Narendra Modi's toughest task yet: Cleaning India's diamond pipeline

India's diamond trade keeps exhibiting symptoms of money laundering and other illicit activities

That there was something egregiously rotten in India’s diamond trade should have been evident when Finance Minister Arun Jaitley, in Union Budget for 2018-19, doubled the import duty on polished diamonds to five per cent. Within a few days after Jaitley’s Budget announcement, the Narendra Modi-led central government launched a massive crackdown on the businesses of India’s diamond and jewellery magnates Nirav Modi and Mehul Choksi. Both are now facing investigations for alleged money laundering and swindling millions of dollars in bank loans.

Investigators are probing something that has been noticeable in India’s diamond trade – or what is referred to as the diamond pipeline in this business – for a long time now.

According to the Ministry of Commerce and Industry, 14 of every 15 diamonds sold across the world are exported from India. The country is the world’s biggest hub for processing rough diamonds, with Gujarat’s Surat at the centre of the trade.

So, it would occur that if India was producing most of the world’s polished diamonds, it should be meeting its domestic demand without having to import them. Not quite. Government data show that there has been a boom in the import of polished diamonds into India since 2008. This coincides with former finance minister P Chidambaram’s 2007 decision to abolish import duty on polished diamonds. By 2010-11, India’s import of polished diamonds had touched a staggering $21 billion. This represented almost six per cent of India’s total imports during the year. In 2011-12, it was down to $13 billion but still represented three per cent of India’s total imports. Chidambaram’s intention was to reinvigorate the domestic jewellery-making industry. But the move doesn’t seem to have achieved the desired results.

Government information shows that diamond jewellery exports remained relatively flat at around $3 billion until 2010. In 2012, Chidambaram re-introduced a two per cent import duty on polished diamonds.

However, a couple of years before the decision to raise import duty, it seems, diamond and diamond jewellery traders had a premonition of the impending jolt. Diamond jewellery exports almost doubled to $7 billion while the import of polished diamonds saw an explosive growth from 2010 to 2012.

Reports of the time suggested that the Manmohan Singh government had reversed its decision on zero import duty on finished diamonds after being briefed on bank frauds by diamond traders who were using the lenient regime to launder money and evade taxes. In many ways, the present Modi government was faced with a similar predicament. In the first seven months of 2017-18, the import of polished diamonds had crossed $5 billion. This was more than the total import of these polished stones over the past two years and two-thirds of the total imports since the Modi government came to power in 2014.

A diamond pipeline in nations like Israel, where Jews have been traditionally involved in polishing and trading diamonds, is generally straight (barring past exceptions like the underground diamond bank fraud). Rough diamonds find their way to auction centres across the world like Antwerp (where eight of every 10 rough diamond trades take place). These then find their way to centres like Surat in India where they are polished and then exported back to cities like New York, Antwerp and Tel Aviv for sale to buyers and diamantaires. 

In India however, this pipeline doesn’t run straight. The country gets two-thirds of the world’s rough diamonds and then supplies more than 90 per cent of its polished diamonds. Despite producing and exporting most of the world’s polished diamonds, India sees them finding their way back. For instance, in the first seven months of 2017-18, India exported polished diamonds worth $14 billion but ended up importing polished diamonds worth over $ 5 billion.

The Gem and Jewellery Export Promotion Council (GJEPC) however counters these figures and says that imports for the first nine months of FY 18 have come down compared to the same period in FY17:  "The actual imports of cut and polished diamonds for this period stand at US$ 1,527.43 million, and represent a decline of 14.44% as compared to US$ 1,785.17 million for April-Nov 2016."

Since 2014, India’s import of polished diamonds has been almost a 10th of the value of its polished diamond exports. Despite India having its own diamond bourse in Mumbai, traders and jewellers still seem to be importing polished diamonds rather than buying them locally.

Surprisingly, the Bharat Diamond Bourse in Mumbai did not state the volume and value of the parcels of polished diamonds imported through its Precious Cargo Customs Clearance Centre (PCCCC) in its regulatory filings. According to DeBeers, India accounted for six per cent of the global demand for polished diamonds in 2016. A report by Bain & Company, released in December 2017, stated: “India is potentially one of the fastest-growing among all major diamond jewellery markets through 2030. The continued expansion of bridal diamond jewellery and the middle-class will drive demand for diamond jewelry.”

India even ends up exporting rough diamonds to the world while producing virtually none of it. The Bharat Diamond Bourse in Mumbai accounted for more than half of India’s re-export of rough diamonds, at Rs 72 billion. More than 19 million carats of rough diamonds in 1,369 parcels were exported through the bourse’s PCCCC.

How the obfuscation of a relatively straightforward diamond pipeline to and from India abets money laundering and tax evasion was revealed in a 2013 report by the Paris based Financial Action Task Force (FATF) on money laundering. India’s financial intelligence units had furnished information to FATF on some diamond traders whose activities were found to be suspicious.

A case study similar to Nirav Modi and Mehul Choksi’s labelled as a fraud committed under ‘polished diamond trade’ stage was presented as follows: ABC is a company represented by its directors Mr X and Mr Y. The company opened a bank account in June 2011. The aggregate turnover in the account from April 2012 to July 2012 was Rs 321 million. The total turnover in the account from July 2011 to May 2012 was Rs 687 million and the average balance in the account during the period was Rs 0.5 million. This triggered suspicion that the account was being used only for layering of funds. The company had also sent foreign outward remittances of Rs 5.6 million to Hong Kong, ostensibly for the purpose of import of polished diamonds during the period July 2011 to May 2012. The transactions happened between ABC and other diamond traders but the funds never stayed in the account of ABC except on a few occasions when the funds were kept just for a day. Mr X and Mr Y also have their personal savings account with the same bank. An analysis of the transaction activities in this account revealed that the company used to transfer funds through RTGS to real estate companies and stock-trading firms as well. These transactions raised doubts that the company, being active in diamond trade, might be facilitating the integration of funds received from diamond merchants in favour of real estate and share trading companies. The very high turnover followed by low end of day balances in the account shows that the customer was using the banking system only for fund collection and transfers.

As the Modi government tries to crack the whip on black money, it seems to have realised that India’s real enemy in this fight is a glittering stone that has been hyper-sold to mankind for decades as a girl’s best friend.

Clarification: An earlier version of the story carried a quote by Mr Dineshbhai Navadiya, former president of Surat Diamond Association. He has since disowned the quote and therefore it is removed from this updated  copy. The Gem and Jewellery Export Promotion Council's figures for imports are also included in this updated copy.