2 things to know about the Bank of Baroda forex scam.

Six people have been arrested including employees of Bank of Baroda and HDFC Bank in what is now known as the Forex scam. But the details that are coming out in media suggests that this is only the tip of a much bigger scam. More heads are likely to roll and more banks may come under the scanner of interrogating agencies.

Let's take a look at what this scam is all about.

1) The Scam and its modus operandi

Bank of Baroda (BoB) noticed some unusual transactions from its Ashok Vihar branch in Delhi, a relatively new branch which had obtained permission to accept forex transactions only in 2013. Within a year, forex business of its Delhi's Ashok Vihar branch shot up to Rs 21,529 crore.

The bank alerted government agencies who sprung into action, with the Central Bureau of Investigation (CBI) and Enforcement Directorate (ED) working on the case. Raids were carried out over last weekend on some branches of BoB and residences of a few employees. The raids were in connection with the alleged illegal remittance of around Rs 6,172 crore to Hong Kong between 1 August 2014 and 12 August 2015.

Let’s now look at the modus operandi of these illegal remittances.

Modus Operandi

Prima facie it seems that two different types of transactions took place, but both the transactions can be related. There is nothing new in the modus operandi on one of the transactions used by money launders who try to earn a quick buck by exploiting government schemes. But it’s the second one which is intriguing.

Transaction one – exploiting export schemes

In the first transaction, a company or an individual exports goods at an higher price to their own fake companies in order to take benefit of duty drawback scheme of the government. Duty drawback is a refund given by the government to recoup the amount paid by way of custom and excise duties on the raw materials used and service tax on input services used for the manufacture of exported goods. Government uses the duty drawback scheme to promote exports.

Here is an example. Suppose a garment company sells Rs 1,000 worth of shirts for which it used Rs 500 worth of cloth and other materials. The custom duty paid on imports of the cloth or other materials or the excise duty paid on domestic purchases and service taxes paid on all inputs of services will be refunded by the government. If 20 per cent is the tax paid on its raw material, then Rs 100 (20 per cent of Rs 500) can be claimed as duty drawback.

In this case, dummy companies were opened in Hong Kong. The exporter who had foreign exchange – black money parked abroad, used these entities as clients who send the money back to India to make the transaction look genuine. Government on receiving the foreign exchange disbursed the duty drawback money to the exporter since the entire transaction was closed.

The problem, as ED points out is that the accused traders evaded custom duties, taxes and over-claim duty drawbacks to generate slush funds. ED says that the accused connived in “forming” fake companies and business entities overseas, particularly in Hong Kong by “overvaluing” the export value and subsequently claiming duty drawbacks.

Companies route their exports through these fake entities who re-sell the goods at the market price and pad it up with their own money to claim the duty drawback.

In the garment example, if the market value of the goods sold is Rs 900, then the dummy company will sell in the market and realise Rs 900 but will send Rs 1000 to its Indian exporter by adding Rs 100 on its own.

This mechanism achieves two purposes. One is the unaccounted black money residing abroad comes to India as white money and the exporter also generates extra income by duping the government through its own export incentive schemes.

Transaction two – advance remittances for imports

BoB in its communication to the stock exchanges said that between May 2014 and August 2015, 5853 outward foreign remittances of Rs 3,500 crore, mainly for the purpose of 'advance remittances for import' was recorded. Funds were sent through 38 current accounts to various overseas parties numbering to 400, mainly based in Hong Kong and one in UAE.

Advance remittances for imports are basically part payment that an importer makes to confirm his imports. Generally, after the initial advance is paid, an exporter sends the remaining amount either on receipt of the goods or after a lag, depending on the negotiation with the seller. Banks on their part have to check if the remaining amount is sent and the goods have landed by confirming it with import documentations.

The modus operandi in this transaction was that a number of current accounts were opened in the Ashok Vihar branch. As per our banking system, a remittance of up to $100,000 does not raise an alarm and is automatically cleared without supporting documents of imports. The money launderers exploited this loophole to pass under the radar. They also smartly selected commodities which are prone to cancellations on account of quality or sharp price fluctuations like fruits, pulses and rice.

2) The Players

The scam started taking place by mid 2014 when companies were getting formed in Hong Kong. One such company, Star Exim was incorporated in Hong Kong on August 1, 2014, as reported by DNA. Around the same time money transfers started from Bank of Baroda’s Ashok Vihar branch. Bank of Baroda in its internal audit report mentions that most of the transactions, totalling over Rs 6,000 crore, started on the same date as Star Exim was incorporated in Hong Kong, and continued for another year till August 12, 2015.

 

Star Exim was incorporated with a paid-up capital of $HK 10,000 and is located in an upmarket location in Hong Kong. But more interesting is the company’s owner's address. The company belongs to one Om Prakash Rungta, living in the mining town of Chaibasa in West Singhbhum district of Jharkhand. The same address in Chaibasa is also registered in the name of Fulchand Sanwarmall, a small coal trading company.

Star Exim’s office in Hong Kong is occupied by Ashok Rungta of Krsna Group Ltd, a one-stop financial advisory company.

The money, which ran into several thousands of dollars, was meant for the import of rice and cashew to India. These were in reality never imported nor any invoices generated that could authenticate the trade.

Though the existence of the ‘Advance remittance for imports’ route of transferring has been discovered, the arrests made by the investigating agencies has been in the Duty Drawback scam.

CBI arrested BoB’s Ashok Vihar branch head SK Garg and the foreign exchange (forex) head of the bank branch, Jainis Dubey, for criminal conspiracy and cheating. ED arrested Kamal Kalra, working with the foreign exchange division of HDFC Bank and three other individuals — Chandan Bhatia, Gurucharan Singh Dhawan and Sanjay Aggarwal (none of them working with  any bank).

ED says that the HDFC Bank employee Kalra was allegedly helping Bhatia and Aggarwal in remitting the amount through BoB against a commission of 30-50 paise per dollar remitted abroad.

Bhatia’s role was in forming companies in India and remiting money to companies based in Hong Kong. Dhawan, an exporter of readymade garments, helped Bhatia. Dhawan allegedly obtained duty drawback to the tune of Rs 15 crore in a short period of 6-7 months  Aggarwal was allegedly successful in sending tainted foreign remittances worth Rs 430 crore through BoB’s branch in Ashok Vihar in a short span of time.

Reports say that more arrests of similar middlemen and other operatives, including BoB employees, could take place in the near future. All the accused are alleged middlemen for at least 15 fake companies, out of the total 59 which were involved. ED is now investigating further to check the activities of the remaining suspected 44 fake firms which pumped in money to overseas locations in a similar manner.

The question is if those arrested are middlemen then who is the kingpin of this racket. Like all financial scams, there is a money trail which will ultimately lead to the beneficiary.