Author – Saumya Poddar, ICFAI University, Dehradun
- ABSTRACT
- BACKGROUND OF THE CASE
- BUYER’S CREDIT
- LEGAL CONSEQUENCES
- EXTRADITION TREATY
- CURRENT STATUS OF NIRAV MODI
- AFTERMATH OF SCAM ON VARIOUS SECTORS
- LESSON LEARNED AND MEASURES TAKEN POST-SCAM
- CONCLUSION
- REFERENCES
ABSTRACT
This article provides a detailed legal analysis of the Nirav Modi scam, also known as “The PNB Scam Case involving more than 11,000 crores. Highlighting its impact on the banking sector and the broader economy. delves into the background of the case, legal consequences, the aftermath in various sectors, the role of the extradition treaty, lessons leaned and measures taken by the government and RBI post-scam.
BACKGROUND OF THE CASE
The Nirav Modi Scam case is the largest fraud in the history of the Indian baking sector, significantly affecting the entire economy of the country. Nirav Modi, an Indian-born businessman from Palampur Gujrat, later moved to Mumbai to learn the diamond business from his uncle Mehul Chowksi, head of Geetanjali group which operated more than 4000 jewelry stores in India. Nirav owned ‘Firestar’, a diamond sourcing and trading company, and was listed among Forbes India’s richest individuals. He had many achievements in his name and also held the international patent for his ‘jasmine cut-designed diamond necklace’.
He was consistently reaching new heights in his business. However, Nirav had other plans for increasing his profits, which involved engaging in fraudulent activities against the bank. The scheme unraveled after seven years when Punjab National Bank (PNB) discovered that Nirav had been obtaining buyers’ credit from foreign banks using fraudulent Letters of Undertaking (LOUs) issued in the name of PNB, with the assistance of two senior bank officials namely Gokulnath Shetty & Manoj Kharat. To fully understand the intricacies of this case, let’s delve into the relevant banking terms and the entire scenario in detail.
BUYERS CREDIT
Buyer’s credit is a form of loan given by a foreign bank or the foreign branch of Indian bank of an Indian bank to finance the import between dealers of two countries. It is a financial tool to carry out finances effectively and flexibly. To issue the buyer’s credit a letter of undertaking (LOU) is required from the importer’s residential bank. This undertaking serves as a contract, ensuring the residential bank will pay the amount if a default occurs. The bank issuing LOU checks documents, the importer’s creditworthiness, and required security, which is calculated accordingly. In case of default, this amount is payable by the bank to the foreign bank.
In this case, the buyer’s credit was continuously obtained by Nirav Modi through fraudulent LOUs issued with the help of officials from the Punjab National Bank, Brandy House Mumbai without the payment of securities. The fraud was discovered when one of the involved officers retired, and a new officer took his place. Revealing the extensive deceit.
HOW THE FRAUD CAME TO LIGHT
Entrepreneur Hari Prasad of Bangalore wrote to the prime minister’s office (PMO) on July 26, 2016, alerting the authorities to what he believed could be a massive scam. Prasad said that all the information was disclosed in the balance sheets. He said that after being defrauded of Rs 13 crore by Mehul Choksi’s business, one of the main suspects in the Rs. 11,380-crore Punjab National Bank scandal, he had filed a complaint against the latter. In 2015, he filed a case against Choksi and his group firms with the Bengaluru Police. He wrote to the Prime Minister’s Office, the Securities and Exchange Board of India, the Enforcement Directorate, the Ministry of Corporate Affairs, and even the Central Bureau of Investigation a year later. Former Allahabad Bank director and whistleblower Dinesh Dubey has made it quite evident how many attempts he made to intervene in relation to Mehul Choksi’s unauthorized loans.
LEGAL CONSEQUENCES
Nirav Modi and Uncle Mehul Chowksi were charged with Criminal Conspiracy Under Section 120B of the Indian Penal Code (IPC), Criminal Breach of Trust Under Section 409, Cheating under Section 420, Corruption charges under sections 7A & 8 of the Prevention of Corruption Act, some additional charges including section 3 & 4 Prevention of Money Laundering Act (PMLA)
In 2018, Nirav was declared a fugitive economic offender (individuals who left India to not face criminal proceedings). his assets were also attached under the said Act by the Enforcement Directorates. He is also listed on Interpol’s wanted list. In March 2019, UK authorities arrested him in central London. Including Nirav, Uncle Mehul Chowksi, his wife Ami Modi & 2 bank officials. apart from Nirav Modi, Mehul Choksi and Ami Modi, the other key people held responsible were Nirav’s brother Neeshal Modi, his associate Subhash Parab, and the corrupt PNB officials Gokulnath Shetty, Manoj Kharat, Usha Ananthasubramanian, KV Brahmaji Rao and Sanjiv Sharan.
