The PNB Fraud: A Banking Scandal That Shook India

Nirav Modi, along with his uncle Mehul Chhoksi and several officials of the Punjab National Bank, has masterminded the biggest banking scam ever in India from book-keeping transactions to the tune of some ₹12,000 crore in early 2018. They are said to have exploited the loophole in Indian banking systems via the unauthorized issue of Letters of Undertaking (LoUs) by the PNB Brady House branch in Fort, Mumbai. This scam points out gross lapses in banking oversight and regulatory control, with serious financial and legal ramifications. 

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Key Figures in the Scam

1. Nirav Modi – Diamond merchant and prime accused.

2. Mehul Choksi – Owner of Gitanjali Gems and Nirav Modi’s uncle.

3. Gokulnath Shetty – Deputy Manager at PNB, facilitated fraudulent LoUs.

4. Manoj Kharat – PNB employee, allegedly assisted in issuing unauthorized LoUs.

5. Multiple Indian banks – Overseas branches of Allahabad Bank, Axis Bank, and UCO Bank honoured these fraudulent LoUs.

Inside the PNB Fraud

The scam was carried out through fake LoUs, a type of bank guarantee issued by banks for businesses to obtain credit from foreign banks for international trade and assuring the lender that the issuing bank will repay the loan if the borrower defaults. The PNB officials including deputy manager Mr. Gokul Shetty colluded with Nirav Modi's firms-Diamond R US, Solar Exports, and Steller Diamonds-and issued fake LoUs without even a token cash margin whenever LoUs were to be used. These were then used to obtain credit from the overseas branches of Indian banks such as Allahabad Bank, Axis Bank and Union Bank of India. The fraud escaped detection because the transactions were kept out of PNB's core banking system (CBS) and executed through SWIFT, the international messaging network for financial transactions.

Investigations and Arrest 

The frauds remained unexplained and sat on paper until January 2018 when officials of PNB noticed irregularities in the transactions that had passed unnoticed thanks to a recruit who raised further queries. As an afterthought, on January 29, 2018, the financial institution, alleging a main fraud by Nirav Modi, his wife Ami Modi, brother Nishal Modi, uncle Mehul Choksi, and involved several other bank officers that had have complained to the Central Bureau of Investigation (CBI). The case was also taken up by using the Enforcement Directorate (ED) and the Reserve Bank of India (RBI).

Before 2011, Nirav Modi and Mehul Choksi created their firms within the diamond and jewellery business and they created networks with key financial institution officers and suppliers. 

From 2011 to 2017, PNB Brady House branch issued fraudulent LoUs which allowed Modi’s companies to secure loans worth ₹12,000 crore. The fraud remains undetected as Gokulnath Shetty bypassed the bank’s Core Banking System (CBS) and issued LoUs via the SWIFT interbank messaging system which is a loophole discovered by them. These LoUs acted as bank guarantees, allowing Modi’s firms to obtain credit from overseas branches of Indian banks. Since these LoUs were not recorded in PNB’s official ledgers, the fraud remained undetected for several years. The fraudulent LoUs were continuously rolled over, allowing Modi’s companies to siphon funds without repaying.

On 29 Jan 2018, PNB filed a complaint against Nirav, Ami Modi, Nishal Modi and Mehul Choksi, all partners of M/s Diamond R US, M/s Solar Exports and M/s Stellar Diamonds committed the offence of cheating against PNB and caused a wrongful loss to CBI. The PNB officials in his complaint alleged two of its employees, Gokulnath Shetty, retired Deputy Manager of PNB and another bank official, issued fraudulent LoUs to Hong Kong-based creditors on behalf of three firms associated with Nirav Modi and the Gitanjali Group.

On 18 May 2018, The scam came out in front of the public domain worth ₹14,356.84 crore and Nirav Modi is stated to be hiding in London and allegedly visiting on a fake passport in Feb 2018. On 13 June 2018, CBI approached Interpol to issue a red corner notice (RCN) in opposition to Nirav Modi, his uncle Mehul Choksi of the Gitanjali Group, his brother Nishal and certainly one of his executives in connection with its explore for PNB fraud. 

Nirav Modi was arrested in central London on 19 March 2019 after an Indian-origin clerk at a bank in central London recognized him and alerted the police. The next day Nirav appeared in court and in that month a UK court rejected twice to grant bail on the ground that he was a flight risk and could flee the country if given a chance. Mehul Choksi, on the other hand, however sought refuge in Antigua and Barbuda, claiming he left India for medical treatment. His extradition remains an ongoing legal battle.

Asset Seizures and Legal Proceedings

In the aftermath of the scam, Indian authorities initiated a crackdown on the accused by attaching their assets under the Fugitive Economic Offenders Ordinance. Swiss authorities froze Nirav Modi’s and his sister Purvi Mehta’s bank accounts, amounting to ₹283.16 crore. Similarly, Singapore’s High Court ordered the freezing of four bank accounts associated with Modi and his associates, containing ₹44 crore.

In June 2020, a special PMLA (Prevention of Money Laundering Act) court ordered the confiscation of Nirav Modi’s assets and all the related belongings that amounted to ₹1,400 crore. The ED further auctioned off luxury objects, together with high-end watches, jewellery, and paintings, recovering ₹2.29 crore. In parallel, the CBI filed a disproportionate assets case against Gokulnath Shetty, revealing that his wealth was over 200% more than his known income sources. PNB and the Indian government.

Government and RBI Reforms

The PNB scam revealed major loopholes in Indian banking regulations. The Indian authorities, in response, brought in the Fugitive Economic Offenders Bill (2018), which now enables the authorities to seize the assets of the economic offenders fleeing the country. The RBI additionally took corrective measures by scrapping LoUs and Letters of Comfort (LoCs) to prevent similar frauds from going onwards in the future. 

Financial Impact

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PNB suffered direct losses of ₹14,356 crore, leading to:

• Net loss of ₹12,283 crore in FY 2018-19.

• Stock price drop of 40% post-revelation.

• ₹5,473 crore provisions set aside for potential NPAs.

Banking sector reforms:

• Stricter audit norms for SWIFT transactions.

• Improved internal banking oversight to prevent such frauds.

Current Status

As of now, Nirav Modi is still fighting against extradition from the UK while Mehul Choksi's status remains murky in Antigua. The Indian government is still adamant in attempting to bring both fugitives to justice, as authorities continue to try and recover all other assets and make other financial institutions tighten security to avert such frauds in the future.

Conclusion

The PNB fraud case brings into focus the vulnerability of the Indian banking industry. While measures have been instituted to remediate the incident, the conduct reinforces the need for very strict regulatory scrutiny and technology upgradation to avert such high-profile financial crimes. This case illustrates the pressing need for international collaboration to counter economic offenders who misuse loopholes in legal systems to escape justice.