Rogues and Scoundrels: Nirav Modi

How did PNB get cheated, and what role was played by bank employees

Over the last three decades, there have been many financial scams that cheated banks to the point of closure, and with that, shook the very foundations of India’s economy. In this series, we will cover in brief the stories and modus operandi of many prominent scamsters, and the lessons to be learnt from these. This story is about Nirav Modi.

Who is Nirav Modi?

Nirav Modi came literally from nowhere within a few years and became one of the richest men in India, with his eponymous jewelry brand making waves all over the globe. 

The family of Nirav Modi were involved in the diamond business for many generations. Nirav too, at 19, started working with his father Deepak Modi in Antwerp, Belgium and later, came to Mumbai to work with his uncle Mehul Choksi’s company, Gitanjali Group which had 4000 stores in India. In 2008, he began a jewelry brand in his own name, and opened several stores in the high streets of several cities in the US and Europe. In 2010, he became the first jeweler from India to be featured in Sotheby's and Christie's catalogues, and in 2013, he figured in Forbes magazine’s list of Indian Billionaires. 

The Nirav Modi crime saga

In 2018, news surfaced that Punjab National Bank (PNB), a reputed public sector bank in India, had been cheated of Rs.11,800 crores from a single branch in Mumbai. Nirav Modi and his uncle Mehul Choksi were the accused. Both used Letters of Understanding (LoUs), a bank-issued document used to secure short credits from overseas branches of Indian Banks) to take credit from Indian Banks abroad. These LOUs were issued on PNB’s letterhead. It turned out that these LOUs were issued without any proper sanction, and with no record being kept in the issuing branch about their issue, and that this had been going on for years without detection. Due to the nature of the offence (no records kept in issuing branch), the true extent of the scam only came to light slowly as claims from overseas branches flowed in, asking the branch to pay the sums to foreign firms. Investigation disclosed that two employees of a branch in Mumbai handed out the LoUs without keeping any records, for years together. Initial estimates of Rs.280 crores ballooned to Rs.28,000 crores of LOUs resulting in loss to PNB of Rs.11,800 crores, catapulting the Modi-Choksi duo to the ranks of the biggest fraudsters in Indian crime history.  

Banks regularly issue many transaction-enabling documents in unsecured or partially secured fashion. Among them are Letters of Credit (L/Cs) and LOUs. These documents are issued in performance of the commercial banks’ role as trusted intermediaries, making possible business among strangers. Issue of these kinds of letters involve no cash flow, but banks usually charge a fee as a percentage of the amount assured, which is shown as fee income. They only create a contingent liability for the bank, which becomes a real liability only if and when the client in whose favour the letter is issued is unable to or refuses to pay for the transaction or supply the goods promised to be supplied. If both parties honour the contracts, the transaction-specific L/Cs/ LoUs lapse and the transaction closes. Nirav Modi and Mehul Choksi did the classic trick of lulling the bankers into complacence by honouring many such transactions – with, no doubt, large under the table payments to the bank employees involved. When he became cash tight, he started using new LOUs to repay old LOUs. Their total dues rapidly piled up. Then, with their dues at an all-time high, they flew the coop. Nirav fled India to London on New Year’s Day, 2018 and his uncle followed 3 days later. 

Notice that while Nirav has undoubtedly was a major player in the scam, he colluded with at least two PNB employees, and thus, equally culpable is PNB, whose internal control processes, including those for issue of LOUs, were shown to be so lax that such big exposures could be created at the level of a single branch manager, with higher-ups being none the wiser for years together. It is often said that bribe takers and bribe givers are equally to blame. By this token, the two PNB employees are as much guilty as Nirav Modi is.

As a result of the light shone upon banks’ internal control weaknesses, it was reported that the RBI has completely banned issue of LoUs and LoCs for jewelry imports, which has limited the financial flexibility of importers. It is not known whether this has been re-started with safeguards.

The CBI filed cases against them trying for Nirav Modi’s extradition. In March 2021, we have read reports that the UK High Court has cleared the way to extradite Nirav Modi from the UK to India to face charges here. In the meanwhile, banks (PNB was the major, but not the only bank he cheated) and the PMLA Court have together recovered large sums through seizure of his assets, including jewelry, paintings, real estate and four wind power plants in India. Mehul Choksi has taken citizenship of Antigua and Barbuda, a country in the Caribbean, and now lives there.  

 

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Author
Rajesh Haldipur
Rajesh Haldipur

Founder, Law Gyani

Rajesh is a qualified CA & CWA. He has served as a Director of PricewaterhouseCoopers, a Director of a large urban co-operative bank and Dean of a B-School over the years. He has taught Finance for over 20 years & trained participants from several Companies and B-Schools. He is an educator and a learner (he believes both are inextricably intertwined), and a knowledge product developer. Law Gyani, which he has founded to help Law Students with their exam preparations, and to understand nuances of the law.


Co-Author

A qualified lawyer enrolled with Bombay High Court, Nayan is an enthusiastic reader, mostly of Indian Mythology and World History. Also a binge watcher and enjoys travelling to new places.


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