Author: Jhanvi Panday, student of University of Lucknow
To the Point
In 2018, a multi-billion-rupee banking fraud shook India’s financial system to its core. At the heart of it stood celebrity jeweller Nirav Modi, accused of defrauding Punjab National Bank (PNB) to the tune of over ₹13,000 crore. This scam not only highlighted deep-rooted vulnerabilities in India’s public banking system but also raised important questions about oversight, accountability, and the international legal frameworks surrounding extradition and white-collar crimes.
Use of Legal Jargon
Fraudulent Misrepresentation- When a person intentionally makes a false statement or hides a material fact to deceive another party, causing them to suffer a loss. In Nirav Modi’s case, false financial data and forged documents were used to mislead the bank.
Letter of Undertaking (LoU) – A type of bank guarantee issued by an Indian bank to overseas branches of other Indian banks, promising payment on behalf of a customer. Normally requires collateral and approval, but PNB officials issued them without proper process — leading to the scam.
Money laundering (under PMLA, 2002) the act of disguising illegally obtained money as legitimate income. The Prevention of Money Laundering Act, 2002 criminalizes such activities, and ED charged Nirav Modi under this law for layering and integrating funds through shell companies.
Extradition (under Extradition Act, 1962) – A formal process where one country surrenders a person to another country where they are wanted for trial or punishment. India sought Nirav Modi’s extradition from the UK through this Act.
Section 420 of IPC – Cheating- Punishes anyone who cheats and dishonestly induces a person to deliver property. It’s the core offence in most financial frauds, including this one.
Section 409 IPC – Criminal Breach of Trust by a Banker or Public Servant- This applies when a person entrusted with property misuses it for personal gain. Here, bank officials helped Nirav Modi by violating their fiduciary duty.
Sections 467, 468, 471 IPC – Forgery and Use of Forged Documents- Creating fake documents (Section 467), using them to commit fraud (Section 468), and knowingly presenting them as genuine (Section 471). These charges were invoked due to the use of fake LoUs.
Section 120B IPC – Criminal Conspiracy- When two or more persons agree to commit an illegal act together. Nirav Modi, Mehul Choksi, and corrupt bank officials formed such a conspiracy.
Corporate Veil- A legal concept separating a company’s identity from its shareholders. But if the company is used for fraudulent purposes, courts may “lift the corporate veil” to hold individuals accountable.
Banking Regulation Act, 1949- This Act governs how banks in India function. It includes rules on licensing, operations, audits, and supervision by the Reserve Bank of India. Failure to follow its provisions often results in regulatory action.
The Proof
The scam untraveled when PNB filed a complaint with the CBI, disclosing that fraudulent LoUs were issued to Nirav Modi’s companies without following due banking protocol or collateral requirement. These LoUs allowed Modi to secure buyer’s credit from overseas banks based on forged SWIFT transactions — bypassing the bank’s Core Banking System (CBS).
Further probe revealed:
- Use of shell companies in Hong Kong and UAE
- Complicity of senior PNB officials
- Multiple LoUs issued without sanction
- Swift laundering of funds to personal and business accounts abroad
- Letters of Credit not backed by genuine trade transactions
The Enforcement Directorate (ED) and CBI’s investigation linked Modi and his uncle Mehul Choksi to over 100 shell firms, ultimately tracing transactions violating FEMA and PMLA provisions.
Abstract
The Nirav Modi PNB Scam represents one of India’s gravest banking frauds. It exposed gaping holes in internal controls and compliance mechanisms within banks and emphasized the misuse of instruments like LoUs. The case became a cornerstone for reforms in financial governance, anti-money laundering systems, and corporate accountability. It also tested the boundaries of India’s extradition treaties and international cooperation in white-collar crime prosecution.
Case Laws
- CBI v. Nirav Modi (2020, UK Extradition Case)
The Westminster Magistrates’ Court in London held that Nirav Modi could be extradited to India. The court recognized sufficient prima facie evidence of fraud, conspiracy, and money laundering, highlighting Modi’s actions amounted to a criminal breach of trust and deceit under Indian law. - Nirav Modi v. Union of India (Extradition Appeal, UK High Court, 2021)
Modi appealed the extradition citing mental health concerns and conditions in Indian jails. The court dismissed the appeal, asserting that India’s assurances on prison conditions and fair trial were credible. - PNB v. Nirav Modi (2020)
A commercial suit filed in Indian courts by PNB sought recovery and seizure of Modi’s assets under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. - Enforcement Directorate v. Firestar Diamond International (2021)
The ED attached multiple assets under the Prevention of Money Laundering Act, 2002, holding that the business was used as a front to layer and launder funds.
Conclusion
The Nirav Modi scam is not just about one man or one bank — it’s a cautionary tale for India’s financial and legal systems. It exposed the fragility of trust, the misuse of power, and the ease with which high-profile individuals can exploit systemic gaps. The case catalyzed regulatory overhauls in LoU issuance, inter-bank communication, and internal checks. Legally, it emphasized the need for stricter enforcement of white-collar crime laws, seamless international cooperation, and faster extradition procedures.
Even as Nirav Modi sits behind bars in the UK, the ripple effects of his scam continue to reshape India’s legal, financial, and regulatory landscape.
FAQs
Q1. What is a Letter of Undertaking (LoU)?
Ans. A LoU is a guarantee issued by an Indian bank to overseas branches of other Indian banks to provide short-term credit to the applicant. It essentially functions as a credit note and requires high-level clearance and collateral.
Q2. How did Nirav Modi misuse LoUs?
Ans. Modi’s firms got PNB officials to issue LoUs without collateral. These LoUs were then used to obtain buyer’s credit from international banks, funds which were then siphoned or layered across various accounts.
Q3. Under which laws was Nirav Modi charged?
Ans. He was charged under various sections of the Indian Penal Code (420, 409, 467, etc.), the PMLA, FEMA, and the Companies Act for criminal conspiracy, fraud, forgery, and money laundering.
Q4. Was Modi extradited to India?
Ans. As of 2025, Nirav Modi remains in UK custody. Though extradition was approved, he continues to appeal on health and human rights grounds.
Q5. What reforms followed the PNB Scam?
Ans. The RBI discontinued the use of LoUs for foreign trade finance. Banks were directed to tighten internal audit systems, integrate SWIFT with CBS, and establish real-time monitoring of foreign transactions.
