BANKING

FRAUD
PRESENTED BY-SUNDARAM
MISHRA
YASH DESHMUKH
VIPUL PATIL
Table of contents
01. 02. 03.
MEMBERS
PNB WHO IS NIRAV
INVOLVED IN
BACKGROUND MODI? SCAM

04.
EFFECT OF SCAM 05.
LETTER OF
06.
ON PNB & Analysis of the
UNDERTAKI
OTHERPUBLIC Scam
SECTOR BANKS NG
Table of contents
07. 08.
WHY THE SCAM
09.
Scam Operation COULDN'T
BEDETECTED EARLIER Fraud Detection

10. 11. 12.

ETHICAL CONCLUSI
Legal Penalty
CONCERNS ON
 SYNOPSIS
• India's second largest state-owned lender Punjab National Bank disclosed on Feb. 14,
2018 that it was the victim of the country's largest bank fraud.
• PNB revealed that fraudulent transactions by billionaire jeweler Nirav Modi and related
entities amounted to $1.77 billion or over Rs 11,400 crore.
• The key accused in the case were jeweler and designer Nirav Modi, his maternal uncle
Mehul Choksi, and other relatives and some PNB employees.
• Nirav Modi and his relatives escaped India in early 2018, days before the news of the
scam became public.
• PNB scam has been dubbed as the biggest fraud in India's banking history.
 PNB Background
• 2nd largest public sector bank in India
• 59% government ownership
• 125 years old
• 7000 + branches in 764+ cities• 11,000 +
ATMs
• Foreign operations through subsidiaries and
representative offices
• 60,000 + employees
• 80 million + customers
 Who is Nirav Modi?•
• Nirav Modi is an importer of diamonds.

• Basically importers prefer to take loans in foreign currencies as interest rates on that are

lower.

• He is into Diamond trading business. He is the founder and creative director of the Nirav

Modi chain of Diamond jewelry.

• In this case a loan that is taken from any overseas bank guaranteed by PNB.

• Nirav Modi. the billionaire jeweler who along with others scammed Punjab National

Bank(PNB) of over 11400 crore's has fled the country.

 INTRODUCTION
• On 29th Jan,2018, PNB (Punjab National Bank)filed a criminal complaint with India's
federal investigative agency against three companies and four people, including
billionaire jeweler Nirav Modi and his uncle Mehul Choksi, the managing Director of
Gitanjali Gems, saying they had efrauded PNB and caused a loss of 2.8 billion rupees
($43 million).

• In a regulatory filing on Feb. 14, the bank updated the sum involved in the fraud to
113.94 billion rupees ($1.77billion), which it said was determined after further
investigation at its Mumbai's Brady branch. This fraud is done by Nirav Modi in 2011
who fraudulently raised funds worth of Rs.11,400 crore from various public & private
sector banks by showing Letter of Undertaking (LOU)issued by
Punjab National Bank.
 Members involved in the Scam
• Nirav Modi: Nirav Modi is the owner of the Nirav Modi firm,
Diamond RU.S. Stellar Diamond and Solar Exports and the
prime accused in this scam.
• Ami Modi : Nirav Modi's wife.
• Nirav Modi : Nirav Modi's brother in law..• Mehul Choksi :
Mehul Choksi is the owner of Gitanjali Group and the uncle of
Nirav Modi.• PNB Employees : Gokul Nath Shetty (retired
deputy manager), Manoj Kharat (clerk)
EFFECT OF SCAM ON PNB & OTHERPUBLIC SECTOR BANKS

