The fraud came to light when the corrupt PNB official retired. When the Nirav Modi and Gitanjali firms requested for fresh LoUs, they were denied, since the records did not mention any such arrangement.
Three diamond firms belonging to the Nirav Modi Group and some other firms owned by Gitanjali Gems held current accounts at a domestic branch of Punjab National Bank (PNB).
These firms purchased raw gems from overseas firms, and had to make payments to the sellers in foreign currency.
The sellers of the raw gems held accounts at foreign branches of Indian banks.
A junior official at PNB fraudulently issued ‘letters of undertaking’ (LoUs), allowing Niravi Modi group companies to get short term loans (buyers’ credit) from overseas bank branches to pay the sellers. Under the terms of the LoU, PNB was the guarantor of these loans.
The Nirav Modi and Gitanjali Gems firms would ask the corrupt PNB official to issue LoUs and get the foreign branches of the Indian banks to make payments to the sellers.
Interestingly, the transaction request was not routed through the core banking system, but instead through SWIFT, the global financial messaging service. As a result, the higher authorities at PNB were unaware of the fraud.
Think of it like this, a formal request for funds was made on SMS or WhatsApp like messaging service instead of on an official mail.
The foreign branches made the payment to the sellers on receiving the LoUs.
Obviously, the Nirav Modi and Gitanjali firms had to repay the foreign branches.
It now appears that they would refinance the loans by getting their accomplice at PNB to issue fresh LoUs, borrow money from one bank and use it to repay the loan of another bank.
The fraud came to light when the corrupt PNB official retired. When the Nirav Modi and Gitanjali firms requested for fresh LoUs, they were denied, since the records did not mention any such arrangement. The firms said they had been availing of the facility for years. On scrutiny, the fraud was exposed.
Interestingly, PNB alleges that some officials at the foreign branches too were hand in glove with the Nirav Modi and Gitanjali firms.
According to RBI rules, the validity of the LoU is for 90 days from the day of shipment. However, the foreign branches loaned money for a year against the LoUs, in violation of RBI guidelines.In all, foreign branches of 30 Indian banks were duped of Rs 11,400 crore by the Nirav Modi and Gitanjali firms.