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Probe into huge forex fraud by corporates

Sangita Shah

The Enforcement Directorate is probing suspected foreign exchange fraud by Indian corporates, running in excess of Rs 40 billion ($816 million), over the past few years. The list of entities under the Enforcement Directorate probe reads like a Who's Who of Indian industry.

The Enforcement Directorate has already sent show-cause notices to these corporates in the first leg of prosecution under the Foreign Exchange Regulation Act.

And this is just the tip of the iceberg as the Reserve Bank of India has referred more than 15,000 cases and the Enforcement Directorate has been able to focus its attention on only transactions involving sums in excess of Rs 10 million.

The prosecutions refer to India Inc failing to submit proof of physical imports, through airway bills or bills of entry, after having availed themselves of foreign exchange from authorised banking channels.

These companies have failed to produce proof in the time stipulated by the RBI under Fera and in many cases, have failed to produce documentary evidence even after four years.

This, the Enforcement Directorate suspects, is part of the companies' design to divert foreign exchange out of the country through ostensibly legal channels.

In a few cases, the Enforcement Directorate has been unable to even establish the financial antecedents of the Indian importers and of the overseas sellers.

The authorised dealers had reported cases of non-compliance to the RBI, which then forwarded a consolidated list to the Enforcement Directorate in August 2001.

Enforcement Directorate officials explained that though the proceedings had been initiated under Fera, the department had the right to proceed against the errant companies under the revised Foreign Exchange Management Act.

The RBI had referred more than 15,000 doubtful transactions entered into over the past four years to the Enforcement Directorate in August 2001.

"However, since various preliminary procedures had to be finished, the directorate managed to shortlist the corporates and their various transactions only in May 2002," sources said.

"It was a stupendous task for the Enforcement Directorate to check on all these companies and their transactions. Finally, we decided to concentrate only on frauds involving sums beyond Rs 2 billion. The transactions were slotted into slabs of Rs 200,000 to Rs 500,000 and Rs 5 million and beyond. And 718 transactions involving sums over Rs 10 million have been placed under the special director's jurisdiction," Enforcement Directorate sources said.

According to the RBI Exchange Control Manuals, any entity importing goods and remitting foreign exchange outside the country has to produce proof of import by producing bills of entry in four copies.

As a rule, import bills and documents should be received from the banker of the seller by the banker of the buyer in India.

The operating procedure is aimed at checking the incidence of fake import bills, where there are no physical imports and almost all documents, notably invoices, bills of lading and airway bills, and bills of entry are counterfeit.

According to the RBI, the risk of fraudulent import bills is highest in the case of bills received on collection basis, particularly those relating to customers who do not avail of any credit facilities from the authorised dealer or customers whose business relationship with the bank is by and large restricted only to the retiring of import bills.

Since fake import bills can be the handiwork of cash-rich persons and their front-firms, it is not difficult for such firms to open letters of credit favouring overseas parties putting up a cash margin of even up to 100 per cent.

Though it is unlikely that a prima facie scrutiny can reveal the authenticity of a bill of entry, on occasion obvious inconsistencies can be noticed. In such cases, there are standing RBI instructions, to put the bank staff under inquiry.

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