The jeweler’s heist

The Punjab National Bank has uncovered fraud amounting to nearly $1.8 billion fraud. The bank has noted that it was defrauded by jeweler Nirav Modi. His maternal uncle Mehul Chinubhai Choksi and some of his family members have also been implicated in the case. The scam apparently took place through a single branch in Mumbai and experts have suggested that it could be one of the biggest banking scams in India.

Background                                                                           

Founded in 1894, the Punjab National Bank (PNB) is an Indian multinational banking and financial services company. It has 6,937 branches and 10,681 ATMs spread across 764 cities in India. In 2017, it was noted that the bank had over 80 million customers. It is a state-owned corporation based in New Delhi, India. It also has branches outside of India in regions like Hong Kong, Kowloon, Dubai, and Kabul. It has representative offices in Almaty (Kazakhstan), Dubai (United Arab Emirates), Shanghai (China), Oslo (Norway), and Sydney (Australia). As of 2016, it had assets worth ₹667,390.45 crore and had 70,801 employees. It is the second largest state-run bank in India.

Nirav Modi is a businessman in India who founded the jewelry house of the same name. In 1999 he founded Firestar (Formerly known as Firestone), a diamond sourcing and trading company. In 2008, after discovering an aptitude for designing diamond jewelry, he started his own jewelry house. The brand Nirav Modi has stores not only in India but also across the world including New York and Hong Kong. He is considered one of the most successful jewelers from India having designed jewelry for celebrities like Priyanka Chopra and Kate Winslet. He is estimated to be worth over $1.73 billion.

Analysis

On February 2018, Punjab National Bank filed a complaint with the Central Bureau of Investigation (CBI), alleging that Modi along with his family members had perpetuated a massive scam through a number of companies owned by the family.

Punjab National Bank (PNB) MD Sunil Mehta said that the scam was isolated to a “standalone incident in a single branch.” “The fraud was detected in the third week of January and a case was filed with CBI on January 30,” he said.

Reports note that Modi and his associates fraudulently acquired PNB guarantees worth 100 billion rupees ($1.6 billion). They used these guarantees to obtain further loans from banks across the world.  The bank stated that officials had detected fraudulent and unauthorized transactions that seemed to be “for the benefit of a few select account holders with their apparent connivance,” PNB said in the statement. “Based on these transactions other banks appear to have advanced money to these customers abroad.”

It has further been reported that Modi was able to perpetuate the fraud with the of aid two rogue employees working at the bank. The rogue employees used SWIFTBSE, which is a global financial messaging service in order to completely bypass the core banking system (CBS) that processes daily banking transactions. It was done to ensure the transactions were not detected immediately. These employees also issued fake LoUs. This was used to obtain dollar loans from foreign branches of a few Indian banks — including Axis and Allahabad Bank. An additional 10 other employees are also under the scanner of the investigation. 10 employees have been suspended as a result.

The fraud is close to nearly a third of PNB’s market value. It is also 50 times the profit the bank made in 2017. After the news of the scam surfaced, shares in the bank fell by more than 10%. The CBI is said to be investigating the matter. Nirav Modi is presently said to be in Switzerland. Meanwhile, the Enforcement Directorate has raided Modi’s residence, showrooms and offices in Mumbai, Delhi and Surat. His brother (a Belgium citizen) and his wife (a US citizen) both left the country in January 2018.

The bank’s MD Sunil Mehta said, "We will honor our bona fide commitments. We will comply with regulators and the matter is being investigated. We will not spare anyone." He added, “We have investigated this and gone to the law enforcement officials. We have informed all the lenders and SEBI for clean banking. We have the capabilities to come out of the situation. Raids and documents are being seized by law enforcement agencies to protect the bank's interest.”

The scam reportedly dates back to 2011.

Assessment

Our assessment as details have begun to emerge, is that this scam could potentially affect not only Punjab National Bank but also other banks that advanced money to the accused. The scam comes to light during a period when Indian banks have struggled due to bad loans. The bad loans have crippled banks from lending to businesses, thus potentially affecting the growth of the Indian economy. It is possible that a scam of this magnitude will further pose a hindrance.  Incidentally the timing of this announcement, which comes after it was revealed that Punjab National Bank would be the largest recipients of the bank recapitalization, feels like too much of a coincidence.