banker he was dealing with, told him that he would fudge the numbers to show that papers of property worth Rs 5 crore have been deposited with the bank in exchange for an LoU. In return, the banker gets his cut.

The going rate of the bribe or “commission”, Jaspreet Singh tells The Quint, is 2% of the total LoU amount. In this way, the trader who owned property worth Rs 3 crore got LoUs worth Rs 5 crore.

Float a Bogus Company

In the Nirav Modi-PNB fraud case, LoUs worth Rs 12,600 crore were issued. So far, the Enforcement Directorate, in its raids on Nirav Modi’s premises has seized diamonds, gold, precious stones and jewellery worth an estimated Rs 5,674 crore.

However, it is still a subject of investigation, whether all the money raised through the LoUs by the Modi-Choksi duo, was in fact, used to purchase diamonds and pearls. The question that the CBI and the ED would be asking is whether any of the money was diverted into other activity.

Some big diamond merchants are known to siphon off borrowed money into offshore shell companies.

They’ll name some family member as a director of this bogus company and transact money in their name.

Jaspreet Singh, Diamond Trader

This is easy considering once the bank has issued the LoU, it is not following up to check what purpose the money is being used for. They are not checking if they’re importing genuine diamonds, lab-grown diamonds which cost half the money or glass pieces.

Was the money borrowed by Modi-Choksi from the Punjab National Bank, on the pretext of importing diamonds diverted elsewhere, will also be probed by the investigating agencies.

Lab-Grown or Genuine Diamonds, Who Knows?

In several Bollywood movies we have seen that a jeweller looks through a small magnifying glass to check whether the stone in his hand is a diamond or just a piece of stone. In moments he decides the fate of the stone. Is it so easy to check whether a diamond is real or made in a laboratory? Well, the answer is no.

Singh shares his experience when he was duped by a diamond merchant in Surat.

I was few years old in this trade. I went to Surat to buy diamonds with my staff who was pretty old in this business. We met with a trader who showed us a single piece of diamond and said that it is mined from a certain place and that its worth is in crores. My staff and I checked the diamond, it looked precious. We bought it. When we sent the same diamond to a laboratory for a certificate, we found out that the diamond was not natural. Since I purchased the diamond in cash, I couldn’t claim my money from the Surat merchant. Ever since I get all diamonds tested in laboratory before purchasing them.

Over the years, several advancements have been made in evolving lab-grown diamonds to make them appear more and more like the real deal. The naked eye cannot distinguish between a mined diamond and a lab-grown diamond. A distinction can only be made if they are rested in a laboratory.

Lab-grown diamonds cost 30% to 50% less than natural diamonds of comparable size. In general practice, seized goods auctioned by the government are known to sell for a much lower price as compared to its market rate. So, to say that about 50% of the LoU value has been recovered would be inaccurate.

Diamond traders rely heavily on Angadias to supply diamonds between Gujarat and Mumbai(Photo Courtesy: rediff.com)

Fake Diamond Certification

Most diamond traders get their diamonds certified in a laboratory. None of these laboratories follow any one standard to authenticate and certify a diamond. But this certificate is a must to decide its value.

“It is usual for these traders to develop a rapport with these lab technicians who can easily manipulate certificates to exaggerate the quality of a diamond,” Singh tells us.

Generally, the manipulation is done by increasing the quality of the diamond by one grade, which will certainly increase the value of the diamond. But you will be shocked to know that I have come across a case where a buyer was duped by a retailer who sold the diamond, calling it a rare piece certified by the laboratory. In reality, it was a replica of a rare piece of diamond.

Tap into the Black Market

Indians have a growing affinity for diamonds. As is clear from the data provided by the Gem & Jewellery Export Promotion Council (GJEPC) that shows a sharp increase in India’s rough diamond imports in the last ten years. In 2007-2008, India imported rough diamonds worth $9,797 million. In 2016-2017, it rose to $17,080 million.

In comparison, the exports of cut and polished diamonds has seen a dip. From $30,574 million in 2010-2011 to $22,784 million in 2016-2017.

The question is – who are all these diamond traders?

In the last several years, we have seen even small diamonds traders enter the market, who don’t necessarily have the means to import these precious stones.

Jaspreet Singh, Diamond Trader

So, how do they get hold of them?

Through the big guys like Modi-Choksi who have white money apparatus (like an LoU, in this case) to leverage. But there are others too, who may not directly be involved in the diamond trade, but charge a commission for routing money through banking channels to import diamonds for these small traders.

Say for example, I’m a small diamond merchant who does not have access to enough white money to import diamonds. What I can do, however, is travel to Antwerp, choose the diamonds I want to import, come back to India. Here, I will approach another company that has the wherewithal to import it for me, in return for a 1% to 2% commission. This importer will make the payment for the diamonds through the banking channels, while I pay in cash.

Jaspreet Singh, Diamond Trader

Most diamond traders transact in cash. Very few, like Modi-Choksi use banking channels to import diamonds.

“But there’s some fraud or illegality at every level of the diamond trade and that’s the only way for it to thrive,” says Singh.

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