Investigation into $1.8B Jewelry Fraud Intensifies

RAPAPORT... Indian authorities have reportedly arrested five senior executivesat Nirav Modi Group and Gitanjali Gems as investigations continue into amassive fraud case involving the two companies.Punjab National Bank (PNB) has alleged the jewelersfraudulently obtained loans worth $1.8 billion (INR 113.94 billion), accordingto a complaint filed by the state bank last week. It describes how executives colludedwith a PNB official over several years to obtain loans from foreign branches ofIndian banks, avoiding official checks and without getting proper approvals. The Central Bureau of Investigation (CBI) on Tuesday heldthree executives of Firestar International, a subsidiary of Nirav Modi, onefrom Nakshatra, which is a Gitanjali brand, as well as a manager at GitanjaliGroup, The Times of India reported. Nirav Modi, chairman of the brand that carries his name,and his uncle Mehul Choksi, managing director of Gitanjali, are currently outof the country, according to media reports. Trade ImpactIndia's Gem and Jewellery Export Promotion Council(GJEPC) blamed PNB for not carrying out the proper due diligence to prevent thealleged fraud, adding that the case doesn't represent normal lending practicein the industry. "When thousands of exporters undertake business lawfully,adhering to all norms and practices, prescribed very diligently, incidents ofthis kind can only take place due to non-adherence of procedures," the councilsaid in a statement over the weekend.De Beers, which supplies rough diamonds to Gitanjali,declined to comment on the case directly, or to say whether the company wouldremain one of its sightholders. However, the miner added that it scrutinizes suchcases closely, while its Best Practice Principles ensure it only retainsclients whose behavior meets certain ethical standards. "We take matters of financial probity extremelyseriously, and investigate any issues that come to light as a matter ofurgency," a spokesperson for the rough producer told Rapaport News. Alrosa did not respond to a request for comment onwhether it would strip Firestar Diamond, a Nirav Modi company, of its membership in theAlrosa Alliance, a contract-sales arrangement for rough-diamond buyers. Responses and ResignationsBoth Nirav Modi and Gitanjali have contested theallegations. Modi disputed the amount he owed the lender, and, in a letter toPNB published in The Times of India on Monday, claimed that thebank's eagerness to recover the money had destroyed his business. "The erroneously cited liability resulted in a mediafrenzy, which led to immediate search and seizure of operations, and which inturn resulted in Firestar International and Firestar Diamond Internationaleffectively ceasing to be going concerns," the newspaper cited the letter assaying. Gitanjali's management did not come across any such fraudulent activity, or findanything wrong, the group's company secretary and compliance officer, Pankhuri Warange, said in a statement Monday. Warange resigned from his role, mentioning his"cluelessness" about the matter. Gitanjali's CFO, Chandrakant Karkare, alsoresigned last week, citing his wife's illness. Gitanjali shares slumped more than 50% in the past weeksince the allegations surfaced. Nirav Modi is a private company.Image: Sorbis/Shutterstock