Senior auditors say they raised a red flag after the 2016 audit of the industry exposed serious discrepancies in the records maintained and in re-exports

The last detailed government audit of the gems and jewellery industry threw up serious lacunae in the supervision and coordination among various government agencies, including the Reserve Bank of India, the departments of Commerce and Customs. It had also cautioned against the massive re-export of diamonds to countries such as the UAE.

Senior auditors of the Comptroller and Auditor-General who were involved in the audit in 2016 are not surprised by the Punjab National Bank scam involving Nirav Modi and others. “It had to happen, we had raised red flags about the way the business was being conducted, the drama of simply passing diamonds through the trade-accounting and bank-financing channels to inflate value, etc.,” a former CAG official said.

Revenue implication

The audit report tabled in Parliament on April 29, 2016 said: “This report has revenue implication of ₹1,003.37 crore, in addition to systemic issues worth ₹19,522.67 crore and internal control matters which could not be quantified.”

The previous audit of the sector was done in 2008, but “most of the improvements recommended by the audit [in 2008] were not achieved,” the 2016 report said.

All units in the gem and jewellery sector are required to maintain a register for import, use and issue and used or broken jewellery imported for various purposes, the audit said. The register should have “serially numbered pages and should be maintained for each financial year and balance should be struck at the closing of each month to facilitate the authorities concerned to inspect and verify the account maintained,” it said. Such goods have to be stored separately.

The companies including Nirav Modi’s Firestar International imported used jewellery for ₹537.58 crore. “However, the record as mentioned above was not maintained by the units.”

‘Purchase misreported’

In another instance, the audit pointed out that Firestar Diamond International misreported “purchased gold worth ₹12.05 crore from Bank of Nova Scotia during 2013-14”.

It was an audit based on a sample of 21,245 bills of entry and 13,143 shipping bills out of a total of almost 15 lakh bills from 2010 to 2015, an official said. The audit team also inspected records of 28 export-oriented units out of 34 such and 156 special economic zone (SEZ) units out of 891 such. The audit had also accessed records of several banks. Pointing to the huge re-export of gold and diamonds to the UAE, Hong Kong and so on, the report said: “Evidently, trade with the UAE involving re-export did not create major economic activity while inflating the total value of the trade.” It said the Commerce Department and arms of the government should have examined if the re-exports were “simply passing through the trade-accounting and bank-financing channels”. But there was no such effort, one of the auditors said.

The report had recommended that the Revenue and Commerce departments, the Central Board of Excise and Customs and and the Director-General of Foreign Trade “need to improve coordination and implement the EDI (electronic data interchange) systems with full functionality”.

The report had also called for regulation in “related party transactions, tariff and re-export.”