https://www.freepressjournal.in/analysis/jatin-mehta-files-a-usd-5-billion-suit-against-de-beers-stanchart-and-kroll

Indian diamond industry in a tizzy — Jatin Mehta files a $ 5 bn suit against De Beers, Stanchart and Kroll

RN Bhaskar

For most market watchers in India, Jatin Mehta is a renegade, an absconder from Indian law (https://www.businesstoday.in/latest/corporate/story/cbi-files-two-fresh-firs-against-absconding-diamantaire-jatin-mehta-207129-2019-06-11) , and a person who has defrauded Indian banks to the tune of Rs.6,500 crore through two of his companies Winsome Diamonds and Forever Diamonds (https://www.thehindubusinessline.com/companies/winsome-diamonds-fraud-case-jatin-mehta-might-have-moved-to-montenegro/article30790493.ece).

But on 24 June 2022, Mehta hit back.  In an appeal filed before the Surat Civil Court (Special Civil Suit No. 120-2022), he sued De Beers, Standard Chartered Bank (SCB) and Kroll.  The claim prepared on 27 May 2022, outlines  how the three conspired over a number of years to destroy Mehta’s business and his and his family’s reputations. Media lapped up this news, especially those in regional languages (a more complete list of media coverage can be downloaded from Jatin-Mehta-case_media-coverage)

Says Swadeep Singh Hora, Advocate for Mehta, “Jatin Mehta suit provides clear and irrefutable evidence of the conspiracy carried out by De Beers, Standard Chartered Bank and Kroll and has been filed to recover fully what was damaged.”

Emails were sent to De Beers and SCB to elicit their views.  No response. Kroll’s email could not be located, and the request for information was sent through twitter (https://twitter.com/rnbhaskar1/status/1552517512717168640?s=20&t=AeJ1kcwH-nQxKQroo-Vr3w). Once again, no response.

Opening a can of worms

A text version of the Kroll image above can be viewed at https://asiaconverge.com/2022/07/kroll-refuses-to-face-facts/ .

The case threatens to unwind allegations of fraud levelled by the CBI against Indian bankers. It could also reopen the entire Winsome outstanding to Indian banks – which according to the suit filed by Mehta, was an accident, and not a fraud, and that the actual defaulters had agreed to make good the money.

It could also raise questions about the willingness of the RBI, the government investigation authorities and banks to allow SCB to nominate Kroll as the audit firm, overriding the three names that the consortium of banks had recommended at the Joint Lenders’ Meeting on 14 May 2013. In Para 87 of the suit filed in the court, it explains how the lenders jointly decided that basis the quotes received from 3 audit firms namely Haribhakti & Co., Pricewaterhouse Coopers and Ernst & Young (EY), work would be shortly awarded to the selected firm.” Kroll was not recommended.  But SCB  “unilaterally decided to induct Kroll.”

SCB’s role is murky, and so is that of Kroll which took on this assignment without any locus in the matter.  Worse, there are good reasons to believe that it did not even do its investigation well, and instead relied more on hearsay, than company resolutions and minutes,  court documents and audit reports by Dun and Bradstreet (DB).

Finally, the court documents throw the spotlight on the activities of De Beers and SCB. As the court documents state (para 10), “SCB has a long-established relationship with the diamond industry specifically – De Beers Group and continues to play a leading and active role with De Beers and has large exposure in the diamond industry. SCB acts in close coordination with De Beers. Worldwide SCB funds diamond manufacturing companies, sight holders and traders, which is done in close coordination with De Beers.”

De Beers’ murky past

De Beers own conduct in the diamond trade is certainly not unblemished.  Even in India. It may be recalled that the government finally terminated its own agreement with De Beers by winding up Hindustan Diamond Corporation in 2016 (https://www.pmindia.gov.in/en/news_updates/winding-up-of-hindustan-diamond-company-private-limited/). In this cased too, the government was convinced that De Beers had misled it.

