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PNB fraud: US bankruptcy examiner unravels Nirav Modi's sham business deals through fraudulent LoUs

Yatish Yadav
The US examiner has obtained evidence of a number of transactions that appear to constitute round-tripping of loose diamonds among the Firestar global entities and the shell companies floated by Nirav Modi.

New Delhi: A spreadsheet titled 'AR-AP (Jan 18)' nailed the shady deals of fugitive diamantaire Nirav Modi, who built an illicit business empire by conning the Punjab National Bank (PNB) to finance its sham transactions.

The document recovered from Modi's man Friday Mihir Bhansali by US bankruptcy examiner John J Carney and his team contains business transactions between Modi-owned Firestar Diamond International and shadow entities in Hong Kong and Dubai.

Firstpost had earlier reported on 13 August exposing Nirav Modi's fraudulent transactions with shell firms, which were raised to siphon off money under the garb of legitimate business transactions. Carney's report confirms that millions of dollars were moved from one entity to another to channelise the money drawn on fraudulent Letters of Undertakings (LoUs) issued by PNB Brady House Branch.

"The examiner found this spreadsheet significant in that it listed no customers known to be legitimate, foreign or otherwise, but only shadow entities. The spreadsheet also contains a column identifying many Shadow Entity employees that were current or former Firestar employees," the report said.

The millions of dollars of purported diamond sales by Firestar to various shadow entities flowed from India into the US and in numerous instances were returned to Firestar in India or used to fund its operations, including making payments on loans made by banks in the US. These transactions allegedly involved the transfer of stones and money at Nirav Modi's direction and without any economic purpose, in order to create the appearance of import transactions to support the fraud.

At least 10 shell firms- Auragem Company Limited, Brilliant Diamonds Limited, Empire Gems FZE, Eternal Diamonds Corporation Limited, Fancy Creations, Pacific Diamonds FZE, Tri Color Gems FZE, Unique Diamond and Jewellery, Universal Fine Jewellery and Vista Jewellery RJE, were involved in highest volume transactions with Firestar Diamond and Modi's two other companies.

For example, in an email dated 8 June 2012, Firestar Chief Financial Officer Ajay Gandhi asked Bhavesh Patel and Shyam Wadwha, two Firestar employees, for payables to Hong Kong and Dubai -€" for companies Firestar, Firestar Diamond International, and A. Jaffe Inc because he needed to pay $1 million to Hong Kong or Dubai and hence needed name and the amounts only.

Subsequently, Bhavesh Patel replied saying there was nothing open with Dubai, however, Hong Kong was the possibility. Gandhi responded by saying that it could be Pacific, World Diamond etc., too. Gandhi's goal was to send $1 million from Firestar International to Hong Kong or Dubai, and for that he considered shadow entities as fungible sources to legitimise such a payment.

Firestar employees also directed payment of certain shadow entities' back-office expenses, which is an unusual practice among unaffiliated entities. For example, on 18 March 2014, Ajay Gandhi requested that $150,000 be wired from Firestar account to Unique Diamond for the payment of back-office expenses for the period of October 2013 to March 2014.

The investigators in the US also identified a $150,000 disbursement from Firestar to Unique Diamond on the same day. In October 2010, Gandhi wired $220,000 for Unique Diamond's back-office expenses. On 24 October, 2013 a wire was sent from Synergies to Brilliant for $125,000 for back-office expenses. Both Unique and Brilliant were reported on the Firestar books to be customers of the Debtors. Correspondence suggests that these entities were under the shared control of Firestar Global Entities. Like entities within the Firestar organisational structure, the accounts payable for one entity appear to have been available to clear the accounts received by another entity, as needed to satisfy inquiries by auditors or banks.

The greatest-ever swindler

Nirav Modi knew in 2011 that one day he would have to disappear with thousands of crores swindled by manufacturing sham transactions purportedly to import diamonds and other gems into India using a web of more than 20 secretly controlled shell entities.

The US examiner has obtained evidence of a number of transactions that appear to constitute round-tripping of loose diamonds among the Firestar global entities and the shell companies floated by Nirav Modi. They reviewed Modi's numerous companies' export invoices and packing lists for diamond transactions that contained expensive fancy-colored loose diamonds showing the same fancy color diamonds appeaing in multiple shipments among the US-based companies, international Firestar companies, and the shell companies.

These diamonds have a high and subjective value, and the shipments at issue often exceeded $1 million. Despite the lack of certification attached to the fancy-colored diamonds in the loose diamond transactions reviewed, the distinctiveness of the diamond descriptions and carat amounts in the invoices and packing slips provided the Examiner with a high degree of confidence that certain "high-value" fancy-colored diamonds were, in fact, being round-tripped.

The diamond expert corroborated that this sampling of diamonds is likely round-tripped or non-existent given exaggerated prices and the likelihood that the same diamonds were used in connections with multiple transactions. Moreover, based on the market at the time of the transactions, the expert explained, "the volume of such diamonds from one entity not well-known for their trading in fancy-colored diamonds could not exist in their market to generate as many sales," the US Examiner report said.

The report has identified several specific diamonds that appear to have been round-tripped in 2011-12. The investigation determined that these transactions were consistent with the Letter of Undertaking (LoU) scheme being used to inflate diamond inventory and accounts receivables artificially, to justify the need for LoU financing, and to create purchases and sales to validate the movement of money obtained through fraudulent LoUs.

