Author: Ritika Ranjan, USLLS
To the Point
The banking fraud by the significant figure, Nirav Modi, stands as one of India’s most important white-collar crimes, which involved the misappropriation of over ₹14,000 crore from Punjab National Bank (PNB) through fraudulent Letters of Undertaking (LoUs). This scam revealed a systematic manipulation of banking procedures, corruption in public sector banks and exploitation of regulatory procedures and loopholes.
The deceptive misuse of LoUs is the heart of the scam. LoUs are a type of bank guarantee that allows Indian importers to obtain short term credit from overseas branches of other Indian banks. Between the years 2011 to 2018, Nirav Modi who was a prominent diamond merchant, along with his partner and family-run companies such as Firestar Diamonds, Solar Exports, and stellar Diamonds, managed to obtain unauthorized LoUs outside the core banking system (CBS), from some Punjab National Bank employees without any legitimate collateral or credit sanction. These LoUs were issued through Society for Worldwide Interbank Financial Telecommunication (SWIFT) platform, which was not attached with PNB’s internal system at that time, because of which the fraud went undetected for years.
The firm of Nirav Modi used to use the LoUs to receive buyer’s credit from foreign branches of Indian banks like Axis Bank and Allahabad Bank. When the LoUs matured, PNB found itself liable without having sanctioned the transactions in its books. This revealed not only the liability of PNB bank financially but also the significant reputational damage which triggered a nationwide banking crisis.
The Modus operandi involved collusion between Nirav Modi and senior PNB officials, primarily Gokulnath Shetty and Manoj Kharat, who bypassed checks and balances, and intentionally avoided recording transactions on official bank system. This deliberate concealment of data amounted to criminal breach of trust, cheating, forgery and a clear violation of banking norms.
The scam exposed critical regulatory loopholes in Indian banking, especially in risk management which pushed the RBI to introduce stricter guidelines for monitoring of foreign credits. In essence, the Nirav Modi case is a reflection of financial fraud, corporate greed, systematic failure and legal inadequacies.
Abstract
The Nirav Modi scam stands as a defining example of corporate fraud, regulatory failure, and institutional vulnerability in India’s banking system. Involving the misappropriation of over ₹14,000 crore from Punjab National Bank (PNB) through fraudulent issuance of Letters of Undertaking (LoUs), the case uncovered a deeply rooted nexus between corrupt banking officials and corporate entities. Nirav Modi, a prominent diamond merchant, along with his associates and shell companies, exploited loopholes in the banking infrastructure, particularly the non-integration of the SWIFT messaging system with the Core Banking System (CBS), allowing large-scale unauthorized transactions to go unnoticed for years.
At the core of the scam lies the deliberate circumvention of due process by PNB officials who issued LoUs without proper collateral or internal recording. These were used to avail buyer’s credit from foreign branches of Indian banks, creating financial liabilities that PNB had not sanctioned. The involvement of senior bank officials, especially Gokulnath Shetty, highlighted systemic collusion and breach of trust, marking violations under various provisions of the Indian Penal Code, including Sections 409, 420, 467, 471, and 120B. Additionally, the scam triggered enforcement action under the Prevention of Money Laundering Act, 2002, and the Fugitive Economic Offenders Act, 2018.
Investigations by the Enforcement Directorate (ED) and Central Bureau of Investigation (CBI) revealed a vast network of shell entities operating in multiple countries, which served to launder and reroute the funds back to Modi’s main businesses. Legal proceedings were initiated both in India and the United Kingdom, with UK courts approving Nirav Modi’s extradition, emphasizing the growing relevance of international cooperation in financial crime cases.
The scam forced Indian regulators and financial institutions to rethink risk management frameworks, audit mechanisms, and cross-border transaction oversight. Reforms introduced post-scam included banning LoUs, integrating SWIFT with CBS, and strengthening due diligence norms.
This case serves as a crucial learning point for the legal and financial ecosystem. It underlines the importance of institutional accountability, the role of technology in fraud detection, and the need for robust legal frameworks to combat white-collar crime in an increasingly globalized economy.
