A mid-May order of a UK Upper Tribunal Judge, Sir Stephen Oliver, QC, confirming a 1.25 million fine on Sachin Karpe, a former UBS bank wealth manager who handled accounts relating to Anil Ambani's Reliance ADA Group (R-ADAG), among others, has opened a can of worms both for R-ADAG and the Indian market regulator Sebi.
According to a Business Standard report on Tuesday, a Sebi officer accompanied an unnamed Indian national, Mr X, when he was being quizzed by the Financial Services Authority (FSA), the UK financial watchdog and regulator, in the Karpe case. The Upper Tribunal heard Karpe's appeal against the FSA's verdict.
During the FSA interview, which is confirmed in official documents of the Upper Tribunal accessed by Firstpost, Mr X apparently denied that he was linked to Swiss Bank UBS's Customer Account A, from where Karpe made several unauthorised payments to various other unidentified parties.
Says the Tribunal in its 15 May order (see below): "Between 4 December 2006 and 21 January 2008, 67 transfers were carried out between Customer A and the accounts of other UBS customers, including occasions when transfers were routed via the suspense account. The aggregate value of the transfers between the various accounts was USD 29,507,690 (about Rs 118 crore at Rs 40 to US dollar) and 5,141,220. All of these transfers were unauthorised."
The interesting bit, as disclosed in the Tribunal's order, is this: between September 2007 and January 2008, Karpe ordered three redemptions from a Mauritius-based fund account (Pluri Cell E) linked to Reliance ADAG, but the proceeds were not credited to the beneficial holder (Reliance ADAG) but to Customer A, who did not have any interest in the Cell E fund.
Says the Tribunal: "There was...no connection between Cell E or its beneficial owner, Reliance ADAG, and the Customer A account; Customer A did not invest in Cell E. Reliance ADAG was not aware of the payments that were made to Customer A."
Who then are Mr X and Customer A, and why were these credits amounting to $8 million (around Rs 32 crore at the then exchange rate of Rs 40 to the dollar) made by Karpe from a Reliance ADAG account to Customer A?
Firstpost had mailed a questionnaire to R-ADAG on the questions arising from the Tribunal's findings. At the time of publication, the group had not responded. We will carry any detailed response, if and when offered. (For the group's previous response to our earlier stories in this regard, read here).
The UK Tribunal discusses the possibility of Mr X being the owner of Customer A and rejects it: "...it is observed that the so-called beneficial owner of Customer A (Mr X) had, when interviewed by the FSA in the presence of the Indian regulator, Sebi, denied that he held the Customer A account."
The Tribunal, however, does not conclude that Customer A is not beneficially owned by Mr X. Only that the transactions made at Customer A accounts were not the result of instructions from Mr X. It said: "We base no conclusions on Mr X's denial that he was beneficial owner of Customer A. We, in common with the FSA conclude, as a fact, that no instructions had been given by Mr X as regards the many Customer A transactions."
The Tribunal clearly says that Reliance ADAG, despite its links to Karpe, did not know that he was routing payments to Customer A - whoever he is. Does this mean Karpe was a rogue wealth manager making money transfers on client accounts for his own reasons, or is there some other nexus here?
While the UK Tribunal order does not say Mr X is an Indian, given the Sebi presence at the FSA interview, it seems fair to assume that.
Sebi's linkage to the FSA interviewee (Mr X) is not clear. However, its links to the Karpe case lie through its January 2011 consent order where it settled a case with Anil Ambani and four of his executives for Rs 50 crore for alleged illegal routing of borrowed funds to Indian stocks. The UK Tribunal now establishes that the funds were Reliance ADAG's, and the money was invested in Reliance Communications (RCom) shares through a Mauritius Fund, Pluri Cell E.
The UK Tribunal's order is embarrassing for both Sebi and Reliance ADAG for three reasons. Not only does it resurrect old demons, but raises new questions about the purpose of Reliance ADAG's Mauritius investment structure.
First, one wonders how serious Sebi has been while upholding Indian law which forbids nationals from channelling their own investments through overseas institutions. The FSA and the Tribunal give gory details of how Karpe helped "Reliance investors" to not only break Indian law with an investment structure based in Mauritius, but also hoodwink UBS's compliance regime.
Second, Reliance ADAG has allegedly been trying to breach Indian law even earlier. Says the Tribunal: "The statement of case (by the FSA) makes the point that Mr Karpe knew that the use of Cell E of the Fund was not the first attempt to use an investment structure for Reliance ADAG for the purpose of breaching Indian law. The first, unsuccessful, attempt was a proposed investment for Mr Ambani and/or his family to invest in Indian securities using an insurance vehicle. To conceal the true nature of that investment, Mr (Jaspreet) Ahuja (a client adviser at UBS) deliberately, and over a prolonged period, provided UBS' Legal and Compliance Department in Zurich with false and/or misleading information."
Third, Karpe, who headed Asia Desk II at UBS's Wealth Management arm before he was dismissed for compliance failures, seems to have put through several unauthorised foreign exchange and structured products transactions which "resulted in significant losses for 21 customers". According to the Upper Tribunal, "he also carried out unauthorised transfers between unconnected customer accounts (as documented below), in particular using Customer A's account, to disguise losses which had arisen as a result of the unauthorised trading."
Karpe's actions were discovered when an internal UBS whistle-blower discovered that $5,000 was transferred from a customer account to his own personal account. The subsequent investigations within UBS ended up blowing the lid on all of Karpe's transactions.
However, it is Karpe's links to Reliance ADAG and his activities that may hold the most interest.
According to the UK Tribunal's detailed review of the FSA order which fined Karpe 1.25 million for his white collar crimes, he was a key player helping Reliance create its investment structure in Mauritius.
The Upper Tribunal establishes the following points with respect to Reliance ADAG: funds from group companies Reliance Natural Resources Ltd (RNRL), Reliance Energy (now Reliance Infra), and Reliance Energy Global Pte Ltd were routed indirectly to the Mauritius-based Pluri Cell E; these funds were then again indirectly routed through foreign institutional investors into Reliance Communications shares.
This is how the Tribunal documents the subterfuge:
In December 2006, Ahuja arranged for Reliance ADAG to invest in Cell E indirectly (via the purchase of structured notes by the Reliance investors) rather than directly (by the purchase of shares in Cell E) to conceal the link between the customer and its investment;
• In December 2006 and January 2007, Ahuja repeatedly provides UBS Singapore's account opening team and UBS' Legal and Compliance Department in Singapore with false and/or misleading information in relation to the Fund;
• In January 2007, at Karpe's instruction, Ahuja and other UBS staff routed payments from one of the Reliance investors to Cell E through the account of an unconnected customer (Customer Q) in breach of UBS compliance rules.
• At Karpe's direction they created internal documents setting out false reasons for the transfers; and in September and October 2007, in order to open an account for Cell E at UBS Zurich, Ahuja signed account opening documentation containing false and/or misleading information. Two French nationals were shown as beneficiary owners of Cell E.
Clearly, Karpe's role, and that of his client adviser Ahuja, was to ensure that the Reliance link remained hidden.
The tribunal is thus sure that Karpe and Reliance ADAG were in cahoots. It says: "Reliance ADAG gave all of its instructions regarding investment decisions directly to Mr Karpe, who relayed the instructions to Jaspreet Ahuja...".
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Updated Date: Dec 20, 2014 08:46:06 IST