Author- KAUSTUBH VERMA, a Student of UNIVERSITY OF PETROLEUM AND ENERGY STUDIES
INTRODUCTION
On Valentine’s Day in 2018, an event unfolded that would forever mark the year as a dark period for the banking industry. India’s largest banking scam shook the foundation of the country’s financial sector, with diamond mogul billionaire Nirav Modi and his associates at the center of the debacle. The colossal fraud, amounting to Rs. 11,400 crores (approximately 1.8 billion dollars), primarily occurred at a single branch of the Punjab National Bank (PNB) in Mumbai, India’s second-largest public sector lender. This article delves into the details of this multi-billion-dollar scam through an analytical and legal lens.
WHO IS NIRAV MODI?
Born into a family of diamond merchants in Palanpur, Gujarat, on February 27, 1971, Nirav Deepak Modi moved to Antwerp, Belgium, shortly thereafter. He enrolled at the Wharton School of the University of Pennsylvania but eventually dropped out. At 19, Modi and his father, Deepak Modi, returned to India, relocating to Mumbai to join his uncle Mehul Choksi at the Gitanjali Group, a retail jewellery company with around 4,000 stores across India. Modi later married Ami Choksi, daughter of diamond businessman Amukuraj Choksi, whom he met during his time at Wharton.
While Nirav Modi is now infamous for his involvement in a major scam, his business acumen and visionary approach were undeniable. His numerous achievements highlight his exceptional skills:
- In 2010, Modi became the first Indian jeweller to be featured on the prestigious covers of Christie’s and Sotheby’s catalogues.
- In November 2010, at a Christie’s auction in Hong Kong, his Golconda Lotus Necklace, featuring a rare 12.29 carat Golconda diamond, pink diamonds, and exclusive Aindra cut diamonds, sold for an impressive sum.
- In 2012, his ‘Riviere of Perfection’ solitaire collection, part of the Nirav Modi Jewellery collection and comprising 36 flawless white diamonds totalling 88.88 carats, was auctioned at Sotheby’s in Hong Kong.
- In 2013, Nirav Modi was featured on the prestigious Forbes list of Indian Billionaires.
NIRAV MODI COMPANY
In 1999, Nirav Modi established Firestar Diamond International Company, which primarily focuses on high-end jewellery. The ‘NIRAV MODI’ brand was launched in 2014, with its inaugural store opening in New Delhi, India. By 2015, Nirav Modi had expanded his presence by opening stores in Mumbai, Madison Avenue in New York, and Hong Kong. His business reportedly achieved sales exceeding $2 billion. Additionally, he owns other companies, including Solar Exports, Stellar Diamonds, and Diamond R US.
NIRAV MODI PNB SCAM STORY
The scheme behind the scam was highly sophisticated, and although investigations are still in progress, it is evident that Nirav Modi and his uncle Mehul Choksi orchestrated it in collaboration with certain officials from Punjab National Bank (PNB). To understand the intricate method used in this grand fraudulent scheme to deceive a prominent public sector bank, one must first grasp the concept of a Letter of Undertaking (LoU). Unauthorized LoUs, granted to Nirav Modi and his companies by corrupt PNB officials, played a crucial role in enabling him to abscond with billions of taxpayers’ hard-earned money.
A Letter of Undertaking (LoU) is essentially a bank guarantee. This guarantee allows the recipient of the LoU to raise funds overseas by presenting the LoU. Foreign banks (which are overseas branches of Indian banks) accept the LoU and extend credit or loans to the borrower, with the issuing bank guaranteeing repayment in case the borrower defaults. Typically, when someone requests an LoU, the bank requires collateral, such as a Fixed Deposit (FD) or property, and sets a credit limit. LoUs are primarily used to secure short-term, low-cost buyer’s credit.
In this scam, corrupt PNB officials issued unauthorized LoUs to Nirav Modi and his firm without requiring any collateral or sanctioned credit limit. These transactions were deliberately excluded from PNB’s Core Banking System (CBS), which is used for record-keeping. Additionally, in some cases, lower amounts were recorded than the actual transaction amounts. These unauthorized LoUs were processed using the SWIFT system, an international messaging network used by banks and financial institutions to transmit financial information securely and swiftly. The SWIFT system was not integrated with the bank’s CBS, creating a loophole that allowed Nirav Modi and his associates to operate undetected. Essentially, the SWIFT system bypassed the bank’s CBS. Indian bank branches overseas, trusting their counterparts in India, issued loans (buyer’s credit) to Nirav Modi and his firms without scrutinizing the credit quality.
Furthermore, although these LoUs were intended for import-related payments, Nirav Modi and his associates used them to repay previous loans and for other purposes. This unchecked and rampant misuse continued for approximately seven years, facilitated by Nirav Modi, Mehul Choksi, their associates, and corrupt PNB officials.
