Author : Kashika Verma, Institute of Law, Nirma University.
To the point-
The PNB scam involving Nirav Modi, uncovered in early 2018, is considered India’s largest financial fraud. Diamond trader Nirav Modi, together with accomplices and involved bank officials, exploited the issuance of unauthorized Letters of Undertaking (LOUs) via the SWIFT network, evading the core banking system (CBS) at Punjab National Bank’s (PNB) Brady House branch in Mumbai. In more than seven years, this enabled his companies to secure almost ₹13,000 crore in loans from foreign banks with little oversight. This fraud not only exposed deficiencies in banking compliance systems but also raised important issues concerning regulatory effectiveness, corporate oversight, and global responsibility.
Use of Legal Jargon-
Fraudulent Misrepresentation – False statements made by PNB officials regarding the bank’s responsibility permitted the offender to gain inappropriate credit.
Letter of Undertaking (LOU) – A legally enforceable bank guarantee provided to international banks, ensuring the customer’s repayment commitments. Used improperly here without the necessary authorization.
SWIFT (Society for Worldwide Interbank Financial Telecommunication) – An international messaging platform utilized by financial organizations to safely share information; was used independently from PNB’s CBS.
Core Banking System (CBS) – The unified banking system designed for immediate processing of banking transactions. Exclusion of LOU data here enabled concealment.
Money Laundering – Concealing the source of illegal money via intricate pathways; a vital element in this situation.
Criminal Conspiracy (Sec. 120B IPC) – Pact between individuals to carry out an unlawful act; relevant in collaboration between PNB employees and Nirav Modi.
Fugitive Economic Offender (FEO) – An individual for whom an arrest warrant has been issued related to economic crimes exceeding ₹100 crore and who has escaped from the country.
Due Diligence – A legal obligation for banks to assess creditworthiness, collateral, and KYC standards prior to providing guarantees or loans.
Non-fund Based Facilities – Financial tools such as letters of credit or guarantees; banks are accountable only upon default, thus off-balance-sheet unless activated.
Know Your Customer (KYC) and AML Compliance – Essential steps to authenticate identity and hinder the abuse of banking systems.
The proof-
The Nirav Modi–PNB fraud was carried out via methodical manipulation of the banking system by taking advantage of procedural weaknesses and internal collusion. Central to the fraud were illicit Letters of Undertaking (LOUs) issued from the Brady House branch of Punjab National Bank in Mumbai. LOUs are official bank assurances enabling a client to obtain short-term foreign credit. In this instance, PNB officials, particularly Gokul Nath Shetty and Manoj Kharat, sidestepped internal procedures by issuing LOUs through the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network without recording them in the Core Banking System (CBS). The CBS-SWIFT disconnection resulted in these transactions being undetected by PNB’s internal audit, risk management, and senior management for several years. From 2011 to 2017, LOUs totaling more than ₹13,000 crore were issued without collateral or proper due diligence. Foreign branches of Indian banks disbursed funds relying on PNB’s fraudulent guarantees, which were deposited into PNB’s Nostro accounts and subsequently utilized by Nirav Modi’s firms.
The fraud came to light in January 2018 when Nirav Modi’s companies applied for a new LOU, and the new officer, finding no record in the CBS, rejected the request and raised the matter. An internal inquiry was initiated, resulting in PNB’s report to the CBI on January 29, 2018. It was subsequently found that previous LOUs had been deceitfully extended for years to evade detection. The fraud resulted in significant financial and reputational harm—not only to PNB but also to other banks that provided credit based on these deceitful guarantees. It showed how a mix of internal collusion, inadequate integration of key systems, and regulatory neglect can result in one of the largest banking frauds in Indian history.
Abstract-.
This case study reveals the Nirav Modi–Punjab National Bank scam, a complex financial offense that highlighted systemic weaknesses in India’s banking and regulatory frameworks. At its core was a failure of internal controls, driven by collusion between bank officials and Nirav Modi’s businesses. Fraudulent LOUs were generated outside of PNB’s main systems, successfully concealing ₹13,000 crore in liabilities from being identified. The discovery of the scam resulted in a trust crisis within India’s public sector banks, initiated reforms in risk management and SWIFT-CBS integration, and prompted the implementation of new legal measures such as the Fugitive Economic Offenders Act. This situation illustrates how collusion, inadequate governance, and technological mismanagement can result in significant financial disasters. The research additionally suggests changes for risk reduction, legal remedies, and structural safeguards.
Case Laws-
CBI v. Nirav Modi & Others-
Tribunal: Special CBI Tribunal, Mumbai
Relevance: This is the primary criminal case where the Central Bureau of Investigation (CBI) accused Nirav Modi, his family members, and involved PNB officials under various sections of the Indian Penal Code (IPC) and Prevention of Corruption Act.