EXTRADITION TREATY
Nirav Modi fled to the UK to evade charges, but the UK’s Home Department later approved his extradition. Extradition is the formal process of one state surrendering an individual to another state for prosecution or punishment for crimes committed in the requesting country’s jurisdiction. This treaty was signed by India and the UK in 1992. In India, the extradition of a fugitive criminal is governed under the Indian Extradition Act, of 1962.
CURRENT STATUS OF NIRAV MODI
In March 2019, Modi was arrested in the UK and remained in judicial custody. Despite substantial evidence submitted by the ED, His extradition faced several legal challenges. On February 25, 2021, the UK court approved Modi’s extradition and sent the order to the Secretary of State of the UK Home Department. The secretary signed it on April 15, 2021. Subsequent appeals by Modi were rejected by both the High Court and Supreme Court. As of now, he has not yet been extradited to India. Efforts to obtain updates from UK authorities have been unsuccessful due to legal confidentiality but as per some official reports of 2022, he has lost his legal fight against extradition.
AFTERMATHS OF SCAM ON VARIOUS SECTORS
The scam exposed significant deficiencies in the internal control within banks, particularly concerning the issuance and management of LOUs. In response, the Reserve Bank of India (RBI) banned LOUs entirely, leading to considerable losses for small-time traders.
The rotation of employees became more stringent to prevent such fraud. The RBI implemented stricter oversight and regulatory measures to ensure banks adhere to stringent protocols and checks.
RECOVERY OF LOST MONEY THROUGH THESE FRAUDS
The recovery of money lost through bank fraud often places an undue burden on taxpayers highlighting systemic flaws in financial oversight. fraudsters like Nirav Modi exploit loopholes, while ordinary citizens bear the brunt of the financial fallout This unfair recovery procedure highlights the shortcomings of the legal and regulatory systems, which cannot prevent well-publicized frauds. The public’s confidence in the financial system is eroded, and economic unfairness is sustained due to taxpayers bearing the brunt of the elite’s carelessness and greed.
LESSON LEARNED AND MEASURES TAKEN POST-SCAM
- Enhanced Internal Controls
A significant gap was found in the management framework of the banks which highlighted the need for a more comprehensive approach to managing the financial risks. As a result, RBI implemented stricter oversight and regulatory measures to ensure that banks adhere to more stringent protocols and checks. Additionally, banks have been mandated to strengthen internal control mechanisms like – better verification processes, regulator audits, and enhanced scrutiny of financial transactions.
- Technological upgradation
banks are encouraged to adopt advanced technological solutions to improve their monitoring and risk management system, this includes the use of data analytics and AI to detect anomalies and potential frauds.
- Integration of a stronger SWIFT system
The integration of a swift system with strict guidelines was implemented in the banking sector to improve monitoring and risk management.
CONCLUSION
Frauds like those perpetrated by Nirav Modi, Mehul Choksi, and Vijay Mallya raise serious questions about government efficacy in preventing such offenders from escaping the country. This failure allows them to evade justice while poor taxpayers are left to bear the burden of repaying bad loans. The persistence of white-collar crime, despite high-profile scams, underscores the systemic issues within various sectors. Fraudulent loans remain prevalent in the banking industry, and the fact that scams can go undetected for seven years highlights severe deficiencies in oversight and accountability. Punjab National Bank’s lack of due diligence on foreign loans further emphasizes the urgent need for comprehensive reforms in the sector.
REFERENCES
FREQUENTLY ASKED QUESTIONS
- What is the Nirav Modi scam case about?
- What is a Letter of Undertaking (LOU)?
- What were the consequences of the scam for Punjab National Bank?
- Has Nirav Modi been extradited to India?
- What happened to the businesses owned by Nirav Modi?
- How did the scam affect small-time traders?