Use of Legal Jargon
Letter of Undertaking (LoU) is a form of guarantee given by bank wherein a bank allows its customer to raise short term credit from foreign nation’s branches of Indian banks. In this scam LoUs were fraudulently issued without proper authorization or collaterals.
As per the Fugitive Economic Offenders Act, 2018, an individual against whom a warrant has been issued for a scheduled economic offence and who has left India to avoid prosecution or refuses to return is called as a Fugitive Economic Offender or FEO.
According to the definition given under section 2(u) of the Prevention from Money laundering Act, 2002, Proceeds of Crime refers to property or assets obtained directly or indirectly through criminal activity related to a schedule offence.
Mens Rea & Actus Reus are the fundamental principles of criminal liability which states the intention or the knowledge of the wrongdoing which is mens rea, combined with the actual act committed which is the actus reus. Both of these elements form the basis for prosecution.
However sometimes mens rea alone can also lead to criminal charges.
Shell companies are entities that exist only on paper and are used to conceal ownership and movement of black money, often aiding in money laundering.
The Proof
The Nirav Modi scam reveals a complex nexus of financial deceit, misuse of official positions, and money laundering that led to one of India’s biggest banking scandals in history. Below are the detailed interpretations as well as evidence uncovered through research, investigative and legal channels:
Between 2011 and 2018, Punjab National Bank discovered that over ₹14,000 crore was fraudulently disbursed through Letters of Undertaking (LoUs) to entities owned by Nirav Modi. Certain corrupt PNB officials issued these LoUs without routing them through the Core Banking System (CBS), and without adequate collateral, which is a violation of banking norms and RBI guidelines. These LoUs were used to obtain credit from foreign branches of other Indian banks such as Allahabad Bank, Axis Bank and Union Bank of India, most of which eventually defaulted. The fraudulent issuance of LoUs marked the basic illegality in the procedure.
In this scam case, the primary accused, Nirav Modi along with his uncle Mehul Choksi, and a senior bank employee, conspired to bypass the bank’s internal audit mechanisms and exploited the society for worldwide interbank financial telecommunication (SWIFT) system by sending LoUs without recording them in PNB’s internal software. Gokulnath Shetty, who was the senior bank employee, a person with access to the SWIFT system of bank was also involved in executing these illegitimate and unauthorized LoUs. This clearly established the offence of criminal breach of trust and criminal conspiracy under sections 409 and 120B of the Indian Penal Code.
Investigators from the Enforcement Directorate (ED) and Central Bureau of Investigation (CBI) unravelled that Modi used a network of over 20 shell companies, registered in various jurisdictions including Hong Kong, Dubai and British Virgin Islands and these entities had no real business but were only used to divert funds and obtain credit fraudulently. These companies routed the money back to Modi’s flagship companies like Firestar Diamond which created a façade of legitimate revenue while laundering proceeds of crime.
A forensic audit as ordered by the PNB and the RBI confirmed the allegations of large-scale fraudulent transactions and in return the CBI filed multiple chargesheets against Nirav Modi. Mehul Choksi and other accomplices under sections 420 i.e. cheating, section 120B i.e. criminal conspiracy, section 467 i.e. forgery and 471 i.e. using forged documents as genuine of the IPC. This invoked prevention of corruption act, 1988 too, against PNB officials involved in the scam along with other bank officials and the ED also filed separate charges under sections 3 and 4 of the prevention of money laundering act, 2002.
The ED attached assets worth rupees 2650 crore including luxury apartments, diamond inventories, international bank accounts etc. under Section 5 of the PMLA. The proof includes financial trails through SWIFT transactions, emails, internal documents and company records.
Post scam, the RBI banned issuance of LoUs and introduced stricter SWIFT-CBS integration requirements. The government also pushed for banking reforms, internal vigilance, real-time audit trails and enhanced due diligence in credit disbursals.
Case Laws
Union of India v. Nirav Deepak Modi, citations: UK Westminster Magistrates Court, 2021
This case has a crucial holding when it comes to extradition process of Nirav Modi. The Indian government, through the crown prosecution service in UK, sought his extradition under the India-UK extradition Treaty (1992). Nirav Modi challenged the request on the grounds including:
Poor prison conditions in India (citing article 3 of the European convention on Human Rights).
