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ED probing money laundering by brokers in NSEL spot trading scam

The Enforcement Directorate (ED) has issued fresh notices to several equity and commodity market brokers, whose involvement came to the fore in the NSEL spot market scam. ED is investigating these brokers for money laundering since the agency has found that a large number of clients who traded on the NSEL spot exchange were dummies or fronts for high-net-worth investors. A copy of the ED summons shows that brokers or their representatives have been called by the agency starting on December 12.

ED is following the trail based on investigations by various other agencies, including the Serious Fraud Investigations Office (SFIO) and the Economic Offence Wing (EoW) of the Mumbai police. Of the 13,000 NSEL clients who were said to be stuck in payment crises for five years, the SFIO said in its report that it got responses only from 7,217, and nearly 84 per cent of them were found to have never traded in commodity markets before their broker introduced them to NSEL. This clearly indicated to the ED the involvement of huge dummy accounts. 

Scathing remarks

SFIO has made scathing remarks in its investigation report against the commodity arms of the top five brokers, including Anand Rathi, IIFL, Motilal Oswal, Geofin Comtrade, and Phillip Capital, among others, on several issues. It is the top 5-7 brokers who churned most volumes on NSEL and they are the ones who also do high volumes on other equity and commodity exchanges, showing they know every feature of financial markets. The ED is looking into the roles of all the brokers, the sources said. 

The EOW investigation report says the brokers traded without client permission, illegally changed unique client codes, engaged in market capturing activity, traded under the names of employees, had nexus with defaulters, re-routed funds through multiple accounts, enrolled and financed low-income people as clients, misled submissions to the EOW about clearing and forwarding services, gave false assurances to investors and were involved in short-selling, which was not allowed. Also, the brokers had acquired powers of attorney from several clients, who remained in the dark about the activities in their accounts. Several of these dummy clients borrowed money from non-banking finance companies owned by the brokers. One such South-based broker had given 90 percent of the funds to a single dummy client, and the rest was spread across 299 clients. The ED officials believe that such a modus operandi is used for money laundering, the sources said.

The above activities, coupled with the fact that authorities suspect not the entire ₹5,600 crore claims are to be true, speak volumes of how whitewashing of money took place while rules went for a toss. The SFIO report showed that genuine investors like Achal Agarwal, Borosil Glass Works, Encore Natural Polymers, Vishvanidhi Dalmia and Moti Dadlani had complained against their brokers for fabricating documents, forging their signatures and trading without authority. Agarwal had told SIFO that he discovered that ₹5 crore was invested in his name even though he had given only ₹97 lakh to his broker. Dadlani discovered ₹1.82 crore invested in his name against an amount of ₹50 lakh he gave.

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