Assuming Drawback rates of 7.5% to 9.8% on various apparel items, calculations by TDB Intelligence Unit suggests that the recent Bank of Baroda scam has resulted in the Indian exchequer losing up to Rs.573 crores. The loss was on account of over-invoicing of exports to the tune of $900 million.

Steven Philip Warner | The Dollar Business 

Putin’s hatred for Obama, Russia’s muscle-flexing act in Syria, continued excitement over the Arab Spring, appointment of Greece’s first ever lady Head of State, quarrels in the race for the White House, continued vilification of the eurozone – the attention span these issues dictate is a sign of how earthlings consider “fair politics” to be a prerequisite to a thriving world order. And bet your bottom dollar that the handful of generations in today’s globalised world – with preternatural abilities to discuss “ethics” in all things business and money – consider “fair trade” to be as critical as green Earth! Strange, much as inhabitants of six continents consider the culture of hacking unethical and unfair, for them, a once-popular Napster and the now cult of Facebook born out of a “hacker culture” is “fair”. Translation: “fair” needn’t necessarily be “ethical”.

That’s probably the thought that motivates individuals and groups to indulge in foul play and taint the fabric of global trade. The recently uncovered Bank of Baroda (BoB) remittance case is worthy of a quick discussion in this regard. As Murphy’s law would have it, the scamsters ran out of luck in the second week of October. In the week that followed, investigative hounds started sniffing at the trail in an effort to arrive at a prima facie opinion. Some of the ‘whats’ and ‘wheres’ of the case are readily available in public domain. A North Delhi branch of BoB has been accused of being the centre of despatch for close to a billion dollars (Rs.6173 crores) under the garb of payments for importing commodities through current accounts belonging to companies whose addresses were non-existent. Transfers were made in over twelve months (till August 2015). Funds were directed to over 400 companies in Hong Kong and UAE through 8,667 transactions – that’s around but under the $100,000 transfer detection limit per day. So the capital flight happened for bogus imports, in real-time and under the radar! An interesting revelation was made by the Enforcement Directorate to an Indian daily, in which it observed that while remittances were routed to Hong Kong and UAE from India, the actual exports were sent to Afghanistan. And that the exchequer lost about Rs.15-150 crores in the process. These are the ‘whats’ and ‘wheres’.

[Many reports claim it to be ‘black money’ routed to Hong Kong. Completely baseless. BoB has claimed that of the total amount involved in the scam, less than 10% was deposited in cash. The rest were routed through accounts across 30 other banks. Now why would anyone take the foolish pain of transferring funds “already deposited” in other banks to BoB and then to offshore accounts to convert black money into the legal form?]

This is clearly a forex scam. So, we paint the plot here. Fact 1 – Over-invoiced exports from India to Afghanistan. Fact 2: Remittances made in the most doubtful manner to Hong Kong and UAE. Fact 3: Exports recorded from Hong Kong to India. This is how it may have been worked out: India exported product X with value A and inflated value B to Afghanistan to earn a Y% drawback on exports on value B (under the Duty Drawback Scheme). Because the goods were worth only A (A<B), the additional sum C that had to be paid by the importer(s) in Afghanistan to exporter(s) in India, i.e. C=B-A, had to be initially sent to the importer(s) so that he/they could make the payment in full to the Indian exporter(s). C was routed through banks in Hong Kong and Dubai over a stretch of time in a manner to avoid stares from suspecting financial watchdogs. With payments to Hong Kong and UAE recently completed – the last tranche was on August 12, 2015 – depending on the terms of payment between the importer(s) and exporter(s), it is but logical that the exports from India to Afghanistan would have only been concluded/conducted in recent months. There’s another benefit to the accused – how about incentives and drawback that will be earned on exports from Hong Kong on fake import bills?

Analyses by The Dollar Business Intelligence Unit help throw more light on the subject. Let me enumerate some pieces of the puzzle.

Piece 1: The product of choice

Two names were thrown up as being probable destinations of Indian exports in the case – Afghanistan and UAE. There were eight chapters (2-digit HS Code-level) under which $1 million-plus monthly average exports were made from India to Afghanistan in the May-July 2015 quarter (period 2). The number for UAE stood at 62. Next, for each chapter, the change in monthly exports during period 2 as compared to the previous 12 months (May 2014 to April 2015; period 1) is calculated. What we arrive at is startling. Of the top ten products (chapters) that were exported to Afghanistan (in terms of monthly avg. exports) and the top 35 to UAE during period 2, the highest growth between the two periods were observed in two common chapters – 61 (Articles of apparel, accessories – knit or crochet) and 62 (Articles of apparel, accessories – not knit or crochet)! The jump ranging anywhere between 63%-283%. Avg. monthly exports to USA, EU & UK under the chapters rose or fell by under 6% during the same intervals! [Note that there were no anomalies in the case of mature economies with trade and banking systems that are far stringent than in the Third World.]

