New Delhi: Import synthetic diamonds from overseas suppliers at 100 times their value, paid for by bank transactions made through various shell companies in India under the pretext of “payment towards import”. Use the diamonds to make jewellery, and then export it at inflated prices to show marginal profit, effectively turning black money into white. This is the classic modus operandi used to launder money by several diamond jewellery businesses that have now come under the scanner of federal agencies.
Last month, the Enforcement Directorate (ED) conducted search operations under the provisions of the Foreign Exchange Management Act (FEMA), 1999, at the premises of Surat-based M/S Paplaj Foreign Trade LLP, its partners Somabhai Sunderbhai Meena and Ojaskumar Mohanlal Naik, and its associates at various locations in Surat, Vadodara, Mumbai and Pune.
The ED was investigating the company, involved in the import and export of diamonds, for using the diamond trade method to remit an eye-watering Rs 2,800 crore between July 2023 and March 2024.
The firm, M/S Paplaj Foreign Trade LLP, allegedly made large-scale suspicious “outward remittances on account of overvaluation of diamonds”, an ED source said. Allegedly, it mis-declared not only the value of diamonds imported but also the value of studded diamonds in silver rings, which were to be exported as finished goods. The value of the diamonds imported, ED sources said, had an actual value of “only 1 percent of the declared value of each diamond”.
Moreover, according to ED sources, the company had taken limited loans from public banks, while the massive suspicious outward remittances were allegedly paid through various non-existent and bogus shell entities.
A source in the ED said an analysis of the bank account of PFT LLP revealed that the major funds were credited to its accounts from Delhi, Surat, Mumbai, Pune, and Hyderabad through the accounts of entities that were either non-existent at the registered address or bogus.
“This is a classic case of money laundering to convert proceeds of crime into legitimate cash,” the source said. They had received amounts of Rs 2,800 crores from various non-existent entities based in Surat, Delhi, Mumbai, and Pune, and remitted the same to eight entities based in Hong Kong,” the source said.
This is trade-related money laundering, the source added.
“First you show an item worth Rs 10 as Rs 10,010 and send an additional 10,000 out. Later, you show the polished diamonds that you imported as exports and get the remittance back as export proceeds, tax-free and washed into white,” the source further explained.
“Using trade to launder proceeds of crime from black to white, further export remittances will be used to build balance sheets to procure loans. This is how many economic fugitives have functioned in the past,” the source said.
During its raids last month, according to a statement by the ED, incriminating documents and electronic devices were recovered and seized. “During the search, it was revealed that the entities which transferred amounts of Rs 2,800 crore approximately to M/S Paplaj Foreign Trade LLP were shell entities and had provided accommodation entries through a web of complex transactions in the garb of sale-purchase of diamonds,” the statement read.
ThePrint had reached out to PFT LLP for a comment via email.
Overvaluing synthetic diamonds
According to a second source in the ED, companies involved in this kind of money laundering import cheap, synthetic diamonds from firms based in Hong Kong and Dubai under the guise of natural diamonds. The diamonds are usually overvalued by over 100 times to send foreign currency out of India.
“The companies importing diamonds also export jewellery studded with diamonds at a very inflated value to Hong Kong and a few other countries,” the source said.
“While most of the declared inflated value of the imports is remitted out of the country through banking channels, the remittances received for the exports are seen to be only marginal at around 0.2 percent, indicating that this trade has been a cover to launder money outside,” the source said.
Investigations have shown similar approaches in previous cases, where the inflow of money into the importing entity’s bank account takes place through bank transactions by various dummy firms in India, and, then, the cash is laundered from this single bank account to overseas suppliers in Hong Kong under the pretext of payment towards import of ‘diamonds’, officials in the Directorate of Revenue Intelligence (DRI) explained.
In almost all cases, money launderers operate through front companies overseas in a bid to escape enforcement action in India.
Last year, Hong Kong customs unearthed a large-scale transnational money laundering syndicate that had laundered about $65 million to India using the diamond trade.
According to a statement issued by the Ministry of Finance on 29 December last year, HK customs raided eight premises across Hong Kong, including four residential premises and four commercial units, arresting four people suspected to be connected with the case. It arranged to freeze $1 million in assets held by the arrestees. This action was initiated based on enforcement action taken by Indian customs in India earlier.
(Edited by Sanya Mathur)
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