Largest scam in corporate history involves jeweller’s family, two bank employees
In what may turn out to be one of the biggest scams in the country’s corporate history, Delhi-based Punjab National Bank (PNB) said on Wednesday it has been defrauded about Rs 114 billion by jeweller Nirav Modi, his maternal uncle Mehul Chinubhai Choksi and other relatives through a clutch of companies they own. The second-largest public sector bank (PSB) said two of its employees were involved in the scam, where the bank’s core banking system was bypassed to raise payment notes to overseas branches of other Indian banks, including Allahabad Bank, Axis Bank and Union Bank of India, using international financial communication system, SWIFT. Three jewellers Gitanjali Gems, Ginni and Nakshatra are also under the scanner of investigative agencies to probe their role in the matter. Bankers in other banks said they are insulated against the fraud, as the payment request was raised by PNB (irrespective of who raised that in the bank), and therefore, the payment will have to be met by the Delhi-based bank. However, other banks with separate exposure to companies owned by Modi, who has shot a mail to the lenders assuring them he would return all the dues and that his brand, Firestone Diamond, valued at Rs 105 billion, was up for sale. The latest fraud was an age-old method employed to defraud the banking system. It involved a letter of understanding (LoU) raised at the PNB’s Mumbai office by the firms owned by Modi and his family. A LoU is issued by a bank to an importer (in this case Modi). It works like a bank guarantee, which the importer can sell to other banks at a discount. The importer gets the money, or letter of credit, and pays his client. The issuer bank messages overseas branches of other banks through the SWIFT network and that bank immediately pays the client against the LoU. The bank that holds the LoU then goes back to the issuer bank (PNB in this case) and gets its due. The issuer bank (PNB) recovers its due against the LoU from its client (Modi).
Since the LoUs are used for importing goods and involve foreign currency, a vostro account (client’s overseas account) is used to deposit the credit by the bank accepting the LoU. However, issuance of LoU involves a lot of process and to mitigate the risks of fraud, banks insist the client deposit an equivalent amount of assets, mainly cash in the local branch, to avail of the overseas facility. The fraud shock The Delhi-based PSB disclosed in a filing to the BSE on Wednesday morning that it detected fraudulent and unauthorised transactions worth around $1.78 billion (approximately Rs 113 billion) “for the benefit of a few select account holders” with the help of the bank staff based out of one of its Mumbai branches. “In the bank these transactions are contingent in nature and liability arising out of these on the bank shall be decided based on the law and genuineness of underlying transactions,” the bank said, adding it had reported the matter to the investigative agencies. PNB share prices fell 9.8 per cent to Rs 145.80 on Wednesday. In its notification, PNB did not disclose the names of the firms, or individuals involved in the fraud. However, bank officials confirmed the notice pertained to an earlier complaint with the Central Bureau of Investigation (CBI). The Enforcement Directorate has also registered a case based on the FIR filed by CBI to probe if the defaulted funds were laundered and proceeds subsequently used to create illegal assets and black money, according to news agency Press Trust of India. On Monday evening, PNB filed two fresh complaints with the CBI. In one, the bank alleged involvement of a jewellery company. The CBI sources said they were still undecided if they would want to file a fresh FIR on the latest complaints, or merge them with their previous FIR. Separately, Gitanjali Gems, headed by Modi’s maternal uncle Mehul Chinubhai Choksi, who was also named in the first FIR, postponed its board meeting scheduled to be held on Wednesday that was supposed to approve its third quarter results for this financial year. “I don’t think this is out of control or too big a worry at this point. That is my broad sense,” Joint Secretary in the Department of Financial Services Lok Rajan told Press Trust of India on the sidelines of an event in the Capital. The finance ministry has sought details about the fraudulent transactions involving this case or related incidents by the end of this week and in a fresh missive have asked all banks to go for a clean-up drive. Department of Financial Services Secretary Rajiv Kumar said that this seems to be an isolated case and will not impact other banks.
(Abhijit Lele and Shrimi Chaudhury in Mumbai contributed to this story)
First Published: Wed, February 14 2018. 21:21 IST