In his latest Diamond Intelligence Briefing, "A Fraud in Progress... A Criminal Conspiracy to Default Hits Indian Exporters", industry insider Chaim Even-Zohar unravels a massive case of fraud perpetrated by a rogue diamond broker and US-based buyers against Indian diamond suppliers, currently estimated at $35-50 million. The template for the scheme is not new: earn the confidence of suppliers by having buyers - intentionally fraudulent or not, but nonetheless willing - establish an excellent payment record for a short period of time and then placing orders for massive amounts of diamonds on credit terms, only to default on the payment and disappear. The key figure in this instance is Indian broker Mehul Shah and his wife Khushboo, whom Even-Zohar has no doubt coordinated the operation with malicious - read criminal - intent. The fraud also exposes the suppliers' "inexplicable failure" to conduct due diligence (KYC) on their purported buyers, who "more or less simultaneously defaulted."
Tip of the iceberg
That several Indian diamond suppliers have been defrauded would be bad enough even it was just an isolated case, but Even-Zohar believes we might just be seeing the tip of the iceberg. A letter of appeal written by the victimized Indian diamantaires to the Gem and Jewellery Export Promotion Council (GJEPC) and the Bharat Diamond Bourse (BDB) - which has led to the arrest of Mehul Shah and pending arraignment of his wife - states, "We would like to inform you that this is not a matter of these few victims, but it is a serious concern and threat for the whole diamond industry here [in India], who have been regularly selling on credit terms to buyers abroad in good faith and trust." It also voices the concern that, "such fraud companies ususally target Indian sellers as they feel that we Indians are not legally well equipped and that no action will be taken against them by the Indian authorities owing to cross border limitation."
The GJEPC has taken swift action, informing the FBI, Indian police and Ministries of Commerce, Home Affairs and the Director General of Foreign Trade, embassies and trade organizations, but this gives no assurance that the diamonds or cash will be found and/or refunded. One source tells Even-Zohar that the scammers took care to cover the downstream trail: "It was suggested that in some instances, the diamonds that were released from customs (or from the courier service) in New York were immediately couriered back to India. This would put any tracking of the goods in New York at a dead end before the checking even began."
Even-Zohar's expose reads like a script for a detective film, and the DIB certainly has pounded the pavement to dig up the details about the (currently) seven to nine U.S. diamond companies and the "oddball collection of individuals" involved in the scheme. DIB uncovers how several of the companies were formed only in the past six months, some being merely the latest iteration of companies that had changed their name but operate from the same address in NYC, most of which have disappeared before the investigation proper even started. Mehul Shah reportedly told one of the victims," that the companies and their persons are not traceable," and may not have even known in full about the scheme in which they were participating.
Total failure of due diligence: "Greed is getting the better of us"
The real question, however, is why the Indian companies implemented no KYC due diligence. As Even-Zohar writes: "The date of establishment of each and every New York company [is available]. They should not have blindly relied on Mehul Shah and should have done a more serious KYC exercise. Most puzzling is, when the intermediary broker, who clearly stated that he had known his clients for years, specifically told the Indian exporters that there was no need to complete Know Your Clients forms, why didn't this trigger a loud ringing of alarm bells?"
Indeed, at least one of the victims admits to doing some soul-searching. He tells Even-Zohar, "We always end up blaming the broker or the fraudster, but we do not learn from our own experiences and those of others. Greed is getting the better of us as diamond dealers ... Mehul Shah has one of the worst reputations in the market. Everyone who has ever dealt with him I am sure knows it ... There is absolutely no doubt in my mind that he was incapable of guaranteeing any payments ... A few million dollars are an extremely large sum of money for a broker like Mehul. Exporters selling through him would and should know it," he said. "I think the sellers have no one to blame but themselves ... How many times will people lose money before they learn to do their own due diligence and KYC exercises? ... We are guilty of not doing our due diligence and for trusting someone so casually. The fact is that our governance structure and discipline is very weak."