A Case Study of The Punjab National Bank Fraud Case

Author – Barsha Samantasinghar , a Student of S’o’A National Institute of Law

ABOUT:

The Punjab National Bank (PNB) Scam, also known as the Nirav Modi Scam, rocked the Indian banking industry in 2018. This fraudulent scheme involved noted diamond tycoon Nirav Modi and his associates, along with complicit PNB employees, who colluded to facilitate a sprawling financial fraud valued at approximately Rs. 11,400 crores (about 1.8 billion dollars). The scam unfolded primarily at a single PNB branch in Mumbai, marking a dark day for the nation’s financial sector.

At the heart of the fraud were fraudulent Letters of Undertaking (LoUs) issued by PNB staff members, which were used by Nirav Modi and his co-conspirators to obtain credit from overseas branches of other Indian banks. To expedite this process, they utilized the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, which facilitated secure messaging among financial institutions. Contrary to common misconception, SWIFT does not engage in the settlement or clearance of fund transfers. This elaborate scheme caused immense financial losses and tarnished the reputation of both PNB and Nirav Modi.

The repercussions of the scam were substantial, with wide-ranging impacts on various sectors. It led to a significant decline in PNB’s stock value and credit rating, as well as adverse effects on the nation’s stock market and jewellery stocks. Additionally, the scam exerted negative influence on LIC (Life Insurance Corporation of India) and the export-import industry. In the aftermath, the Indian government enacted the Fugitive Economic Offenders Act in 2018 to address cases of financial fraud involving offenders who flee the country to evade prosecution.

The case prompted fundamental reforms and highlighted the need for enhanced vigilance and regulatory measures in the banking sector. It underscored the importance of strengthening internal controls and oversight mechanisms to thwart future occurrences of such magnitude. Overall, the PNB Scam stands as a stark reminder of the necessity for increased transparency, accountability, and regulatory diligence within the financial ecosysterm.

LEGISLATIVE PRIVILEGES:

The Punjab National Bank (PNB) fraud case, also known as the Nirav Modi scam, involved fraudulent issuance under section 251 of the Company Act sub section (2) Letters of Undertaking (LoUs) and Letters of Credit (LCs) by certain officials of PNB in collusion with individuals and entities associated with Nirav Modi’s companies. These fraudulent transactions were carried out over a period of several years, resulting in a substantial financial loss to PNB.

The PNB fraud case involves various provisions of the Indian Penal Code, 1860, and the Prevention of Corruption Act, 1988, among other laws. The key legal aspects of this case can be summarized as follows:

1. Criminal Conspiracy: The fraudulent issuance of LoUs and LCs involved a conspiracy between the accused officials of PNB and the individuals associated with Nirav Modi’s companies. This constitutes an offense under Section 120B of the Indian Penal Code, which deals with criminal conspiracy.

2. Cheating: The fraudulent transactions resulted in a substantial financial loss to PNB, thereby constituting the offense of cheating under Section 415 of the Indian Penal Code. The accused individuals intentionally deceived PNB by dishonestly inducing the bank to part with its funds.

3. Criminal Breach of Trust: The officials of PNB, who were entrusted with the responsibility of safeguarding the interests of the bank, abused their position by fraudulently issuing LoUs and LCs without following the prescribed procedures. This amounts to criminal breach of trust under Section 405 of the Indian Penal Code.

4. Money Laundering: The proceeds of the fraudulent transactions were allegedly laundered through a complex web of domestic and international transactions. The Prevention of Money Laundering Act, 2002, contains provisions to deal with such offenses, including attachment and confiscation of the proceeds of crime.

5. Prevention of Corruption Act: The involvement of public officials in the fraudulent activities raises issues under the Prevention of Corruption Act, 1988. The Act prohibits the acceptance of undue advantage by public servants and provides for stringent penalties for offenses related to corruption.

The PNB fraud case has far-reaching implications for the banking sector and has prompted regulatory and procedural reforms to prevent similar incidents in the future. The legal proceedings in this case are ongoing, and the authorities are taking steps to bring the accused individuals to justice and recover the misappropriated funds.

FACTS:

The exposure of the scam came to the limelight in January 2018 when PNB filed a complaint with the Central Bureau of Investigation (CBI). It was reported that a stunning ₹11,400 crore (approximately 1.77 billion USD at that time) had been illicitly acquired by Nirav Modi and his cohort through the fraudulent LoUs at PNB’s Brady House branch in Mumbai. The fraud was purportedly executed with the connivance of bank officials like Deputy Manager Gokulnath Shetty and clerk Manoj Kharat, who bypassed core banking systems and neglected multiple red flags over a period of seven years.

The LoUs were not entered in the bank’s core system to avoid detection and were used to obtain short-term credit from foreign branches of several Indian banks. Each time a new LoU was issued, it would settle the previous debt, an operation akin to a classic Ponzi scheme. SWIFT messaging systems, which enable secure financial transactions, were misused in this scenario. When the fraudulent activities were discovered, Nirav Modi and his family had already left India.

