A Case Study on Punjab National Bank

(Nirav Modi Scam)

 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 • In a regulatory filing on Feb. 14, the bank updated the sum

a criminal complaint with India`s federal investigative involved in the fraud to 113.94 billion rupees ($1.77 billion),

agency against three companies and four people, which it said was determined after further investigation at its

including billionaire jeweler Nirav Modi and his uncle Mumbai's Brady branch. This fraud is done by Nirav Modi in

Mehul Choksi, the managing director of Gitanjali 2011 who fraudulently raised funds worth of Rs.11,400 crore

Gems, saying they had defrauded PNB and caused a from various public & private sector banks by showing Letter

loss of 2.8 billion rupees ($43 million). 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.
• Nishal 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)
 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.
• 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.

• 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.

Transaction Flow

q u est
Re re dit
e rs c
B u y

PNB 2

Issue LOUs via

Importer

swift
money paid to the
overseas branch for
maturity of earlier LOU

Exporters Bank
Clearing Bank
Based on the LOU, the
overseas bank funds PNBs
Nostro account
11
 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.
 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 section 120 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-

• Not following corporate governance norms
• Tempering the financial data
• Misleading the bank as well as the government
• 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.
Thank
You