Main Accusations:
Section 120B of the IPC (Criminal Conspiracy)
Section 420 of the IPC (Fraud and deceitfully persuading the transfer of property)
Section 468 & 471 IPC (Forgery for the purpose of cheating and using forged documents)
Section 13(2) in conjunction with 13(1)(d) of the Prevention of Corruption Act, 1988 (Criminal misconduct by public officials)
Enforcement Directorate v. Nirav Modi (PMLA Proceedings)-
Legislation: Prevention of Money Laundering Act (PMLA), 2002
Forum: Authority for Adjudication, New Delhi
Relevance: The ED seized assets totaling over ₹1,800 crore under PMLA, claiming that Nirav Modi laundered money obtained from the bank fraud.
Case Law Application: According to Sections 3 and 4 of PMLA, money laundering and hiding illegal assets are punishable crimes.
Union of India v. Nirav Modi (Extradition Proceedings in UK)-
Tribunal: Westminster Magistrates’ Tribunal & UK High Court
Relevance: The UK Extradition Act of 2003 was invoked to request Nirav Modi’s extradition to India due to charges filed in India. The courts in the UK determined that there exists a prima facie case of fraud, conspiracy, and money laundering.
Nirav Modi Declared Fugitive – ED Application under Fugitive Economic Offenders Act, 2018-
Relevance: Nirav Modi was among the initial persons to be labeled a Fugitive Economic Offender under this legislation. This allowed the Indian government to seize his assets without needing a conviction.
Key Areas:
Section 2(f) – Definition of a Fugitive Economic Offender
Section 4 – Application for declaration
Section 12 – Seizure of assets
Delhi High Court Judgments on Property Attachment (2019–2021)-
Nirav Modi and Mehul Choksi contested property seizures under PMLA and FEOA, yet the Delhi High Court affirmed the ED’s measures, bolstering the authority of recent economic offense legislation
Conclusion-
The Nirav Modi–PNB scam highlights a significant failure in India’s banking and regulatory systems. It revealed significant weaknesses in internal banking controls, risk evaluation, and oversight systems, especially in public sector banks. The extended issuance of unauthorized Letters of Undertaking lacking collateral or appropriate documentation facilitated by the disconnection between the SWIFT network and the Core Banking System underscores how technological and procedural deficiencies can be taken advantage of in the absence of strong oversight. Moreover, the conspiracy among high-ranking bank executives, the lack of prompt audits, and insufficient regulatory scrutiny fostered a situation where fraudulent activities totaling over ₹13,000 crore remained unnoticed for years. The situation also exposed significant shortcomings among external auditors and brought into question the responsibility of management and board leadership. Following the incident, the scam led to major policy and legal changes, such as the RBI’s prohibition on LOUs and the implementation of the Fugitive Economic Offenders Act, 2018. Nevertheless, although these are crucial corrective actions, the genuine insight underscores the necessity for a cultural transformation in banking ethics, stronger compliance structures, and continuous risk assessment. Moving ahead, transparency, technological integration, and rigorous legal enforcement must serve as the foundation of India’s financial governance to avert the recurrence of such extensive frauds.
FAQs-
1. What allowed this fraud to persist for more than 7 years?
The critical factor was the PNB officials’ utilization of the SWIFT system independently from CBS. As SWIFT transactions were not displayed in real-time in PNB’s records, the liabilities stayed concealed. Moreover, insufficient cross-checking, internal audits, and excessive dependence on trust in senior staff permitted the fraud to persist unchecked.
2. What distinguishes fund-based lending from non-fund-based lending?
Fund-based: Immediate monetary departure (e.g., loans, cash advances).
Non-fund-based: Potential obligations such as bank guarantees or letters of credit (e.g., LOUs). In this instance, PNB regarded LOUs as non-fund-based, overlooking the potential for default to change them into fund obligations.
3. In what ways did the scam impact PNB and the banking industry?
The stock price of PNB collapsed. Credit rating agencies such as Moody’s have put it under review. Other banks participating (Union Bank, SBI, Axis Bank, etc.) experienced a decline in market capitalization. The fraud eroded investor trust in India’s public sector banks and highlighted the necessity for reforms in the banking industry.
4. What insights were gained from the PNB scam?
Requirement for technology-driven audit trails.
Compulsory CBS-SWIFT integration.
Significance of safeguarding whistleblowers.
Importance of training and rotating essential staff.
Public sector banks need to embrace the efficiency and accountability benchmarks of the private sector.
5. What structural alterations occurred as a result of the fraud?
RBI prohibited LOUs/LoCs.
Integration of SWIFT-CBS was required for all banks.
RBI launched an Enhanced Supervisory Framework (ESF) aimed at the early identification of fraud.
The government expedited the execution of the Insolvency and Bankruptcy Code (IBC) for non-performing assets (NPAs).
