The Diamond Trail: How India Rose to Global Domination

By Shantanu Guha Ray

If you visit Antwerp, the diamond market of the world, you will see for yourself how Indians have taken over the sleepy Belgian town, where bells in the biggest Hindu temple attract thousands of visitors every evening. Global diamond trade is now on a new chapter, and India is playing an important role in that. Diamonds are the second-largest export commodity from India after mineral fuels. With more than 80 per cent of the world's diamonds being cut and polished in Surat, India has become the processing house for the world's diamonds. But how did we get here?In The Diamond Trail, veteran journalist Shantanu Guha Ray charts the course of India's rise to domination in the diamond industry.

• Language: English
• Publisher: HarperCollins India
• Release date: Jul 15, 2019
• ISBN: 9789353026806

Shantanu Guha Ray

Shantanu Guha Ray is a Wharton-trained journalist who has spent nearly three decades in the profession. He is the India editor of Central European News, a Vienna-based wire agency, and is a regular contributor to Firstpost.

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Preface

Let’s get to the bottom of the case right away. Nirav Modi is somewhere on this planet, his lawyers constantly hoodwinking the courts about their client’s whereabouts. They are following the standard procedure adopted by all fugitives from India: threat to life, poor jail conditions.

They rarely talk about the missing cash.

In faraway New York, lawyers probing the peculiar case of three companies bankrolled by Nirav Modi called one night to offer some interesting details. They had in their possession a huge spreadsheet, titled ‘AR-AP’ and dated 18 January 2018. It had all the details India’s Enforcement Directorate (ED) and the Central Bureau of Investigation (CBI) wanted about the dubious deals of the fugitive diamantaire.

In the corridors of power in the Indian capital, Nirav Modi’s name has caused tremendous tensions, so much so that the all-powerful Prime Minister’s Office (PMO) has even issued an unwritten order that all media outlets should refer to the diamond merchant as Nirav and not ‘Modi’, the surname being a source of tension for the nation’s prime minister, also a Modi.

The Enforcement Directorate officials sat down to explain the details contained in the spreadsheet. It had all the relevant information about Nirav’s illicit business empires and details of how he and his men conned the Punjab National Bank (PNB) to finance sham transactions.

Interestingly, the man who spilled the beans was none other than Nirav’s man Friday, Mihir Bhansali. In his deposition to the US bankruptcy examiner John J. Carney and his team, Bhansali sang like a canary about the dubious operations of Nirav and his men, which were spread across the world, from New York to Antwerp, Dubai to Hong Kong. The man who wanted to shape India’s billion-dollar diamond business had set up scores of shell companies in numerous countries, many virtually working out of suitcases and mailboxes to hoodwink investors and bankers.

On paper, Nirav and his men showed all transactions to be legitimate, while actually pushing fraudulent transactions with shell firms to siphon off cash. In his report, Carney confirmed in detail how Nirav moved millions of dollars from one shell company to another to channel the cash drawn on fraudulent Letters of Undertaking (LoUs) issued by PNB’s Brady House branch in Mumbai. ‘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 contains a column identifying many Shadow Entity employees that were current or former Firestar employees’ the report said.¹

Nirav’s men knew their game was done, their goose cooked. The millions of dollars of purported diamond sales by Nirav’s firm Firestar Diamond Inc. 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. Nirav was at the centre of these transactions, which also involved the movement of stones without any economic purpose in order to create the appearance of import transactions to support the fraud. The deals were big and many companies were involved. As many as ten 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 these high volume transactions with Firestar and two other companies owned by Nirav, which operated out of New York.

And this had been going on for almost a decade.

Consider this incident. In an email dated 8 June 2012, chief financial officer (CFO) of Firestar, Ajay Gandhi, asked Bhavesh Patel and Shyam Wadhwa, both employees of Firestar, for payables to Hong Kong and Dubai. The companies chosen were Firestar, Firestar Diamond International, and A. Jaffe Inc. Gandhi had to pay $1 million to Hong Kong or Dubai; he merely needed a name and the amounts to be logged in the account books. But Patel responded by saying there was nothing open with Dubai; however, Hong Kong was a possibility. Gandhi responded by saying that the money could be routed through some other companies (Pacific, World Diamond etc.). Gandhi considered shadow entities to be fungible sources to legitimize the payment of $1 million. And such transactions continued throughout the year, a reflection of the way Nirav worked.