• Public sector banks will now have to look back on every defaulters, rupees 50
crores and check whether he was genuinely stressed or just fooling them.
• The stock price of PNB has fallen down from rupees 160 to rupees 95.5 as on
9th march 2018.
• RBI has said to PNB to pay all debts to other banks.
• The RBI stop banks to issue LOU (letter of undertaking).
• Because of this fraud PNB has lost trust of people.
• In case where fraudulent transactions are found, the government want bankers to
involve to investigating agencies like the enforcement directorate and their ilk.
• This put the approximately rupees 8 trillions worth of bad loan stockpile of the
banking sector in the spotlight.
LETTER OF UNDERTAKING
• A Letter Of Undertaking, or
LOU is a document issued by a
bank to a person or a firm. This
LOU is generally used for
international transactions and
is issued keeping pin mind the
credit history of the party
concerned.
• The party can then avail
Buyer's Credit against this
LOU from a
foreign bank.
 Analysis of the Scam
• PNB employees issued the fake Letter of Undertakings (LOU) which could lead to
fraud. The two employees of PNB directly used SWIFT and while doing it, they did not
pay attention on the core banking system (CBS). The FIR contained the details like those
two PNB employees were issuing LOUs in unauthorized way for 7 years.
• Afterwards, one of them retired and the new employee came on his designation. In
January, when the officials of firm demanded fresh LOUs from PNB, the new PNB officer
asked for the collateral security.
• The officials of firm mentioned that this had been never asked by the PNB manager in
the last 7 years.
• Now the bank got signal that something wrong has taken place.
• The new Bank officer got doubt on the past 7 years LOU issuance and he looked into the
concerned matter in detail.
 Analysis of the Scam
• An Indian bank (A) issues an LOU (Letter of undertaking) at the request of a corporate to a
bank in a different country (B), guaranteeing a loan that (B) gives to a third party who is
overseas. The third party generally is the beneficiary or the importer.
• The importer sells the goods and repays the loan. LOUs as corporate lending product is a
common practice by banks in India.
• As it is a high risk lending, LOUs are generally issued against collateral. Regulatory
compliance requires the LOU cannot be issued for more than 90 days.
• After detail investigation, it found near about 100 LOUs issued to these firms without
asking for collateral security. PNB became the victim of the fraud.
• It faced the problem amounting to about 11,400 crores.
• The PNB reported to the RBI and CBI.
 Scam Operation
• Nirav Modi exported rough store from foreign country worth crores of rupees.

• The employees at PNB Brady House branch fraudulently issued LOU for 365 days without making any provisions

for collateral and by passing Core Banking System (CBS).

• The firm also raised funds from Indian banks overseas branch for paying to the suppliers.

• Nirav Modi's firm again requested the bank to issue another LOU (letter of undertaking) but the official refused on

ground that the company has to keep collateral with bank but Modi's firm argued that no such money was kept on

margin for the previous LOU.PNB11000CRORE.

 Scam Operation
• After the PNB official started scanning the records and didn't find any such transactions and then

filed a complaint with CBI.

• Nirav Modi's firm again requested the bank to issue another LOU but the official refused

• on ground that the company has to keep collateral with bank but Modi's firm argued that no such

money was kept on margin for the previous LOU.

• After the PNB official started scanning the records and didn't find any such transactions and then

filed a complaint with CBI.
WHY THE SCAM COULDN'T BEDETECTED
EARLIER
• The failure of the Auditors - Auditors failed to detect any frauds which took place in PNB branch, Mumbai.

• No linkage of SWIFT with CBS - Society for worldwide interbank financial telecommunication (SWIFT) and core
banking system (CBS) was not linked with each other.

• Management Failure - The management system was very weak and couldn't detect any fraud because the deputy
manager of branch himself was involved in the fraud.

• No Rotation of Employees - According to reserve bank of India (RBI) guidelines, every employees working in banks
should be rotated from one position in every three years but the same was not done in the PNB branch.
 Fraud Detection
• 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. A set of partnership firm -
Diamond R US ,solar exports and Stellar Diamonds -approached the bank on
January 16 with a set of import documents and requested buyer's credit to
make payments to overseas suppliers. Since they had no pre-arranged credit
limit, the branch official asked the companies to put down the full amount as
collateral so the bank could issue LOU to authorize the credit.
Market trends after scam
Period 1 Period 2
 Legal Penalty
• This case comes under cheating i.e. under section 420 of IPC.

• According to section 420 IPC the person shall be punished with

imprisonment of either description for a term which may extend to
seven years, and shall also be liable to fine.

• This case comes under also Criminal Conspiracy under section120

B of Indian Penal Code
 Ethical Concerns
Ethics in the banking industry is simply defined as banks must comply with all the laws, rules and regulations levied by
the competent authority to enhance the confidence of the society.

Following are the Ethical Issues involved in the case-

1. Not following corporate governance norms

2. Tempering the financial data

3. Misleading the bank as well as the government

4. Putting self-interest first
 Conclusion
• The impact of frauds on entities like banks, and the economic cost of frauds can be huge in terms of
likely disruption in the working of the markets, financial institutions, and the payment system.
• Besides, these scams can have a potentially weakening effect on confidence in the banking system
and may damage the integrity and stability of the economy.
• It can bring down banks, undermine the central bank's supervisory role and even create social unrest,
discontent and political violence.
• The passiveness of banks to fraud has been heightened by technological advancements
in recent times.
Thanks!

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