Author : M.Gomathi, Chennai Dr. Ambedkar Government Law College, Pudupakkam
To the point
In 2018, Punjab National Bank (PNB) reported a major fraud worth around ₹14,000 crore. The scandal involved well-known jewelers Nirav Modi and Mehul Choksi, who secured fraudulent Letters of Undertaking (LoUs) from PNB’s Mumbai branch without offering adequate collateral. These LoUs were later used to obtain international credit from other banks. The fraud remained unnoticed for a period due to weaknesses in internal controls and the involvement of certain bank employees, exposing gaps in risk management and compliance. After the scam came to light, the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) launched formal investigations, filing legal cases and working to recover assets associated with the fraud. The incident led to significant reforms in banking oversight, stricter rules for issuing LoUs, and heightened monitoring of cross-border credit operations. As one of the largest banking frauds in the country, the PNB scam severely damaged public confidence in financial institutions.
Use of legal jargon
The 2018 Punjab National Bank (PNB) scandal is regarded as a landmark case of financial fraud and corporate delinquency in India, valued at approximately ₹14,000 crore. The main perpetrators, Nirav Modi and Mehul Choksi, in collusion and conspiracy with certain bank employees, orchestrated the issuance of unauthorized Letters of Undertaking (LoUs) from PNB’s Mumbai branch. These instruments, granted beyond the scope of lawful authority and in breach of mandatory regulatory compliance, were misused to raise international credit without proper collateral.The scam remained undetected due to gaps in institutional oversight, failure to discharge statutory obligations, and violation of fiduciary duties by PNB officials. Once exposed, the case was investigated by the CBI and ED under provisions of the IPC covering cheating, forgery, fraud, and breach of trust, as well as under the PMLA for money laundering..Following the discovery, the authorities initiated seizure of assets and commenced extradition action against the accused. The episode compelled wide-ranging regulatory reforms, such as the discontinuation of LoUs and the introduction of tighter compliance measures to restore trust in the banking framework.
The Proof
The scam was substantiated through a strong set of financial records and documentary material. The central evidence consisted of unauthorized Letters of Undertaking (LoUs) issued from the Brady House branch of PNB. These LoUs were located in the SWIFT communication system but were missing from the Core Banking Solution (CBS), clearly showing that the entries were intentionally excluded.Additional evidence came from transaction records, falsified trade documents, and invoices, which directly tied Nirav Modi and Mehul Choksi’s firms to the foreign credit raised through these LoUs. Digital audit logs, internal emails, and bypassed verification procedures further demonstrated collusion by bank employees.The Central Bureau of Investigation (CBI) and Enforcement Directorate (ED) also seized property papers, banking statements, and laundering trails, confirming diversion of funds to shell entities. The depositions of employees and audit officials confirmed intentional malpractice and dereliction of duty.
Abstract
The 2018 Punjab National Bank (PNB) fraud remains one of the gravest economic crimes in India, exposing serious flaws in internal banking controls and oversight mechanisms. Estimated at nearly ₹14,000 crore, the fraud was engineered by jewellers Nirav Modi and Mehul Choksi in connivance with senior PNB employees. The operation revolved around the illegal issuance of Letters of Undertaking (LoUs) via the SWIFT platform, which were deliberately excluded from the Core Banking System (CBS), thereby allowing access to overseas credit facilities without genuine security.The irregularities came to light during internal checks and were soon probed by the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED). The agencies uncovered forged documentation, manipulated records, audit trails, and corroborating witness statements that established conspiracy, falsification, and breach of trust. Once detected, enforcement agencies attached assets, pursued the return of the accused from abroad, and initiated prosecution under Indian Penal Code and money laundering laws.Collectively, the evidence established a clear nexus pointing to a criminal conspiracy encompassing fraud, forgery, cheating, breach of trust, and laundering of illicit funds.
Case Laws
1.K. V. Brahmaji Rao vs. Union of India & Ors. (2023)
The Delhi High Court examined the liability of K. V. Brahmaji Rao, former Executive Director of Punjab National Bank, in connection with the 2018 fraud. The Court noted that he overlooked repeated RBI circulars and failed to exercise due diligence, which permitted the illegal issuance of Letters of Undertaking (LoUs). His inaction was treated as serious negligence, dereliction of duty, and misconduct under banking and anti-corruption provisions.
2.CBI Court Bail Order – Gokulnath Shetty (2023)
In 2023, the Special CBI Court ruled on the bail application of Gokulnath Shetty, ex–Deputy Manager at PNB’s Brady House branch, who was identified as a central figure in the ₹14,000 crore scam. He was accused of issuing Letters of Undertaking (LoUs) via the SWIFT system while deliberately bypassing the Core Banking Solution, facilitating foreign credit to Nirav Modi’s companies. Considering his lengthy pre-trial detention and the conclusion of investigation, the Court allowed bail with conditions.
3.Enforcement Directorate vs. Nirav Modi (2018, PMLA Court, Mumbai)
In 2018, the Enforcement Directorate filed action against Nirav Modi under the Prevention of Money Laundering Act in connection with the massive ₹13,000-crore Punjab National Bank fraud. Investigators claimed that he diverted funds secured through fake Letters of Undertaking from PNB’s Brady House branch. The PMLA Court directed the confiscation and attachment of his properties in India and overseas, treating them as illicit assets, thereby strengthening India’s pursuit of economic offenders.
Conclusion
The 2018 Punjab National Bank (PNB) scam uncovered deep flaws in India’s banking structure and regulatory oversight. Through the unlawful issuance of Letters of Undertaking (LoUs), bank insiders facilitated Nirav Modi and Mehul Choksi in executing a fraud exceeding ₹13,000 crore, making it one of the most infamous financial scandals in the country. The case exposed gaps in internal audit systems, the disconnect between SWIFT operations and the Core Banking System (CBS), and weak monitoring mechanisms.Court cases such as CBI vs. Nirav Modi & Ors., Enforcement Directorate vs. Nirav Modi (PMLA Court), and K. V. Brahmaji Rao vs. Union of India & Ors. emphasized that liability was not confined to the main culprits but extended to negligent officials who allowed such irregularities.At the same time, regulatory bodies like the RBI and SEBI implemented reforms, while the enactment of the Fugitive Economic Offenders Act, 2018 made it harder for economic offenders to escape Indian jurisdiction. The scam stands as a powerful reminder of the dangers of collusion and oversight failure. At the same time, it became a driving force for stronger regulatory measures, stricter compliance frameworks, and the need to restore transparency and trust in India’s banking sector.
FAQS
1.What was the PNB scam?
The 2018 PNB scam revolved around fraudulent Letters of Undertaking (LoUs) issued from the bank’s Brady House branch. These were exploited by Nirav Modi and Mehul Choksi to siphon off more than ₹13,000 crore.
2.Who were identified as key offenders?
Those implicated included diamond merchant Nirav Modi, his uncle Mehul Choksi, and certain PNB officials, notably Gokulnath Shetty, who bypassed the Core Banking System while misusing SWIFT transactions.
3.How did regulators and courts respond?
Criminal proceedings were initiated by the CBI and ED, properties were confiscated, and extradition steps taken; concurrently, the RBI ended the issuance of LoUs, enhanced monitoring, and the Fugitive Economic Offenders Act, 2018, was introduced to stop economic offenders from fleeing abroad.
4.Why is the case significant?
The scam revealed deep flaws in internal controls of Indian banks and prompted major governance and compliance reforms to safeguard depositors’ trust.
