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Nirav Modi extradition: The story so far and what it means for Indian banks

The diamantaire's case involving PNB exposed the loopholes in the banks' risk management systems.

February 26, 2021 / 10:28 AM IST

The UK court’s ruling on fugitive diamantaire Nirav Modi allowing his extradition is a major step in the case that has been going on for the last two years. To be sure, Modi can still appeal against this order in a higher court. On February 25, allowing the extradition of the fugitive economic offender to India, the Westminster Magistrates' Court in London also accepted the Indian government’s claim that the jeweller was threatening witnesses and tampered with evidence.

What is the case? 

On February 14, 2018, the Indian banking sector was rocked by an enormous fraud, the modus operandi of which was unheard of until then. That day, Punjab National Bank (PNB) disclosed a Rs 11,400-crore fraud at one of its Mumbai branches. The bank filed a complaint with the Central Bureau of Investigation (CBI) saying Modi, a billionaire jeweller, connived with some of its officials to defraud the bank using fake bank guarantees.

How did Modi orchestrate the crime?

The bank said fake letters of undertakings (LoUs) were created to draw money from foreign branches of Indian banks on behalf of Indian banks linked to Modi and the Gitanjali Group. LoUs are basically bank guarantees that assure banks that the issuing bank will pay up if the company, for whom the LoU is issued, defaults.

Apart from the PNB fraud, Modi also faces two additional charges of "causing the disappearance of evidence" and intimidating witnesses or "criminal intimidation to cause death, which were added to the CBI case. Modi is believed to have left India in January 2018 while PNB announced the scam a month later, in February. In March 2019, Modi was arrested in London.

Mehul Choksi’s role

Along with Modi, Mehul Choksi is also a key accused in the PNB scam. Like his nephew, Choksi too left India around the same time in February 2018. Choksi later became a citizen of Antigua and Barbuda under a programme in which a certain quantum of investment entitles an individual to citizenship. A recent charge sheet by the Enforcement Directorate (ED) named Choksi as a person who ran an organised racket to cheat customers and lenders across India, Dubai and the US. Choksi claims he flew out of the country for medical reasons while investigators say that he left to avoid arrest.

Could PNB recover any losses from the scam?

In an exclusive interview with Moneycontrol in April 2020, PNB Managing Director and CEO Mallikarjuna Rao said the bank has not recovered anything significant from the Nirav Modi scam.

“So far, nothing. Only thing is that assets worth Rs 1,000 crore have been confiscated by the CBI recently. They have given permission to us to apply to the courts for the sale of these properties. We have already done that. But there are some legal hurdles before we go for the auction,” Rao said.

However, "the impact on the balance sheet has been addressed fully because we have provided (for the losses) fully," Rao noted.

Who’s to blame for PNB fraud?

The PNB fraud is often blamed on technology — the lack of integration between the SWIFT software and core banking. Post-the fraud, the Reserve Bank of India (RBI) made the rules stricter and asked banks to address this problem. But top bankers have opined that failure to ensure adherence to laid-out processes and rules has played a bigger role in the fraud remaining undetected for years.

Surely, PNB failed to monitor transactions involving LoUs (the instrument used by Modi to design the scam) from the very beginning. The fraud began in 2011. The bank kept honouring the instrument all these years till the scam came out in public in February 2018.

The checks and balances that didn’t work

In the PNB episode, the SWIFT messaging platform that was used by the corrupt bank officials and Modi is subjected to a daily check by the branch manager, which is compulsory in any bank. Even if one imagines that this part failed, the branch manager has to do a daily tally of income and expenditure in the branch while one of the officers (not involved in the transactions) combs through the books to look for suspicious transactions, the official said. That apart, the bank conducts a concurrent audit throughout the year. Such a fraud should have reflected there. The PNB miserably failed to follow the rule book that could have prevented the fraud.

After failing in its duty, paving way for one of the biggest-ever bank frauds since nationalisation, the PNB kept defending itself by passing the blame to the SWIFT software, its disconnect with the CBS (core banking system) and Modi’s criminality, to claim innocence.

The regulator’s reaction

The RBI acted in panic by terminating LoUs altogether in a knee-jerk reaction post-the PNB fraud. To begin with, the RBI couldn’t detect a banking fraud right under its nose, perpetrated by a smart jeweller in collusion with certain low-rank bank officials; that too for a good six to seven years.

When the fraud surfaced and questions were raised about the regulator’s efficacy to do its job properly, it decided to kill a legitimate trade instrument outright, something traders have been using for long. Both importers and exporters use LoUs extensively as this is one of the cheapest instruments available to them. The RBI banned it without giving much thought to the larger impact on the country’s importers and exporters. This was a big mistake from the RBI.

To sum up, the PNB fraud wasn’t a financial crime orchestrated by two greedy businessmen alone.  This episode exposed the weak links in the risk management infrastructure of Indian banks and the vulnerability of bankers to rule violations when approached by powerful and influential businessmen. Will Nirav Modi’s return help PNB to recover the money lost? It is too early to say.
Dinesh Unnikrishnan
first published: Feb 25, 2021 06:16 pm
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