State-owned Punjab National Bank (PNB) unearthed a Rs 11,300 crore scam on Wednesday, in what could be one of the biggest banking scams in the country. The bank filed a complaint with the Central Bureau of Investigation (CBI).
The fraud, which involves money laundering, concerns the Firestone Diamonds group. The CBI last week booked billionaire diamond trader and designer Nirav Modi, his wife Ami, brother Nishal and his maternal uncle Mehul Choksi in the case.
What exactly happened?
Nirav Modi allegedly acquired fraudulent letters of undertaking (LoU) from one of the branches of PNB for receiving overseas credit from other Indian lenders. PNB has already complained against Nirav Modi for fraudulent transactions worth Rs 280 crore, for which he is currently under investigation.
What does acquiring fraudulent letters of undertaking mean?
The letters of undertaking basically helped the companies owned by Nirav to raise credit. An LoU is a letter issued by the bank to branches of other banks. Based on this, foreign branches of Indian banks offer credit to buyers.
In this case, branches of Allahabad Bank and Axis Bank got trapped as they offered credit to Nirav Modi’s company based on PNB’s LoU.
Three companies - Gitanjali, Ginni and Nakshatra, to which loans were issued and recalled by the banks, are also under the scanner.
Financial Services Secretary Rajiv Kumar told IANS that 10 PNB employees have been placed under suspension.
How did the bank not realise what was going on?
The employees allegedly didn’t make entries in the bank system, and avoided detection by using the SWIFT system.
“SWIFT is like a fax which is not integrated with the CBS. The concerned firm manipulated and used this technology to send the LoU with the help of some of our officials who gave access to the LoU fraudulently,” a PNB official told Moneycontrol.
The complaint filed by PNB mentions five LoUs that were issued in favour of Allahabad Bank at Hong Kong and three LoUs in favour of Hong Kong branch of Axis Bank.
"Based on these transactions, other banks appear to have advanced money to these customers abroad. 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," PNB's regulatory filing said.
How was it unearthed?
After PNB complained to the CBI last week about Nirav Modi’s fraudulent transactions, it said that it was digging into its records to understand the magnitude of the loss. In its complaint, PNB stated that fraudulent LoUs worth Rs 280.7 crore were issued on January 16.
PNB named three of Nirav Modi’s group firms in its complaint - Solar Exports, Diamonds R Us and Stellar Diamonds. Nirav, Ami, Nischal and Mehul are partners in these firms.
These firms were named by the bank as they had approached it for buyers’ credit, which would help them pay their suppliers who are overseas.
“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,” reported PTI.
However, there was no record of any of this being granted in the bank's records.
What now?
On Thursday, the Enforcement Directorate launched a nationwide raid on the offices, showrooms and workshops of Nirav Modi.
It is learnt that Modi - whose operations are spread across Europe, the US, Middle East and Far East besides India - has written to PNB and other banks that he would return their outstandings.
With IANS inputs