The Nirav Modi PNB Fraud Case: A Legal Dissection of India’s Biggest Banking Scam


Author: Vaishnavi.M, The Tamil Nadu Dr. Ambedkar Law University


To the Point


Nirav Modi, a high-profile diamond jeweller with global reach, masterminded a massive financial fraud amounting to over ₹13,000 crores through a complex manipulation of the Letter of Undertaking (LoU) system at Punjab National Bank (PNB). This fraudulent activity spanned several years and involved collusion with key bank officials who bypassed the Core Banking System (CBS) to issue unauthorized LoUs bank guarantees used to obtain foreign credit.


The case has laid bare significant loopholes in internal banking controls, underscoring the absence of robust checks and balances in handling international credit transactions. It reveals a deep-rooted criminal conspiracy, involving forgery, cheating under Section 420 IPC, criminal breach of trust (Section 406 IPC), and violation of the Prevention of Corruption Act and Prevention of Money Laundering Act (PMLA).


The scam also highlights regulatory failure on the part of RBI’s oversight and ineffective audit mechanisms. Despite repeated issuances of LoUs, the transactions went undetected for years due to systemic lapses and internal collusion.
After the fraud came to light in 2018, Nirav Modi fled India, prompting a high-profile extradition battle in the United Kingdom. Indian investigative agencies, notably the Enforcement Directorate (ED) and the Central Bureau of Investigation (CBI), undertook a wide-ranging probe, seizing assets in accordance with the Prevention of Money Laundering Act, 2002, and commencing legal action under the provisions of the Fugitive Economic Offenders Act, 2018.


This case has become a cornerstone for discussing the legal ramifications of economic offences, corporate accountability, and the urgent need for reform in banking governance and international cooperation in economic crime cases. It also raises questions about the effectiveness of red flag mechanisms, compliance audits, and the need for stronger corporate criminal liability provisions under Indian law.

Use of Legal Jargon


The Nirav Modi case presents a textbook instance of white-collar criminality, invoking a gamut of legal provisions across penal, financial, and procedural laws. The central offence, fraudulent misrepresentation, is actionable under Section 420 of the Indian Penal Code (IPC), read with Sections 463 to 471 IPC (for forgery, forgery for the purpose of cheating, and use of forged documents as genuine), and Section 120B IPC (criminal conspiracy). The element of mens rea is evidenced through deliberate concealment and manipulation of official records by accused bank officials, who abused their fiduciary position, thereby attracting Section 409 IPC for criminal breach of trust by a public servant or banker.


The issuance of unauthorized LoUs without entering them into the Core Banking Solution (CBS) constitutes a breach of regulatory and procedural mandates, further supported by violations under the Banking Regulation Act, 1949, and RBI Master Circulars on LoU usage. The collusion enabled systemic regulatory arbitrage, resulting in significant financial exposure for PNB.


The financial trail of illicit funds has invoked the application of the Prevention of Money Laundering Act, 2002 (PMLA). Under Section 3, the conversion and concealment of proceeds of crime via offshore entities and shell companies constitutes money laundering, with Section 4 prescribing punitive measures. The Enforcement Directorate (ED) exercised powers under Sections 5 and 8 for provisional attachment and confirmation of properties acquired through illicit gains. The case also exemplifies the placement-layering-integration model of laundering, commonly cited in FATF guidelines.
The Enforcement Directorate also commenced action under the Fugitive Economic Offenders Act, 2018, legislation specifically designed to tackle high-value economic offences committed by individuals who evade the legal process by fleeing the country . The declaration of Nirav Modi as a “Fugitive Economic Offender” under Section 12 enabled confiscation of both domestic and foreign assets, even before conviction, altering the traditional presumption of innocence under criminal jurisprudence.


In terms of international legal cooperation, the extradition proceedings were carried out under the UK Extradition Act, 2003, in conjunction with the India–UK Extradition Treaty, 1992. The matter dealt with the doctrine of dual criminality, the specialty rule, and Article 3 of the European Convention on Human Rights (ECHR)—where Modi unsuccessfully pleaded against extradition on mental health and prison condition grounds. The UK courts affirmed the prima facie standard of evidence, recognizing India’s ability to ensure fair trial rights and humane detention standards.


The corporate dimension of the fraud necessitates examination of corporate criminal liability, which in Indian law remains under-evolved but is rooted in the “alter ego” doctrine and vicarious liability principles—especially in context of offences by companies under Section 70 of the PMLA, and Section 10 of the Companies Act, 2013. Comparative reference is made to the “identification doctrine” under UK common law, and the recent UK Economic Crime and Corporate Transparency Act, 2023, which imposes stricter standards on failure to prevent fraud by corporate entities.


