Author: Yashika Mittal, Ramaiah College of Law
ABSTRACT
The Punjab National Bank (PNB) scam involving Nirav Modi stands as one of the largest financial frauds in Indian banking history. Estimated at over ₹14,000 crore, the scam highlighted critical vulnerabilities in the Indian financial and regulatory systems. Through fraudulent Letters of Undertaking (LoUs) and exploitation of the SWIFT messaging system, Nirav Modi and his associates siphoned off public money over a span of years. This case study explores the scam’s background, the modus operandi, its legal implications, and its broader impact on India’s banking sector. It also reflects on key judicial precedents and reforms introduced following the scandal. The case represents a significant learning opportunity for legal and financial professionals alike.
Keywords: Nirav Modi, PNB scam, banking fraud, Letters of Undertaking, Indian banking sector, money laundering, corporate fraud, SWIFT abuse.
INTRODUCTION
In recent years, India has witnessed several high-profile financial scams that have shaken public trust in the banking system. One of the most infamous among them is the PNB scam involving celebrity jeweller Nirav Modi. Emerging in 2018, the case stunned the nation due to the sheer size of the fraud and the ease with which it had been carried out under the noses of regulators, auditors, and banking officials. What made the scam especially alarming was that it involved one of India’s oldest and most trusted public sector banks—Punjab National Bank.
The scam not only resulted in an enormous financial loss but also revealed serious flaws in the internal control mechanisms of Indian banks. More importantly, it raised questions about the accountability of both private enterprise and public officials. This article delves into the intricacies of the case to understand how such a significant fraud was possible, and what steps the Indian legal and financial systems have taken in its aftermath.
BACKGROUND OF THE SCAM
Nirav Modi, once a celebrated figure in the global jewellery market, owned a thriving business empire, with high-end stores located in several international cities. His rise to fame was swift, but it concealed the murky financial practices that ultimately brought him down. Along with his uncle Mehul Choksi, Nirav Modi systematically defrauded Punjab National Bank by securing unauthorized credit guarantees that allowed them to obtain massive loans from overseas branches of Indian banks.
The PNB branch at Brady House in Mumbai became the epicentre of the scam. It was here that a few officials colluded with Nirav Modi’s companies to issue LoUs without proper authorization or collateral. These LoUs were used to obtain buyer’s credit from foreign banks, supposedly for the import of gems. However, these imports were either non-existent or grossly overvalued. The lack of margin money and guarantees made the entire process risky and fraudulent. Yet, the practice continued for nearly seven years, undetected by any internal or external audits.
THE PROOF AND MODUS OPERANDI
The scam revolved around the fraudulent issuance of Letters of Undertaking—a banking instrument through which one bank guarantees payment on behalf of a client to another bank, usually for import financing. In this case, PNB officials issued LoUs in favour of Nirav Modi’s companies without any approved credit limit or collateral.
A critical flaw exploited by the fraudsters was the loophole in the use of the SWIFT (Society for Worldwide Interbank Financial Telecommunication) messaging system. Bank employees used SWIFT to send messages to overseas banks confirming the issuance of LoUs. However, these transactions were not recorded in PNB’s Core Banking System (CBS). Because of this disconnect between SWIFT and CBS, auditors and compliance officers were unaware of the growing financial liability. Each new LoU was used to repay previous borrowings, forming a massive Ponzi-like structure within the banking network.
The fraudulent scheme came to light only when a new officer at the branch refused to process fresh LoUs without proper margin money. When Nirav Modi’s representatives argued that no such margin was required in the past, the bank initiated an internal inquiry. The subsequent findings shocked everyone: the bank had been exposed to liabilities exceeding ₹11,000 crore, which later escalated to ₹14,000 crore.
LEGAL IMPLICATIONS UNDER INDIAN LAW
Once the scam was discovered, a host of legal actions were initiated against Nirav Modi, Mehul Choksi, and the involved bank officials. Multiple Indian laws came into play, each addressing different aspects of the fraud.
Under the Indian Penal Code, 1860, several provisions were invoked. These included Section 420 for cheating and dishonestly inducing delivery of property, Section 409 for criminal breach of trust by public servants, and Section 120B for criminal conspiracy. The Prevention of Corruption Act, 1988, was used to prosecute the bank officials who accepted bribes and facilitated unauthorized transactions.