WHEN AND HOW PNB SCAM CAME INTO LIGHT?
As previously mentioned, this fraud was carried out with the cooperation of corrupt officials at a PNB branch in Mumbai. When one of these corrupt officials retired, a new official took over the position. This new official, adhering to standard procedures, requested collateral from Nirav Modi and his firms for issuing LoUs. In response, he was informed that Nirav Modi and his firms had been receiving LoUs without collateral for many years. Concurrently, the foreign banks that had extended loans to Nirav Modi and his firms based on PNB’s LoUs began demanding repayment from PNB.
At this point, internal investigations commenced, but no records of these transactions were found because the corrupt officials had not recorded the unauthorized LoUs in the bank’s Core Banking System (CBS). Consequently, on February 14, 2018, Punjab National Bank, the second-largest public sector bank in India, was forced to report the fraudulent transactions, amounting to approximately 1.8 billion dollars, to stock exchanges, the Central Bureau of Investigation (CBI), the Reserve Bank of India (RBI), and the public. This revelation brought the Nirav Modi scam to the forefront of public attention.
TIMELINE OF THE SCAM
29th January 2018: Punjab National Bank (PNB) lodged a complaint with police authorities, alleging that two staff members colluded with Nirav Modi and Mehul Choksi to defraud the bank of approximately two billion dollars.
5th February 2018: PNB informed the Securities and Exchange Board of India (SEBI) about its internal investigation into the scam. Subsequently, the Central Bureau of Investigation (CBI) took over the inquiry after a meeting.
14th February 2018: PNB announced a fraud amounting to Rs. 11,400 crores. Additionally, foreign branches of Indian banks reported that they had credited funds to Nirav Modi and his firms due to unauthorized and unsecured Letters of Undertaking (LoUs) issued by PNB staff.
16th February 2018: Following a complaint against Mehul Choksi, the CBI raided around 20 stores of Choksi’s Gitanjali Group. PNB issued an optimistic statement, expressing hope to recover the losses within six months. Various banks disclosed their credit exposure to the Nirav Modi fraud, including:
- Union Bank of India – $300 million (approx.)
- State Bank of India – $212 million (approx.)
- UCO Bank – $412 million (approx.)
- Allahabad Bank – $367 million (approx.) The Reserve Bank of India (RBI) called for stricter supervisory and regulatory measures.
17th February 2018: The CBI issued arrest warrants for the two corrupt PNB employees and key executives from Nirav Modi’s group involved in the scam. The Enforcement Directorate (ED) seized diamonds, gold, and jewellery worth approximately Rs. 56.74 billion from Nirav Modi’s properties.
20th February 2018: PNB’s share prices plummeted, resulting in a significant loss in market capitalization due to the fear and volatility caused by the scam. Finance Minister Arun Jaitley and the RBI issued statements highlighting the failure to link the SWIFT system with the CBS (Core Banking System). Nirav Modi and his lawyers denied any wrongdoing, but the ED found evidence of illegal fund laundering through nearly 100 shell companies. The CBI detained three more officers from Nirav Modi’s group for interrogation.
21st February 2018: The CBI began arresting several corrupt officers involved in the scam, including PNB’s general manager Rajesh Jindal, who had served at the Mumbai branch where the scam occurred.
23rd February 2018: The Institute of Chartered Accountants of India (ICAI) appointed independent auditors to investigate the PNB scam. The RBI announced stricter controls for supervising and regulating the SWIFT system.
27th February 2018: Firestar Diamond International, Nirav Modi’s firm, filed for bankruptcy in the United States.
28th February 2018: Former auditor M.K. Sharma was arrested by the CBI for manipulating the audit system in the PNB scam.
1st March 2018: Internal Auditor Bishnubrata Mishra of PNB was arrested by the CBI for his role in the scam.
6th March 2018: The CBI arrested Vipul Chitalia, Vice President of Banking Operations of the Gitanjali group.
2nd June 2018: Interpol issued a Red Corner Notice against Nirav Modi for money laundering and fraud.
26th June 2018: A Mumbai court ordered Nirav Modi and Mehul Choksi to appear before the court or be declared fugitives under the Prevention of Money Laundering Act (PMLA), 2002.
3rd August 2018: The Indian government requested the UK government to extradite fugitive billionaire Nirav Modi to India to face trial.
18th March 2019: The Westminster Court in London issued an arrest warrant for Nirav Modi following the Indian government’s request, which was forwarded by the UK Home Office.
20th March 2019: Nirav Modi was arrested in London after the Westminster Court issued an arrest warrant. He was subsequently sent to Her Majesty’s Prison (HMP) Wandsworth.
29th March 2019: The Westminster Court rejected Nirav Modi’s bail application.
25th February 2021: The UK’s Westminster Magistrates’ Court, presided over by District Judge Sam Goozee, ruled that Nirav Modi can be extradited to India to face charges of fraud and money laundering.
