Money & Banking

LoU funds flowed through Nirav Modi’s American entities, reveals US examiner

Radhika Merwin | Updated on January 11, 2019 Published on August 28, 2018

Round-tripping of high-value diamonds created an appearance of millions of dollars of legitimate transactions, facilitating the movement of funds

The examiner in the United States Bankruptcy Court, appointed to probe Nirav Modi’s ties with three US entities that filed for bankruptcy, has revealed that the US companies were directly involved in transactions related to the multi-billion-dollar Letter of Undertaking (LoU) fraud at Punjab National Bank (PNB). Firestar Diamond Inc, A Jaffe Inc and Fantasy Inc, the three entities in question – controlled by Nirav Modi – had filed for Chapter 11 bankruptcy protection in the US after the massive fraud came to light in India.

The findings of the examiner in the 170-page report not only supports allegations made by the Indian authorities relating to the massive fraud, but also shines light on the modus operandi by tracing the fraudulent LoU transactions to entities controlled by Modi.

The crux of the purported fraud involves Modi’s alleged creation of sham import transactions to support requests for financing in the form of LoUs from PNB. These transactions allegedly involved the transfer of stones and money at Modi’s direction and without any economic purpose to create the appearance of import transactions to support the fraud. The examiner’s investigation disclosed that the US entities engaged in a large volume of suspect transactions with shadow entities (shell entities created for laundering of funds obtained fraudulently from PNB).

Round-tripping

Interestingly the examiner found evidence of a number of transactions that appear to constitute round-tripping (traded repeatedly to give the appearance of multiple, distinct transactions) of loose diamonds among the Firestar global entities, Modi firms, and the shadow entities.

Investigations by the examiner revealed that six of the LoUs that were issued as part of the alleged fraud were for the benefit of the US companies.

The examiner’s report confirmed that the funds issued in connection with each of these LoUs were received and deposited by the US companies and, in each case, were either returned to Firestar India (all Firestar entities located in India) or used by the three entities in the US or shadow entities.

The report traces one transaction in which an overvalued diamond appears to have been round-tripped between two Modi entities for no purpose other than to obtain LoU financing.

The diamond – a 1.04 carat Fancy Intense Pink Emerald Cut SI2 diamond – appeared in three international transactions with Modi’s US companies within six weeks of each other when no such diamond is known to have existed, according to the records of the most probable public auctions from June 1, 1982, to June 30, 2018.

The modus operandi

The Fancy Intense Pink Emerald Cut SI2 diamond was among a package of 26 fancy-coloured loose diamonds that were shipped on October 4, 2011, from A Jaffe to Diamonds ‘R’ Us (Modi’s firm) in India. Diamonds ‘R’ Us sought an LoU from PNB for $1,921,079 to purchase the stones.

Gokulnath Shetty, the PNB insider charged with aiding Modi in the alleged bank fraud, authorised the issuance of this LoU at the PNB Brady House branch. He did not record the LoU in the CBS, and Diamonds ‘R’ Us did not provide the required collateral.

PNB coordinated with its Hong Kong branch via SWIFT message, which deposited the money into PNB’s Deutsche Bank nostro account in New York. PNB paid A Jaffe from the nostro account on October 13, 2011, for exporting the diamonds.

On the same day, A Jaffe received $1,921,079 from the bank; it transferred $1,832,700 to L/C Collections, an HSBC payment mechanism that acts as an intermediary between transacting parties.

The LoU funds were sent to India for the benefit of Firestar India entities. Thus, a Modi entity received the LoU money under the pretext of legitimate transactions with HSBC and A Jaffe.

The same diamond was purportedly transacted among Modi entities in two other transactions within six weeks.

How did Diamonds ‘R’ Us repay the LoU? According to the report, it was not repaid with money earned from the sale of the diamonds. Instead, it repaid the nostro account and, ultimately, PNB with other misappropriated funds.

Firestar India obtained packing credit loans, (short-term working capital loans), which were improperly utilised, and were diverted to Diamonds ‘R’ Us from Neeshal Merchandising, an Indian company controlled by Nirav Modi’s brother, on the due date of the outstanding LoU.

Published on August 28, 2018
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