Risk of an unfair trial
Political motivation behind the prosecution
The judgement included a prima facie case of fraud and money laundering. The court held that the evidence collected by authorities demonstrated a “ clear criminal intent”. The high court later upheld this decision, marking a milestone in transnational economic crime enforcement.
Central Bureau of Investigation v. Gokulnath Shetty & others, citation: Trial court proceedings, Mumbai
This case addressed the criminal conspiracy angle involving Nirav Modi and bank officials. Gokulnath Shetty who was a retired deputy manager at PNB, was charged under sections 120B i.e. criminal conspiracy , cheating under section 420 and criminal breach of trust under section 409 of IPC. Though in this case the trial proceedings are ongoing, the case demonstrated the internal bank mechanism were exploited and it underscores the criminal liability of both public servants and private entities.
Conclusion
The Nirav Modi scam stands as an outstanding example of systematic loopholes in banking . internal collusion and regulatory procedures and complacency which culminated as one of India’s largest financial frauds. Legally, it serves as a precedent setting case, especially in the application of Prevention of Money Laundering Act (PMLA) and the Fugitive Economic Offenders Act (FEOA), 2018. This scam demonstrated the vulnerability of banking institutions to internal fraud when adequate safeguards, such as real-time auditing and inter-system integration like SWIFT and CBS are absent.
It also highlights the role of enforcement agencies like ED and CBI along with the increasing relevance of international legal cooperation in extraditing white-collar offenders. This arrest reflects the evolving stance of India towards financial fugitives and cross-border legal enforcement mechanisms. Ultimately, this scam not only exposed the fragility of institutional trust but also brought reforms in the banking governance and financial accountability. As India continues to modernize its economic infrastructure, this precedent will remain a legal milestone and ethical benchmark in combating financial crimes and ensure that no sparkle can conceal the stain of fraud under sharp lens of law and justice.
FAQS
Q1. What exactly was the Nirav Modi scam about?
The scam involved Nirav Modi fraudulently obtaining over ₹14,000 crore from Punjab National Bank (PNB) using unauthorized Letters of Undertaking (LoUs). These LoUs were issued by colluding bank officials to secure credit from foreign branches of Indian banks, without proper documentation or collateral.
Q2. How did Nirav Modi manage to escape India?
Nirav Modi fled India in early 2018, just days before the scam became public. He initially moved to the United Arab Emirates and later sought refuge in the United Kingdom, where he was eventually arrested and subjected to extradition proceedings.
Q3. What charges have been brought against Nirav Modi?
He faces multiple charges under Indian laws including:
Section 420, 468, 471, and 120B of the Indian Penal Code (IPC) for cheating, forgery, and criminal conspiracy.
Prevention of Money Laundering Act (PMLA), 2002 for laundering the proceeds of crime.
Fugitive Economic Offenders Act, 2018 for fleeing to avoid prosecution.
Q4. What is the current status of the case?
As of now, Nirav Modi is in the custody of UK authorities. In 2021, a UK court approved his extradition to India. Legal appeals are ongoing, but the Indian government is actively pursuing his return to stand trial.
Q5. How did this scam expose weaknesses in the Indian banking system?
The case highlighted serious lapses such as:
Lack of integration between the SWIFT messaging system and the core banking software.
Poor internal controls and oversight mechanisms within the bank.
Failure of auditors and regulators to detect irregularities over a long period.
Q6. What legal reforms were prompted by this scam?
Post the scam, several measures were introduced:
Tightened RBI regulations on LoUs and international credit instruments.
Strengthening of the Fugitive Economic Offenders Act.
Calls for better audit systems, real-time alerts, and greater transparency in public sector banks.
Q7. Why is this scam considered historically significant?
It’s one of the largest bank frauds in India’s history, both in terms of the amount defrauded and its implications for the legal, financial, and political landscape. It also underscored the importance of cross-border legal cooperation in cases involving economic fugitives.
