Author: Ishika Sharma, Lords University
ABSTRACT
In the Punjab National Bank Fraud Case, the PNB (Punjab National Bank) issued a fraudulent letter of undertaking at its Brady House branch in Fort, Mumbai, worth approximately ₹11,400 crore (US$1.8 billion).
As a result, Punjab National Bank is held accountable for the sum. Jeweler and designer Nirav Modi, his maternal uncle Mehul Choksi, all partners in the companies M/s Diamond R US, M/s Solar Exports, and M/s Stellar Diamonds, as well as other family members and some PNB employees, were the primary defendants in this fraudulent case. Before the day the news broke, Nirav Modi and his family fled India in early 2018 after he had completed his scam. In addition to undermining public confidence in India’s banking industry, this $1.4 billion scam, which was carried out through phony Letters of Undertaking (LoUs), also led to extensive regulatory changes.
HOW DID THE SCAM TAKE PLACE?
PNB bankers at the Brady House Branch in Fort, Mumbai, used a fictitious Letter of Undertaking (LoU). According to Reserve Bank of India guidelines, the LoUs were opened for Indian bank branches to import pearls for a period of one year, with a total of ninety days from the date of payment. Indian banks’ overseas branches disregarded these rules. PNB did not receive any documents or information from Indian banks that were provided to them by the companies when they applied for credit from them.
The billionaire jeweler Nirav Modi and his uncle Mehul Choksi, who owns Gitanjali Gems, conspired with PNB’s deputy manager Gokulnath Shetty and colleague Manoj Kharat at the Brady House branch in Mumbai. Shetty issued fraudulent LoUs without entering them into the Core Banking System (CBS) by circumventing PNB’s internal systems. In violation of banking regulations, these LoUs were given to Modi and Choksi’s shell corporations (such as Solar Exports and Stellar Diamonds) without any collateral.
Indian banks’ overseas branches (such as Axis Bank, Allahabad Bank, and Union Bank of India) provided buyers’ credit through the LoUs. A global messaging system used by banks for cross-border transactions is called SWIFT, or the Society for Worldwide Interbank Financial Telecommunication.
Because PNB did not integrate SWIFT with CBS, SWIFT transactions were not automatically entered into the central database of the bank.
Shetty took advantage of this discrepancy by issuing LoUs through SWIFT without logging them in CBS, concealing the transactions from senior management and auditors. No attempts were made to confirm whether the LoUs were supported by appropriate documentation or collateral. Modi and Choksi’s companies were unable to pay back the loans when the 90–180 day credit period on a LoU ended. Shetty created a debt cycle by issuing new LoUs to repay older ones in order to evade detection. For years, the liabilities were removed from PNB’s balance sheet due to this “rolling over” of LoUs. Shetty gave junior employees access to her SWIFT login information so they could approve transactions. Red flags like missing collateral records or abnormally high credit limits for Modi/Choksi’s companies were disregarded by mid-level PNB employees.
Despite yearly inspections, PNB’s internal and external auditors—including Price Waterhouse Coopers—were unable to identify the fraud. The fraud was able to go undetected because SWIFT-CBS was not integrated. Nirav Modi’s companies requested new LoUs totaling ₹280 crore from PNB’s Brady House branch in January 2018. In accordance with protocol, a new PNB employee requested collateral. The bank looked into and discovered the fraud when Modi’s team said they had consistently received LoUs without collateral. Total Loss: Between 2011 and 2017, 1,214 fraudulent LoUs were issued, totaling ₹11,400 crore ($1.8 billion). Nirav Modi used the money to open stores in New York and Hong Kong as part of his global jewelry empire. Mehul Choksi exaggerated the financial health of his company and transferred money to offshore accounts.
The PNB Fraud Scam’s Development: A Comprehensive Analysis
The Scam’s Trigger Point: An Ordinary Request When businesses connected to Nirav Modi approached Punjab National Bank’s (PNB) Brady House branch in Mumbai on January 29, 2018, the scam, which had been operating smoothly since 2011, finally started to fall apart. To obtain foreign credit, they asked for new Letters of Undertaking (LoUs) totaling ₹280 crore. In contrast to earlier transactions, the request was handled by a new PNB officer who requested collateral before issuing the LoUs in accordance with standard banking procedures. The bank became suspicious when Modi’s representatives claimed that they had previously always received LoUs without collateral. An internal investigation that was prompted by this disparity eventually revealed one of the largest banking scams in India.
