The PNB fraud highlights certain flaws in the system and focuses on the issues

surrounding the fraud. How vulnerable is the banking system ? Can a group of people
with misplaced ethics bring down a large bank and consequently give rise to a
systemic risk

Background of the case

Mr Nirav Modi, a jeweller who ranked 85 on the Forbes list ( list of India’s
richest people , through his firms, Diamond R Us’ , Solar Exports and Stellar
Diamond gets Letters of Undertaking (LOUs) from Punjab National Bank’s
Brady House branch in Mumbai from 2011 onwards till 2018. Through these
LOUs, Modi avails credit limits from foreign branches of Banks in India and uses
these limits to pay off his suppliers of rough diamonds.

On January 16th 2018 representatives of these partnership firms of Mr Nirav

Modi and his maternal uncle, Mr Mehul Choksi come to Brady House branch of
Punjab National Bank in Mumbai, with a set of import documents, wanting to
take LOUs so as to avail buyers credit for making payment to the overseas
suppliers. The branch officials request them to furnish at least 100 percent cash
margin for issuing the LOUs. However the representatives argue that they had
procured LOUs in the past without providing any margin. The branch officials
check for such past records, but can find none. They become suspicious and on
a further examination find that Mr Gokulnath Shetty, a Deputy Manager, who
was posted at the branch from 2010- 2017 (since retired) had fraudulently
issued the LOUs without following the necessary procedure in that regard. It
turns out that the amount of such LOUs was Rs. 11000 crores.
Money trail
Name of the Bank Amount of loan granted
against the LOUs (mio
$)
1 Union Bank of India, Hongkong 110.214
2 UCO bank, Hongkong 247.493
3 Canara Bank, Bahrain 423.750

Around 200 shell companies in Macau, Beijing, Hongkong, Singapore, Bahrain

and Kuala Lumpur were used by Modi and Choksi to divert funds from India.
From there, they were transferred to the bank accounts in Hawaii, Las Vegas
and New York. From there the amounts were sent to a bank account in London,
from there to 2 Swiss bank accounts and bank accounts in Antwerp. Under the
scanner came 114 companies, and LLPs that were linked to the duo. Some of
these companies dealt with diamonds and jewels, while others were into retail,
exports and technology.
The fraud dates back to 2011.
Come prepared for a discussion on the following

• Letters of Undertaking - how misused in the PNB scam

• Analyse the role of technology in the PNB fraud case and extend it to other
cases as well.
• Highlight the failures in the system that could have prevented the early
detection of a fraud of this magnitude

hari prasad letter of complaint