You are on page 1of 12

Nirav Modi and the $1.

77-billion PNB fraud

Punjab National Bank (PNB), the country’s second-largest public sector


lender, is now in the middle of a ₹11,400 crore transaction fraud case.

On Wednesday morning, PNB informed the Bombay Stock Exchange that it


has detected some “fraudulent and unauthorised transactions” in one of its
branches in Mumbai to the tune of $1771.69 million (approx).

Following the announcement, the share price of the State-owned bank


plunged 10%.

Meanwhile, the Central Bureau of Investigation (CBI) received two


complaints from PNB against billionaire diamantaire Nirav Modi and a

1
jewellery company alleging fraudulent transactions worth about ₹11,400
crore, the Press Trust of India reported

This is in addition to the ₹280 crore fraud case that he is already under
investigation for, again filed by PNB.

Nirav Modi, the billionaire in the middle of this controversy, is a luxury


diamond jewellery designer who was ranked #85 in the Forbes list of
India’s billionaires in 2017

the founder and creative director of the Nirav Modi chain of diamond
jewellery retail stores, and is the Chairman of Firestar International, the
parent of the Nirav Modi chain, which has stores in key markets across the
globe.

His designs have been worn to the Oscars by ‘Hidden Figures’ star
Taraji P. Henson and to the Golden Globes by Dakota Johnson, among
others. Actor Priyanka Chopra is the brand ambassador.

Modus Operandi?

In a statement issued to stock exchanges on Wednesday, PNB said that


it has detected some “fraudulent and unauthorised transactions
(messages)”

**** A stock statement is a business statement that provides information on


the value and quantity of stock related transactions. It details opening and
closing balances for transacted items as well.

2
According to the complaint filed by PNB with the CBI on January 28, the
fraudulent issuance of Letters of Undertakings (LOU) was detected at the
Mid Corporate Branch, Brady House in Mumbai.

What are major the differences between an SME, mid-corporate and lar

crore Mid Corporate


branches give credit upto ₹50 crore Large Corporate branches have large
credit exposure of major corporate clients with credit limit of ₹50crore and
more.

headed by AGM, while Large


Corporate branches are headed by DGM and above, depending on Bank
business.

Letter of Understanding?

A contract to perform the promise, or discharge the liability, of a third


person in case of his default

-Bank

Provisioning

overseas lenders such as banks and other financial institution for goods
they are importing

3
— Diamond R US, Solar Exports and Stellar
Diamonds — approached the bank on January 16 with a set of import
documents and requested for Buyer’s Credit to make payments to
overseas suppliers.

Nirav Modi, and Mehul Chinubhai Chokshi as partners.

Buyers Credit is, typically, a short-term loan facility extended to an importer


by a bank to finance goods and services.

It is a common mode of transaction in international trade where a bank


extends credit to the importer and a finance agency based in the exporter’s
country guarantees the loan.

As there was no sanctioned limit in the name of the firms, the branch
officials requested the firms to furnish 110% cash margin for issuing the
LOU for raising the Buyer’s Credit.

At this, the firms contested that they have been availing this facility in the
past; but the branch records do not corroborate this.

On digging further, the bank officials discovered that two of its employees
had fraudulently issued LOUs in the past without following prescribed
procedures and approvals.

branches of Indian banks for raising Buyer’s Credit without making entries
in banking system to avoid detection.

4
SWIFT Code:

Society for Worldwide Interbank Financial Telecommunication code. An


internationally recognized identification code for banks around the world,

and are comprised of 8 or 11 alphanumeric characters,

authoritative body that approved the creation of SWIFT codes

The complaint also said that the funds so raised for the payment of the
Import Bills have not been utilised for such purposes in many cases.

As per the FIR, five of the SWIFT messages (SWIFT is a messaging


network used by financial institutions to securely transmit instruction) were
issued to Allahabad Bank in Hong Kong and three to Axis Bank in Hong
Kong.

