Author: Ashok Kumar Ratan, Assam University, Silchar
Abstract
The Punjab National Bank Fraud Case related to a fraudulent letter of undertaking, which was worth around ₹11,400 crore (US$1.8 billion) issued by the PNB (Punjab National Bank) at its Brady House branch located in Fort, Mumbai, which makes Punjab National Bank liable for the amount.
The main accused in this fraudulent case were jeweller and designer Nirav Modi, his maternal uncle Mehul Choksi, all partners of the firms M/s Diamond R US, M/s Solar Exports and M/s Stellar Diamonds and other relatives and some employers of PNB. After he accomplished his scam, Nirav Modi and his relatives absconded from India in early 2018, before the day the news became public. This $1.4 billion scam, orchestrated through fraudulent Letters of Undertaking (LoUs), not only shook public trust in India’s banking sector but also prompted sweeping regulatory reforms.
How did the Scam take Place?
Bankers of the PNB used a fake Letter of Undertaking (LoU) at PNB’s Brady House Branch in Fort, Mumbai. The LoUs were opened in favour of branches of Indian banks for the import of pearls for one year, for which Reserve Bank of India guidelines lay out a total time of 90 days from the date of paydoad.
Overseas branches of Indian banks ignored these guidelines. Indian banks failed to share any document/information with PNB, which was made available to them by the firms at the time of availing credit from them.
PNB’s deputy manager Gokulnath Shetty and colleague Manoj Kharat at Mumbai’s Brady House branch colluded with billionaire jeweler Nirav Modi and his uncle Mehul Choksi (owner of Gitanjali Gems).
Shetty bypassed PNB’s internal systems to issue fraudulent LoUs without recording them in the Core Banking System (CBS). These LoUs were issued to Modi and Choksi’s shell companies (e.g., Solar Exports, Stellar Diamonds) without collateral, violating banking norms. The LoUs were used to obtain buyers’ credit from overseas branches of Indian banks (e.g., Axis Bank, Allahabad Bank, Union Bank of India).
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a global messaging system banks use for cross-border transactions.
At PNB, SWIFT was not integrated with CBS, meaning transactions via SWIFT were not automatically recorded in the bank’s central database.
Shetty exploited this disconnect; he issued LoUs via SWIFT but did not log them in CBS, hiding the transactions from auditors and senior management. No checks were made to verify if the LoUs were backed by collateral or proper documentation
When an LoU’s 90–180 day credit period expired, Modi/Choksi’s firms could not repay the loans. To avoid detection, Shetty issued fresh LoUs to repay older ones, creating a cycle of debt. This “rolling over” of LoUs kept the liabilities off PNB’s balance sheet for years
Shetty shared SWIFT login credentials with junior staff to authorize transactions. Mid-level PNB employees ignored red flags, such as missing collateral records or unusually high credit limits for Modi/Choksi’s firms.
PNB’s internal auditors and external auditors (including Price Waterhouse Coopers) failed to detect the fraud despite annual inspections. The absence of SWIFT-CBS integration allowed the fraud to remain hidden.
In January 2018, Nirav Modi’s firms approached PNB’s Brady House branch for fresh LoUs worth ₹280 crore. A new PNB employee, following protocol, asked for collateral. When Modi’s team claimed they had always received LoUs without collateral, the bank investigated and uncovered the fraud.
Total Loss: ₹11,400 crore ($1.8 billion) issued via 1,214 fraudulent LoUs between 2011–2017. Nirav Modi used funds to expand his global jewelry empire (e.g., opening stores in Hong Kong and New York). Mehul Choksi diverted funds to offshore accounts and inflated his company’s financial health.
How the PNB Fraud Scam Unfolded: A Detailed Breakdown
1. The Trigger Point: A Routine Request Exposes the Scam
The scam, which had been running smoothly since 2011, finally began unraveling on January 29, 2018, when companies linked to Nirav Modi approached Punjab National Bank’s (PNB) Brady House branch in Mumbai. They requested fresh Letters of Undertaking (LoUs) worth ₹280 crore to secure overseas credit. However, unlike previous transactions, a new PNB officer handling the request followed standard banking protocols and asked for collateral before issuing the LoUs. When Modi’s representatives insisted they had always received LoUs without collateral in the past, the bank grew suspicious. This discrepancy prompted an internal investigation, which ultimately exposed one of India’s biggest banking frauds.
2. Discovery of Fraudulent LoUs and Hidden Transactions
As PNB officials dug deeper, they found no records of previous LoUs in the bank’s Core Banking System (CBS). A cross-check with the SWIFT transaction logs revealed a shocking truth -1,214 fraudulent LoUs, totaling ₹11,400 crore ($1.8 billion), had been issued between 2011 and 2017 without proper authorization. These LoUs were never recorded in CBS, making them invisible during audits. The scam had thrived because Gokulnath Shetty, a deputy manager at PNB’s Brady House branch, had bypassed CBS and directly issued LoUs through SWIFT, ensuring they remained undetected for years.
