India’s Enforcement Directorate (ED) is currently investigating a widespread money laundering scheme that exploits the trade of lab-created diamonds.
This complex operation, involving several Indian and Hong Kong-based entities, centres around the overvaluation of synthetic diamonds, which are then used as a cover for illicit financial transactions.
The investigation has significant implications for the diamond and jewellery industry, highlighting vulnerabilities that can be exploited within the supply chain.
Investigation Details and Key Players
The ED’s investigation was triggered by intelligence shared by Hong Kong Customs following a significant operation in December 2023.
During this operation, Hong Kong authorities seized large quantities of suspected synthetic diamonds, a small number of natural diamonds, and foreign currency, amounting to approximately $1 million. The investigation has so far led to the arrest of four individuals suspected of involvement in the scheme, as well as the seizure of various documents and electronic devices connected to the operation.
In India, the investigation is focused on Surat-based M/S Paplaj Foreign Trade LLP, and its partners Somabhai Sunder bhai Meena and Ojaskumar Mohanlal Naik. The ED conducted search operations at multiple locations across Surat, Vadodara, Mumbai, and Pune under the Foreign Exchange Management Act (FEMA), 1999. The searches revealed that the firm had overvalued lab-created diamonds between July 2023 and March 2024, receiving approximately Rs. 2800 crore from non-existent entities in various Indian cities, which were then remitted to eight entities in Hong Kong.
Modus Operandi: A Detailed Examination
The modus operandi of this money laundering operation involves a sophisticated scheme of over-invoicing synthetic diamonds and jewellery. According to investigations, Hong Kong-based shell companies export low-value synthetic diamonds to India, falsely declaring them as high-value natural diamonds. These lab-created diamonds are then set into jewellery in India, which is subsequently exported at inflated prices. The majority of the declared inflated value is remitted out of India through official banking channels, while the actual remittances received for the exports are minimal, exposing the fraudulent nature of the trade.
The money is funnelled into the bank accounts of Indian importers through complex transactions involving various dummy firms, which appear legitimate but serve as conduits for laundering illicit funds. This practice of using front companies to disguise the origin and destination of funds is a common tactic in trade-based money laundering, a method increasingly under scrutiny by global enforcement agencies.
Impact on the Jewellery Industry
The use of synthetic diamonds in money laundering operations has far-reaching implications for the jewellery industry, both in India and globally. This case highlights the potential risks associated with the synthetic diamond market, particularly in regions where regulatory oversight may be less stringent. For jewellers, the operation underscores the importance of due diligence and transparency in supply chains, especially when dealing with high-value materials like diamonds.
As the investigation progresses, it may lead to increased regulatory scrutiny of the diamond trade, including stricter controls on imports and exports. This could result in higher compliance costs for jewellers and diamond traders, as well as potential disruptions in the supply chain if more cases of fraudulent activity are uncovered. Additionally, the industry may see a push towards greater traceability and certification of synthetic diamonds to prevent similar schemes in the future.
