Nirav Modi scam once again raises concerns over round tripping of diamonds

ED(Enforcement Directorate) officials conduct raid at a Nakshatra store in connection with multi-crore Punjab National Bank scam (Photo: PTI)
Nirav Modi's alleged fraud came to light only after he failed to secure fresh loans to service his existing debt. And, the news of the purported crime committed by  Modi and Gitanjali Gems groups has once again brought the issue of illegitimate havala channels and round tripping of diamonds centre stage.

Diamond business is predominantly involved in imports and then exports. Round Tripping is the practice of traders exporting the same stock of polished diamonds multiple times to borrow from banks against the receivables at a lower interest rate.

India is the biggest processor of rough diamonds globally. In 2017-18 till January, according to the Gem & Jewellery Export Promotion Council (GJEPC) data, India exported rough diamonds worth $1.175 bn against last full year’s $1.5 bn.

India’s import of polished diamonds was also $1.88 bn in the 10 months this year. Even the proportion of return consignment doubled in the last two years and remained high. When diamonds are sent abroad for sale on a consignment basis, some unsold diamonds come back but that proportion has doubled over the last couple of years.

Sources say that “diamond trade continues to be a route to launder money by sending dollars abroad or bringing official dollars in India as per trade requirements.” With government increasing the import duty for polished diamonds earlier to 2.5 per cent and now 5 per cent, the modus operandi keeps changing and non standardization of prices and synthetic diamonds have spoiled the sanctity of the trade.

Valuation of coloured gem stones and lab grown diamonds were difficult and hence misdeclaration in trade has always been a preferred Modus operandi. Round tripping has been a preferred trick which helps exporters to get cheaper finances against exports banks.

The Gem and Jewellery Export Promotion Council (GJEPC), which compiles data and overseas exports, says that round tripping of diamonds is history after import duty increased to 2.5 per cent a few years back. Council’s spokesperson said, “while fulfilling the export orders of major customers they tend to return or send back the unused diamonds which on an average may be up to 10% of the purchases. For any industry return of orders and exported products to an extent of 10% can always be termed as normal operational hazard and our industry is no exception.”

 “Additionally, the figures reveal that out of the $ 2 billion polished diamonds imports, 50% of the diamonds are imported in SEZ, which is the manufacturing hub for studded jewellery. Diamonds of specific cut, size and colour are required for studding in jewellery which might not be available in India and has to be imported," the spokesperson added. 

However sources said that, “Part of export orders may face rejection but in the name of rejections costlier diamonds were entering India and excess payments were made using hawala channels.”

Magnitude of such trade is difficult to measure but that has always been a grey area for diamond trade which GJEPC tries to address. In 2012, “council suggested imposition of 2.5 per cent duty on polished diamonds import which stopped round tripping,” said the Council’s spokesperson.

In 2015-16, return consignment of diamonds exported used to be 10 per cent, which more than doubled a year after and in 17-18 reached 23 per cent. Insiders don’t rule out possibility of misdeclaring the value of imports and return diamonds.

 “Return consignments as per statute are generally consignment exports where no monetary transactions are involved like that in outright exports/imports. Gems & jewellery (including diamonds) taken abroad for exhibition, export promotion or brand promotion purpose; Diamonds and gemstones sent abroad for lab certification is also included in this category of exports/imports which are always returned  with certificates. As there is no monetary transaction involved against value of these consignments as there is no sale, the question of round tripping does not arise," the Council said. 

Those who know tricks of the trade however says silver jewellery exports rose from $2 bn in 2014-15 to over $4 bn in 16-17. According to them,  silver jewellery studded with diamonds are also used to adjust Havala because of difficulties in valuing such studded jewellery. Diamond purity certificates may show different valuation than actual diamonds. Exporting such diamond studded jewellery to Dubai or HongKong and then melting silver and taking out diamonds has been a practice.

Surendra Mehta, national secretary of Indian Bullion and jewellers association however said that, “when you continue to nourish any industry with zero import duty and zero indirect tax for so long inspite of huge profit margins, it is bound to indulge in fraudulent activity. Diamond industry fits in this case.”


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