PNB detects India's biggest USD 1.77 bn banking fraud with links to Nirav Modi

In what could be the biggest banking fraud in India, state-owned Punjab National Bank on Wedensday said it has detected a USD 1.77 billion scam in which billionaire jeweller Nirav Modi allegedly acquired fraudulent letters of undertaking from one of its branches for overseas credit from other Indian lenders.

PNB has suspended 10 officers over the USD 1.77 billion (about Rs 11,400 crore) scam and referred the matter to CBI for investigation.

Financial Services Secretary Rajiv Kumar said this seems to be an isolated case and is not going to impact other lenders.

"The finance ministry has taken proactive steps by asking the lender to report the matter to CBI and Enforcement Directorate (ED) so that action can be taken quickly," he told PTI.

"The Bank has detected some fraudulent and unauthorised transactions in one of its branch in Mumbai for the benefit of a few select account holders with their apparent connivance," India's second-biggest state-run bank said in a regulatory filing. "Based on these transactions other banks appear to have advanced money to these customers abroad."

While PNB did not name the other lenders, Union Bank of India, Allahabad Bank and Axis Bank are said to have offered credit based on letters of undertaking (LOUs) issued by PNB.

An LOU is a letter of comfort issued by one bank to branches of other banks, based on which foreign branches offer credit to buyers.

Foreign bank branches too are under investigation.

Three other jewellers, Gitanjali, Ginni and Nakshatra are under the scanner with the CBI and ED looking at their arrangements with various banks and end use of money, a senior official of a public sector bank told PTI.

No immediate comments were available from these companies.

Last week, PNB had lodged an FIR with the CBI stating that fraudulent LoUs worth Rs 280.7 crore were first issued on January 16. At the time, PNB had said it was digging into records to examine the magnitude of the fraud.

In the complaint, PNB had named three diamond firms -- Diamonds R Us, Solar Exports and Stellar Diamonds -- saying they had approached it on January 16 with a request for buyers' credit for making payment to overseas suppliers.

The bank sought 100 per cent cash margins for issuing LoUs for raising buyers' credit, which was contested by the firms, saying they had availed of the facility from as early as 2010.

Nirav Modi, his wife Ami, brother Nishal and Mehul Choksi are partners in Diamonds R US, Solar Exports and Stellar Diamonds, which has shops in foreign locations such as Hong Kong, Dubai, and New York.

Among those named is a deputy manager, Gokulnath Shetty, who was posted at PNB's foreign exchange department in Mumbai since March 31, 2010. He had allegedly along with another official Manoj Kharat fraudulently issued LoUs to these firms without following prescribed procedure or making entries in the banking system, avoiding detection of transactions.

"This (investigation) is a part of the clean up drive that started with AQR (Asset Quality Review) in 2015. Post clean up, this is going to make banks clean forever, healthy, responsive and enable them to provide hassle-free banking to all honest borrowers," Kumar said.

A senior official of a public sector bank said there is strict instruction from the finance ministry to all banks that no big fish should go scot-free and no honest borrower is harassed.

Banks are now looking at their systems and processes so that such frauds are not repeated, he said, adding all banks have been asked to present a status report as soon as possible.

This could be the biggest banking fraud in India as its quantum was bigger than an estimated 9,000 crore scam at erstwhile Satyam computers.

In 2015, Bank of Baroda -- another public sector bank -- had brought to light a scam in which two Delhi-based businessmen cheated it of Rs 6,000 crore (slightly less than USD 1 billion at that time).

Investigations revealed major irregularities, as the forex transactions were done mainly via advance remittances for import, through newly-opened current accounts. Heavy cash transactions -- sometimes four or five times a day -- were also noticed.

The Enforcement Directorate, under the revenue department of the finance ministry, had arrested the businessman duo under money laundering provisions.

PNB said in a statement that fraudulent transactions took place in one of its branches in Mumbai for the benefit of a few select account holders with their apparent connivance.

Based on these transactions, done by his brother Nishal, wife Ami and Mehul Chinubhai Choksi, other banks appear to have advanced money to these customers abroad.

The CBI has received two complaints from the PNB against billionaire diamantaire Nirav Modi and a jewellery company alleging fraudulent transactions.

Modi, whose jewellery creations are popular among global celebrities, may face a fresh CBI probe as the agency is looking at suitable legal action to be taken in the case.

He is already being investigated by the CBI for alleged cheating and fraud involving Rs 280 crore at a PNB branch.