Belgian auditor traces fake transactions and imports by Nirav firms

The auditor noted that “the anomaly indicates potentially fictitious import transactions where the actual movement of goods have not taken place”.

Fictitious imports, fake transactions, duplicate invoices, fake employee records. These are some of the findings of Belgian auditor BDO which was commissioned by the Punjab National Bank in February 2018 to conduct a forensic audit of fugitive diamantaire Nirav Modi group’s seven entities/subsidiaries.

In its 329-page draft report, handed by a whistleblower to the International Consortium of Investigative Journalists (ICIJ) which partnered with The Indian Express for a series of reports on the findings of the forensic team, BDO has detailed the sham show being run in the name of a jewellery conglomerate — the final report has been submitted with more annexures.

Tracing fictitious import Belgian auditor in Nirav Modi case traces fake imports, transactions, the report carries details of four Letters of Undertaking (LoUs), amounting to $9.41 million, that did not show up in the Customs database or in the CBS (Core Banking System) of the PNB. All importers and exporters involved in these transactions were entities controlled by Nirav Modi.

In three cases, the material ostensibly imported were pearls and in one instance, cut and polished diamonds. The auditor noted that “the anomaly indicates potentially fictitious import transactions where the actual movement of goods have not taken place”.

Several instances of duplicate invoices (of total value Rs 220.7 crore) were discovered from the Customs database and these too have been listed by BDO as “possibly fictitious transactions”.

There are also sections in the report on the low profitability and low operating expenditure shown by the Nirav Modi partnership firms, all of which indicate the existence of fraudulent business practices. For instance, there are details of how net profits of three Nirav Modi partnership firms (Diamond ‘R’ us, Solar Exports and Stellar Diamond) showed low profit margins ranging from 0.21% to 0.26% in the years 2016-2018. This, the auditor concluded, “raises concern on the genuineness of the business operations of the entities”.

An analysis of the profit and loss accounts of the three firms showed very low manufacturing costs. The total manufacturing expenses shown is 0.02%-0.04% and the auditor noted that “the operations of the firms indicate that the volume of expenses incurred is minimal which does not seem commensurate with the scale and level of operations of these entities”.

Inflated employee cost and potential fake employee costs have also been detected by the auditor. Through use of digital forensics and an analysis of tally records, periods have been detected when the number of employees receiving salary is almost twice the number of employees shown in the attendance register with no unusual increase in production during the same period. Also, the basic salary of unmapped additional employees is almost twice the basic salary of other employees. Just for the period April 2016 to October 2016, this led to an inflation of salary expenditure of Rs 83 lakh.

A scrutiny of attendance records showed the same punch-in and punch-out time which, the auditor said, “indicates potential fake employee records to show manufacturing operations”. Lists and names of employees, wherein this anomaly was noticed between 80%-100% over a three-year period, are included in the report.

On fraudulent practices, the auditor found that Letters of Undertaking (LoUs), central to the scandal, were obtained by the Nirav Modi group, bypassing bank regulations and were “rolled over’’ and “evergreened’’.

For instance, during the review period (2011-2018), the auditor traced 1,380 LoUs valued at Rs 24,991 crore. Of these, 193 LoUs were “misutilised” for settlement of 408 old LoUs valued at Rs 5,926 crore. More importantly, all the 193 LoUs, amounting to Rs 5,947 crore, were declared to be “fraudulent”, according to the team of auditors.

The report also revealed how 33 LoU issued to the Nirav Modi group were “rolled over” for settlement by issuing fresh 24 LoUs amounting to Rs 387 crore by the same LoU-accepting bank. On this aspect, the report noted that since the amount of fresh LoUs was equal to the amount due and the rollover/settlement happened on/near to the due date, the possibility of involvement of the LoU accepting bank cannot be ruled out and should be further investigated.”

A sample of seven LoUs, which were the subject of “evergreening” and issued between 2013-2016, show that the beneficiary banks were branches of the Bank of India in Antwerp, Axis Bank in Hong Kong and the Allahabad Bank in Hong Kong.

The BDO team, looking at the fund trail of the LoUs obtained by the Nirav Modi Group, noted several instances wherein the inflow and outflow of funds occurred the same day. The listing of branches showed that these fast-track transactions occurred in the branches of the Bank of India in Hong Kong, Antwerp and London; the PNB in Hong Kong; the Allahabad Bank in Hong Kong and the Axis Bank in Hong Kong.

According to the auditor, a total of 249 LoU payouts within a single day involved six bank branches, the largest number of entries being for the Bank of India branch in Hong Kong. The BDO, in its recommendation, said that “as more than 40% of the LoUs were from the Bank of India, the possibility of involvement of the LoU accepting bank cannot be ruled out and should be further investigated”.

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