Author: Nikita Agarwal, Bharati Vidyapeeth Deemed University, Delhi
Introduction
The Punjab National Bank (PNB) scam, involving businessman Nirav Modi, is one of the largest financial frauds in India’s history. It was discovered in early 2018. The scam included the illegal issuance of Letters of Undertaking worth over ₹13,000 crores. This scheme was implemented through manipulation of banking systems and collusion with bank officials. This case exposed significant weaknesses in the internal controls of public sector banks. It also highlights the need for stronger regulatory oversight and accountability within the Indian financial system. As the scandal unfolded, it led to investigations by several agencies and resulted in major legal, political and economic consequences. This case illustrates how white-collar crime can severely damage public trust and interest, highlighting the need for legal changes and vigilant monitoring.
Abstract
In January 2018, India learned about the Punjab National Bank (PNB) scandal, a staggering ₹13,578-crore heist allegedly run by diamond dealer Nirav Modi, his uncle Mehul Choksi, and a handful of corrupt bank staff. They pulled it off by sneaking out Letters of Undertaking that were never logged in the bank’s Core Banking System, then using SWIFT messages to move credit around the globe as if everything were perfectly normal. Because no collateral was asked for, Modis companies quickly pocketed huge overseas loans, and the bank was left holding the bill. Follow-up inquiries by the Central Bureau of Investigation, Enforcement Directorate, and Serious Fraud Investigation Office piled charges under the Indian Penal Code, Prevention of Corruption Act, Prevention of Money Laundering Act, and 2018 Fugitive Economic Offenders Law. The episode hammered public trust in India’s lenders, forced regulators to tighten rules, and sparked fresh arguments about how boards and government owners should protect taxpayers’ money. Modi has since been branded a fugitive economic offender and is still battling extradition in the United Kingdom. Even now, the affair stands as a chilling reminder of how white-collar crime and banking oversight can collide in the United States.
The Modus Operandi
How the Scam Worked Nirav Modi and Mehul Choksi ran the scam using LoUs, which are bank guarantees for international credit. They worked with senior PNB officials to send unauthorized LoUs through the SWIFT system, completely avoiding the bank’s Core Banking System. Since these LoUs were not recorded, internal and external auditors could not detect them. Foreign branches of Indian banks depended on these LoUs and gave out credit that was never paid back, leading to huge defaults.
Use of Legal Jargon
Letter of Undertaking (LoU): This type of bank blessing enables a borrower to gain backing from abroad.
SWIFT (Society for Worldwide Interbank Financial Telecommunications): A vast network that allows banks to swap messages in seconds.
Constructive Fraud: Wrongdoing the courts read into the facts, even when no one meant to cheat on paper.
Men’s Rea: The guilty mind that proves a crime isn’t just a careless mistake.
Vicarious Liability: When a boss must answer for the misdeeds of the staff working under her.
Money Laundering: Hiding cash that started in crime by shuffling it through banks or everyday businesses.
Fugitive Economic Offender: Someone wanted by warrant for a ₹100-crore-plus financial crime who bolts abroad.
Wailful Default: Refusing to return a loan when there are sufficient funds to do so.
CBI/ED Prosecution: Court action led by the Central Bureau of Investigation and the Enforcement Directorate under their respective laws.
Legal Provisions Invoked
Indian Penal Code, 1860
Section 420: infidelity and dishonest converting the handover of property.
Section 120B: Criminal conspiracy
Sections 467, 468, 471:: Document phony and use of documents.
Prevention of Corruption Act, 1988
Charges against bank officials for abusing their official positions for personal gain.
Prevention of Money Laundering Act, 2002
The assets of Nirav Modi and Mehul Choksi were seized. The lawsuit included properties valued at ₹ 2,396 crore.
Fugitive Economic Offenders Act, 2018
This Act allowed for the seizure of Nirav Modi’s assets once he was designated as a fugitive.
Companies Act, 2013: For fraudulent conduct and concealment of financials in Firestar Diamond International.
Using the Pvt. Ltd. Repatriation Act of 1962, the Indian government requested Modi’s repatriation from the UK.
Important Organizations and Steps Done
The Central Bureau of Investigation (CBI) arrested bank officials and company workers and filed formal complaints.
The Enforcement Directorate (ED) seized assets valued at thousands of crores and followed money laundering trails.
The Serious Fraud Investigation Office (SFIO) investigated compliance infractions and corporate governance shortcomings.
Red Corner Notices were issued by Interpol against Mehul Choksi and Nirav Modi.
The UK government is handling India’s request to extradite Nirav Modi from a jail in London.
Effect on the Legal and Banking Systems in India
Significant changes to India’s financial regulatory framework were brought about by the scam:
RBI tightened SWIFT integration with CBS and prohibited the issuance of LoUs.
