Nirav Modi Case: How a $1.8 Bn Fraud at PNB Was Detected

PNB is at the centre of a $1.8 billion fraud – one of the largest to be detected across the Indian banking sector.

(Photo Courtesy: niravmodi.com)

State-owned lender Punjab National Bank (PNB) is at the centre of a $1.8 billion fraud – one of the largest to be detected across the Indian banking sector.

In a statement issued to stock exchanges on Wednesday, 14 February, PNB said that it has detected some “fraudulent and unauthorised transactions (messages)”, which it has reported to the concerned authorities. Based on these ‘transactions’, other banks appear to have advanced money to customers overseas, said the bank.

The quantum of such transactions is $1.77 billion, the bank disclosed. 

The fraudulent transactions are allegedly linked to designer and jeweler Nirav Modi, against whom a complaint has been filed with the Central Bureau of Investigation. The first such complaint was filed by PNB on 28 January 2018. BloombergQuint has reviewed the bank’s complaint, which is included in the first information report filed by the CBI on 31 January, 2018. The FIR is available on the CBI’s website.

While the initial complaint speaks of an amount of Rs 280 crore being involved in the alleged fraud, further internal investigations conducted by the bank showed that the amounts involved were much larger, said three people familiar with the matter. This led the bank to issue a revised statement saying that fraudulent transactions worth $1.77 billion have been detected.

The case relates to Nirav Modi and Gitanjali Gems. This started in a fraudulent manner in 2011. A fraud letter of undertaking was issued by a branch manager in Mumbai.

Rajiv Kumar, Secretary, Govt Department of Financial Services to BloombergQuint.

Calls made to Nirav Modi’s communication team were not answered. In a statement issued to stock exchanges on 7 February, when the matter first came to light, Gitanjali Gems said that promoter Mehul Choksi is taking all legal steps to ensure his name is removed from the list of accused in the FIR filed as he does not have any current dealings with the firms named in the FIR.

The Modus Operandi

According to details included in the initial complaint filed by PNB with the CBI, the issue was detected at the bank’s mid corporate branch at Brady House, Mumbai in mid-January.

Three firms – M/s Diamonds R US, M/s Solar Exports, M/s Stellar Diamonds – approached the bank for ‘buyers credit’ to make payments to overseas suppliers. According to the complaint, Nirav Modi, Nishal Modi, Ami Nirav Modi and Mehul Choksi were partners in these firms. Choksi, in his 7 February statement, said he had no dealing with Solar Exports and Stellar Diamond and had retired from Diamonds R US in 1999.

Buyers credit is short term credit (90-180 days) provided by international banks (or international branches of Indian banks) to an importer. This credit is typically provided based on a ‘letter of comfort’ issued by the importer’s local bank.

When the above three firms approached PNB in January for buyers credit via a ‘letter of comfort’, the concerned official sought a 100 percent cash margin since there was no pre-sanctioned limit for these firms.

At this, the firms contested that they have been availing this facility in the past also. But the branch records did not reveal details of any such facility having been granted to the said firms. 

PNB Complaint To CBI 

The complaint adds that preliminary investigations have shown that two officials of the bank had in the past fraudulently issued Letters of Undertaking (LoU) to the said firms without following due process.

These fraudulent LoUs were then transmitted across the SWIFT messaging system, based on which credit was offered to the said firms. In its original complaint, PNB specifies that 5 LoUs were issued in favour of Allahabad Bank at Hong Kong and 3 LoUs were issued in favour of Axis Bank at Hong Kong. BloombergQuint could not determine whether subsequent investigations had found LoUs issued in favour of other banks as well.

An email sent to Allahabad Bank and Axis Bank was not immediately answered.

Two officials have been named in PNB’s complaint. BloombergQuint is not naming the officials since it could not contact them directly. According to Rajiv Kumar, secretary in the Department of Financial Services, ten officials from PNB have been suspended.

What This Means for PNB

Shares of PNB fell 9.8 percent in trade on Wednesday following the disclosure made by the lender.

Bankers who BloombergQuint spoke to said that typically the final liability in such cases lies with the bank which has issued the LoU. In its statement, PNB said that its liabilities in the case were “contingent in nature” and that they would be paid out depending on genuineness of the underlying transactions.

PNB met with concerned bankers on Wednesday to discuss the issue, said one of the three people quoted above.

While the final liability of the bank may take time to establish, the detection of a large scale fraud adds pressure on the bank which has been reeling under a pile of bad loans. As of the December 2017 ended quarter, PNB had bad loans amounting to 12.11 percent of total loans. The bank, which reported a profit of Rs 207 crore during the October-December quarter, just received capital infusion of Rs 5,473 crore via the government’s recapitalisation bonds.

This is not the first time that PNB has seen trouble emerging from its dealings with the gems and jewelry sector. The bank was one of the lead lenders in the Winsome Diamonds case, where the company’s promoters defaulted on nearly Rs 5,000 crore in bank loans.

(This article was first published on BloombergQuint.)