NMC fraud explained: How false invoices, hidden loans concealed billions

Dubai: False invoices raised financing, spreadsheets tracked hidden debts, and two sets of books concealed the financial position. These were among the methods used in the fraud against NMC before its 2020 administration, according to an Abu Dhabi court judgment.

The November 5 ruling held founder BR Shetty and former chief executive Prasanth Manghat liable for fraudulent and wrongful trading. Justice Sir Andrew Smith identified $5.397 billion — nearly Dh20 billion — as the starting figure for assessing payments towards NMC Healthcare’s assets, with each man’s final payment undecided.

The judgment describes NMC as the victim of a “massive and sophisticated fraud” between April 2, 2012, and April 9, 2020. NMC companies and their court-appointed administrators pursued the claims, alongside Abu Dhabi Commercial Bank’s separate action against Manghat.

How did false invoices raise money?

Third-party companies invoiced NMC entities for goods or services never intended to be supplied. Financial institutions paid through financing typically lasting 90, 120 or 180 days; the supposed suppliers returned the proceeds to the group, whose funds later covered repayment and charges.

“It was a sham in that it was never intended that there should be any genuine supply,” Justice Smith said. Unlike genuine purchases, the relevant NMC company “did not enter the initial supply of goods or services in its general ledger to record the purchase as an expense or the invoice as a liability”.

Forensic accountants Mark Bezant of FTI Consulting, called by the NMC companies and their administrators, and Andrew Grantham of AlixPartners, called by Bank of Baroda, agreed that the scheme helped conceal debt. According to the judgment, it provided cash without formal loan agreements.

Annual advances through identified sham suppliers rose from Dh200 million in 2012 to Dh8.5 billion in 2018 and Dh10.1 billion in 2019. Those figures came from undisputed evidence given by Julian Jones, a managing director at Alvarez & Marsal Disputes & Investigations who led the forensic investigation into the fraud.

These were annual advances, not debt outstanding on one date. From 2016 or 2017, funds increasingly passed through intermediate companies before returning to the group.

What did the accounts conceal?

By December 2018, identified undisclosed borrowing was approximately Dh14.28 billion, alongside reported borrowing of Dh7.32 billion. Together, these totalled Dh21.60 billion, excluding bonds and sukuk, according to the judgment.

An internal accounting record, referred to as the “Advance Account”, contained about 20,000 entries involving concealed transactions. Their debit values exceeded Dh100 billion and credit values exceeded Dh87 billion — accounting-entry totals, rather than money stolen or additional debt.

The fraud required “discipline, organisation and meticulous planning”, the judge said. Those involved manually matched false accounts with information supplied to auditor Ernst & Young, referred to in the judgment as EY.

Internal spreadsheets nevertheless tracked actual borrowing. One circulated in November 2015 listed 50 banking facilities and exposure of Dh8.24 billion, against Dh2.68 billion reported for December 31.

Another, forwarded to Manghat in August 2016, listed 69 facilities and lending of Dh10.4 billion at July 31, against Dh2.9 billion reported for June 30. The comparison dates differ, but the court cited the records as evidence of internal tracking.

“It was thus disguised through manipulation of the underlying accounting ledgers, and thereby it was concealed from EY,” Justice Smith said of undisclosed borrowing. His findings concerned the historical accounts examined in the proceedings.

Were other arrangements involved?

Fixed-term deposits at Bank of Baroda were matched by equal, or nearly equal, overdrafts costing more in interest than the deposits earned. The court stressed that these “offset deposits” were legitimate products but accepted that they were used here to report assets while concealing matching borrowing.

The allegations formed part of the administrators’ case against the bank, rather than Shetty or Manghat. The administrators subsequently settled with Bank of Baroda and ended their claims.

The court also examined guarantees and other financial backing for facilities used by Shetty and related parties between 2012 and 2020. Shetty knew his personal facilities were supported by security arrangements missing from the group’s financial statements, the judge found.

Such arrangements could create obligations without immediate cash transfers. The judgment records the claimants’ statement that many guarantees were not called upon when creditors’ claims were established, and says there was no evidence that other security, such as post-dated cheques, was enforced.

When did the shortfall emerge?

Undisputed accounting evidence showed that NMC Healthcare and other group companies lacked sufficient assets to cover liabilities from December 31, 2013, once hidden borrowing and security arrangements were included. Following restructuring, the 34 ADGM companies ceased to be “balance sheet insolvent” on March 25, 2022, the judgment records.

Borrowing also financed the scheme’s running costs. “New Undisclosed Debt not only allowed misappropriations to continue, but covered interest and finance costs of existing debt and provided cash to cover the inflated revenue,” the judgment said.