AFTERMATH OF THE PNB SCAM
The Nirav Modi PNB scam had a profound impact on India’s financial sector, leading to several significant developments:
On March 13, 2018, approximately a month after the scam made headlines, the Reserve Bank of India (RBI) issued a notice prohibiting banks from issuing guarantees in the form of Letters of Undertaking (LOUs) to prevent further misuse. Consequently, the issuance of LOUs for trade-related credits for imports in India was immediately discontinued by commercial banks, as mandated by the RBI. Additionally, the RBI required the integration of the SWIFT system with banks’ Core Banking System (CBS) within a specified timeframe.
Nirav Modi faced charges of criminal conspiracy, cheating, dishonesty, fraud, breach of trust, and breach of contract.
The banking, jewellery, and insurance sectors experienced significant negative repercussions. Punjab National Bank (PNB) was expected to repay approximately Rs. 11,400 crores (about 1.8 billion dollars) in bank guarantees owed to the overseas branches of Indian banks such as UCO Bank, Allahabad Bank, Axis Bank, Union Bank of India, and SBI.
LEGAL ASPECTS OF NEERAV MODI PNB SCAM
Central Bureau of Investigation (CBI)
- Charge: Criminal Conspiracy (Section 120B)
- Statute: Indian Penal Code, 1860
- Punishment: If convicted, the punishment is the same as if the convict had abetted the offence.
- Charge: Criminal Breach of Trust by Public Servant, Merchant, Banker, or Agent (Section 409)
- Statute: Indian Penal Code, 1860
- Punishment: If convicted, the punishment is imprisonment for life or imprisonment of either description for up to ten years, and a fine.
- Charge: Cheating and Dishonestly Inducing Delivery of Property (Section 420)
- Statute: Indian Penal Code, 1860
- Punishment: If convicted, the punishment is imprisonment of either description for up to seven years, and a fine.
- Charge: Corruption (Sections 7A and 8)
- Statute: Prevention of Corruption Act, 1988
- Punishment: If convicted, the punishment is imprisonment for a term not less than three years, which may extend to seven years, or a fine, or both.
- Charge: Causing the Disappearance of Evidence (Section 201)
- Statute: Indian Penal Code, 1860
- Punishment: If convicted, the punishment is imprisonment of either description for up to three years, and a fine.
- Charge: Criminal Intimidation to Cause Death (Section 506)
- Statute: Indian Penal Code, 1860
- Punishment: If convicted, the punishment is imprisonment of either description for up to seven years, or a fine, or both.
Enforcement Directorate (ED)
- Charge: Money Laundering (Sections 3 and 4)
- Statute: Prevention of Money Laundering Act, 2002
- Punishment: If convicted, the punishment is rigorous imprisonment for a term not less than three years, which may extend to seven years, and a fine.
FREQUENTLY ASKED QUESTION
1. What is the Nirav Modi PNB Scam?
The Nirav Modi PNB scam is a major financial fraud involving the Punjab National Bank (PNB), where businessman Nirav Modi, his uncle Mehul Choksi, and their associates colluded with bank officials to fraudulently obtain Letters of Undertaking (LoUs) and embezzled approximately $2 billion.
2. How did the scam unfold?
The scam involved the issuance of unauthorized LoUs by corrupt PNB officials to Nirav Modi and his firms without proper collateral or recording these transactions in the bank’s Core Banking System (CBS). This allowed Modi to obtain loans from overseas branches of Indian banks.
3. What are Letters of Undertaking (LoUs)?
LoUs are a type of bank guarantee that allows the holder to raise funds overseas. The bank issuing the LoU guarantees repayment if the borrower defaults. In this scam, unauthorized LoUs were issued without the required collateral and not recorded in the CBS.
4. When was the scam discovered?
The scam came to light in January 2018 when PNB officials discovered the unauthorized LoUs. By February 14, 2018, PNB publicly disclosed the fraudulent transactions amounting to approximately Rs. 11,400 crores ($1.8 billion).
5. What actions were taken by the authorities?
- The Central Bureau of Investigation (CBI) and Enforcement Directorate (ED) launched investigations.
- Arrests were made, including PNB officials and Nirav Modi’s associates.
- The RBI banned the issuance of LoUs and mandated the integration of SWIFT with CBS.
- Interpol issued a Red Corner Notice against Nirav Modi, and extradition proceedings were initiated.
6. What were the charges against Nirav Modi and his associates?
Charges included criminal conspiracy, cheating, breach of trust, corruption, and money laundering under various sections of the Indian Penal Code and the Prevention of Corruption Act.
7. What was the impact on PNB and other banks?
PNB was liable to repay the fraudulent loans amounting to Rs. 11,400 crores. The banking, jewelry, and insurance sectors experienced significant negative impacts, and PNB’s market capitalization suffered a substantial decline.
