Author: Ashwin R Nair, Student of Lloyd School of Law, Greater Noida.

ABSTRACT

The Nirav Modi scandal, including fraudulent transactions of ₹12,000 crore (US$1.4 billion), was engineered through the issuing of Letters of Undertaking (LOUs) by the Punjab National Bank (PNB) at its Brady House branch in Mumbai. Jeweller Nirav Modi, his uncle Mehul Choksi, and other partners orchestrated the scheme. These bogus LOUs were produced by circumventing PNB’s core banking system and obtaining credit from Indian banks’ foreign branches via the SWIFT network. The scam was discovered by a new PNB employee, prompting a thorough investigation by India’s Central Bureau of Investigation (CBI) and Enforcement Directorate. Key bank officials, including PNB’s former CEO Usha Ananthasubramanian, were accused of neglecting to regulatory rules. The accused fled India before the scheme was discovered, resulting in international manhunts and asset seizures. Nirav Modi was finally arrested in London in March 2019. This incident showed serious inadequacies in financial monitoring, prompting increased regulatory measures in the Indian banking system.

KEYWORDS

Scam, Punjab National Bank, Credit , Finance, Asset, Fraud

TO THE POINT

Nirav Modi is a fugitive Indian businessman who was in the business of luxury diamond jewellery. He is the founder of Nirav Modi chain of diamond jewellery retail stores and his henchmen were at the helm of India’s largest-ever banking scandal, which rattled the very foundation of the country’s financial industry. The scam was Rs.11,400 crores (approximately 1.8 billion dollars) and was primarily carried out in a single Mumbai branch of the Punjab National Bank (PNB), India’s second-largest public sector lender. This article examines the routes of this billion-dollar swindle via an analytical and legal lens. The Punjab National Bank (PNB) Fraud Case concerns the illegal issuing of letters of undertaking (LOUs) totalling ₹12,000 crore (US$1.4 billion) by PNB’s Brady House branch in Mumbai, resulting in the bank’s liability. The fraud was allegedly carried out by jeweller and designer Nirav Modi, his wife Ami Modi, brother Nishal Modi, and uncle Mehul Choksi. They were all partners in the enterprises Diamond R US, Solar Exports, and Stellar Diamonds. The Central Bureau of Investigation (CBI) has filed a charge sheet against several PNB officers and workers, as well as directors of Nirav Modi and Mehul Choksi’s enterprises. 

Nirav Modi and his family fled in early 2018, shortly before the scandal was uncovered. India’s Enforcement Directorate has began attaching the accused’s assets and is pursuing swift confiscation under the Fugitive Economic Offenders Ordinance. Nirav Modi has been on Interpol’s wanted list since February 2018, charged with criminal conspiracy, breach of trust, cheating, corruption, and money laundering. UK authorities apprehended him in downtown London in March 2019.

The theft was detected after unscrupulous workers bypassed the bank’s core banking system and issued LOUs to foreign branches of other Indian banks via the SWIFT international financial communication system. The transactions were discovered by a new bank employee. PNB then reported the incident to the CBI, which is investigating the scandal alongside the ED and the Reserve Bank of India. The CBI has appointed key officers, including Former PNB CEO Usha Ananthasubramanian and executive directors KV Brahmaji Rao and Sanjiv Sharan were charged with failing to follow RBI circulars and caution notices involving the reconciliation of SWIFT messages and core banking systems.

SPOTLITS OF THE CASE

False LOUs: Nirav Modi, his uncle Mehul Choksi, and other associates carried out the scheme by obtaining false LOUs from PNB. LOUs are guarantees offered by one bank to another bank’s branch, allowing the bank’s customer to acquire short-term credit from the latter.
Bypassing Banking Systems: Corrupt PNB staff issued fake LOUs by bypassing the bank’s main banking system. They sent similar letters of authorisation to overseas branches of other Indian banks such as Allahabad Bank, Axis Bank, and Union Bank of India using the SWIFT international financial communication system.

Scam Detection: The scam was discovered when a fresh employee at PNB observed the odd transactions. Following an examination, it was discovered that the LOUs had been issued without proper authorisation and without being logged into the bank’s central system. Before the scheme was discovered, Nirav Modi, his wife Ami Modi, brother Nishal Modi, and uncle Mehul Choksi departed India. They were all partners in enterprises such as Diamond R US, Solar Exports, and Stellar Diamonds.

Legal Actions: The Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) have launched investigations into the scam. The accused’s assets were attached, and seizure was pursued pursuant to the Fugitive Economic Offenders Ordinance. Nirav Modi was added to Interpol’s wanted list and detained in London in March 2019.