3. Immediate Actions: Reporting the Fraud and Launching Investigations
Upon confirming the fraud, PNB took swift action. On February 5, 2018, the bank filed a formal complaint with the Central Bureau of Investigation (CBI). By February 14, 2018, PNB officially disclosed the fraud to the stock exchanges and the Reserve Bank of India (RBI), sending shockwaves through India’s financial sector. The next day, the CBI and Enforcement Directorate (ED) launched nationwide raids, seizing assets worth hundreds of crores from Nirav Modi’s offices, residences, and jewelry showrooms. The scale of the fraud became clear—funds had been siphoned overseas, and the key accused had already fled the country.
4. Key Findings: How the Fraud Was Executed
Investigations revealed a well-planned scam involving multiple players. Gokulnath Shetty, the PNB official at the center of the fraud, had exploited a critical loophole—SWIFT was not integrated with PNB’s CBS, allowing him to issue LoUs without leaving a digital trail. Meanwhile, overseas branches of other Indian banks (such as Axis Bank, Allahabad Bank, and Union Bank) had failed to verify the authenticity of these LoUs with PNB’s head office before disbursing funds. This lack of due diligence allowed the fraud to go undetected for years. Additionally, Nirav Modi and Mehul Choksi had already fled India—Modi was last seen in New York, while Choksi had secured citizenship in Antigua, making extradition difficult.
5. Aftermath: Regulatory Reforms and Financial Fallout
The PNB fraud forced India’s banking sector to implement sweeping reforms. In March 2018, the RBI banned LoUs entirely to prevent future misuse. By April 2018, all banks were mandated to integrate SWIFT with CBS to ensure real-time transaction monitoring. The government also introduced the Fugitive Economic Offenders Act (2018), empowering authorities to confiscate the assets of economic criminals who flee the country. Meanwhile, PNB suffered massive financial losses, reporting a record quarterly loss of ₹13,417 crore in Q4 2018. The bank began recovering funds by auctioning seized assets, including luxury properties, diamonds, and artwork linked to Nirav Modi.
The PNB fraud was not just a case of individual corruption but a massive institutional failure. Poor oversight, lack of system integration, and negligence by multiple banks allowed the scam to operate undetected for seven years. While reforms have since strengthened banking protocols, the case remains a cautionary tale about the dangers of weak internal controls. Today, Nirav Modi remains jailed in London, fighting extradition, while Mehul Choksi continues to evade prosecution in Antigua. The PNB scam serves as a stark reminder of the need for transparency, accountability, and technological safeguards in India’s financial system.
Supreme Court’s Orders in the PNB Fraud Case
1. Refusal to Quash Investigations
The Supreme Court firmly rejected attempts by the accused to stop the ongoing investigations. When some of the defendants, including PNB employees and associates of Nirav Modi, filed petitions seeking to quash the FIRs or halt the CBI and ED probes, the Court dismissed these pleas. It emphasized that the case involved serious financial crimes that warranted a comprehensive investigation. The judges noted that economic offenses of this scale required strict judicial scrutiny, and they upheld the agencies’ authority to continue their work without interference.
2. Approval of Asset Confiscation
In a significant ruling, the Supreme Court backed the Enforcement Directorate’s use of the Fugitive Economic Offenders Act (FEOA) against Nirav Modi and Mehul Choksi. The Court dismissed legal challenges to the FEOA’s constitutional validity, affirming the government’s right to seize properties belonging to economic offenders who flee the country. This decision allowed authorities to auction high-value assets, including luxury properties, diamonds, and artwork, to recover some of the defrauded funds. The ruling strengthened the legal framework for dealing with financial fugitives.
3. Non-Interference in Extradition Proceedings
The Supreme Court adopted a hands-off approach regarding the extradition of Nirav Modi from the UK. While Modi’s legal team attempted to challenge aspects of the extradition process through Indian courts, the SC declined to intervene, stating that extradition matters fall under international treaties and foreign jurisdiction. The Court’s position cleared the way for Modi’s eventual extradition, which was approved by UK courts in 2021. However, the SC did ensure that Modi’s right to legal representation was protected during the process.
4. Rejection of Bail Pleas
The Supreme Court consistently denied bail to key accused individuals, including PNB officials and Modi’s associates, who were in custody. The judges cited the gravity of the offense, the risk of evidence tampering, and the possibility of witnesses being influenced as reasons for keeping the defendants in jail during the trial. These rulings underscored the Court’s strict stance on financial crimes and its commitment to allowing the judicial process to proceed without obstruction.
