PNB Fraud: ED Files Money Laundering Case Against Nirav Modi

PNB detected a fraud worth Rs 11,292 crore at its Mumbai branch involving billionaire jeweler designer Nirav Modi.

File photo of Punjab National Bank.

(Photo: Twitter/@BloombergQuint)

After the Central Bureau of Investigation (CBI) received two fresh complaints from Punjab National Bank (PNB) against Nirav Modi, alleging fraudulent transactions worth Rs 11,292 crore, the Enforcement Directorate (ED) registered a money laundering case against the diamantaire in connection with the earlier fraud – estimated to be worth Rs 280 crore.

The case was filed on the basis of an FIR registered by the CBI on 31 January. According to official sources, the agency filed the case under the Prevention of Money Laundering Act after reviewing the FIR and PNB’s complaint against Modi.

10 PNB Officials Suspended

In a setback to the Indian banking system, the country’s second-largest state-run bank reportedly detected the latest case of fraud at its Brady House Branch, in South Mumbai – its second-biggest lending branch in the country. The bank has suspended 10 officials in connection with the case – and referred the matter to the CBI on 14 February, ANI reported.

In a statement, PNB says it has detected fraudulent and unauthorised transactions "for the benefit of few select account holders with their apparent connivance". The Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) will begin a probe involving disclosure lapses by banks and other listed companies, including several jewellery firms, which have come under the scanner.

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

Unearthing of the Fraud

According to details included in the initial complaint filed by PNB with the CBI, the issue was detected at the bank’s mid corporate branch at Brady House, Mumbai in mid-January.

Three firms – M/s Diamonds R US, M/s Solar Exports, M/s Stellar Diamonds – approached the bank for ‘buyers credit’ to make payments to overseas suppliers. According to the complaint, Nirav Modi, Nishal Modi, Ami Nirav Modi and Mehul Choksi were partners in these firms. Choksi, in his 7 February statement, said he had no dealing with Solar Exports and Stellar Diamond and had retired from Diamonds R US in 1999.

Buyers credit is short term credit (90 to 180 days) provided by international banks (or international branches of Indian banks) to an importer. This credit is typically provided based on a ‘letter of comfort’ issued by the importer’s local bank.

When the above three firms approached PNB in January for buyers credit via a ‘letter of comfort’, the concerned official sought a 100 percent cash margin since there was no pre-sanctioned limit for these firms.

At this, the firms contested that they have been availing this facility in the past. But the branch records did not reveal details of any such facility having been granted to the said firms.

The complaint adds that preliminary investigations have shown that two officials of the bank had in the past fraudulently issued Letters of Undertaking (LoU) to the said firms without following due process.

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.

These fraudulent LoUs were then transmitted across the SWIFT messaging system, based on which credit was offered to the said firms. In its original complaint, PNB specifies that 5 LoUs were issued in favour of Allahabad Bank at Hong Kong and 3 LoUs were issued in favour of Axis Bank at Hong Kong.

An email sent by BloombergQuint to Allahabad Bank and Axis Bank was not immediately answered.

RBI, SEBI to Seek Help from Hong Kong Regulators

The RBI and the SEBI are likely to approach their counterparts in Hong Kong for cooperation in the matter.

The regulators are set to spread their net overseas as it has been found that credit was availed from various bank branches in Hong Kong on the basis of LoUs issued by PNB.

Officials said the RBI would be approaching its counterpart Hong Kong Monetary Authority (HKMA) to gather more details in the PNB matter.

Similarly, the SEBI would be getting in touch with the Securities and Futures Commission (SFC). Besides, the watchdog and the stock exchanges would analyse trading data of the companies under scanner and their top officials, some of whom are already under the scanner for insider trade and other violations, officials said.

PNB Fraud Case Not Out-Of-Control, Says Fin Min

The Finance Ministry on 14 February sought to allay worries over the Rs 11,300-crore fraud case at Punjab National Bank, saying the case not "out-of-control" and it is taking action in this respect.

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.

Financial Services Secretary Rajiv Kumar told PTI

On the sidelines of an event in New Delhi, Joint Secretary in Department of Financial Services Lok Rajan said the bank fraud was not “too big a worry”.

I don’t think this is out of control or too big a worry at this point. That is my broad sense. 

Joint Secretary Lok Ranjan said at the event

PNB Shares Plunge

Following the regulatory filing, the bank's shares plunged drastically. PNB shares reportedly fell as much as 7.5 percent as of 11:20 am in Mumbai on 14 February, which is its steepest drop since October, reported Bloomberg.

The amount of fraudulent transactions is equivalent to eight times the bank’s net income of about Rs 1,320 crore ($206 million).

The latest case – which involves a sum considerably higher than the Vijay Mallya default of around Rs 9,000 crore – comes at a time when the Indian banking system is already grappling with swelling non-performing assets.

However, the bank did not elaborate what impact these transactions may have on its overall finance. Hit by a massive fraud, the state-owned bank cautioned other banks about the modus operandi of the scam.

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. The quantum of such transactions is $1,771.69 million (approx). The matter is already referred to law enforcement agencies to examine and book the culprits as per law of the land.

PNB said in a letter sent to various banks

(With inputs from Bloomberg, ANI, PTI and BloombergQuint)