Piece 2: The magnitude of over-invoicing

So product X is “Articles of apparel, accessories that fall under Chs. 61 and 62”. Next, we analyse the degree of over-invoicing. When compared to the average of per unit prices during FY2015, the price of Ch. 61 exports to Afghanistan and UAE in the April-July 2015 period, increased by 37% and 27% respectively. Unexpectedly high rise, given the 4.5% inflation rate in India last year! Similarly, per unit FOB value of Ch.62 exports to Afghanistan and UAE rose by 22% and 14% respectively. Assuming no foul play in unit exports reported, we conclude that per unit price of Ch.61 exports to Afghanistan and UAE was over-invoiced by at least 33% and that of Ch.62 by at least 18%. If the quantity reported was inflated, the over-invoicing could range anywhere between 100-300%.

Piece 3: A game that’s lasted enough

‘Inflated’ Ch. 61 exports to Afghanistan and UAE (i.e. B61) in period 2 stood at $520 million. In this case, C would be about $900 million (value of the current BoB scam). Notice that Ch. 61 alone isn’t sufficient to justify the scam value C. So we bring Ch.62 in the picture, whose ‘inflated’ exports during period 2 amounts (B62)was $676 million. We arrive at a total B of $1.2 billion. If C is $0.9 billion, the real value of exports, i.e. A, is only $300 million! That’s over-invoicing of 300%! [Read the last line of the previous para!]

Piece 4: The real loss

Some say the scam has cost the exchequer a few tens to a hundred crores of rupees. Our calculation suggests a bigger damage. If $900 has been the over-invoiced amount, assuming Drawback rates of 7.5% to 9.8% on various apparel items, we are talking of a loss to the Indian exchequer in the range of Rs.440 crores ($67.5 million) to Rs.573 crores ($88.2 million). Not an amount to ignore.

Piece 5: Are Afghanistan’s neighbours cross with us?

In the past three months, the monthly avg. increase in Ch.61 exports to Afghanistan totalled $7.5 million. During the same time, India’s exports to 6 of 8 of Afghanistan’s neighbours and almost neighbours fell – Tajikistan, Turkmenistan, Kyrgyzstan, Kazakhstan, Uzbekistan, Pakistan and China – by $6.5 million. We’re forced to call the closeness of the two numbers a sheer coincidence for now. [Afghanistan isn’t too keen on reporting its trade figures.] More questions can be asked in the BoB forex scam. Why have India’s monthly exports of Ch.61 products during period 2 to regular buyers like Panama, Ethiopia, Azerbaijan, Armenia, etc., suddenly dropped? Is Afghanistan re-exporting Made in India garments to them? How about the stranger-than-usual rise in exports to Bulgaria, Tanzania, Latvia, Iraq, Lebanon, etc.? [See table titled, “Theory of suddenness…”] Do we smell over-invoicing here too?

In recent days, more forex scams have been unearthed. On the part of the banks, they will continue to face questions for failing to adhere to FEMA guidelines and KYC procedures. As for the scamsters, such acts will not weaken the ever-growing influence of global trade. Ships will continue to sail, manufacturing will find newer havens, Africa will become a bigger importing destination, BRICS will be reborn, and governments and foreign policy will evolve…

Fair politics and fair trade – the problem is that “fair” doesn’t always imply “ethical”. But some jokers, inspired by Captain Jack Sparrow, just misunderstand “throwing caution to the...” as jumping off the ship deck. There is a difference between tax avoidance & evasion – one is sensible, the other, crime. If the government presents opportunities, grab them. But don’t go about defining your own like a blockhead and then go abusing them around the world!

Spot opportunities and invest on containers filled with new product ideas – strangely, the secret to success in foreign trade will continue to remain what pre-Napster and pre-Facebook old-schoolers bet on. A scam is for once, genuine trade is forever. And for the latter, you don’t get jailed!

November 03, 2015 | 11:48pm IST.