Firestar Diamond reportedly exported a 3.27-carat Fancy Vivid Yellow Orange Cushion Cut SI1 diamond three times and imported it once between 8 August and 13 September 2011, a period of five weeks. Instructions on how to move the diamond came from Firestar India employee Sandeep Mistry to Firestar Diamond International (FDI) USA. The email from India came with a spreadsheet identifying each diamond in the shipment and the destination to which it was to be shipped from FDI. Invoices for these exports accompanied the spreadsheet.

The documents indicate that on 8 August 2011, FDI sold the stone to Fancy Creations Company Ltd for $1,098,802. Approximately three weeks later, Solar Exports, another Nirav Modi firm, exported the diamond to FDI for $183,087€"approximately $900,000 less, although much closer to its actual value. Six days later, FDI exported the diamond back to Fancy Creations Company Ltd for $1,156,043, now in excess of the original inflated price. Finally, two weeks later, Modi's another US-based company A Jaffe sold it to World Diamond for $1,218,991.

Similarly, FDI reportedly exported a 1.04-carat Fancy Intense Pink Emerald Cut SI2 twice and imported it once within six-weeks. The diamond's first trip came on 19 August 2011 when Firestar India sent it to FDI for $608,400. As with the 3.27 carat Yellow Orange Cushion Cut, Sandeep Mistry sent shipping instructions and a spreadsheet accompanied by invoices created in India. Consistent with Mistry's instructions, FDI sold it to SDC Designs LLC for $642,200. Without any sign of a return shipment to the Debtors, Modi's company A Jaffe shipped the same diamond one month later to another in-house entity Diamonds 'R' Us for $682,760.

On two occasions, the FDI exported a 15.55-carat Fancy Vivid Yellow Cushion VS1 diamond and imported it once over the course of approximately 27 days. Records reveal that the diamond was shipped through FDI, Firestar India and shell firm, Eternal Diamonds based in Hong Kong.

The diamond expert noted that such shipments of diamonds were unusual due to the high price of diamonds and low turnover in the market. The fancy colored loose diamonds that appeared on the invoices were overvalued and so large in quantity that the packing slips alone should have raised suspicion.

"For example, 4 October 2011 $1,246,765.60 LoU transaction between Firestar India and FDI, shipping records and related packing lists show that FDI shipped nineteen fancy colored diamonds to Firestar India with a total carat count of 73.70. The export from FDI to Firestar India occurred on 19 September 2011 for $1,246,765.60 and FDI received the payment on 4 October 2011 with the LoU funds.

"Two days before this export, FDI imported the same diamonds from Fancy Creations, a Hong Kong Shadow entity, for $1,233,965. In other words, the records reflect a shipment of more than $1.2 million worth of the same loose diamonds from Hong Kong to the US, then to India over a period of two weeks among Modi-related entities for a $12,800 profit less shipping and other transactional costs that would further reduce the profit," the report noted.

Approximately 1,425 LoUs issued by PNB were primarily for the benefit of shell companies owned by Nirav Modi but posing as exporters. Hong Kong-based Auragems was issued 517 LoUs, UAE-based Pacific Diamonds FZE 370 LoUs, Hong Kong-based Sino Traders 333 LoUs, UAE-based Tri Color Gems FZE 320 LoUs, Sunshine Gems Limited 273 LoUs, Diadems FZC 243 LoUs, Fancy Creations 168 LoUs and Unity Trading FZE 167 LoUs.

Shadowy game

On 16 February 2017, Firestar Chief Financial Officer Ajay Gandhi sent an email with the subject "Foreign Customers plus affiliated customers". The only entities that were listed were shell companies, revealing Nirav Modi's shady business under shadow entities. The email does not list any legitimate international customers and it evidences the fact that Gandhi understood that the listed entities were not independent customers but rather affiliates.

The investigation has revealed that Gandhi had also received communication on his personal email account from Nirav Modi's personal assistant in India where he was instructed to only communicate with her regarding shadow entities on gmail or Panemail.

So, how were these shell companies operating? The investigation report said in UAE, Universal Fine Jewellery FZE was incorporated in 2010 with office at Saif Zone in Sharjah. The Universal Fine office consists of a single desk space in a two-floor building. The site visit revealed that Apollo Energy FZE occupies the office listed for Universal Fine. It was locked, and the investigators learned from the EZ licensing department that Universal Fine ceased operations in May 2018.

Internal documents indicate that Modi's partners exercised control over both Universal and US-based company A Jaffe. For example, on 4 February 2013, Sridhar Krishnan, the manager of SDC Designs, a New York entity with connections to the Nirav Modi family wrote to Bhansali and Modi firm partner Hemant Bhatt using personal email addresses. Krishnan told Bhatt and Bhansali "you should expect 1.4 million in Universal FZE today. Please wire the same to A Jaffe."

Two days later, Bhatt confirmed that Universal had received the funds and that "Empire paid US $1,391,570 to A Jaffe on 5 Feb 2013."Empire" appears to be a reference to Empire Gems, another front on whose behalf Bhatt corresponded. A Jaffe, Universal and Empire Gems appear to be treated as interchangeable sources through which funds for the benefit of Nirav Modi and his entities were transacted.

Fancy Creations was incorporated in June 2010 and has an office at its registered address of Unit B03, 2/F, Summit Building, 30 Man Yue Street, Hung Hom, Kowloon. In a document created by a Firestar employee in 2016, Nilesh Khetani is also listed as Fancy's owner and manager, and a former Firestar employee.

"The office seems to be permanently closed. Investigators confirmed by the pile of junk mail on the floor that the office is unused. Building staff indicated that on rare occasions a Pakistani or Indian person visited the office. The investigators experienced similar results at three alternate addresses. At each location, the security guards did not recognize the company name, and Fancy Creations did not appear on the building directories," the investigation report further added.

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