Moreover, in sharp contrast with earlier governments that allowed De Beers to influence many of its policies, the present government has given lab-grown diamonds great support, realising that India’s interests are best served by creating alternative sources of supply for roughs.  Using the cover of the Kimberley Process (something this author has questioned for years — https://asiaconverge.com/2011/05/543/) De Beers had got the government to send its law enforcement authorities to arrest diamantaires who procured (cheaper and better) roughs from Russia, Angola and other places which sold these gemstones outside of the DeBeers channels. Effectively, the plans that got Mehta to fall foul of De Beers are now being ratified by the Indian government.

De Beers (https://www.debeers.com/en-us/home) has seen itself as the keeper of the keys to the kingdom of diamonds for over a century.  It is headed by the Oppenheimer family, though in recent years, the family has tried to distance itself from direct association with this diamond group. The group began diamond prospecting in South Africa, then bought off the mines of many other prospectors. It then began bushwhacking other miners who refused to sell their mines to this group (quite lucidly brought out in the book titled Death of the Diamond by Edward Jay Epstein).

More details and articles can be found from a report that was submitted to the government in January 2015  (http://asiaconverge.com/wp-content/uploads/2015/12/2015-02-05_Govt_Book_4-2-15_Low_Res.pdf). At one point o time, De Beers controlled over 90% of the global supply of roughs, though now it is reported to have slipped to around 30-40% if not lower.

For De Beers, legal niceties mean little.  It may be recalled that in December 1953, Sir Ernest Oppenheimer appointed Sir Percy Sillitoe, who was earlier the head of the British counterespionage service known as MI-5 (https://asiaconverge.com/2011/05/543/) . He was asked to create a system which could stop independent producers (often referred to as smugglers) from selling diamonds in the open market. Those who did not accept the price offer made by De Beers and its associates were beaten into submission, killed, mugged or even ransacked.

Sillitoe helped set up an elite core of agents called the “International Diamond Security Organisation (IDSO),” which even hired private armies of mercenaries to ambush diamond caravans in the jungles. When much of these ‘smugglers’ had been eliminated, the IDSO was quietly disbanded. But, the work of elimination of independent ‘smugglers’ continued. (more details on this subject can be gleaned from http://www.edwardjayepstein.com/diamond/chap14.htm).

A great track record

During the four decades when Mehta practised the diamond trade from Mumbai, he was known to be one of the finest of innovators in the trade.  He introduced the concept of sawn diamond cutting techniques in India, was the first in the trade to make his company go public and thus bring in transparency for a trade that was shrouded in secrecy. He was the youngest ever chairman of the Gems & Jewellery Export Promotion Council (GJEPC).  He was the recipient of several awards for outstanding export performance.

But he and De Beers crossed swords when — in an attempt to get cheaper and good quality diamond roughs —  he began importing the stones from Russia.  Finally, in 1996, Mehta and De Beers parted ways and he opted to give up the privilege of being a De Beers sight holder.  Sight holders could source diamonds directly from De Beers, while non-sight holders had to depend on secondary sources, usually from other sight holders.

Mehta’s perceived intransigence allegedly enraged De Beers which is said to have decided to destroy his business.  The relationship soured even more when Mehta decided to go in for lab-grown diamonds, which were a clear threat to earth-mined diamonds which De Beers sought to control. In 2013, allegedly aimed at crippling both Mehta and his businesses De Beers conspired with SCB and Kroll, by pressing for payments for the very significant exposure to 13 companies in the United Arab Emirates. In 2013 these companies defaulted on over US$1.3 billion of obligations to Winsome.

That was when SCB took charge of investigations against Winsome, allegedly under instructions from De Beers.  According to a press note that Mehta and his lawyers have circulated, “Standard Chartered was only interested in the Mehta family’s Singapore LGD facility – going as far as to make it crystal clear to Mr. Mehta that ‘all his problems will go away’ if he were to handover the LGD facility as part of any restructuring to De Beers.” LGD stands for lab-grown diamonds.

Kroll produced a report in August 2013 whose conclusions according to the court documents were false and misleading. It succeeded, in destroying the Winsome-led restructuring. That in turn led to the collapse of Winsome and Forever. They were liquidated in September 2020

Controversial SCB

Even SCB has been no stranger to controversy (https://www.justice.gov/opa/pr/standard-chartered-bank-admits-illegally-processing-transactions-violation-iranian-sanctions). In April 2019, it agreed to forfeiture of $240 million, a fine of $480 million, and to the amendment and extension of its deferred prosecution agreement (DPA) with the Justice Department for an additional two years for conspiring to violate the International Emergency Economic Powers Act (IEEPA).  This criminal conspiracy, lasting from 2007 through 2011, resulted in SCB processing approximately 9,500 financial transactions worth approximately $240 million through U.S. financial institutions for the benefit of Iranian entities.