Why better systems didn't expose it?

Manghat said the balance sheet was “essentially kept as a very complicated Excel spreadsheet” and the group lacked a “proper IT environment”. Shared accounting software followed auditor pressure, but “the fraudsters continued to conceal the fraud by maintaining two sets of books”, the judge said.

A March 2019 email recorded a meeting about difficulties maintaining those separate records. The judge also accepted ADCB’s argument that Manghat opposed hiring an experienced outside deputy chief financial officer because he did not want the accounting arrangements discovered.

The judgment describes a forged letter that an EY representative, Sikkander Ali, believed he collected directly from Bank of Baroda. The court examined messages arranging for an NMC executive to meet him and hand over the document.

“Somehow, apparently through impersonation of Baroda staff, Mr Ali was tricked into believing that he had collected the forged letter from Baroda directly,” Justice Smith said. Separately, he found that Shetty “knew of and assisted in hiding the NMC Group’s borrowings from EY” in March 2019.

What about personal investments?

Unchallenged evidence showed Dh4.183 billion entered Shetty’s personal accounts, with net direct payments of approximately Dh2.6 billion after transfers back to the group.

He “knowingly acquired with funds so transferred personal assets and investments”, including Travelex, an aircraft share, Dubai Hills properties and a Wyoming oil investment, the judge found.

Shetty and Puthan N C Menon jointly acquired a Gulfstream G450 aircraft for private use under an equal partnership agreed in July 2014. The arrangement ended under a January 2017 settlement, according to the judgment.

NNMC, a company solely owned by Shetty with Shetty and Manghat as directors, was used for other acquisitions. Its July 2014 investment of about $3.9 million in Wyoming oil-exploration leases was funded by Dh14.33 million from NMC Healthcare, the court found.

Payments can exceed personal gains

Shetty said senior managers defrauded him; Manghat disputed involvement and argued that Shetty perpetrated the fraud for his own benefit. The court rejected those positions and found both knowingly participated.

The assessment concerns the wider shortfall facing creditors — those owed money. Diverted funds, borrowing to finance and disguise them, and servicing costs were a major reason the group became unable to meet its obligations, the judge found.

“I see no reason that his contribution should be limited to the amount of the misappropriations, still less to the amount of the misappropriations for his own benefit,” Justice Smith said of Shetty. His apparent lack of daily involvement did not reduce his responsibility.

Manghat ran financial and treasury arrangements and had “a leading role, indeed the leading role” in carrying out and concealing the fraud. Fraudulent trading required knowing participation; wrongful trading concerned whether they knew, or should have concluded, that the companies had no reasonable prospect of continuing to pay debts when due.

What does nearly Dh20b represent?

The $5.397 billion reflects the increased shortfall after April 30, 2012, between assets available to creditors and amounts owed. Bezant and Grantham agreed on the figure, and neither defendant challenged their evidence on it.

It is not a final order requiring each man to pay nearly Dh20 billion. The court will determine the final amounts after further submissions, with payments ordered on the fraudulent-trading basis.

What could creditors recover?

ADCB separately established claims against Manghat for approximately $1.022 billion outstanding and $168.989 million in lost profits. Its forensic accounting witness was Mark Taylor of Secretariat Partners, who, like Bezant and Grantham, gave oral evidence and was cross-examined.

The outstanding amount remains subject to any adjustment Manghat establishes. ADCB must also deduct recoveries from pledged shares, the administration and creditor exit instruments — financial instruments through which creditors received recoveries.

Other successful claims overlap, requiring measures to “avoid double recovery”. Bezant calculated unlawful payments under the NMC companies’ civil claims at $1.589 billion, compared with Grantham’s $1.587 billion; the difference, possible adjustments and a $278.7 million professional-fees request await further consideration.

Under restructuring arrangements, claims belonging to the 34 ADGM companies were transferred to NMC Healthcare. Relevant creditors became entitled to litigation recoveries under agreed terms, but the ruling sets no payment date or individual recovery percentage.

What happens next?

A further hearing will settle payments, interest, costs and claims between defendants. Adjustments will be required to prevent recovery of the same loss twice.

The judge also declined to decide whether Shetty and Bank of Baroda’s then managing director, PS Jayakumar, agreed that the group would repay liabilities in exchange for the bank withholding the true account position. He had not heard the bank’s response to the claimants’ closing arguments.

“It would be unfair to Baroda and to Mr Jayakumar personally to make a finding about that,” he said. Final financial orders remain outstanding.