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Black Money Channels Take Center Stage in India

Nov 3, 2014 10:20 AM   By Zainab Morbiwala
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RAPAPORT... India's  new government, headed by the Bharatiya Janata Party,  promised to crack down on black money channels within its first 100 days. Still, many reports have surfaced of how  big businesses continue to siphon money off the balance sheet to avoid certain taxes. One such report found  that  intelligence agencies raised an alert when they found diamond trading was being used to redirect money from India through various banking channels, especially to Switzerland.

An industry expert, who spoke on the condition of anonymity, revealed, “The diamond industry in India is not open in terms of declaring their exact revenue. There have been ongoing cases of diamond traders resorting to undesirable actions to avoid taxes and the money saved is siphoned off to international bank accounts. Considering that diamonds are a commodity and  part of a global value chain, the resources that a diamond trader has to carry forward financial transactions make it easy for him to have international bank accounts.”

The modus operandi -- as explained by the Times of India -- is that an importer shows a higher value for the goods he purchased and the difference  is remitted to a foreign bank. This is easier to do in the case of unworked diamonds since valuations are difficult. It is important to highlight, however, that one of the people identified before the Supreme Court as a Swiss bank account holder in the last week of October is a bullion trader. As further reported in the Times of India, the Directorate of Revenue Intelligence and Customs authorities have alerted the Reserve Bank of India (RBI) of official remittance channels being used for illegitimate transfers.

In addition to  over-invoicing  imports, unscrupulous traders use multiple invoices to siphon money from the country. In a recent case,  Mumbai Customs authorities,  found that funds were remitted overseas on the basis of multiple bills of entry — the documents that provide details on the actual shipment  importing a consignment of diamonds. The operators of the scheme managed to transfer illegitimate funds with a legitimate import transaction as a front, before the practice was uncovered. As transferring currency in physical form becomes difficult and premiums rise for unofficial channels -- by as much as 5 percent -- shady elements in the trade are resorting to more innovative means to hold black money overseas, the official said. Confirming that such activity does take place, Sanjay Shah, the director of Gold Star Diamond Pvt. Ltd., said,  “Yes, but it is very low and not [done] in big quantities; yes, there are few companies doing it.”

Meanwhile, Sabyasachi Ray, the executive director of the Gem and Jewellery Export Promotion Council (GJEPC), said,  “We have only detected such cases from fly-by-night operators and alerted the government on this same issue. But the notable fact is that none of those people are members of the trade and people from outside the industry have been using our product as a conduit for such malpractice, for which the industry is getting a bad reputation. We all should come together to condemn such activities and see to it that outside industry players may not be able to tarnish our image.”

Ray added, “The reputation of diamond trade gets severely affected by such activity of fly-by-night operators.  The industry also suffers due to increases in transaction cost and due to increased procedures and loss of facilities by the government or the financial institutions and an image deficit with the consumers,  industry peers and the outside world.”

With that in mind,  it is interesting to note that in India's 2013-14 fiscal year, while overall imports fell, imports of unworked diamonds rose to $22.1 billion from $21.6 billion  the year before. Ray clarified, “The increase in imports as stated by you is negligible. Also, as we all know, that relationship between rough and polished prices for diamonds is not linear. So, it cannot be generalized as such.”

As explained in the Times of India,  part of the problem lies in the fact that banking and Customs data management systems do not communicate, making it easier for fraudulent operators to use diamond trading as a front. The bill of entry does not specifically mention any authorized dealer's code or name that would restrict fund transfers to just one authorized dealer as  is done in the case of exports. In the recent Mumbai case, money was remitted from five banks. However, the banks' IT systems could not verify if imports had been carried out before remitting the funds overseas.

Commenting on how the situation maybe better controlled, as far as the diamond industry is concerned, Shah said, “[It's] very difficult as there is no way to assure  rough prices.  We know rough prices can vary by 5 to 10 percent due to various factors and again 5 to 10 percent of the people who are involved overprice the shipment. Also, you can bribe Customs officials and have shipments released in a place like Surat.  In fact, I am aware that people ship cubic zirconia (CZ) in place of diamonds and Customs has reported the same.”

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Tags: Banking, black money, diamond trading, India, taxes, Zainab Morbiwala
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