Public sector banks were instructed to enhance risk management and internal auditing.
To expedite asset recovery, the Fugitive Economic Offenders Act of 2018 was passed.
The case increased public pressure for stronger corporate governance guidelines and bank privatization.
Post-Scam Policy Reforms
To stop future banking scams of this nature, the Indian government and regulatory bodies implemented a number of policy changes following the discovery of the PNB scam in 2018. Important reforms consist of:
Prohibition of LoU and LoC Issuance:
Because they were abused in the scam, the Reserve Bank of India (RBI) prohibited public sector banks from issuing Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for trade-related credit in March 2018.
SWIFT and CBS integration:
To guarantee real-time tracking and stop internal audit trails from being circumvented, the RBI mandated that all banks integrate the SWIFT system with their Core Banking System.
The National Financial Reporting Authority (NFRA) was established.
empowered to improve corporate accounting transparency and supervise and control auditors of sizable public interest organizations.
Prompt Corrective Action (PCA) for Banking Reforms:
To improve financial discipline and decrease non-performing assets (NPAs), PSU banks were placed under PCA.
Bank Mergers in the Public Sector:
Weaker banks were merged with stronger ones as part of a long-term structural reform to enhance operational effectiveness and governance.
Case Laws
Central Bureau of Investigation v. Modi (2018) made the FIR mandatory and cited IPC-grade cheats and forgery sections, plus provisions of the Prevention of Corruption Act. Evidence proved that Nirav Modi worked with bank insiders to create fake letters of undertaking to commit fraud.
Directorate of Enforcement v Modi (2019) Under the PMLA, the Enforcement Directorate froze assets worldwide and began steps to label Modi as a fugitive economic offender.
UK Court Order: Government of India v Nirav Modi [2021] Westminster Magistrates Court London judges noted strong early proof of fraud and money-laundering conduct and swept aside his legal objections, clearing the path for extradition to India.
Union of India v. Vijay Mallya (2020) Although unrelated, the Supreme Courts reading of the Fugitive Economic Offenders Act in Mallyas matter created a guiding benchmark that courts later cited when dealing with Modis appeal.
Suggestions and the Future
The following actions are advised to stop major financial scams like the PNB scam from happening again:
Systems for detecting fraud in real time:
To identify odd financial trends and quickly flag high-risk transactions, artificial intelligence and data analytics tools are used.
Improved Protection for Whistleblowers:
Enact stronger legislation to safeguard banking industry whistleblowers and promote internal reporting of questionable activities.
Framework for Global Asset Recovery:
For quicker asset recovery and extradition, strengthen international agreements and mutual legal assistance treaties (MLATs).
Increasing Bank Officials’ Accountability:
Clearly state that senior bank officials are liable for egregious negligence or collusion, with financial and criminal penalties.
Tight Regulator and Auditor Supervision:
Give organizations like NFRA and SEBI the authority to carry out impartial audits and to penalize compliance officials or statutory auditors for infractions.
Establishing a Central Fraud Registry:
All banks and regulators should have access to a national database of previous defaulters, fraud trends, and blacklisted entities.
Required Instruction in Risk and Compliance:
regular instruction in cybersecurity, fraud detection, and compliance for bank employees.
Courts for Special Economic Offences with Fast Track:
Create specialized courts to expeditiously and efficiently handle high-value fraud cases.
Conclusion
The PNB scam highlights the weaknesses in Indian banking. The scale of the fraud, which took advantage of gaps between SWIFT and CBS systems, has had significant consequences. The scam led to changes in banking rules, including the removal of LoUs for import financing and ensuring real-time integration of SWIFT and CBS. This case also shows how economic offenders use international jurisdictions to avoid justice. The ongoing extradition of Nirav Modi and the successful prosecution under PMLA and FEOA demonstrate India’s commitment to fighting economic crimes. For law students and practitioners, this case serves as an important reference for understanding white-collar crime, enforcement methods, and the challenges of cross-border criminal law enforcement.
FAQS
Q1. What is the full form of LoU?
A: Letter of Undertaking, a bank guarantee provided for overseas buyers’ credit.
Q2. How did Nirav Modi commit the fraud?
A: He colluded with PNB officials to issue unauthorized LoUs without CBS entry and used the SWIFT network.
Q3. What laws apply to this case?
A: IPC, PMLA, Prevention of Corruption Act, Companies Act, and Fugitive Economic Offenders Act.
Q4. Where is Nirav Modi now?
A: Nirav Modi is in a UK prison and facing extradition to India.
Q5. What was the total loss in the PNB scam?
A: The total estimated loss is ₹13,578 crore.
Q6. What is the Fugitive Economic Offenders Act?
A: An Indian law that allows authorities to seize properties of economic offenders who flee India to avoid prosecution.
