Author, Poornesha Palanivelan, Government Law College, Tiruchirappalli
I: TO THE POINT
The Nirav Modi–Punjab National Bank (PNB) Scam stands as one of the most catastrophic and sophisticated financial frauds in India’s economic history. At its core lies the deliberate misuse of Letters of Undertaking (LoUs)—a banking instrument meant to facilitate legitimate buyer’s credit—manipulated through the SWIFT messaging system, bypassing the bank’s internal Core Banking System (CBS). This enabled Nirav Modi–controlled entities to secure unauthorized credit from overseas branches of Indian banks without collateral, thereby creating massive off-balance-sheet liabilities. The scheme was executed through a well-coordinated criminal conspiracy involving PNB officials who abused their fiduciary positions by sharing SWIFT credentials, forging financial documents, and intentionally suppressing mandatory ledger entries. Their actions established the foundation for offences under the Indian Penal Code, Prevention of Corruption Act, and Prevention of Money Laundering Act, as funds were routed through layers of shell companies across Hong Kong, Dubai, and other jurisdictions to disguise the illicit origin of proceeds. This legal case delves into the criminal culpability of the primary accused and the complicit bank employees, while simultaneously uncovering institutional failures, including ineffective internal controls, absence of SWIFT-CBS integration, and inadequate regulatory supervision. The scam ultimately exposed systemic weaknesses in India’s banking structure and triggered multi-agency investigations into a fraud exceeding ₹13,000 crore.
II: USE OF LEGAL JARGON
This case analysis incorporates a wide range of legal terminology essential for understanding the depth and complexity of the Nirav Modi–PNB Scam. Key criminal law concepts include mens rea (the guilty mind) and actus reus (the guilty act), which collectively establish criminal liability. The scam embodies criminal conspiracy under Section 120B IPC, wherein multiple actors intentionally collaborated to commit unlawful acts. Offences such as cheating under Section 420 IPC, forgery under Sections 463–477A IPC, and criminal breach of trust under Section 409 IPC form the backbone of the prosecution’s case. The fraudulent LoUs and forged documentation constitute fabrication of evidence, falsification of accounts, and using forged documents as genuine, all prosecutable offences. The acts of bank officials amount to wilful misconduct, abuse of official position, and breach of fiduciary duty, invoking provisions under the Prevention of Corruption Act, especially Sections 7, 13(1)(d), and 13(2). Their intentional failure to follow procedure may also be categorized as culpable negligence and dereliction of duty, creating grounds for both criminal and disciplinary action.
The money laundering trail involves predicate offences under the PMLA, alongside processes such as placement, layering, and integration of illicit funds through shell companies, cross-border transactions, and over-invoiced imports. Legal tools like attachment of proceeds of crime, provisional attachment orders, and search and seizure under Section 17 PMLA play a crucial role. Banking and regulatory failures are analyzed through concepts like vicarious liability, regulatory non-compliance, statutory breach, failure of due diligence, and institutional liability. The misuse of SWIFT reflects technological oversight lapses and internal control deficiencies. In addition, the case touches upon extradition principles, mutual legal assistance treaties (MLATs), quasi-criminal liability, forensic accounting, and cross-border jurisdiction, making it a multidimensional legal and financial investigation.
III: THE PROOF (KEY EVIDENCE IN THE LEGAL CASE)
1. Fraudulent LoUs (Letters of Undertaking)
The core proof lies in the unauthorised issuance of LoUs by PNB officials without collateral, in violation of RBI Master Circulars.
These LoUs were sent via SWIFT messaging, bypassing the bank’s internal CBS (Core Banking System).
This allowed Nirav Modi companies to receive credit from overseas branches of Indian banks (e.g., Allahabad Bank, Axis Bank).
2. Collusion of Bank Officials
Bank officials—most notably Gokulnath Shetty, a deputy manager—were found to have:
Shared SWIFT passwords illegally
Generated forged LoUs
Omitted entries from the ledger
Bypassed mandatory internal audits
This establishes actus reus and mens rea for criminal conspiracy.
