Question

A UK court on Thursday rejected for the fifth time the bail plea of fugitive diamond merchant Nirav Modi, who is fighting his extradition to India on charges over the nearly USD 2 billion Punjab National Bank (PNB) fraud and money laundering case.

The 49-year-old, who has been lodged at Wandsworth Prison in south-west London since his arrest in March last year and is scheduled for an extradition trial in May, made his fifth attempt at getting bail on the basis of a change in circumstances.

However, the High Court in London rejected his bail plea.

Nirav Modi was arrested on March 19, 2019, on an extradition warrant executed by Scotland Yard on charges brought by the Indian government.

a. How did Nirav Modi manage to defraud the PNB for 7 years? Explain in detail.

b. Could it have been avoided? If so, how?

Answer 1

A-

The Punjab National Bank scam relates to fraudulent letter of undertaking worth Rs 10,000 crore issued by the bank.

The key accused in the case were jeweller 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.

How the 10,000-crore scam happened?

Bankers used fake Letters of Undertakings (LoUs) at PNB's Brady House branch in Fort, Mumbai. The LoUs were opened in favour of branches of Indian banks for import of pearls for a period of one year, for which Reserve Bank of India guidelines lay out a total time period of 90 days from the date of shipment.

This guideline was ignored by overseas branches of Indian banks. They failed to share any document/information with PNB, which were made available to them by the firms at the time of availing credit from them. Nirav Modi got his first fraudulent guarantee from PNB on March 10, 2011 and managed to get 1,212 more such guarantees over the next 74 months. The Enforcement Directorate (ED) recovered bank token devices of the foreign dummy companies used by the fugitive diamond trader to transfer the fraudulent funds. The probe agency found that Nehal Modi, brother of Nirav Modi had destroyed the devices and had even secured a server located at United Arab (UAE) soon after the scam broke out. These dummy firms had been receiving the fraudulent PNB LoUs and were based out in British Virgin Island and other tax havens. The enforcement agency has so far seized movable and immovable properties to the tune of Rs 2362 crore in the PNB fraud case.

How was the Punjab National Bank management oblivious to this?

PNB employees misused the SWIFT network to transmit messages to Allahabad Bank and Axis Bank on fund requirement. While all this was done using SWIFT passwords, the transactions were never recorded in the bank’s core system — thereby keeping the PNB management in the dark for years.

How did the scam unfold?

On 29 January 2018, PNB lodged a FIR with CBI stating that fraudulent LoUs worth Rs 2.8 billion (Rs 280.7 crore) were first issued on 16 January. In the complaint, PNB had named three diamond firms, Diamonds R Us, Solar Exports and Stellar Diamonds. As of 18 May 2018, the scam has ballooned to over Rs 14,000 crore.

Who is Nirav Modi?

Nirav Modi is a luxury diamond jeweller and designer who was ranked 57 in the Forbes list of billionaires in 2017. He is also the founder of the Nirav Modi chain of diamond jewellery retail stores. Modi is the Chairman of Firestar International, the parent of the Nirav Modi chain, which has stores in key markets across the globe. He has 16 stores in diverse locations such as such as Delhi, Mumbai, New York, Hong Kong, London and Macau.He is currently in the United Kingdom and is seeking political asylum in Britain.

B- Yes the scam could have been avoided. The employees who presented Fake LOU were using it to route money to the overseas suppliers for Nirav Modi. They were using a Secure Messaging service called SWIFT which could also be used having a way round Pubjab national Banks Server. These transactions were not reported and authorisation was routed through SWIFT, which made the detection of these things very hard. However this could have been avoided by using Blockchain where in all the information is related to each other and any glitch can be found comparatively faster. A better integration of the Banks Server could have avoided such a mishap too.