What will happen now?

One of the worrying aspects of the scam is that in its statement, PNB says
that based on the fraudulent transactions, other banks appear to have
advanced money to the customers abroad.

contingent in nature and


any liability arising out of these on the bank will have to be decided based
on the law and genuineness of underlying transactions.

What is a ‘Contingent Liability?’

A contingent liability is a potential liability that may occur, depending on the


outcome of an uncertain future event.
5
contingency is probable and the amount of the liability can be reasonably
estimated.

liability may be disclosed in a


footnote to the financial statements or not reported at all.

Rajan said “I don’t think this is out of control or too big a worry at this point.
That is my broad sense.”

Department of Financial Services?

The Department of Financial Services covers Banks, Insurance and


Financial Services provided by various government agencies and private
corporations.

e and Micro, Small


and Medium Enterprise. It started the Pradhan Mantri Jan Dhan Yojana.

is a statutory body which also works under this department. Rajiv Kumar is
the current Secretary of this department.

government is attempting to provide a breather to ailing PSBs, having


announced a ₹2.11 lakh crore

receive Rs 5,473 crore as capital infusion from the government through a


mix of recapitalisation bonds and direct infusion.

6
As of now, as Reuters(An international news agency founded in London in
1851 by Paul Julius Reuter (1816–99)) opined, the only good that could
come out of the affair would be some fresh consideration to implementing
better practices in public sector banking.

HIGHLIGHTS

o Punjab National Bank (PNB) disclosed that it has detected some


fraudulent transactions with financial implication of $1.77 billion
o The matter has been referred to law enforcement agencies for the
recovery.

NEW DELHI: Major jewellers Gitanjali, Ginni and Nakshatra have also
come under the scanner of various investigating agencies following
PNB's declaration of Rs 11,400 crore fraud, committed allegedly by
Nirav Modi.

Punjab National Bank (PNB) disclosed this morning that it has detected
some fraudulent transactions with financial implication of $1.77 billion
(about Rs 11,346 crore) and the matter has been referred to law
enforcement agencies for the recovery.

Four big jewellers -- Gitanjali, Ginni, Nakshatra and Nirav Modi -- are
under scanner. The CBI and Enforcement Directorate is looking at their
arrangements with various banks and end use of money," a senior
official of a public sector bank told PTI.

No immediate comments were available from these companies.

7
There is strict instruction from the finance ministry to all banks that no
big fish should go scot free and no honest borrower is harassed, the
official said.

Banks are now looking at their systems and processes so that such
frauds are not repeated, the official said.

All banks have been asked to present a status report as soon as


possible, he added.

In 2015, Bank of Baroda -- another public sector bank -- had brought to


light a scam in which two Delhi businessmen cheated it of Rs 6,000
crore which slightly less than $1 billion at that time.

Investigations revealed major irregularities, because the forex


transactions were done mainly via advance remittances for import,
through newly-opened current accounts. Heavy cash transactions --
sometimes four or five times a day -- were also noticed.

The Enforcement Directorate, under the revenue department of the


finance ministry, had arrested the businessman duo under money
laundering provisions.

PNB said in a statement that fraudulent transactions took place in one of


its branches in Mumbai for the benefit of a few select account holders
with their apparent connivance.

Based on these transactions, done by his brother Nishal, wife Ami and
Mehul Chinubhai Choksi, other banks appear to have advanced money
to these customers abroad.

8
The CBI has received two complaints from the PNB against billionaire
diamantaire Nirav Modi and a jewellery co... Read More

NEW DELHI: Major jewellers Gitanjali, Ginni and Nakshatra have also
come under the scanner of various investigating agencies following
PNB's declaration of Rs 11,400 crore fraud, committed allegedly by
Nirav Modi.

Punjab National Bank (PNB) disclosed this morning that it has detected
some fraudulent transactions with financial implication of $1.77 billion
(about Rs 11,346 crore) and the matter has been referred to law
enforcement agencies for the recovery.

