In February 2018, Punjab National Bank (PNB) disclosed fraud allegedly by Nirav Modi relating to fraudulent letter of undertaking worth 11,600 crore.
Who are all involved in the scam?
- In its complaint, PNB has alleged that the fraud was led by Nirav Modi, a jeweller who’s No. 85 on Forbes’s 2017 list of India’s richest people.
- It is alleged that Modi and his relative Mehul Choksi and companies linked with them colluded with a former PNB employee, Gokulnath Shetty, who was a deputy general manager in the foreign-exchange department in one of its branches in Mumbai to pull off the heist.
- In PNB fraud, letters of undertaking (LOU) were issued in favour of Nirav Modi bypassing the bank’s reporting system (Core Banking Solution-CBS) through SWIFT messages to overseas banks without authorisation, without proper import documents and without obtaining margin money.
- These LoUs — which are equivalent to providing credit and should be recorded as contingent liabilities — were not so recorded in CBS, so as to avoid detection by audit system and internal controls.
- Overseas bank remit funds to Nostro account of PNB, backed by LOU.
Under RBI guideline, buyer’s credit for import of gems should not exceed 90 days from the shipment date; however in this case they were rolled over repeatedly. By rolling over the credit, Nirav Modi ensured that subsequent LOUs repaid the dues on earlier LOUs.
How did it come to Light?
- The scam came to light in January 2018, when representatives of Nirav Modi’s companies approached PNB for a fresh loan. By then, Shetty had retired and his successor declined to honour Modi’s request.
- At this, the firms contested that they have been availing this facility in the past also but the branch records did not reveal details of any such facility.
- This was when the fake letters of the undertaking were discovered
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