PNB Rs 114 bn fraud: How 2 bankers, Nirav Modi & his cohorts pulled it off

Punjab National Bank
Punjab National Bank (PNB) on Wednesday made a startling revelation that it has detected a colossal fraud worth Rs 114 billion (Rs 11,400 crore) in one of its Mumbai branches.

PNB said that it had been defrauded of about Rs 114 billion by jeweller Nirav Modi, his maternal uncle Mehul Chinubhai Choksi, and other relatives through some firms they own with the help of the bank employees. According to TV reports, Nirav Modi said he willing to pay back Rs 50 billion (Rs 5,000 crore).

So what really happened?

How the PNB scam unfolded

Last week, PNB had lodged an FIR with CBI stating that fraudulent LoUs worth Rs 2.8 billion (Rs 280.7 crore) were first issued on 16 January. At the time, PNB had said it was digging into records to examine the magnitude of the fraud, a PTI report said. In the complaint, PNB had named three diamond firms, Diamonds R Us, Solar Exports and Stellar Diamonds.

In a letter to 30 banks (dated - February 12, 2018) (Business Standard has reviewed the letter) Punjab National Bank said:
An excerpt of the letter

Modus operandi adopted was as under:

It was found through SWIFT trail that one junior level branch official unauthorisedly and fraudulently issued LoUs on behalf of some companies belonging to Nirav Modi Group viz. Solar Exports, Stellar Diamonds and Diamonds R Us for availing buyers' credit from overseas branches of Indian Banks.

Who carried out the fraud?

A. Two bankers

Two PNB bankers managed to bypass PNB's core banking system to raise payment notes to overseas branches of other Indian banks, including Allahabad Bank, Axis Bank, and Union Bank of India. The employees used international financial communication system -- SWIFT to raise payment notes to bank branches.

B. Corporates - Diamond, gems dealers

Initially, PNB did not reveal names of those involved in the scam. However, in a BSE filing, the bank has said the transactions were "for the benefit of a few select account holders with their apparent connivance" and that "based on these transactions other banks appear to have advanced money to these customers abroad."

Now, PNB has revealed that it was defrauded of about Rs 114 billion by jeweller Nirav Modi, his maternal uncle Mehul Chinubhai Choksi, and other relatives through some firms they own.

Three jewellers Gitanjali Gems and its subsidiaries Gili and Nakshatra are under the scanner of investigation agencies.

How did they carry out the scam?

PNB employees used fake LoUs

Letters of undertakings (LoUs) are were opened in favour of branches of Indian banks for import of pearls for a period of one year, for which Reserve Bank of India (RBI) guidelines stipulate a total time period of 90 days from the date of shipment.

This stipulation was overlooked by overseas branches of Indian banks that are also required to follow the RBI guidelines. There is clear criminal connivance of group companies of Nirav Modi and Gitanjali Gems with our branch official and also, apparently, with officials of overseas branches of Indian banks. None of the overseas branches of India based banks have shared with PNB any document/information made available to them by these Indian companies at the time of availing buyers’ credit from them."

How was the Punjab National Bank management kept in the dark?

PNB employees misused the SWIFT network to transmit messages to Allahabad Bank and Axis Bank on fund requirement. In using SWIFT, one has to log into the network to fill up fields like the account number and SWIFT code, following which, it is endorsed by a supervisor. The process is completed when the bank receiving the message confirms and the details are validated. While all this was done using SWIFT passwords, the transactions were never recorded in the bank’s core system — thus keeping the PNB management in the dark for a long time.

Who will suffer from this fraud?

According to Economics Times, banks will clampdown on credit limits and insurance companies will turn cautious. It is unclear whether the insurer in question would wriggle out of its existing commitments (if any) on the grounds that there has been a fraud. 

The Finance Ministry, however, on Wednesday sought to allay worries over the Rs 113 billion fraud case at Punjab National Bank, saying the case was not “out-of-control” and it is taking action in this respect.

The Punjab National Bank (PNB) shares plunged over 5% on Thursday in the morning trade, a day after losing 10% in the market capitalisation after a colossal banking fraud was brought to light.

Action taken

Punjab National Bank has informed reported the fraud to law enforcement and investigative agencies.

ED on Wednesday had registered enforcement case investigation report under the Prevention of Money Laundering Act (PMLA). The Enforcement Directorate (ED) is conducting searches at the residences of Nirav Modi and 11 other locations in Mumbai and Delhi in connection with the Rs 2.8 billion fraud of Punjab National Bank (PNB) allegedly by Modi and others.

Who is Nirav Modi?

Nirav Modi is a luxury diamond jewellery designer who was ranked 57 in the Forbes list of billionaires in 2017. Modi is the founder and creative director of the Nirav Modi chain of diamond jewellery retail stores.

He is also the Chairman of Firestar International, the parent of the Nirav Modi chain, which has stores in key markets across the globe. 

The 48-year-old jewellery designer's current net worth is $1.73 billion.

According to Forbes magazine, Modi has launched 16 stores in diverse locations such as such as Delhi, Mumbai, New York, Hong Kong, London and Macau.

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