How did Nirav Modi pull off the PNB Fraud?
While everyone in India is linking Aadhar to their Bank Accounts, hoping to secure their accounts. Somewhere else, a bank is being looted with a horrendous amount of money. Yes! People in India were taken aback on Valentines’ Day as a $1.7 billion fraud came up. Punjab National Bank (PNB) was swindled with 11,000 Crores by a famous Jeweler, named Nirav Modi.
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How did Nirav Modi pull off the PNB Fraud?
Money Involved: 1.7 Billion Dollars
While everyone in India is linking Aadhar to their Bank Accounts, hoping to secure their accounts. Somewhere else, a bank is being looted with a horrendous amount of money. Yes! People in India were taken aback on Valentines? Day as a $1.7 billion fraud came up. Punjab National Bank (PNB) was swindled with 11,000 Crores by a famous Jeweler, named Nirav Modi.
Punjab National Bank (PNB) is an Indian multinational banking and financial services company. It is a state-owned corporation based in New Delhi, India. The bank was founded in 1894.
As of 31 March 2017 the bank has over 80 million customers, 6,937 branches, and 10681 ATMs across 764 cities. PNB has a banking subsidiary in the UK (PNB International Bank, with seven branches in the UK), as well as branches in Hong Kong, Kowloon, Dubai, and Kabul.
What is the Fraud?
On February 14, 2018, PNB was a victim of India?s biggest ever banking fraud. Two junior officers at a single branch had illegally steered $1.77 billion in fraudulent loans to companies, most of them controlled by billionaire jeweler Nirav Modi.
Companies owned by diamond merchants Nirav Modi and Mehul Choksi are alleged to have looted Punjab National Bank (PNB) of over Rs11,000 crore ($1.77 billion). It is noticed that the fraud was in operation for over the last five financial years, between 2011 and 2017.
The Modulus Operandi of the Fraud- At a PNB, Mumbai branch in 2011 the fraud began with a much smaller amount through a single letter of undertaking (LOU) [Letter of undertaking is a guarantee that a bank is obliged to repay the loan if the actual borrower i.e. Nirav Modi in this case fails], worth 800 crore.
The first LOU was issued by two PNB employees on behalf of the bank via SWIFT, sanctioning loans to be disbursed abroad. SWIFT (Society of Worldwide Interbank Financial Telecommunication), is a system to send instant messages. Once a foreign bank or a foreign branch of a bank gets the LOU via the SWIFT message, it disburses the loan to the borrower.
Now, when the credit due was not paid in time, more LOUs were issued on behalf of PNB to offset the payment, and this is where all the trouble of PNB began. When the borrower did not repay the first 800 crore, the bank ought to have stepped in and booked a default by the group company.
Instead, the two PNB employees, who were allegedly part to the fraud, issued more LOUs on behalf of PNB, asking other banks to give out fresh loans to the firms. This continued until two weeks before the whole operation came to light after some of Modi?s employees visited the bank on Jan. 05. The management was caught napping and the overdue loans exceeded 11, 000 crore.
The PNB officials detected the fraud in the third week of January 2018, according to the PNB management which approached the Central Bureau of Investigation on Jan. 29. Also, in the data available with RBI, PNB topped in the number of loan fraud cases across India.
In its complaint to the federal investigation agency -- the Central Bureau of Investigation -- PNB alleged that the fraud was led by Nirav Modi, a jeweler who has dressed Hollywood and Bollywood actors including Kate Winslet and Priyanka Chopra. Modi is No. 85 on Forbes's 2017 list of India's richest people.
PNBs? CEO Sunil Mehta said on Feb. 15, ?If the probe reveals that the amount exceeded the current estimate, the bank?s liability may increase. Gross exposure is significantly higher at $1.8 billion, though, at this juncture, it will be difficult to ascertain the financial impact across the banking system as investigations are on?.
Who is the thief, Nirav Modi?
Nirav Modi, the 47-year-old billionaire accused in $1.7 billion PNB scam, is the founder of Firestar Diamond. Raised in world's diamond capital Belgium's Antwerp, Nirav Modi joined his uncle's business at Gitanjali Gems at 19. Nirav Modi who has dressed Hollywood and Bollywood actors including Kate Winslet and Priyanka Chopra is No. 85 on Forbes's 2017 list of India's richest people.
Modi's office didn't reply to calls and emails seeking comment on PNB's complaint. Gitanjali?s? external media contact wasn't available for comment. Certain reports suggest that Nirav Modi flee India in the start of January and now may be in New York.
What is Indian Government doing about it?
Indian government has asked all banks to send reports involving this case or other such incidents latest by the end of this week, the Press Trust of India reported. About 10 PNB employees have been suspended pending the CBI investigation. India's foreign ministry on Friday said it has suspended Modi and Choksi's passports, and the documents may be revoked if they fail to respond.
PNB's CEO Sunil Mehta said that PNB has the capability and capacity to recover from the theft. He added the bank will honor all commitments if liability falls on them.
Surely, loss of public faith in PNB and other state-owned banks will be the biggest risk. According to RBI regulations, PNB will have to repay other banks the money owed by the firms. PNB shareholders may see their wealth eroding further as the 11,000 crore liability is more than a third of the bank?s market value. The pain will only increase if the probe reveals a bigger scam.