Ms Khobragade, Deputy Consul General at the Indian Consulate in New York, was reportedly arrested on the street while she was dropping her daughter to school. She was later released on a $250,000 bail.
Manhattan's top federal prosecutor Preet Bharara said Ms Khobragade had presented false documents for the woman who worked as a babysitter and housekeeper at her home in New York from November to June this year. He alleged the woman had been exploited and made to work for "less than fair" wages.
Ms Khobragade, 39, who has two young daughters, is in charge of Political, Economic, Commercial and Women's Affairs at the consulate. The charges against her carry maximum sentences of ten years and five years in prison.
India has asked the US to resolve the matter with "sensitivity", taking into account Ms Khobragade's diplomatic status.
In a statement, the Indian embassy in Washington said Sangeeta Richard, whose complaint led to the arrest, had been "absconding since June" and faces an arrest warrant. (read)
The woman reportedly complained that the visa papers said she was to be paid $ 4,500 per month, but in the seven months she worked for the diplomat, she was paid far less and put in much more than 40 hours a week.
Mr Bharara said foreign nationals brought to the US to be domestic workers were entitled to the same protections as US citizens. "This type of fraud on the United States and exploitation of an individual will not be tolerated," he said.
Ms Khobragade's lawyer told NDTV that her arrest on the street, without being given a chance to explain, was "shocking and unprecedented."
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