Mumbai: Overseas suppliers are importing synthetic diamonds, known as lab-created diamonds, at 100 times their actual value, with payments made through various Indian shell companies under the guise of “payment towards import.” These diamonds are then used to craft jewelry, which is exported at inflated prices to show marginal profits. This scheme has attracted the attention of the Enforcement Directorate (ED) due to its potential use in money laundering, involving numerous diamond jewelry businesses.
The investigation gained momentum following an operation by the Hong Kong Customs department in December 2023. During this operation, customs officers seized a large quantity of suspected synthetic diamonds, a small quantity of natural diamonds, foreign currency cash equivalent to about $1 million, as well as mobile phones, computers, company chops, cheque books, bank cards, bank documents, and trading documents from the residential and commercial premises of four arrestees involved in money laundering through synthetic diamonds.
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 Sunder bhai Meena & Ojaskumar Mohanlal Naik and its associates at various locations in Surat, Vadodara, Mumbai and Pune. The investigation was prompted by information suggesting that M/S Paplaj Foreign Trade LLP had made large-scale suspicious outward remittances by overvaluing the import and export of diamonds.
The ED's findings revealed that M/S Paplaj Foreign Trade LLP had overvalued lab-created diamonds between July 2023 and March 2024 and had received approximately Rs. 2800 crore from various non-existent entities based in Surat, Delhi, Mumbai, and Pune. These funds were then remitted to eight entities based in Hong Kong. Officials allege that the firm misdeclared not only the value of imported diamonds but also the value of studded diamonds in silver rings, which were exported as finished goods.
Additionally, ED sources indicate that the company had taken limited loans from public banks, while the suspicious outward remittances were allegedly paid through various non-existent and bogus shell entities. During the search, it was revealed that the entities which transferred approximately Rs. 2800 crore to M/S Paplaj Foreign Trade LLP were shell entities providing accommodation entries through complex transactions under the guise of diamond sales and purchases.
In a recent case of stock market manipulation involving the scrip of Sunrise Asian Limited (SAL) by M/S Iceworth Reality LLP and other entities, the ED conducted searches in Mumbai, Surat, and Delhi. These operations led to the seizure and freezing of movable properties, including diamonds, The investigation revealed that the illicit profits from stock manipulation were routed entities through various accounts, with some involved in diamond trading. This is trade-related money laundering, the source added.
Modus Operandi
According to Hong Kong Customs investigation, Hong Kong Customs officers targeted a suspected transnational money laundering syndicate and initiated a financial investigation, sharing intelligence with Indian Customs earlier this year. The Hong Kong Customs investigation revealed that syndicate members had established several shell diamond trading companies in both Hong Kong and India. The syndicate was suspected of exporting low-value synthetic diamonds from Hong Kong to India, falsely declaring them as high-value natural diamonds. The companies importing these diamonds then exported jewelry studded with diamonds at highly inflated values to Hong Kong and other countries.
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 marginal, indicating that this trade is a cover for laundering money outside India. Investigations have shown similar methods in previous cases, where money is funneled into the importing entity’s bank account through transactions by various dummy firms in India. The cash is then laundered from this single bank account to overseas suppliers in Hong Kong under the pretext of payment for diamond imports. In almost all cases, money launderers operate through front companies overseas to evade enforcement action in India.