The PNB scam has also raised concerns over regulatory oversight failures, especially by the Reserve Bank of India (RBI), and statutory auditors under the Companies Act, 2013, and the Chartered Accountants Act, 1949. It reveals serious lapses in risk-based internal controls, KYC norms, and non-compliance reporting obligations. Additionally, the absence of real-time red flag alert systems, ineffective statutory audits, and decentralized operational autonomy within public sector banks contributed to the scale of the scam.


The Proof


The Proof (Facts & Timeline)


1. Background: Nirav Modi, a globally renowned jeweler, was associated with Firestar Diamond and Mehul Choksi’s Gitanjali Group.


2. Modus Operandi: Nirav Modi and associates colluded with PNB officials to fraudulently obtain LoUs without proper collateral, enabling them to secure foreign credit from other banks.


3. Whistleblower & Exposure: The scam was uncovered in January 2018 when PNB reported unauthorised LoUs amounting to ₹11,300 crore.


4. Key Accused: Nirav Modi, Mehul Choksi, bank officials like Gokulnath Shetty, and companies including Firestar International.


5. Current Status: Nirav Modi was arrested in the UK in March 2019; extradition to India was approved by UK courts in 2021, pending human rights review.


Abstract


The Nirav Modi case stands as a seminal instance of large-scale financial crime that exposed deep systemic failures within India’s banking sector. At its core, the scam reveals a prolonged subversion of internal compliance frameworks, wherein Letters of Undertaking (LoUs) were issued fraudulently without proper authorization or entry into the Core Banking System (CBS), bypassing audit mechanisms and institutional protocols. The case, involving a financial fraud of over ₹13,000 crores, has had far-reaching implications not only for public sector banking but also for regulatory oversight, cross-border enforcement, and political accountability.


This article undertakes a comprehensive legal dissection of the case by examining the applicability of criminal provisions under the Indian Penal Code (IPC), including cheating, forgery, criminal breach of trust, and conspiracy; statutory liabilities under the Prevention of Corruption Act, 1988; and financial crime prosecution under the Prevention of Money Laundering Act, 2002 (PMLA). Further, it analyzes corporate criminal liability, both from the perspective of Indian jurisprudence and in comparative light with UK standards.


A significant portion of the discussion is dedicated to the extradition proceedings initiated in the United Kingdom, where the Indian state invoked bilateral treaty obligations and navigated complex issues such as the doctrine of dual criminality, the specialty principle, and human rights objections under the European Convention on Human Rights (ECHR).


Judicial observations, enforcement strategies employed by the Enforcement Directorate (ED) and the Central Bureau of Investigation (CBI), and procedural dimensions under the Fugitive Economic Offenders Act, 2018, are also critically explored. The article evaluates how judicial interpretation in both Indian and UK courts shaped the outcome of the extradition proceedings and reflects on the role of international cooperation in financial crime enforcement.


Finally, the article proposes policy and legal reforms aimed at strengthening institutional accountability, enhancing corporate due diligence standards, and establishing a robust legal architecture capable of pre-empting and responding to sophisticated economic offences.

The Nirav Modi case, thus, provides a crucial lens through which the urgent need for banking governance reform, anti-corruption vigilance, and global coordination in white-collar crime prosecution may be understood.


Case Laws


1. CBI v. Nirav Modi [UK Extradition Proceedings, 2021]
The Westminster Magistrates’ Court ruled in favor of extradition, stating prima facie evidence of fraud and money laundering.

2. PNB v. Firestar International (2020, NCLT Mumbai)
NCLT allowed insolvency proceedings against Nirav Modi’s firms under IBC, 2016.

3. State Bank of India v. Gitanjali Gems (2021)
Banks sought recovery under the SARFAESI Act against Mehul Choksi’s assets.

4. Enforcement Directorate v. Nirav Modi (PMLA proceedings)
Assets worth ₹1,400 crore seized under the Prevention of Money Laundering Act, 2002.Conclusion:

FAQS


1 What is an LoU and how was it misused?
An LoU (Letter of Undertaking) is a bank guarantee for overseas payment. It was misused as fake LoUs were issued without core banking records, bypassing checks.


2.Under which laws was Nirav Modi booked?
Indian Penal Code (IPC) – Sections 420, 409, 120B; PMLA, 2002; Fugitive Economic Offenders Act, 2018.


3 . Why is his extradition delayed?
His appeal to the UK High Court is based on the risk of suicide and conditions of Indian prisons, invoking Article 3 of the European Convention on Human Rights.


4 How was the money laundered?
Money was routed through shell companies in Hong Kong, UAE, and British Virgin Islands. Proceeds were reinvested into luxury assets and properties.


5 What are the implications for Indian banking?
The scam led to stricter RBI norms on LoUs, increased digitization, and greater vigilance over SWIFT transactions.

Leave a Reply

Your email address will not be published. Required fields are marked *