Punjab national bank is a nationalized and public sector bank in India. It has coverage all over the world. This was a financial fraud case which is popularly known as the Nirav Modi scam. The fraud relates to the letter of undertaking worth ₹11,000 crores issued by the Punjab National Bank at its Brady House branch in Fort, Mumbai, making Punjab National Bank liable for the amount. The fraud was allegedly organized by Nirav Modi who was a jeweller designer. Nirav his wife Ami Modi, his brother Nehal Modi and his uncle Mehul Choksi all are partners of Diamonds jewellery.
Along with Punjab national bank officials and employees. Nirav Modi, in order to import diamonds from foreign countries, he approached Punjab national banks for the buyer’s credit. As per the RBI guidelines, the banks should ask for collateral securities. But two employees of PNB manipulated the data and without taking any collateral securities issued which is the Letter of Undertaking issued by the Indian bank which is used by the importer to import goods from the foreign countries by getting a loan from the Indian banks present in the foreign countries. In case if the importer fails to repay the loan amount to the foreign bank, then the Indian bank that has issued the LOU will be held responsible for the payment. The loans
were taken in 8 different ways during the period of six years starting from the year 2011 to 2017. The foreign banks which were involved are Indian overseas banks such as Allahabad Bank and Axis Bank. The banking system of any transaction with a foreign bank is done through the SWIFT system.
In this case, SWIFT was not directly linked with the Core banking system. The employees of the PNB took advantage and issued a false LOU copy to the overseas bank. This was evenly going through until January 2018 when the companies of Nirav Modi again approached the PNB for buyer’s credit. The officer in charge asked for collateral security against the buyer’s credit. The company refused to give any collateral security and thus disclosed that they have been taking the credit for the past 6 years without any collateral security Nirav Modi and his family flee to a foreign country in early 2018 days before the news of the scam broke in light. In March 2019, Nirav was arrested in central London by the UK authorities.
The economy in India is suffering losses of more than 11,000 crores due to this financial bank fraud. This fraud has not only adversely affected the bank but also affected the people of the Indian citizen.
Indian Experience on Punjab National Bank Scam
PNB India’s second largest public sector bank released a disaster on 14 February 2018 by revealing a scam of Rs.11,000 crore directed by one of the richest diamond businessmen, Nirav Modi. He is 85th on Forbes’s 2017 list of India’s richest people. Nirav Modi had directed and executed the scam with the support of the Deputy Manager of the PNB Mumbai branch named Gokul Nath Shetty and clerk Manoj Karat. Nirav Modi and his Uncle Mehul Choksi schemed with these two bank employers. They had facilitated the issuance of unauthorized Letters of Undertaking to Modi and his company without following the procedure. The LOU is an instrument used to meet the short-term credit requirements of a customer of the bank. Under the LOU ban, PNB has not followed the prescribed procedure for the issuance of LOU to its customer. The post-scam has impacted the shares of PNB by evaporating the market capitalization value. PNB Market Capitalization from April 2016 to April 2019 due to the entire banking sector. The scam shows the disappointment of PNB and regulatory bodies in strongly managing the risk of such a scam occurring.
How does the offender got caught?
The two employees of PNB were sending unauthorised letters of undertaking. This was until one of the employees was retired and a new employee joined in his place. In January when Nirav Modi’s firm asked for a fresh set of guarantees, the new employee demanded collateral. The representatives from Firestar responded by saying that they had never been asked for a guarantee in the past. This triggered an investigation which came to the truth of the fraudulent letter of undertaking coming to the light of the investigation.
Financial fraud is essentially defined as any dishonest act by which a certain person gains or the explicit intent to gain an advantage over another person. Fraud is not described or discussed in The Indian Penal Code, there are certain sections dealing with the constituents of fraud. This includes cheating, concealment, forgery counterfeiting and breach of trust.
Fugitive Economic Offenders Act, 2018
This Act was introduced by the parliament on 21st April 2018 with the intention of punishing economic offenders for any offences involving corruption and fraud. The Act recognises the necessity to serve justice to the economic offenders, who flee the country to evade punishment for their illegal financial activities. The Act was enacted to prevent the economic offenders of the Nirav Modi case from escaping the country. Courts are empowered under this Act to confiscate all assets and properties of the offenders who are charged an amount of Rs.100 or more under which the offender who have committed an offence and those who try to evade the charges by wilfully remaining outside the jurisdiction of the Indian judiciary, the fugitive economic offender’s property of such person owned and other valuable assets are seized with authority.
Effect on Indian Economy Due to PNB Scam
According to the article which had published on 26 February 2018, bank fraud has not only affected the banking sector but also has affected the economic system.
The following impact of the PNB scam by Nirav Modi on the Indian economy.
- The Jewellery sector and banks sector were under pressure.
- The probability of shifting the diamond business from India to Belgium and Israel has increased.
- Decrease the chances of getting loans or credit for businessmen from Indian banks.
The Punjab national bank scam adversely affected on all sector banking industry, its shareholders, employees of PNB citizens with the government of India, etc. Foreign Institutional investor confidence and trust in the public is finished due to this fraud. The image and values of the Indian public bank sector and diamond business have been denigrated. Global credit rating agencies are reviewing the ratings of Punjab national bank for a possible downgrade in light of the massive fraud in the bank which came to light. These effects are so harmful to the Indian economy.
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This Scam was the biggest fraud that impacted the Punjab National Bank and the companies of Nirav Modi but also impacted the entire banking sector of the Indian whole economy. Therefore, to overcome this type of fraudulent behaviour Punjab National Bank has strengthened the practice of underwriting credit. The Indian economy is suffering due to this bank scam because of poor management of the bank. The Government of India should make such policies to over the financial system in India. people are aware now due to such fraud occurs in this case.
Written By:- By Swastika Debbarma
LLM Student, School of Law
Lovely Professional University Punjab