Author: Bhavika Dhuria, Chandigarh University
Linkedin Profile: https://www.linkedin.com/in/bhavika-dhuria-6b20b7340?utm_source=share&utm_campaign=share_via&utm_content=profile&utm_medium=ios_app
To the Point
The Punjab National Bank (PNB) scam, discovered in 2018, was one of the biggest financial scam in the history of Indian banking. It involved fraudulent Letters of Undertaking (LoUs) being issued by the bank officers along with the diamond jeweller and designer Nirav Modi and his maternal uncle Mehul Choksi, managing director of Geetanjali Gems. This was a fraud of about ₹11,400 crore (approximately US$1.8 billion), which highlighted the weaknesses in the system of banks in India. The scam thus gave rise to major reforms in banking laws, extradition battles on foreign countries, and high-profile prosecutions under Indian criminal laws.
Facts and background of the case law
Nirav Modi, a famous diamond jeweller and designer with his maternal uncle Mehul Choksi, managing director of Geetanjali Gems with the help of Punjab national bank officials Gokulnath Shetty, Deputy Manager, PNB and one another member of the bank gets the fraudulent LoUs (letters of undertaking).
This is continue from 2011 to 2017 at the Brady House branch, Mumbai and in this time period they obtain the LoUs of worth 11,400 crores.
In the 2018 when the deputy manager, Gokulnath Shetty retired from his position and a new official join on that position, the company demanded the LoUs from the same branch and when they demanded the collateral the company said that they are getting the LoUs (letters of undertaking) without any collateral.
At that time it attracts the attention of the officials of the Punjab national bank that the letters of undertaking were issued fraudulently by the officials via SWIFT.
Nirav Modi and his family run to the abroad before the scam was come into the light in India.
In February 2018 PNB files a complaint with CBI which becomes this scam public. CBI in its investigation which is apart from the ED and the reserve bank of India filed a chargesheet against Usha Ananthasubramanian, former CEO of PNB, executive directors KV Brahmaji Rao and Sanjiv Sharan holding them the responsible for the scam.
After the complaint the ED initiate to attach the property under the the Fugitive Economic Offenders Ordinance.
Nirav Modi along with his partners were charged under section 420 and section 120(B) of the Indian penal code (IPC),1860 and they were also find offender under the corruption and money laundering. The bank officials were charged under the section 409(criminal breach of trust by public officials )along with other sections.
Nirav Modi was arrested by the authorities of London,UK in march 2019 and India start the procedure of extradition. After that many proceedings were going on and the attached properties were auctioned.
Abstract
This article is an study of the PNB scam from the view of law and banking points. This scam is about the lack in Indian banking systems. It starts with the background and series of events, followed by the modus operandi(mode of operation) which includes the issue of fraud LoUs (letters of undertaking) and the failure of authorised use of swift. We explain the legal jargon which includes the words like LoUs and the section which were imposed on the accused and the bank officials, present the primary evidence discovered by investigating agencies like CBI and ED, and discuss relevant case law to explain this scam better and to tell that how the Indian banking systems are changed after this scam and what laws are involve din the Indian system to protect the money laundering. The article also provides a rich FAQ section for readers who need simplified explanations of complex matters to provide a better understanding of the scam and the changes which were made after the scam of Nirav Modi.
Legal Jargon and Key Terms
The key terms and laws which are used in this case laws are:
LoUs: known as letter of undertaking is a document issued by a bank for the guarantee on behalf of a merchant or businessman for a short time credit. This letters are issued after the collection of a proper collateral (something valuable like property or anything which is given to someone if a person cannot paid the debt amount).
SWIFT Network: known as society of worldwide interbank financial telecommunications network is a global messaging network used by all the worldwide banks to a secure transaction.
Fugitive Economic Offenders Ordinance: A law in Indian system to retain the offenders to flew from the country it provides a right to the authorities to seize or attach the property of offender.
CBI: Central bureau of investigation is an independent investigating agency in India who handle the cases of complex crimes like frauds, murders and corruption.
ED: Enforcement directorate is an independent agency responsible for enforcement of economic laws like PMLA (Prevention of Money Laundering Act, 2002)and FEMA.
Section 420 IPC: deals with the fraud which include the dishonest intention and cheating.
Section 409 IPC : deals with the criminal breach of trust by a public official.
Section 120(B) IPC : this deals with the criminal conspiracy.
Prevention of Corruption Act,1988: deals with the corruption and punishments given for the corruption and the remedies provided to the person.
The Proof
This scam was revealed by a Punjab national Bank official who was newly appointed. It was revealed when the firm of Nirav Modi demand of a new LoUs in 2018 and the newly appointed official of the bank demanded the collateral and the firm said that they have been getting the LoUs without any collateral. Then the official of bank checked the previous record and the collateral which was missing for the issuance of LoUs and suspected something wrong and complaint it to the higher authorities. The proofs which helped in revealing the scam are:
The emails between the firms of Nirav Modi and the bank officials who issued the letters of undertaking for several years.
