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PNB Fraud: Insights Into The Biggest Fraud In Indian History

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Punjab National Bank (PNB), which mentions Lala Lajpat Rai in the ‘about us’ section of their website, is now facing controversy for committing one of the biggest scams in Indian banking history. That’s surely nothing to be proud of as PNB is the second largest lender in the country, founded in 1894. The fraud amounts to around ₹11,400 crore. Let’s look at what happened and how:

  • On Wednesday, February 14, 2018, PNB informed Bombay Stock exchange (BSE) of detecting some fraudulent and unauthorised transactions in one of its branches at Mumbai, while submitting its stock statement.
  • This made the stock of PNB to plunge by 10%.
  • At about the same time, the Central Bureau of Investigation received a complaint against billionaire ‘Nirav Modi’, alleging fraudulent transaction of the same amount.

Nirav Modi

Nirav Modi is a luxury item jewellery designer. He is the first Indian jewellerer to have been featured on the covers of Christie’s and Sotheby’s catalogues. Along with this, he secured the 85th rank on Forbes’ list of Indian billionaires in 2017. His jewellery stores are not only present in India but also across the world. The brand ambassador of this jewellery chain is Priyanka Chopra.

When the CBI conducted its investigation after receiving the complaint, they came to know about fake letters of understanding (LoUs), which were used to commit the scam.

What is a letter of understanding? It is a letter or a document issued by a bank to its customer which allows the customer to lend money. It is a type of bank guarantee. To express this in simple words: “We believe our customer has the capability to repay your loan. If he doesn’t pay you, the bank will.”

A LoU is issued by a bank after verifying the account and loan payback ability of customer. It is bank guarantee for overseas import payments. Though the customer has to pay margin money and only then is the credit limit issued.

A point to be noted is that for business involving gold, diamond, etc, LoUs are issued for a maximum of 90 days. But in this case, the LoUs were issued for six months to a year. There was no margin money paid and no credit limit specified. Strangely, none of the foreign banks smelled anything fishy.

The scam was unearthed when one of the firms of Nirav Modi went to PNB to ask for more LoUs. These officials were shocked to know that the firm had been receiving the advantage of LoUs for several years (since 2011 as per the media reports) without any collateral security.

The persons involved are Nirav Modi, his wife Ami Modi his brother Nishal Modi and Mehul Chinubhai Chokshi. The bank employees who have been arrested are Gokulnath Shetty and Manoj Kharat. Hemant Bhat – the ‘authorised signatory’ of the companies tied to Nirav Modi – has also been arrested.

How did it happen? Well, the investigation is still on and it would be too early to reach any conclusion. But the duration and magnitude of the fraud raises the suspicion that this scam has not been internally performed by bank officials alone but with the support of powerful people. PNB first filed their complaint on January 28. No doubt, bank officials were quite clever to use SWIFT (global financial messaging service) to bypass the Core Banking System (CBS).

PNB uses the software FINACLE, which did not allow SWIFT’s messages to be readily available, hence avoiding the daily transaction record. Therefore, they succeeded in hiding these transactions from the eyes of inspectors and auditors, both internal and external. PNB and RBI officials are under CBI’s radar for being ignorant.

This is not the first time that PNB is involved in such a scam. Five years ago, the Winsome Group – a diamond house – failed to repay their loan. The culprits have already left the country, reminding the nation of Lalit Modi and Vijay Mallya. This scam has started a political war of words. The BJP says Rahul Gandhi was close to Nirav Modi as he allegedly attended his cocktail party. The Congress has accused the BJP of being a friend of Nirav Modi as the PM and Nirav Modi were spotted together at Davos.

The share market has been affected and again, questions have been raised to the banking system of our country. The Union Bank of India, Allahabad Bank and Axis bank have also been affected. Public sector banks were planning on improving their condition and here comes a scam of ₹11,400 crore.

Indian banks could take a hit of at least $2.7 billion from loans and corporate guarantees provided to Punjab National Bank. The Enforcement Directorate (ED) has conducted searches at 21 locations across India and has seized diamonds, gold, precious stones and jewellery worth ₹25 crore. They have declared the total seizure in the Nirav Modi case to be ₹5,674 crore till now. This has proved that there are still many loopholes in our country, at different levels, and they are being exploited.

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