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Billionaire jewellery designer Nirav Modi, the main accused in the Rs 114-billion fraud at Punjab National Bank (PNB), has been under the scanner of central probe agencies since 2013. An income tax investigation on Modi and his uncle Mehul Choksi revealed unaccounted or unexplained funds to the tune of Rs 49 billion.
PNB executives had opened fraudulent letters of undertakings (LoUs) without authority on behalf of firms belonging to the Nirav Modi group.
The Directorate of Revenue Intelligence (DRI) and the income tax (I-T) department had probed Modi and entities promoted by him between 2013 and early 2017. This is the period when possibly several LoUs were issued by PNB or were in the process of opening in favour of branches of Indian banks abroad for the import of diamonds and pearls.
“It is evident that the PNB saga was not discovered overnight and various authorities, including PNB itself, were aware of the irregularities in the business model adopted by the jewellery firm,” said a banker.
The Central Bureau of Investigation (CBI), which is currently probing the matter, has sought the investigation reports from both the I-T department and the DRI to access additional information, which could help it join the dots, said a CBI source.
Significant incriminating evidence was found during the I-T’s search operations on Nirav Modi and his associates in January 2017. The agency’s voluminous report comprised over 10 kinds of modus operandi adopted by Modi and his firms to evade tax. Business Standard has reviewed a copy of the report.
The report revealed that Nirav Modi’s firms had total cash receipts of Rs 2.52 billion in its retail business. Of this, it had accepted Rs 1.6 billion against the sale of diamond jewellery, which was over and above the sale consideration recorded in the books of accounts.
On the foreign assets front, it was found that Modi was the settlor and beneficiary of the Monte Cristo Trust in Jersey. This was the underlying trust of Monte Cristo Ventures, an entity incorporated in Bahamas. Modi had contested that the trust was never operational and had no assets. I-T officials are in the process of verifying his statement with foreign authorities.
Further, Firestar International, Modi’s flagship company, had received total funds amounting to Rs 2.84 billion between March 2013 and April 2014 from Jade Bridge Holdings and Forcom Worldwide Investments based in Cyprus and Mauritius, respectively.
The report said the “source and creditworthiness” of these funds remained unexplained. However, it said the documents submitted by these foreign entities were prepared at Modi’s office in India.
The agency also found that Firestar had received a separate tranche of foreign funds amounting to Rs 2.71 billion from Singapore’s Islington International, whose beneficial owner is stated to be Modi’s sister Purvi Mehta.
The I-T department, which also investigated Gitanjali Gems, a firm promoted by Mehul Choksi, found that both the Modi and Gitanjali groups were engaged in providing accommodation entries on commission basis. Modi’s firms made bogus purchases to the tune of Rs 3.44 billion, while Gitanjali made bogus purchases of Rs 20.21 billion from three Mumbai-based entities.
Other than these, the I-T report said Modi had not reported international transaction details of Rs 5.15 billion.
The I-T investigation was based on the DRI investigation launched in 2013-14, which had first detected customs duty evasion by Modi and three of his firms.
According to the DRI, all these entities including Modi have allegedly diverted imported, duty-free, high-value diamonds to the domestic market. The DRI then had put a stay on Modi’s export consignments to the UAE, the US, and Canada. Further, it had issued two show-cause notices to Modi and three of its firms and levied a penalty of Rs 371 million.
The agency had then found that cut polished diamonds worth Rs 1 billion were lying in stock against the declared stock of Rs 11 billion. Similarly, the entities declared pearl stocks of worth Rs 1 billion against which the stock they kept was only Rs 40 million.
The whole issue also highlights the role of other banks’ officials in foreign offices. A standard protocol in any money transfer mechanism is two-way communication, experts in the field say. So, by theory, the processing bank must send a query confirming the encashment of PNB’s guarantee. The practice here is PNB will not respond if it is a legitimate transaction. The creation of the transaction trail is important but not necessary.
Sources said at least in one case, an overseas bank had asked for a clarification on payment instructions received, but it is not clear if PNB officials ignored the warning made over a year ago.
PNB’s letter to bank chiefs also pointed out to such a collusion.