Involvement of PNB executives: The CBI’s chargesheet implicated numerous PNB executives, including former CEO Usha Ananthasubramanian, and held them accountable for failing to apply RBI’s recommendations on reconciling SWIFT messages from the bank’s basic banking system.

The scandal exposed major flaws in banking operations and regulatory monitoring, prompting stronger restrictions and scrutiny of the Indian banking sector.

“UNVEILING THE TRUTH: THE ROLE OF INVESTIGATION IN THE PNB SCAM”

The Punjab National Bank (PNB) scam, also known as the Nirav Modi scam, began when associates of three firms—Diamond R US, M/s Solar Exports, and M/s Stellar Diamonds—requested Letters of Undertaking (LOUs) from PNB on January 16, 2018, to pay overseas suppliers. PNB demanded a 100% cash margin, but the firms claimed they had previously received LOUs without this requirement. Suspicious of fraud, PNB investigated and found no records of such facilities being granted. Consequently, on January 29, 2018, PNB filed a complaint with the Central Bureau of Investigation (CBI), alleging that Nirav Modi, his family members, and associates, in collusion with two PNB officials, committed fraud and caused significant losses to the bank.

Key details include:

• Two PNB employees, Gokulnath Shetty and another official, issued fraudulent LOUs to creditors in Hong Kong on behalf of Nirav Modi’s firms, bypassing PNB’s core banking system using the SWIFT network.
• Initially, the scam was estimated at ₹280.70 crore (US$42 million) but later ballooned to ₹14,356.84 crore (US$2.1 billion).
• Nirav Modi fled India in February 2018 and was eventually arrested in London in March 2019. His extradition process is ongoing, and he has been denied bail multiple times due to being considered a flight risk.
• Several key officials, including former PNB CEO Usha Ananthasubramanian, were implicated for failing to implement regulatory guidelines.
• Multiple assets belonging to Nirav Modi and his associates have been seized or frozen globally.
• The CBI and Enforcement Directorate (ED) are actively pursuing legal actions, including filing chargesheets, seeking Red Corner Notices, and auctioning confiscated assets.

The scam revealed significant lapses in banking oversight and led to stricter regulations within the Indian banking sector.

NOTABLE FINANCIAL SCAM CASES IN INDIA

Satyam scandal (2009): Known as “India’s Enron,” this scandal entailed falsifying the company’s finances, totalling to around ₹7,000 crore (US$1.5 billion). Ramalinga Raju, the chairman, admitting to altering the company’s balance sheet.

Sahara Scam: In 2010, Sahara India Pariwar was accused of illegally obtaining ₹24,000 crore (US$3.3 billion) from investors. The Supreme Court of India ruled that the corporation refund the money plus interest.

The 2G Spectrum Scam (2010) : It featured the Department of Telecommunications allegedly undercharging telecom corporations for frequency allocation licenses, resulting in a loss of ₹1.76 lakh crore (US$24 billion) for the exchequer.

Coal Allocation Scam of 2012: Popularly known as “Coalgate,” this scheme involves allocating coal blocks to private businesses Failure to conduct a competitive bidding process resulted in a loss of ₹1.86 lakh crore (US$25 billion).

The Saradha Chit Fund Scam (2013): It was a Ponzi scheme that deceived millions of investors. The Saradha Group was accused of defrauding investors of around ₹2,500 crore.

CONCLUSION

On March 1, 2018, the government enacted the Fugitive Economic criminals Bill to dissuade economic criminals from fleeing Indian law by granting the government the authority to seize a fugitive’s assets, including Benami assets of absconding loan defaulters. The measure addresses a wide spectrum of economic offenders, including loan defaulters, fraudsters, those who break tax laws, black money, Benami properties, the financial industry, and corruption. On March 12, 2018, the government introduced the bill in the Lok Sabha. 

In March 2018, the Reserve Bank of India discontinued banking instruments such as Letters of Understanding (Lou) and Letters of Comfort (LoC) in an attempt to close a loophole and improve banks’ trade credit due diligence.

FREQUENTLY ASKED QUESTIONS (FAQs)

Q What legal charges were filed against Nirav Modi and his associates in the Nirav Modi scam?

Ans: Nirav Modi and his associates faced charges of criminal conspiracy, breach of trust, cheating, corruption, and money laundering.

Q Which regulatory and legal bodies investigated the Nirav Modi scam?

Ans: The Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) conducted the investigations, with the Reserve Bank of India (RBI) also involved in oversight.

Q What legal actions were taken against the Punjab National Bank executives?

Ans: Key PNB executives, including former CEO Usha Ananthasubramanian, were charged with failing to follow regulatory guidelines on reconciling SWIFT messages with the core banking system.