Fraudulent LoUs and Hidden Transactions Discovered: PNB officials searched the bank’s Core Banking System (CBS) but were unable to locate any records of prior LoUs. The startling discovery that 1,214 fraudulent LoUs totaling ₹11,400 crore ($1.8 billion) had been issued between 2011 and 2017 without the required authorization was made after a cross-check with the SWIFT transaction logs. Since these LoUs were never entered into CBS, audits were unable to see them. Because Gokulnath Shetty, a deputy manager at PNB’s Brady House branch, issued LoUs directly through SWIFT rather than via CBS, the scam had flourished and remained hidden for years.
Steps to Take Right Away: Reporting the Fraud and Starting an Investigation PNB moved quickly to rectify the fraud after it was confirmed. A formal complaint was submitted by the bank to the Central Bureau of Investigation (CBI) on February 5, 2018. When PNB formally revealed the fraud to the Reserve Bank of India (RBI) and stock exchanges on February 14, 2018, it sent shockwaves through the Indian financial industry. The CBI and Enforcement Directorate (ED) conducted nationwide raids the following day, confiscating hundreds of crores’ worth of assets from Nirav Modi’s homes, workplaces, and jewelry stores. Funds had been siphoned overseas, and the main accused had already left the country, exposing the extent of the fraud.
Key Findings: The Methods Used to Carry Out the Fraud Multiple players were involved in a well-planned scam, according to investigations. Because SWIFT was not integrated with PNB’s CBS, Gokulnath Shetty, the PNB official at the heart of the scam, was able to issue LoUs without creating a digital trail. Before releasing funds, foreign branches of other Indian banks, including Axis Bank, Allahabad Bank, and Union Bank, had neglected to confirm the legitimacy of these LoUs with PNB’s headquarters. The fraud remained undiscovered for years as a result of this lack of due diligence. Furthermore, it was difficult to extradite Nirav Modi and Mehul Choksi because they had already left India; Modi was last seen in New York, and Choksi had obtained citizenship in Antigua.
Repercussions: Financial Repercussions and Regulatory Changes India’s banking industry had to undergo extensive reforms as a result of the PNB scam. To stop future abuse, the RBI completely outlawed LoUs in March 2018. In order to guarantee real-time transaction monitoring, all banks were required to integrate SWIFT with CBS by April 2018. The Fugitive Economic Offenders Act (2018), which the government also introduced, gives authorities the authority to seize the assets of economic criminals who escape the nation. In the meantime, PNB experienced severe financial losses; in Q4 2018, it reported a record quarterly loss of ₹13,417 crore. By holding an auction of confiscated assets, such as expensive homes, diamonds, and artwork connected to Nirav Modi, the bank started to recoup money.
The PNB scam was a significant institutional failure in addition to an instance of personal corruption. For seven years, the scam went unnoticed due to a lack of system integration, poor oversight, and carelessness on the part of several banks. Even though banking procedures have since been strengthened by reforms, the case serves as a warning about the perils of inadequate internal controls. Mehul Choksi is still avoiding prosecution in Antigua, and Nirav Modi is still imprisoned in London and opposing extradition. The PNB scam is a clear reminder that India’s financial system needs accountability, transparency, and technological protections.
SUPREME COURT’S JUDGMENT
Refusal to Quit Investigations: The accused’s attempts to halt the ongoing investigations were categorically denied by the Supreme Court. The Court rejected the pleas of some of the defendants, including Nirav Modi’s associates and PNB employees, who had filed petitions to stop the CBI and ED investigations or to quash the FIRs. It stressed that there were significant financial crimes involved in the case, which called for a thorough investigation. The judges affirmed the agencies’ right to carry on with their work unhindered, noting that economic offenses of this magnitude required rigorous judicial scrutiny.
Approval of Asset Confiscation: The Supreme Court supported the Enforcement Directorate’s application of the Fugitive Economic Offenders Act (FEOA) against Mehul Choksi and Nirav Modi in a landmark decision. The Court upheld the government’s authority to confiscate the assets of economic criminals who escape the nation, rejecting legal challenges to the FEOA’s constitutionality. This ruling made it possible for authorities to recoup a portion of the stolen money by auctioning off valuable assets like artwork, diamonds, and opulent homes. The legal foundation for handling financial fugitives was reinforced by the decision.