There were other instances as well. Firestar employees directed the payment of certain shadow entities’ back office expenses, an unusual practice among unaffiliated entities. On 18 March 2014, Gandhi requested that $150,000 be wired from the Firestar account to Unique Diamond for the payment of back office expenses for the period of October 2013 to March 2014. The US investigators 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 in back office expenses. Both Unique and Brilliant were reported on the Firestar books to be customers of the debtors.² Correspondence suggests that these entities were under the shared control of Firestar Global Entities. Like entities within the Firestar organizational 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. In short, it was a fraudulent transaction.

Nirav was sure that he would have to leave India one day, disappearing with thousands of crores swindled by manufacturing sham transactions purportedly to import diamonds and other gems into India using a web of secretly controlled shell entities. So when the bubble burst in 2017, he quietly slipped away.

Unlike the Indian investigators, the US examiner was quick off the mark, obtaining evidence of several transactions that were nothing but attempts to round-trip loose diamonds among the Firestar global entities and shell companies. The investigators reviewed the export invoices and packing lists for diamond transactions made by Nirav’s numerous companies. These listed expensive, coloured and loose diamonds, and showed the same diamonds appearing in multiple shipments among the US-based companies and the shell companies. These diamonds had a high and subjective value, and the shipments at issue often exceeded $1 million. Although the diamonds in the transactions reviewed lacked certification, the distinctive descriptions of these diamonds and the carats provided in the invoices and packing slips gave the examiner a high degree of confidence that certain ‘high-value’, coloured diamonds were, in fact, being round-tripped by Nirav and his men.

A diamond expert corroborated that this sampling of diamonds was round-tripped or non-existent given the exaggerated prices and the likelihood that the same diamonds were used in multiple transactions. Moreover, based on the market at the time of the transactions, the expert wrote in his note that the ‘volume of such diamonds from one entity not well-known for their trading in fancy-coloured diamonds could not exist in their market to generate as many sales’. The US examiner had driven the nail hard into this sham system.

I read through a copy of the US examiner’s report and was astonished at how Nirav conducted his business. There were several, specific diamonds that appear to have been round-tripped in 2011-12. Worse, these transactions were consistent with the LoU scheme 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 cash sought through sham LoUs.

In one case, Firestar Diamond 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 were sent by Firestar India’s Sandeep Mistry to Firestar Diamond International (FDI) US.³ The email from India came with a spreadsheet identifying each diamond in the shipment and the destination to which it was to be shipped. Invoices for these exports accompanied the spreadsheet. And it was this very spreadsheet, I was told by ED officials, which landed on the desk of US investigators.

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 once again exported the diamond to Fancy Creations Company Ltd for $1,156,043, which was more than the original inflated price. Finally, two weeks later, one of Nirav’s US-based companies, A. Jaffe, sold it to World Diamond for $1,218,991.⁴

Similarly, FDI reportedly exported a 1.04-carat Fancy Intense Pink Emerald Cut SI2 twice and imported it once within a six-week period. The diamond’s first trip was 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, Nirav’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, FDI exported a 15.55-carat Fancy Vivid Yellow Cushion VS1 diamond and imported it once over the course of approximately twenty-seven days. Records reveal that the diamond was shipped through FDI, Firestar India and the 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 coloured 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 Nirav Modi-related entities for a $12,800 profit, less shipping and other transactional costs that would further reduce the profit’ the report noted.⁵

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 received 370 LoUs, Hong Kong-based Sino Traders received 333 LoUs, UAE-based Tri Color Gems FZE received 320 LoUs, Sunshine Gems Limited received 273 LoUs, Diadems FZC received 243 LoUs, Fancy Creations received 168 LoUs and Unity Trading FZE received 167 LoUs.

Shadowy game

On 16 February 2017, Ajay Gandhi, CFO of Firestar, 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.⁶

The investigation has revealed that Gandhi had also received communication on his personal email account from Nirav Modi’s personal assistant in India wherein 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 states that in UAE, Universal Fine Jewellery FZE was incorporated in 2010 with an office at Saif Zone in Sharjah. The Universal Fine office comprises a single-desk space in a two-floor building. The site visit revealed that Apollo Energy FZE occupies the office listed under the name of Universal Fine. It was locked, and the investigators learnt from the EZ licensing department that Universal Fine had ceased operations in May 2018.

