Wake up call for Scam Free India – Punjab National Bank (PNB) Rs.11,400 crore Scam

Scam happened at PNB’s mid corporate branch at Brady House, Mumbai. The fraud was being continuously perpetuated for a period of 7 years without being detected from the year 2011 till January 2018. The main instruments of fraud were LOUs (Letter of Undertakings) and FLCs (Foreign Letter of Credits). 

LOU is being termed as Letter of Understanding or Letter of Undertaking by various sources reporting this scam – even here for such important financial document, the financial pundit does not want to stick to one specific terminology! Even LC is termed as Letter of Comfort and Letter of Credit, but, term - Letter of Credit is popular.

This scam is not a single banking transaction confined to one Branch though originated from one Branch – but, many financial documents, many transactions, many foreign banks – at different periods spread over 7 long years at present mainly two foreign Indian Branches viz. Allahabad Bank at Hong Kong (Main chosen Indian Bank to avail foreign loans by Nirav Modi and Mehul Choksi) and Axis Bank at Hong Kong and above all failures of SWIFT AND CORE BANKING SYSTEM and not to speak of watch dogs like internal audits, external statutory audits and more so the failure of the most powerful autonomous apex body called RBI.

Two PNB bank officials in charge of Society for Worldwide Interbank Financial Telecommunication or SWIFT – retired deputy manager Gokulnath Shetty and Manoj Hanumant Kharat as per 1^st FIR were said to be main players of this fraud without detection for a long period of over 7 years!

It was revealed that Nirav Modi group of companies maintain only current accounts – perhaps 3 accounts in the names of Solar Exports, Stellar Diamonds and Diamond R Us. And they did not have any sanctioned limits for issue of LOUs and they were enjoying LOUs without any margin as well. When questioned, it was reported that the practice of issuing LOUs and Foreign Letter of credits (FLCs) in favour of Nirav Modi Groups and Nirav Modi’s uncle Mehul Choksi Groups viz. Gitanjali Gems Groups at this PNB Brady House Branch in such uncovered manner was started in 2008 and continued till the scam was discovered.  

Though such LOUs are non-funded and contingent liabilities, but, the default, if occurred, the Bank issuing such LOUs without adequate margin and collateral securities will suffer loss to the extent of such default LOUs in case of the applicant failed to meet the liabilities on the respective due dates. 

Again, it was a mystery how there were allowed to meet the matured LOUs by opening fresh LOUs by PNB – as a roll back credits or revolving credits – which are called Kite Flying in banking parlance (similar to ponzi scheme). Such frauds should have been curbed ruthlessly by the banks concerned and the borrowers booked under various acts for defrauding the banks.

LOUs and Foreign Letter of Credits (FLCs) that were extended to Mehul Choksi (Nirav Modi’s maternal uncle) groups of companies – Gitanjali Gems Pvt. Ltd., Gitanjali Gems, Gili India and Nakshatra at the same Branch, enjoyed credit facilities under the fund-based and non-fund based schemes (under a consortium arrangement of 31 Banks led by ICICI Bank). But the same fraudulent modus operandi in respect of LOUs and FLCs through fraudulent SWIFT messages was used in collusion with the PNB officials.

In respect of LOUs, the PNB found that many fraudulent issuances of LOUs on behalf of Nirav Modi and Mehul Choksi through SWIFT without any official sanction were discovered leading to panic and reports to CBI etc.

In respect of Mehul Choksi accounts, the bank’s preliminary investigations made the stunning revelation that while issuing FLCs of smaller amounts by SWIFT, the transactions were routed through the Core Banking System (CBS) but subsequently, amendments were made in these FLCs by substantially enhancing the amount of FLC and transmitted through SWIFT, without routing these enhancements through CBS. 

This is a clear case of collusion between Mehul Choksi groups with PNB officials – as he was duty bound to report if there were any discrepancies in FLCs opened and his request letters.

It was stated that Mehul Choksi groups got 143 LoUs and 224 Foreign Letters of Credit (FLCs) through PNB. According to the FIR, PNB officials Shetty and Kharat deliberately omitted making entries of LoUs issued on behalf of Choksi’s companies in the Core Banking System (CBS) of the bank to avoid detection.

