Nirav Modi – How PNB fraud case happened ?


PNB Fraud Case

The Punjab National Bank fraud case, which came into the limelight in the month of February 2018, is probably the biggest fraud in the history of India. Jeweler Nirav Modi duped the Punjab National Bank, the second largest bank in India, of billions of rupees in connivance with a few bank officials. The case has shocked the public whose hard earned money is deposited in banks, which are considered to be the  custodians of their money.

In the middle of February 2018, reports began to emerge that Nirav Modi, a jeweler, had made fraudulent transactions in a bid to cheat PNB. What was more shocking was the bank had been duped of a whopping Rs11,300 crore.

What is more intriguing is that how was a fraud of such epic proportions enacted without the knowledge of the top bank officials. The banks lax attitude and failure to follow the due processes is what led to the fraud.

Who is Nirav Modi

Nirav Modi is one of the richest businessmen in the country. The owner Nirav Modi, a jewelery House, Nirav’s estimated worth is around $1.73 billion, as per Forbes. The man had featured on the catalogues of leading auction houses Christie’s and Sotheby’s and is the first Indian to get this honor. It has been reported that he owns more than 20 properties and 100 plus bank accounts.

How PNB Fraud Happened

Nirav Modi took advantages of the loopholes in the banking systems to serve his own purposes. Nirav colluded with bank officials and through the firms that he and his family owned –  Diamond R Us, Solar Exports and Stellar Diamonds – fooled the bank by seeking Letters of Undertakings (LoU) and raising credit from foreign banks in with the intention to pay its merchants.

However, Nirav and his associates did not have the required documents or sanctions of credit. They also did not have any long-standing relationships or deposits with the bank. The LoUs were fraudulently issued by two bank employees. The prescribed procedure was not followed and entries were also not made in the banking system thereby avoiding detection of a transaction.

For the past seven years, Modi and his firms were procuring the LoUs from the bank’s branch at Brady Road in Mumbai. Letters of Undertaking are bank guarantees that are issued for overseas payments. It was due to these guarantees of LoUs that Modi successfully raised the short-term loans from foreign branches of Indian banks which helped him pay suppliers of raw materials, which in this case were rough stones.

Nirav was also able to get credit from other banks such as Allahabad Bank, Union Bank of India and Axis Bank on the back of the LoUs issued by Punjab National Bank. However, Nirav’s luck ran out in January when Nirav’s representatives again approached PNB for a fresh loan. Unluckily for Nirav, change personal in the banking system let to the review of the documents. As per Nirav’s representatives, they had been availing the loans earlier but the records at the branch did not reveal the details leading to the discovery of fake LoUs and the unravelling of the mega fraud.

Could the fraud have been avoided?

The fraud went undetected for long due to non-compliance with the processes in the banking system and also frequent stringent audits. Political and Business nexes can also be a reason for a fraud of such epic proportions which could last long undetected. The internal Core Banking System of the Punjab National Bank was not integrated with the International Messaging System, which is run by SWIFT. Had this been done the problem would have been averted.

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