Internal documents indicate that Nirav’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-based entity with connections to the Nirav Modi family, wrote to Bhansali and Nirav’s partner Hemant Bhatt using his personal email address. 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 and his entities were transacted.⁷

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 listed as the owner and manager of Fancy, 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.

Nirav Modi is no longer known as the flashy diamond merchant. He is now a fugitive in the eyes of the law, in the eyes of the investigating agencies, even in the eyes of those who knew him. Sadly, no one wants to talk about him in India, or in the diamond hubs of Antwerp and Dubai.

After the CBI filed a first information report (FIR) in the Rs 14,000-crore PNB scam on 31 January 2018, Nirav continued to work as he could not let his business die. He wanted to reach out to some editors in India, but his lawyers advised him against it. He was told that the CBI had filed an FIR against his uncle Mehul Choksi on 15 February 2018, but he remained unperturbed. Some said he was in California, some said he was in Hong Kong and some said he was in London. He watched his favourite programmes and movies on Netflix and met up with Ajay Gandhi, his CFO, and brand development head Tatyana Waldman to ponder over future plans. A show was planned by A. Jaffe for 30 May 2018 to showcase bridal, designer and diamond jewellery at an exhibition in Las Vegas. Nirav asked family friends Samuel Sandberg and Sumoy Bhansali to represent him at the show. What many did not notice was that A. Jaffe was named in the charge sheet filed by the CBI as one of the seventeen companies controlled by Nirav to show bogus purchases and launder cash abroad for round-tripping of huge sums in the Rs 14,000 crore PNB scam.

I spoke to officers in the CBI and Enforcement Directorate and they showed me documents that reflected how approximately Rs 100 crore was moved from the US to India between January 2017 and February 2018 and subsequently to another country through shell companies. Large amounts were transferred to Firestar International Private Limited, FIPL Majors and Surat-based Firestar International.

Let us take a look at the web Nirav created. Delaware-based Fantasy Inc. is a wholly-owned subsidiary of Firestar Diamond Inc., which is a wholly-owned subsidiary of Firestar Group Inc., which in turn, a wholly-owned subsidiary of Synergies Corporation. And Synergies Corporation is a wholly-owned subsidiary of Firestar Holdings Limited, Hong Kong, which in turn is a wholly-owned subsidiary of Firestar International Limited, India.

Who helped him spin this web? Top bankers, now all accused in the CBI charge sheet: managing director and CEO of PNB, Usha Ananthsubramanian, executive directors K.V. Brahmji Rao and Sanjiv Sharan, and general manager Nehal Ahad were all aware of this fraud involving PNB DFIC, Dubai, and Indian Overseas Bank, Chandigarh. They did not stop Nirav and facilitated the continuance of the fraud by other accused public servants, resulting in wrongful loss to the bank.⁸

Nirav, it appeared, had struck some quiet deals.

On the balmy afternoon of 10 April 2018, senior officials of the Mumbai-based Gems and Jewellery Export Promotion Council (GJEPC)—a quasi-government body that works with the commerce ministry on issues relating to trade—were alerted by officers of Mumbai’s Intelligence Bureau that Nirav Modi, worried his arrest was imminent, was quietly selling off some of his international assets.

The disgraced diamond merchant, then holed up in Hong Kong with his lawyers, had sold off three of his companies to Signet Jewellers, the world’s largest retailer of diamond jewellery, and Independence Stores, which has retail outlets across the US. The three companies Nirav sold provided jewellery Firestar, Fantasy and A. Jaffe—all controlled by Niravi—sold to customers across the US and UK. Firestar, Fantasy and A. Jaffe filed for bankruptcy in a US court in February 2018. According to information filtering out of the US, where Nirav ran some of his biggest operations, two of his companies, Firestar and Fantasy, had annual sales of about $90 million between them. The two companies had about $33.25 million worth of jewellery on consignment with customers.

The sale, as per Indian law, was illegal, because Nirav—against whom there is a non-bailable warrant issued by the Enforcement Directorate—is not allowed to sell his companies or their products without seeking prior permission from the Indian government or the GJEPC, especially at a time when Indian investigating authorities have seized and frozen his assets, including factories in India that produced most of the jewellery, to settle the massive fraud he allegedly caused to a host of Indian banks, among them country’s second largest, PNB. In the Indian capital, the ministry of home affairs was contemplating issuing an extradition notice through the