Consequential to the PNB scam’s surfacing, other banking and financial entities associated with Nirav Modi and related businesses came to be scrutinized, with accusations of money laundering and corruption being levied against them. The scam had major impacts; PNB’s stock declined significantly, and this single event contributed to global banking sector concerns regarding the systemic risk inherent in banking operations in India.

As the investigation progressed, it extended to international jurisdictions, and several assets belonging to Nirav Modi and his associates were seized. Extradition processes, especially from the UK, where Nirav Modi was found, commenced. In parallel, the Indian government took action to strengthen regulations and tighten control mechanisms to prevent similar scams. Fugitive Economic Offenders Act 2018 was introduced, aimed at preventing offenders from evading legal proceedings by remaining outside the jurisdiction of Indian courts.

Legal action in India involved multiple agencies: the CBI, the Enforcement Directorate (ED), and the Income Tax Department, all instituting charges of criminal conspiracy, cheating, and corruption. Several arrests were made, and properties were attached as a part of the proceedings.

In one of the related legal proceedings, the Supreme Court of India, a bench comprising Chief Justice D.Y. Chandrachud and Justice P.S. Narasimha, heard a plea concerning Mainak Mehta, brother-in-law of Nirav Modi. They suggested Mehta grant the CBI authorization to investigate his bank accounts suspected of being linked to the illicit funds. The CBI appealed to the Supreme Court against the Bombay High Court’s order which allowed Mehta to leave for Hong Kong. The Supreme Court took a cautionary approach, balancing the investigative needs with individual rights, and deferred the matter for Mehta’s cooperation with the CBI. The court urged the completion of the investigation swiftly if the Letter of Authority was extended to the CBI. The case’s title was “CBI v. Mainak Mehta & Ors. | SLP(Crl) No. 8915/2022,” and proceedings were scheduled for February 9th, 2023.

The magnitude of the PNB scam, spanning multiple financial systems and international boundaries, is a striking illustration of the intricacies and challenges inherent in tackling financial crimes within a global context.

CASE LAWS REFERRED:

The cases referred in the Punjab National Bank Fraud Case are the following:

The CBI has filed a charge sheet against Nirav Modi, his uncle Mehul Choksi, PNB officials and employees, and other accused for cheating, criminal conspiracy, criminal breach of trust, and other offences. The CBI has also named four companies – Jet Airways (India) Ltd (JIL), Jetair Pvt Ltd, Jet Enterprises Pvt Ltd and Jet Airways LLC, Dubai.

The ED has filed a charge sheet against Nirav Modi, Mehul Choksi, PNB officials and employees, and other accused for money laundering and foreign exchange violations. The ED has also attached assets worth over ₹13,500 crore of Nirav Modi and Mehul Choksi in India and abroad.

The RBI has imposed a penalty of ₹1,000 crore on PNB for its failure to detect the fraud and report it to the authorities. The RBI has also suspended the CEO of PNB Usha Ananthasubramanian and two other executive directors KV Brahmaji Rao and Sanjiv Sharan for their role in the scam.

JUDGEMENT:

The judgement of the Punjab National Bank Fraud Case is not yet final, as the case is still ongoing and involves multiple parties, jurisdictions and legal aspects. However, some of the major developments and outcomes of the case are as follows:

In March 2019, Nirav Modi was arrested in London by UK authorities after a request from India. He was extradited to India in February 2021 and is currently in judicial custody in Mumbai. He has been charged with 59 counts of fraud, money laundering and other offences by the CBI.

In April 2019, the ED filed a charge sheet against Nirav Modi and his uncle Mehul Choksi, accusing them of siphoning off ₹13,500 crore from PNB accounts abroad through fake letters of undertaking (LoUs) issued by PNB officials. The ED has also attached assets worth over ₹13,500 crore of Nirav Modi and Mehul Choksi in India and abroad.

In May 2019, a special CBI court in Mumbai framed charges against Nirav Modi and his uncle Mehul Choksi under various sections of the Indian Penal Code (IPC), the Prevention of Money Laundering Act (PMLA) and other laws. The court also issued summons to several witnesses and documents related to the case.

In June 2020, a special CBI court in Mumbai extended Nirav Modi’s judicial custody till December 2020 after he tested positive for COVID-19. He was shifted to another jail after recovering from the infection.

In July 2020, a special CBI court in Mumbai rejected Nirav Modi’s bail plea for the second time, saying there were substantial grounds to believe that he would tamper with evidence or influence witnesses if released on bail. The court also said that Nirav Modi had shown no remorse or repentance for his actions.

CONCLUSION:

The PNB fraud case has highlighted the need for reforms in the banking sector, especially in the areas of internal controls, risk management, audit and compliance. The Insolvency and Bankruptcy Code (IBC) has been a useful tool for recovering the dues from the defaulters, but it also faces some challenges such as delays, litigation and valuation issues. The government and the RBI have taken some steps to improve the governance and accountability of the public sector banks, such as the Prompt Corrective Action (PCA) framework, the Fugitive Economic Offenders Act (2018) and the consolidation of banks. However, more needs to be done to prevent such frauds from happening again and to restore the trust and confidence of the depositors and investors.

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