Even in India, it managed to get the courts to upgrade its claim on moneys it had lent to the Essar group. SCB was an unsecured creditor, but wanted an equal say with Indian banks which were secured creditors (https://www.bqprime.com/law-and-policy/essar-steel-case-standard-chartered-got-an-extravagant-bonanza-argues-sbi). Finally, it managed to get the courts to agree to create a new category whereby it got more money that would have been due to it (https://unlistedzone.com/essar-steel-supreme-court-verdict-a-big-relief-for-banks/). This is extremely unusual say bankers. Even earlier, it was involved in a spat with the National Housing Bank, though this was because of a dispute it inherited when it took over Grindlays Bank (https://www.business-standard.com/article/finance/sc-verdict-settles-grindlays-nhb-spat-102011801046_1.html).

Kroll, SCB and De Beers

Kroll, on the other hand, as para 11 of the Mehta suit before the Surat Court states, has often been “used by De Beers to provide information on its competitors, to verify profiles, undertake gathering of information of buyers and sight holders. The customer profile of De Beers is submitted to Kroll Associates UK to verify the same as per requirements of Supplier of Choice Policy of De Beers. As part of the process, Kroll checks whether the DTC sight holder [DTC is the trading arm of the De Beers conglomerate]  profiles represent an accurate reflection of the sight holder’s business. . . . . . Even in 2014, when De Beers’ price data was leaked, it appointed Kroll to get to the bottom of the breach. Kroll has also been used by De Beers to provide intelligence on its competitors and use the intelligence to damage the business interests of its competitors. That would explain why SCB and Kroll worked together to prepare an entire report against Winsome, which was used to file cases against Winsome. It also explains why despite not being on the list of the three audit firms recommended by the consortium of banks, it took up the assignment in the face of this gross irregularity.

Even this job wasn’t done well.  Court pronouncements in Antwerp were ignored {the suit mentions in Para 63 that “on 22nd February 2018, the President of the Council Chamber of the Court of First Instance, Antwerp, accepted the Public Prosecutor’s final writ and decided that there was no reason to prosecute in the case.”  This is what De Beers and its associates were rooting for in an alleged “diamond switching” case.

Kroll ignored the well-known fact that as 12 of the 13 UAE based customers of Winsome and Forever’s were based in the Sharjah (Free Zone Establishment) and one was based in Ras al Khaimah (Free Zone Establishment).  Yet Kroll went to Dubai to check on the details of the 13 players.  It would appear to be a deliberate non-application of mind.

In Para 148, the suit states, “On 28th January 2014, SCB fi led a complaint with economic offence of Mumbai Police. The said complaint relied copiously on the Kroll Report. As it later turned out the Mumbai Police found no cognizable offence disclosed in the said complaint. This is  apparent from minutes of JLM [Joint Lenders’ Meeting] dated 12th April 2016.”

Similarly, Kroll did not even refer to the findings of the Sharjah courts (October to December 2014) which had  delegated Accounting/Banking Experts to look over the accounts of the UAE customers. After careful evaluation, all Accounting/Banking Experts verified that the defaulting customers owed money to both of the companies (Winsome and Forever). Therefore, the Sharjah courts decided in favour of Winsome (para 173 of the suit). Instead, Kroll makes allegations about the 13 defaulters, which were just not true. Kroll did not allow even the banks to study its report despite requests. In Para 165 of the suit it records that on 25 May 2015, Winsome sent a letter to SCB “We, once again request you to provide us with a copy of Kroll Report,” Suitable action was not forthcoming.

Now the suit before the Surat City Civil Court threatens to rip the veil apart for all the three – De Beers, SCB and Kroll.

It will be very interesting to follow the way events now unfold.

SCB replies on the evening of 31 July 2022:  “As the matter is sub-judice, we prefer to refrain from making any comments. The Bank will suitably respond before the Court.”