5. Monitoring of Investigation Progress
At various stages, the Supreme Court directed the CBI and ED to submit status reports on the investigation. While the Court did not micromanage the probes, it ensured that the agencies were conducting them diligently and without unnecessary delays. This oversight helped maintain transparency and accountability in one of India’s most high-profile financial fraud cases.
6. Upholding Banking Reforms
Though not directly passing orders on banking regulations, the Supreme Court’s rulings implicitly supported the systemic reforms triggered by the PNB scam. By validating the actions of investigative agencies and refusing to dilute the legal proceedings, the Court reinforced the need for stronger financial oversight, better auditing practices, and stricter compliance mechanisms in India’s banking sector.
The Supreme Court played a crucial role in shaping the legal response to the PNB fraud case. Its orders ensured that investigations proceeded unhindered, assets were rightfully confiscated, and accused individuals were held accountable. While the Court avoided overreach in matters like extradition, its firm stance on economic offenses set important precedents for handling high-value financial crimes in India. The rulings not only advanced the PNB case but also strengthened the country’s legal framework against banking fraud.
FAQS
Q1: What was the total financial impact of the fraud on PNB?
A1: The bank reported direct liabilities of ₹11,400 crore (US$1.8 billion), with subsequent quarterly losses exceeding ₹13,000 crore. Recovery efforts have reclaimed approximately ₹14,000 crore through asset seizures and auctions.
Q2: What is the current legal status of the main accused parties?
A2:
Nirav Modi: Extradition approved by UK courts (2021), currently incarcerated in London pending final appeals
Mehul Choksi: Granted citizenship in Antigua & Barbuda; extradition proceedings ongoing
Gokulnath Shetty (PNB official): Remains in Indian custody facing trial.
Q3: How did the fraud remain undetected for seven years?
A3: The scam persisted due to:
Lack of real-time reconciliation between SWIFT and CBS
Collusion between branch officials and beneficiaries
Failure of internal and external audit mechanisms
Non-verification of LoUs by overseas bank branches.
Conclusion
The Punjab National Bank fraud case of 2018 stands as a defining moment in India’s financial history, exposing critical vulnerabilities in the banking system while triggering much-needed reforms. This ₹11,400 crore scam revealed how systemic failures – from technological loopholes in the SWIFT-CBS interface to lapses in internal audits and regulatory oversight – could be exploited by unscrupulous entities.
The case demonstrated the devastating consequences when banking protocols are bypassed through collusion between bank officials and businessmen. While the aftermath saw significant corrective measures, including the abolition of LoUs, mandatory system integration, and the Fugitive Economic Offenders Act, the complete resolution remains pending. The prolonged extradition proceedings against Nirav Modi and Mehul Choksi’s continued evasion of justice highlight the challenges in addressing complex financial crimes in a globalized economy. More fundamentally, the PNB scam serves as an enduring reminder that robust systems and stringent oversight are meaningless without consistent enforcement and accountability.
As India’s banking sector continues to modernize, the lessons from this case must inform not just policy changes but also the ethical framework within which financial institutions operate. The true measure of progress will be whether these reforms can prevent future frauds while maintaining the delicate balance between operational efficiency and financial security.
Reference
Primary Sources (Official Documents)
Central Bureau of Investigation (CBI)
First Information Report (FIR) No. RCBI/2018/A0003 (February 15, 2018)
Chargesheets filed in Special CBI Court, Mumbai (May 2018, supplementary filings 2019–2020)
Reserve Bank of India (RBI)
Circular on LoUs: RBI/2017-18/154 (March 13, 2018) [Prohibition of LoUs]
SWIFT-CBS Integration Mandate: RBI/2017-18/205 (April 6, 2018)
Enforcement Directorate (ED)
Prosecution Complaint under PMLA (2018)
Asset Attachment Orders (2018–2022) under Fugitive Economic Offenders Act
Supreme Court of India
Vijay Madanlal Choudhary v. Union of India (2022) SCC Online SC 929
State of Gujarat v. Mohanlal Jitamalji Porwal (1987) 2 SCC 364
United Kingdom Judiciary
Government of India v. Nirav Modi [2021] Westminster Magistrates’ Court Case No. 2100339
Secondary Sources (Reports & Articles)
Punjab National Bank
Fraud Disclosure Notice to Stock Exchanges (February 14, 2018)
Annual Reports (2017–2018): Notes on contingent liabilities
Parliamentary Standing Committee on Finance
Report on Banking Sector Frauds (2018–19), Lok Sabha Secretariat
Press Trust of India (PTI)
“PNB Fraud Case: Timeline of Events” (March 10, 2021)
The Hindu BusinessLine
“How the PNB Fraud Unfolded” (February 15, 2018)
Economic Times
“SWIFT System Vulnerabilities Post-PNB Scam” (April 10, 2018)