The Enforcement Directorate invoked the Prevention of Money Laundering Act, 2002 (PMLA), identifying and seizing assets bought with the proceeds of crime. Properties belonging to Nirav Modi and his family were frozen or confiscated under the Act. In 2019, Nirav Modi was declared a fugitive economic offender under the Fugitive Economic Offenders Act, 2018. This gave Indian authorities the legal mandate to seize and auction his assets even in his absence.
The Companies Act, 2013, was also used to scrutinize financial irregularities in Modi’s companies, which had grossly manipulated their books to show a false picture of profitability and stability.
Case Laws Related to Similar Frauds
Harshad Mehta v. State of Maharashtra (1992): In this landmark case, Harshad Mehta manipulated the banking system using fake bank receipts. Though different in method, this case set a precedent for handling white-collar crimes.
Satyam Scandal (Ramalinga Raju v. SEBI, 2009): One of India’s biggest corporate frauds involving manipulation of company accounts. Highlighted the importance of transparent auditing and accountability in corporate governance.
Vijay Mallya Case (State Bank of India v. Kingfisher Airlines, 2016): Another high-profile scam involving unpaid loans to banks. The courts emphasized prompt enforcement actions and recovery of public money.
CBI v. Sanjay Chandra (2G Spectrum Scam): Though not a banking fraud, this case illustrates how public officials and private companies colluded to cause significant financial loss to the government.
CURRENT SITUATION
As of 2024, Nirav Modi remains in a UK prison, contesting his extradition to India. In 2021, a UK court approved his extradition, stating that there was sufficient evidence to try him in Indian courts. However, Modi filed appeals on human rights grounds, arguing that Indian prison conditions would violate his rights under the European Convention on Human Rights. The matter is still pending before higher UK courts.
Mehul Choksi managed to flee to Antigua and acquired citizenship there under the country’s investment program. While India has initiated extradition proceedings against him, Choksi has filed multiple legal challenges claiming threats to his life and alleging abduction attempts. The Antiguan government has yet to hand him over to Indian authorities.
In India, the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) have arrested several bank officials, including Gokulnath Shetty. Former top officials of PNB were also investigated and removed from service. The courts are conducting trials under fast-track mechanisms, although the final verdicts are still awaited.
Several of Modi’s high-value properties and luxury assets, including jewellery, paintings, and international real estate, have been auctioned. According to government reports, assets worth over ₹2,500 crore have been recovered so far, but the full amount is yet to be repaid to the banks.
CONCLUSION
The Nirav Modi-PNB scam is more than just a case of white-collar crime; it is a glaring reflection of the vulnerabilities that exist in India’s financial and legal ecosystem. The ease with which the fraud was carried out, and the length of time it remained undetected, demonstrate the urgent need for reform in financial governance, compliance mechanisms, and legal accountability.
The case forced the Reserve Bank of India and the government to undertake major banking reforms. The integration of SWIFT with CBS was made mandatory to ensure better transaction tracking. Audit protocols were tightened, employee rotation policies were strengthened, and banks were instructed to monitor trade finance transactions more closely.
The case further emphasized the need for legal reforms to deal with economic fugitives. The enactment of the Fugitive Economic Offenders Act was a direct response to this case. While laws alone cannot prevent fraud, their strict enforcement can act as a strong deterrent. The Nirav Modi case continues to serve as a cautionary tale for regulators, banks, and policymakers alike.
FAQS
Q1. What was the total amount involved in the PNB-Nirav Modi scam?
Ans: The total scam amount was approximately ₹14,000 crore (around $2 billion).
Q2. How was the fraud executed?
Ans: The fraud was executed through unauthorized issuance of Letters of Undertaking using the SWIFT system without recording the transactions in the Core Banking System.
Q3. What legal actions were taken?
Ans: Nirav Modi and others were charged under various provisions of the IPC, PMLA, the Prevention of Corruption Act, and the Companies Act. Modi was also declared a fugitive economic offender.
Q4.What is the current status of Nirav Modi?
Ans: Nirav Modi is in the UK, where he is contesting India’s extradition request. Legal appeals are still ongoing.
Q5. What reforms were introduced after the scam?
Ans: Reforms include mandatory SWIFT-CBS integration, better internal audits, employee rotation policies, and the Fugitive Economic Offenders Act.