Non-Interference in Extradition Proceedings: When it came to Nirav Modi’s extradition from the UK, the Supreme Court took a non-interfering stance. The Supreme Court refused to step in, claiming that extradition cases are under international treaties and foreign jurisdiction, despite Modi’s legal team’s attempts to contest certain aspects of the extradition procedure in Indian courts. Modi’s eventual extradition, which was authorized by UK courts in 2021, was made possible by the Court’s stance. The SC did, however, guarantee that Modi’s right to counsel was upheld throughout the procedure.
Rejection of Bail Pleas: The Supreme Court has repeatedly refused to grant bail to important accused parties who were detained, such as PNB officials and Modi’s associates. The judges kept the defendants in jail during the trial, citing the seriousness of the offense, the potential for witnesses to be influenced, and the danger of tampering with the evidence. These decisions demonstrated the Court’s tough stance against financial crimes and its dedication to facilitating the free flow of the legal system.
Tracking the Progress of the Investigation: The Supreme Court ordered the CBI and ED to provide status updates on the investigation at different points in time. Despite not micromanaging the investigations, the Court made sure the agencies were carrying them out effectively and without needless delays. This oversight contributed to the preservation of accountability and transparency in one of the most well-known financial fraud cases in India.
Maintaining Banking Reforms: The Supreme Court’s decisions subtly supported the systemic changes brought about by the PNB scam, even though they did not explicitly issue orders governing banking regulations. The Court reaffirmed the need for more stringent compliance procedures, improved auditing procedures, and stronger financial oversight in India’s banking industry by approving the actions of investigative agencies and declining to weaken the legal proceedings.
A significant influence on the legal response to the PNB fraud case came from the Supreme Court. Its orders made sure that the accused were held accountable, that assets were properly seized, and that investigations went forward without any problems. Although the Court refrained from going too far in cases such as extradition, its strong position on economic offenses established significant guidelines for dealing with high-value financial crimes in India. Along with strengthening the nation’s legal framework against banking fraud, the rulings also advanced the PNB case.
CONCLUSION
An important turning point in India’s financial history was the 2018 Punjab National Bank fraud case, which revealed serious flaws in the banking system and spurred urgent reforms. This ₹11,400 crore scam exposed how dishonest organizations could take advantage of systemic flaws, such as technical shortcomings in the SWIFT-CBS interface or deficiencies in internal audits and regulatory supervision. The case illustrated the disastrous results of bank officials and businessmen working together to circumvent banking procedures. The Fugitive Economic Offenders Act, mandatory system integration, and the repeal of LoUs were among the major corrective actions taken in the aftermath, but the full resolution is still pending.
Mehul Choksi’s ongoing espionage and the drawn-out extradition proceedings against Nirav Modi underscore the difficulties in dealing with intricate financial crimes in a globalized economy. More fundamentally, the PNB scam is a constant reminder that without consistent enforcement and accountability, strong systems and strict oversight are useless. The lessons learned from this case must guide not only policy changes but also the ethical framework that financial institutions operate within as India’s banking industry continues to modernize. Whether these reforms can stop future frauds while preserving the delicate balance between operational efficiency and financial security will be the real test of progress.
FAQS
How much money did the fraud cost PNB in total?
Following quarterly losses of more than ₹13,000 crore, the bank reported direct liabilities of ₹11,400 crore (US$1.8 billion). Approximately ₹14,000 crore has been recovered through asset seizures and auctions.
What are the principal accused parties’ current legal statuses?
Nirav Modi: UK courts granted his extradition in 2021; he is presently detained in London while awaiting final appeals.
Mehul Choksi was granted Antigua and Barbuda citizenship; extradition procedures are still pending. PNB official Gokulnath Shetty is still being held in India pending trial.
How did the fraud go seven years unnoticed?
Lack of real-time reconciliation between SWIFT and CBS was one of the reasons the scam continued. Collusion between beneficiaries and branch officials, Failure of external and internal auditing systems, as well as foreign bank branches’ failure to verify LoUs.