"Four big jewellers -- Gitanjali, Ginni, Nakshatra and Nirav Modi -- are
under scanner. The CBI and Enforcement Directorate is looking at their
arrangements with various banks and end use of money," a senior
official of a public sector bank told PTI.

No immediate comments were available from these companies.

There is strict instruction from the finance ministry to all banks that no
big fish should go scot free and no honest borrower is harassed, the
official said.

Banks are now looking at their systems and processes so that such
frauds are not repeated, the official said.

9
All banks have been asked to present a status report as soon as
possible, he added.

In 2015, Bank of Baroda -- another public sector bank -- had brought to


light a scam in which two Delhi businessmen cheated it of Rs 6,000
crore which slightly less than $1 billion at that time.

Investigations revealed major irregularities, because the forex


transactions were done mainly via advance remittances for import,
through newly-opened current accounts. Heavy cash transactions --
sometimes four or five times a day -- were also noticed.

The Enforcement Directorate, under the revenue department of the


finance ministry, had arrested the businessman duo under money
laundering provisions.

PNB said in a statement that fraudulent transactions took place in one of


its branches in Mumbai for the benefit of a few select account holders
with their apparent connivance.

Based on these transactions, done by his brother Nishal, wife Ami and
Mehul Chinubhai Choksi, other banks appear to have advanced money
to these customers abroad.

All this was being carried out in connivance with officials as high as
Deputy General Manager since 2011.

The CBI has received two complaints from the PNB against billionaire
diamantaire Nirav Modi and a jewellery company alleging fraudulent
transactions.

10
NIrav Modi, whose jewellery creations are popular among global
celebrities, may face a fresh CBI probe as the agency is looking at suitable
legal action to be taken in the case.

He is already being investigated by the CBI for alleged cheating and fraud
involving Rs 280 crore at a PNB branch.

The news of Rs 11,363 crore fraudulent transactions at Punjab National


Bank has raised questions on the efficacy of the public sector banks vis-a-
vis its lending procedures.

The fraud carried out by Nirav Modi, a well-known jewellery designer and a
billionaire diamond trader, will further dent the credibility of the already-
stressed banking system in the global arena.

The latest fraud is being touted as even higher than the Vijay Mallya's
default of around Rs 9,000 crore.

A day after revelation, the Enforcement Directorate, on Thursday, launched


a countrywide raid on the offices, showrooms and workshops of Nirav
Modi.

The bank has suspended its 10 bank employees but it is not clear, as
media reports say, if action against members from the PNB Credit Approval
Committee or its Board of Directors have been taken.

On January 29, PNB informed India’s Central Bureau of Investigation (CBI)


that two employees posted at the Mumbai branch had illegally issued
“letters of undertaking” to get the overseas branches of Indian banks
extend credit to “a few select account holders,” related with Nirav Modi. The
following day, it filed a complaint against the alleged fraud.

11
PNB says its employees bypassed the lender's internal messaging system
and issued instructions through the Swift global payment system in order to
avoid detection.

The CBI, last week, booked Firestar Diamonds group along with Modi, his
wife Ami Nirav Modi, brother Nishal and a maternal uncle Mehul Choksi,
who owns Geetanjali Group.

The fraud was unearthed last month, when Modi's companies applied for a
fresh loan from the bank. As the employee in question had retired, other
staff placed at his position refused to approve the loan.

This was the point when the bank unearthed the fraud and the fake letters
of undertaking.

PNB Chief Executive Officer Sunil Mehta said, on Thursday, the bank is in
talks with other banks to decide on the liabilities, however, it will follow the
regulator's instructions on repayment.

PNB, as NDTV reports quoting Bloomberg, has named Hong Kong


branches of Axis Bank Ltd and Allahabad Bank as the overseas
counterparties.

12