Heera Pheri: How Choksi & Modi pulled off a multi-billion dollar scam

(L to R) Nirav Modi and Mehul Choksi

Absconding diamantaire Mehul Choksi was arrested in Belgium for his involvement in the Rs 13,850 crore Punjab National Bank (PNB)  loan fraud case.

The action against Choksi, a prime suspect in the case, was taken on Saturday in the wake of an extradition request by the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED).

Choksi, who fled India in 2018 and took up citizenship in Antigua, had surfaced in Belgium last year, apparently for medical treatment.

The other prime suspect in this case is his nephew, diamantaire Nirav Modi.

Modi remains incarcerated in a Westminster prison in London, where he has been detained since his arrest in March 2019 on an extradition warrant filed by the Indian authorities. He was denied bail for the seventh time in May 2024.

Dubbed one of the biggest scams in the history of Indian banking, it involved the misuse of financial instruments  to siphon Rs 13,850 crore, exposing loopholes in the banking system, especially in the use of Letters of Undertaking (LoUs)  and the SWIFT messaging system.

LoUs are bank guarantees provided on behalf of a client to overseas banks, which then give the money to the client. If the client fails to repay, the guaranteeing bank becomes responsible for the payment. These are supposed to be backed by margin money or collateral, and recorded in the bank’s system. However, in this case, PNB officials issued LoUs without proper approvals or collateral.

The issue came to light when the public sector bank filed a complaint with the Central Bureau of Investigation (CBI) on January 29, 2018. The complaint stated that Modi and his group of companies had obtained fraudulent loans from PNB's Brady House branch in Mumbai.

Initially, Modi was the face of the scam, but as more details emerged it became clear that Choksi,  his maternal uncle, had played an equal role in it.

Per the CBI FIR, two PNB officials — deputy manager Gokulnath Shetty and clerk Manoj Kharat — bypassed internal protocols. They used the SWIFT system to send the LoUs  to overseas branches of Indian banks, which then credited the accounts of Modi’s companies. The SWIFT messages were not recorded in  PNB’s CBS (core banking solutions), its internal banking software, which allowed the fraud to go undetected for years.

According to the CBI, bank officials had issued 165 LoUs and 58 Foreign Letters of Credit (FLCs) between March and April 2017. A bank FLC guarantees payment to an exporter on behalf of the importer, once the seller furnishes certain documents.

Based on the LoUs issued by PNB, lenders such as the State Bank of India (SBI) in Mauritius and Frankfurt, Allahabad Bank and Axis Bank in Hong Kong, Bank of India in Antwerp, and Canara Bank in Manama released the funds .

The CBI, in its supplementary charge sheet, stated that since the companies involved did not repay the money, PNB had to pay Rs 6,344.97 crore ($965.18 million), including overdue interest, to the banks that had extended credit to the buyers.

The scam started to take shape in 2011 and went on till 2017. It came to light in January 2018 when PNB officials demanded full margin money for issuing fresh LoUs. When the companies said they had received such LoUs in the past without any collateral, PNB set up an internal inquiry, leading to the filing of the complaint.

The companies named in the FIR included Firestar Diamond, Solar Exports, Stellar Diamonds (controlled by Modi), and Gitanjali Gems (controlled by Choksi). The money was supposedly used for the import and export of diamonds and jewellery. However, investigations by the ED and CBI revealed that many of these transactions were circular, and no actual goods were imported.

Following the complaint, the CBI registered multiple cases against Modi, Choksi, their family members, employees, and PNB officials. The ED also filed money laundering cases under the Prevention of Money Laundering Act (PMLA).

Within days of the complaint, Modi fled India and was later traced to the UK in March 2019. He was soon arrested in London and has since been lodged in Wandsworth Prison.

Choksi left India in early 2018 and became a citizen of Antigua and Barbuda. He was located in Belgium last year when he apparently went  there for medical treatment.

Modi and Choksi have been declared "fugitive economic offenders" under the Fugitive Economic Offenders Act, 2018, which allows the Indian authorities to confiscate their assets. ED has attached or seized assets worth Rs 2,565.9 crore related to Choksi and has received court approval to monetise the properties.