3. Shell Companies and Money Laundering
The Enforcement Directorate (ED) traced funds to:
Front companies registered in Hong Kong, Dubai, Singapore
Fake import transactions with inflated invoices
Circular transactions used to layer proceeds of crime
This forms the predicate offence for prosecution under Sections 3 & 4 of PMLA.
4. Forensic Audit Reports
Forensic audits by Kroll and SFIO uncovered:
Overvaluation of diamonds and jewellery
Artificial inflation of stock
Manipulation of books of accounts
These reports serve as documentary evidence admissible under the Indian Evidence Act.
5. Statements under Section 164 CrPC
Confessions of co-accused recorded before a Magistrate under Section 164 CrPC confirmed:
Nirav Modi instructed falsification of LoUs
Bank officers were bribed
SWIFT access was shared deliberately
IV: ABSTRACT
This legal case study examines the Nirav Modi–PNB Scam as a multidimensional financial crime involving fraud, money laundering, breach of statutory duty, and regulatory failure. The scam erupted in 2018 when Punjab National Bank detected unauthorised LoUs worth over ₹13,000 crore issued to Nirav Modi–controlled entities. The case draws attention to loopholes in banking infrastructure, misuse of SWIFT systems, and the role of corrupt officials.
The Government of India initiated proceedings under the Indian Penal Code (IPC), Prevention of Corruption Act (PCA), and Prevention of Money Laundering Act (PMLA). The case also involved international extradition proceedings against Nirav Modi in the United Kingdom, making it one of the most globally coordinated legal battles involving an Indian economic offender.
This analysis discusses the legal provisions invoked, the nature of evidence, key case laws, and the judicial interpretation of financial crimes, concluding with an assessment of the legal system’s response to high-value economic frauds.
V: LEGAL FRAMEWORK INVOLVED
1. Indian Penal Code (IPC)
Section 420 – Cheating and dishonestly inducing delivery of property
Sections 465, 467, 468, 471 – Forgery and using forged documents
Section 409 – Criminal breach of trust by a public servant
Section 120B – Criminal conspiracy
2. Prevention of Corruption Act, 1988
Sections 7, 13(1)(d), 13(2) – Bribery, abuse of official position by public servants
3. Prevention of Money Laundering Act, 2002
Sections 3 & 4 – Offence of money laundering and its punishment
Attachment of proceeds of crime under Section 5
4. Banking Regulation Act, 1949 & RBI Circulars
Failure to follow RBI Master Circulars on LoUs
Non-compliance with SWIFT-CBS integration norms
VI: CASE ANALYSIS
1. How the Fraud Was Committed
The fraud operated through a modus operandi where Nirav Modi companies—Diamond R Us, Solar Exports, Stellar Diamonds—approached PNB for buyer’s credit.
Corrupt officials:
Issued LoUs without recording transactions
Used SWIFT to send messages to foreign branches
Renewed older LoUs repeatedly
This created off-balance sheet liabilities for PNB.
2. Failure of Internal Controls
PNB failed in:
Reconciling SWIFT with CBS
Conducting periodic audits
Ensuring rotation of staff
Monitoring large-value LoUs
This amounts to institutional negligence.
3. Regulatory Lapses by RBI
Before 2018, RBI allowed LoUs under certain conditions.
However, poor oversight enabled misuse.
After the scam, RBI banned issuance of LoUs altogether.
4. Criminal Liability
The actus reus is the issuance of fraudulent LoUs.
The mens rea is established through:
Evidence of bribes
Concealment
Intentional bypassing of CBS
Shell company transactions
5. Extradition Proceedings
Nirav Modi’s extradition was pursued under:
UK Extradition Act, 2003
India-UK Mutual Legal Assistance Treaty
UK courts found:
a prima facie case
adequate evidence
sufficient prison conditions in India
Thus, Nirav Modi’s extradition was approved.
VII: CASE LAWS RELEVANT TO THE SCAM
1. State of Gujarat v. Mohanlal Jitamalji Porwal (1987)
Economic offences are grave, affecting the national economy, and must be dealt with sternly.
This precedent underscores the judiciary’s firm stance on punishing large-scale financial frauds like the PNB scam.
It reinforces that crimes undermining public confidence in financial institutions warrant strict criminal liability.
