ED probes India connection to UBS fraud

MUMBAI: In February this year, an online news service had flashed a report saying, ���UBS suspends four private bankers for unauthorised activities���. The news, soon forgotten, seemed to be yet another case of cowboy bankers pushing the envelope in the secretive world of Swiss banking. But months later, the story drew the attention of authorities in New Delhi because of its strange and multiple India connections.

The accounts in the London branch of UBS belonged to two Indian companies ��� Reliance Natural Resources (RNRL) and Reliance Energy (REL), part of the ADAG group. Overdrafts had been fraudulently drawn against these overseas accounts in order to route funds through a number of Indian diamond traders. The money was suspected to have been used to buy participatory notes (PNs) ��� derivative instruments with Indian stocks as underlying. Among the alleged perpetrators of the fraud are two UBS officials of Indian origin, who were later sacked by the bank. In all, four officials lost their jobs.

The plot, which could have been taken straight out of the pages of a thriller, is now being investigated by the Directorate of Enforcement (ED), which is under the administrative control of the finance ministry. In an eight-page letter dated August 11, 2008, the directorate has requested the Swiss authorities for relevant documents. ET has a copy of the letter.

ED is probing the matter because the transactions may amount to violation of Indian foreign exchange and anti-money laundering laws. The money, which was lying in the RNRL and REL accounts, were funds raised by these firms through foreign loans and convertible securities. Such funds have strict end-use conditions and cannot be used to play the market. While ED, in its letter, has made no allegation against the two Indian companies, the directorate is carrying out a detailed probe on how the accounts were misused.

The exact status of the investigation, post-the August 11 letter, could not be ascertained. ED officials did not respond to phone calls and an e-mail. There is no evidence, at least in the public domain, which indicates that ADAG entities were involved in, or were aware of any misuse of their UBS accounts.

A company spokesperson told ET: ���The ECB/FCCB proceeds of Reliance Energy and Reliance Natural Resources have been deployed in bank deposits, money market instruments etc, in accordance with RBI rules and regulations, and have been repatriated to India way back in April/May 2007.

No borrowings have been made by us against the said proceeds at any time. We are in full compliance of FEMA and all applicable rules and regulations, and have duly filed the prescribed reports, chartered accountants��� certificates etc, with RBI from time to time. We have not received any enquiries and/or communication from any government agency regarding this matter, and are not aware of the same.���

The spokesperson further said all relevant papers have been filed with RBI on time, and they have not received any communication either from UBS or from RBI relating to misuse of funds.

The spokesperson also said the group has not found any irregularity with its accounts maintained at UBS. ���There is nothing to indicate from the account statements we received that funds were misused. Quarterly statements were filed with RBI in keeping with regulatory requirements. If any unauthorised overdraft has been issued, it is an internal problem for UBS,��� the spokesperson said.

According to the ED letter, between January and April 2007, these accounts were used without RBI���s approval by obtaining overdrafts against cash collateral security provided through funds held in these accounts. Both companies had parked their external commercial borrowings (ECB) and foreign currency convertible bonds (FCCB) worth $660 million with UBS.

Opening an overdraft would not require any funds to be physically transferred from these accounts. The ED letter claims that substantial amounts were transferred, using the overdraft, to the accounts of 8 to 10 diamond dealers based in India and Belgium. Indeed, in a communication to UBS, one of the diamond traders has claimed that close to $104 million was routed through his account to Pluri Emerging Companies PCC Cell E Growth Fund, which is controlled by UBS. ED, in its letter to the Swiss authorities, had referred to this communication.

The ED, in its letter, has said: ���The said diamond dealers claim to have no concern whatsoever with these unauthorised transactions routed through their accounts. It is suspected that funds into the Indian stock market have been moved through the fund manager M/s Pluri Emerging Companies PCC Cell Cell E Growth Fund, by way of subscription to participatory notes issued by various FIIs...��� The letter also said that the Mauritius-based Pluri is controlled by UBS.

Two persons in the know offered different estimates of the amount which finally moved through these accounts into PNs. One estimated the amount at $60 million, while another said it could be $30 million; both figures differ from the $104 million mentioned by the diamond merchant. ET was not able to reconcile these varying numbers.
UBS has informed the Financial Services Authority (FSA) of UK and Swiss Federal Banking Commission (SFBC) about the unauthorised transactions from their London branch. When contacted by ET, Mark Panday, a UBS spokesman based in Hong Kong, said he would not be able to comment.

The ED has asked the Swiss authorities for details of overdrafts, loans, credit facilities permitted or sanctioned to RNRL and REL or any other accommodation allowed. These include the opening of any other account in the names of RNRL and REL by UBS Switzerland/London, along with copies of statements of such accounts. It is not known if the Swiss regulator has replied to the ED letter. A source said no reply had come.

The regulators concerned did not offer any substantive comment on the matter. The SFBC spokesperson declined to comment, while the official from the FSA press office said, ���As a matter of policy, the FSA does not comment on whether or not we are carrying out inquiries. In relation to working with other authorities ��� the FSA, in its role as the UK regulator, works with a range of organisations around the world to ensure that it meets its objective of reducing the extent to which it is possible for a business to be used for a purpose connected with financial crime.���