Bank fraud cuffs on Zoom boss for money laundering of over Rs 2,650 cr

Zoom's core business was into engineering and procurement in US, Europe and to some extent in Africa

Of all those who allegedly took the banking system for a ride, very few have shown such ingenuity as Vijay Madanlal Choudhary, director of Zoom Developers Pvt Ltd is reported to have. 

Choudhary was arrested on Wednesday by the enforcement directorate (ED) under the Prevention of Money Laundering Act. It was an elaborate scheme that went on for years and Indian bankers apparently ended up holding the can. The fraud committed on 26 banks amounted to over Rs 2,650 crore.

Choudhary always maintained he was not a wilful defaulter and therefore his name should not figure in the list. This is true to a great extent. For when, enforcement agencies looked for his real assets, it turned out to be not more than Rs 150 crore. 

According to the ED, Wednesday’s arrest came on the back of an alleged fraud involving cheating five banks — Punjab National Bank, Syndicate Bank, Canara Bank, United Bank of India and Union Bank. The amount involved was Rs 966 crore. 

The background

Zoom’s core business was into engineering and procurement in the US, Europe and to some extent in Africa. The firm used to get contracts from ‘aggregators’ to scrap a plant and install equipment at sites specified by the plant’s buyers. 

Aggregators used to pay Zoom in phases as the work progressed. The payment was through letters of credit drawn on local banks (say, Standard Chartered, HSBC or any other bank in the UK), which Zoom used to discount on completion of a milestone. When Zoom ran into trouble discounting these letters of credit, some of the aggregators supported Choudhary, vouching for his work ethics in consortium meetings with Indian bankers, lenders said. 

One such aggregator Llondenium Trading, met bankers in May, stating they would continue to employ Zoom and chastised Indian bankers for not coming to the firm’s rescue by honouring guarantees. It has now turned out that most of the aggregators, including London-based Llondenium, were fake firms floated by Choudhary and his family. And most of the contracts were only on paper.

How did Indian banks get into this? 

The intention was to defraud Indian banks. Foreign banks did not incur any loss in the whole affair, even though they issued guarantees in the first place.

Aggregators used to give contracts to Zoom and in return the latter gave bank guarantees from local lenders. The local banks offered guarantees only if Zoom could get counter-guarantees of Indian banks (from foreign branches situated in the same country). This is standard operating procedure for Indian companies working abroad. Thus, Indian lenders were not sceptical.

Choudhary managed to get counter-guarantees from Indian banks by using political connections. Also, a lot of Indian firms were acquiring assets and Zoom was seen as a successful business model, according to bankers. 

As and when the aggregators released money for Zoom, the bank guarantees would lessen by that amount. Though foreign banks had guaranteed the payment, they were not bothered because they had hedged their exposure against counter-guarantees. 

According to an ED statement, the mobilisation advances received from the aggregators were utilised by Zoom among their group firms as investments in share capital, for purchasing properties, paying advances, or as working capital, among others. “It is observed that most of the contracts are on paper (no physical work, services, supply was ever made against them) and no work was done.”

Zoom frequently sought extensions of bank guarantees and counter-guarantees on false grounds. Credit crisis-related slowdown was one of the reasons. 

In most cases, aggregators released payments worth 30-60 per cent of the contract value. However, on observing that the contracts were not concluded for a long time and Indian banks in some cases refused to renew the counter-guarantees, foreign banks became suspicious and started invoking these. While honouring these guarantees and trying to take possession of Choudhary’s local assets, banks realised the fraudster had nothing much to offer. Even in foreign countries, his assets were grossly inflated. 

“Choudhary was the mastermind and with the help of CA Sharad Kabra and others evolved this novel modus operandi — cheating Indian bankers, siphoning off public funds outside the country and acquiring properties, by way of laundering the illegally generated money through a web of companies created in India,” according to the ED statement. Kabra was also arrested with Choudhary.

Web of companies

Vijay Choudhary formed two trusts, one being Beverin Stifung Foundation, and incorporated these in Liechtenstein, of which he was the sole beneficiary. 

Five companies were formed under the trusts in the UK and Switzerland, including Astikor AG and Llondenium Trading, which worked as the so-called ‘aggregators’. Choudhary had formed a total of 

485 companies in his name or family’s or employees. 

According to the ED, 15 firms in the US, three in the UK and Switzerland each, seven in Singapore, four in Germany, nine in the UAE, two in China and two in Zimbabwe were formed. 

“It appears that he has formed the above companies for the sole purpose of laundering the proceeds of the crime,” the ED said.