Swift messages were also found which were used for the issue of unauthorised LoUs.
There were shortage of record in the banking core system relating to the publication of the LoUs.
ED finds in its audit which finds the transaction of funds in the shell companies (The companies which are made under the companies Act but doesn’t carry its business)
wealth of the Nirav Modi being forfeiture together the belongings and luxury items.
Case Laws
Nirav Modi v. Government of India (UK High Court, 2021–2023): In the magistrate’s court,UK Nirav Modi opposed the extradition saying about the mental health and unfair trial which was quashed by the UK court stating the prima facie evidence against the accused for money laundering, fraud and criminal conspiracy.
Directorate of Enforcement v. Firestar Diamond International Pvt. Ltd. & Ors: In this case the ED filed a chargesheet against the Nirav Modi for money laundering under PMLA(prevention of money laundering act) and the special court gives permission to attach the belongings of the Nirav Modi.
State (CBI) v. Gokulnath Shetty & Others: The trial for criminal misappropriation and corruption is going under the special court of CBI and the charges were framed against the accused under the Indian Penal code,1860 and prevention of corruption act.
Directorate of Enforcement v. Nirav Modi –: In this example the court announce Nirav Modi as a fugitive economic perpetrator and allows the ED to seize the residences of Nirav Modi.
Mehul Chinubhai Choksi v. Union of India & Others: Mehul Choksi fought against the extradition in Antigua on the basis of mental illness and the death fear in India but it was declined due to prima facie.
Reforms
After the scam of Punjab national bank(Nirav Modi scam) RBI (reserve bank of India) issued several guidelines and many laws were bring to prevent this kind of scams by the Indian parliament. The changes which were made after the scam are:
The government of India handed the Fugitive Economic Offenders(FEO) invoice to seize the property of the perpetrator recover the mortgage quantity in March,2018.
In march, 2018 the reserve financial institution of India banned at the LoUs(Letters of undertakings) and LoC (Letter of Comfort).
Reserve bank of India make the mandatory provision of the connection of Swift messages to the core system of the bank.
Conclusion
The Punjab National Bank scam, one of the biggest finance scam in Indian banking history exposed the businessman and the corrupted bank officials which shake the trust of public into Indian banks. This scam tells the failure of the real time audit and the misuse of the swift messages outside its purview. This kind of scam results in the monetary loses to the India. From this scam there was a huge loss which have to be faced by the PNB in the annual year of 2018. After this scam the Indian government gives attention to the Indian banking systems loopholes and it introduce a new guidelines to prevent the scams in India. The scam thus gave rise to major reforms in banking laws, extradition battles on foreign countries, and high-profile prosecutions under Indian criminal laws. The scam led to major changes in banking compliance protocols, international extradition battles, and high-profile prosecutions under Indian criminal law.
FAQS
1. When was the Punjab National Bank scam was highlighted and who were the parties involved in it?
The punjab national bank scam (Nirav Modi scam) was came into light in 2018 and the parties involved in it were Nirav Modi, a famous diamond merchant, his maternal uncle Mehul Choksi (managing director of Geetanjali gems) and two bank officials.
2. What were the main reasons for the scam?
The main reason for the scam was the misuse of Swift messaging system and the lack in the Indian banking systems.
3. Which sections of IPC were imposed on the Nirav Modi ?
The sections of the IPC which were imposed on the Nirav Modi were section 420( fraud), section 120(B) criminal conspiracy and sec 406.
4. What are the reforms made after the scam?
The reforms which were made after the scam was that a bill of fugitive economic offenders was introduced in the parliament in 2018 and many guidelines were provided to banks by the reserve bank of India to prevent the scams in India.
5. Has any money been recovered?
Yes. Properties worth over ₹4,000 crore have been seized and auctioned.
6. Who is a fugitive economic offender?
A fugitive economic offender is a person against whom an arrest warrant has been issued in India for a economic offence and he fled to the abroad and deny to come back in India.
7. How can such frauds be prevented in the future?
Such frauds can be prevented in the future by strict rules for the swift messaging and CBS (Core Banking System), transparent interbank communication and realtime KYC and timely audits.
References
https://en.wikipedia.org/wiki/Punjab_National_Bank_Scam
https://www.business-standard.com/about/what-is-pnb-scam
https://www.hindustantimes.com/india-news/how-mehul-choksi-cheated-punjab-national-bank-of-rs-13-500-crore-pnb-loan-fraud-case-101744604571009.html
https://timesofindia.indiatimes.com/business/india-business/how-mehul-choksi-and-nirav-modi-pulled-off-multi-billion-dollar-pnb-scam/articleshow/120272112.cms
