Punjab National Bank Scam

The Punjab National Bank (PNB) Fraud (2018) was a fraudulent letter of undertaking scheme worth ₹12,000 crore (US$1.4 billion). It was issued by Punjab National Bank at its House branch in Fort, Mumbai, making the Bank liable for the amount.[1] The fraud was allegedly organised by jeweller and designer Nirav Modi. Nirav, his wife Ami, his brother Nishal, and his uncle Mehul Choksi were named in a charge sheet by the Central Bureau of Investigation (CBI), along with all partners of the firms M/s Diamond R US, M/s Solar Exports, and M/s Stellar Diamonds, PNB officials, employees and directors of Nirav Modi and Mehul Choksi's firms.[2] Nirav Modi and his family fled the country in early 2018, days before the news of the scam broke in India.

The Enforcement Directorate confiscated movable and immovable assets of Nirav Modi and his associates amounting to Rs 692.90 crore under the Fugitive Economic Offenders Act, 2018.[3] Nirav Modi was declared a fugitive economic offender in December 2019.[4] Furthermore, he has been on Interpol's wanted list since February 2018 for charges including criminal conspiracy, criminal breach of trust, cheating and dishonesty including delivery of property, corruption and money laundering.[5][6] In March 2019, Nirav was arrested in central London by British authorities.[7]

The bank initially said that two of its employees at the branch had been involved in the scam. The bank's core banking system had been bypassed when the employees had issued LoUs to overseas branches of other Indian banks, including Allahabad Bank, Axis Bank, and Union Bank of India, using the international financial communication system, SWIFT. The transactions were later noticed by a new employee of the bank.[8] The bank then lodged a complaint with the CBI, which investigated the scam along with the ED (Enforcement Directorate) and the Reserve Bank of India. The CBI named key officials Usha Ananthasubramanian, former CEO of PNB, and executive directors KV Brahmaji Rao and Sanjiv Sharan in a charge sheet, holding them responsible for failing to implement several circulars and cautionary notices issued by the RBI regarding the reconciliation of SWIFT messages and core banking systems.[9]

Investigation

PNB alleged that associates of three firms, Diamond R US, M/s Solar Exports, and M/s Stellar Diamonds—approached the bank on 16 January 2018 with a request for Letters of Understanding (LoU) to pay their overseas suppliers. The bank demanded at least 100% cash margin for issuing LoUs, but the firms contended that they had received LoUs without such a guarantee in the past. Branch records did not show that any such facility had been granted to the firms. PNB suspected fraud and began investigating the transaction history.[10]

On 29 January 2018, PNB filed a complaint with the CBI. It alleged that Nirav Modi, Ami Modi, Nishal Modi and Mehul Choksi, partners of M/s Diamond R US, M/s Solar Exports, and M/s Stellar Diamonds, colluded with two bank officials. They were occused of committing cheating against PNB and causing wrongful loss. In his complaint, a PNB official informed the agency about the Bank's Brady House branch in Fort, Mumbai. He stated that two employees, including Gokulnath Shetty, a retired Deputy Manager of PNB, along with another bank official, had issued fraudulent LoUs to Hong Kong-based creditors. These LoUs were issued on behalf of three firms associated with Nirav Modi and the Gitanjali Group.

The first Information Report (FIR) filed by the CBI stated: “The public servants committed abuse of official position to cause pecuniary advantage to Diamonds R US, Solar Exports and Stellar Diamonds and wrongful loss of ₹280.70 crore to PNB during 2017”.[10]

Reforms

On 1 March 2018, the government approved the Fugitive Economic Offenders Bill to deter economic offenders from evading the process of Indian law by giving powers to the government to confiscate assets of a fugitive, including Benami assets of absconding loan defaulters.[30] The bill covered a wide range of economic offences, including loan defaulters, frauds, and violations of laws governing taxes, black money, Benami properties, and corruption. On 12 March 2018, the government introduced the bill in the Lok Sabha.[31]

In March 2018, the Reserve Bank of India scrapped banking instruments such as the Letter of Understanding (LoU) and Letter of Comfort (LoC) in an attempt to plug a loophole and improve banks’ due diligence in trade credit. Some bankers noted that LoUs and LoCs led receiving banks to depend entirely on the issuing bank's assessment of creditworthiness.[32]

In the Media

The fraud was featured in the second episode, "Diamonds Aren't Forever", of the Netflix-based documentary series Bad Boy Billionaires: India.[33] The series got involved in legal issues, as Mehul Choksi approached the Delhi High Court and filed a plea demanding a pre-screening before the release.[34] However, the plea was dismissed by a single judge panel of the Delhi High Court on 29 August 2020.[35] The series was released on 5 October 2020.

See also

• Nirav Modi