2. Y.S. Jagan Mohan Reddy v. CBI (2013)
Money-laundering cases involve deep-rooted conspiracy and cannot be treated lightly.
This principle applies directly to Nirav Modi’s layered transactions and shell-company structures.
It emphasises the need for thorough investigation into the financial trail and intent behind the laundering process.
3. CBI v. Ramesh Gelli (2016)
Bank officials of private and public banks can be prosecuted under the Prevention of Corruption Act.
This ruling validates the ED and CBI’s prosecution of complicit PNB officials under PCA provisions.
It affirms that misuse of official position in banking constitutes corruption and attracts stringent penal action.
4. State of Maharashtra v. Tapas D. Neogy (1999)
Bank accounts containing proceeds of crime can be frozen under criminal procedure.
This ruling legitimises ED’s freezing of Nirav Modi’s and his companies’ accounts during investigation.
It provides statutory backing for attachment of funds linked to fraudulent LoUs and illegal overseas transactions.
5. Enforcement Directorate v. Hassan Ali Khan (2011)
PMLA grants wide powers to attach property derived from economic offences.
This empowered authorities to seize Nirav Modi’s assets—jewellery, bank balances, real estate, and artworks.
It strengthens the legal basis for tracing and confiscating proceeds of crime across jurisdictions.
VIII: CONCLUSION
The Nirav Modi–PNB Scam represents far more than an isolated act of fraud—it is a profound illustration of how systemic vulnerabilities, regulatory gaps, and individual corruption can converge to create one of the largest financial scandals in India’s history. The case revealed how advanced banking tools like SWIFT, when not properly integrated or supervised, can be misused to bypass statutory safeguards. This exposed the fragility of institutional controls within public sector banks and underscored the devastating impact of insider collusion, highlighting the urgent need for robust internal checks, audit mechanisms, and stronger technological oversight.
From a criminal law perspective, the case reaffirmed the judiciary’s consistent stance that economic offences are severe crimes against the nation, capable of destabilizing the economy and eroding public confidence in financial institutions. By invoking a combination of the IPC, Prevention of Corruption Act, and Prevention of Money Laundering Act, the prosecution demonstrated a comprehensive legal strategy to address multi-layered offences involving deception, criminal conspiracy, breach of trust, and laundering of proceeds of crime. The case clarified the evidentiary value of forensic audits, digital trails, and cross-border financial analysis, strengthening jurisprudence on modern white-collar crimes.
The regulatory fallout of the scam was equally significant. In response to the revelations, the RBI introduced sweeping reforms, including the abolition of Letters of Undertaking (LoUs) and mandatory integration of SWIFT with the Core Banking System (CBS), thereby closing the loopholes that enabled the fraud.
Legally, the case underscores:
That economic offences are a societal threat
That mens rea and conspiracy can be inferred through circumstantial and documentary evidence
That public servants face stricter liability under PCA
That international extradition can be successfully pursued in high-value financial crimes
The case remains a crucial precedent for understanding modern financial frauds and the interplay between criminal law, banking regulation, and global cooperation in economic offences.
IX: FAQS
1. What was the exact amount involved in the Nirav Modi–PNB scam?
Approximately ₹13,000 crore, making it one of India’s biggest bank frauds.
2. How were fraudulent LoUs issued?
Through unauthorised use of the SWIFT system, bypassing PNB’s internal ledger, with the collusion of bank officials.
3. Which laws apply to this scam?
IPC (fraud, conspiracy), PCA (corruption), PMLA (money laundering), RBI regulations, and the Banking Regulation Act.
4. What was the role of the Enforcement Directorate?
The ED traced money-laundering routes, attached assets, and produced evidence of cross-border fund diversion.
5. Has Nirav Modi been extradited to India?
UK courts have ordered extradition; final diplomatic steps are ongoing, with judicial approval already granted.
6. Why did the scam go undetected for years?
Due to poor internal controls, failure to link SWIFT with CBS, lack of staff rotation, and collusion of bank officials.
7. What reforms were introduced after the scam?
RBI banned LoUs, mandated SWIFT-CBS integration, and strengthened bank audit mechanisms.