Further probe revealed that LOUs were opened in favour of foreign branches of Indian branches of Indian banks for imports of pearls for a period of one year although the Reserve Bank of India (RBI) guidelines stipulate a maximum period of 90 days only from the date of shipment. This stipulation was simply overlooked by the overseas branches of Indian Banks in respect of many LOUs, when affording foreign credits to PNB Nostro account on behalf of clients. 

Though the PNB is duty bound to honor the liability arising out of LOUs, the Indian Overseas Branches knowing the purpose of such guarantees and the prevailing rules for imports by the Indian merchants as spelt out by the RBI guidelines should have cautioned and alerted the issuing PNB Bank/RBI about the violation of longer credit of one year instead of 90 days. Hence, the foreign Indian Banks also had failed in their moral responsibilities.

Then who noticed the fraud?

One honest official at PNB Brady House Branch who was in charge of the seat which was previously held by now famous Fraudulent Employee Shetty had brought the LOUs Scam.

How?

On 16^th January 2018, representatives of three partnership firms of diamond Nirav Modi and Mehul Choksi came to the Brady House Branch of PNB in Mumbai and presented a set of import documents with request to allow buyer’s credit for making payment to the overseas suppliers through issuance of LOUs. The Branch officials requested them to furnish 100% cash margin for issuing LOUs for raising buyer’s credit.

The clients’ representatives revealed that LOUs were issued without any cash margins in the past. It was a shock to the bank officials that past records had no such entries in the bank’s books. On close examination of the records, they found out that Shetty - a retired deputy manager – retired in May 2017 – posted at the Branch from 2010 to May 2017 (7 years long covering the entire fraud period), had done the issue of fraudulent LOUs without following the prescribed procedures of documentation and getting approvals and making entries in the bank’s trade finance module of the core banking system.

Afterwards, a series of meetings were held between bank officials and representatives of Modi and Choksi in Delhi and Mumbai and perhaps no concrete plans were emerged.

On January 25, 2018, a report on frauds was submitted to RBI.

On February 12, 2018, on the basis of an internal investigation report, PNB pegged the total fraud at Rs.11,400 crore.

On February 14, 2018, the Bombay Stock Exchange and National Stock Exchange were informed.

On 31^st January 2018, PNB registered a complaint – stating that as many as 150 LOUs worth more than rs.6,000 crore were issued to the firms of Modi.

Second FIR to CBI on February 15, 2018 – stating that unauthorized LOUs and FLCs worth more than rs.4,500 crore were issued to three firms of Choksi.

Nirav Modi and Mehul Choksi groups were enjoying consortium loans –  Nirav Modi firms from 17 banks amounting to Rs.3,000 crore and Mehul Choksi firms from 37 banks amounting to Rs.3,000 crore.

It was reported in the Press that Gitanjali Gems Ltd. owned by Choksi defaulted on timely repayments of loans taken from LIC, ICICI Bank and IDBI Bank according to the Secretarial Audit Report and Independent Audit Report conducted on the company’s accounts for 2016-17 and how this adverse comments were dealt with by those banks are not known to us. Above all, all limits are subject to renewal every year and it is not yet revealed how this process was undertaken by all these banks and whether their reviews – especially adverse features, if any in the reports, were shared amongst the banks.

One more interesting factor that was missed by all banks was that both Nirav Modi and Choksi are said to hold other country’s citizenship or permanent residentship and such status should have noticed by the banks while sanctioning various limits to them. Now, on their defaults and leaving the country, their multiple citizenship status might now be a great hurdle to bring them back to India for trials.

Anyhow, CBI, Enforcement Directorate (ED), Income Tax Department, Ministry of Corporate Affairs were geared up to pursue the case ‘SWIFTLY’ and the entire might of the Modi Government had been invoked to pin the culprits – Nirav and Choksi. 

According to the latest information, it was stated that the bill cleared by the Law Ministry has provision for settling dues of creditors by disposing properties of defaulters. Here it should be mentioned that unless the high profile borrowers become honest, the problem is going to persist and to meet these challenges, Laws of the Land need to have a second look.

Further it was also reported that Nirav Modi helped his high-profile customers to exchange rs.90 crore cash on a single day on 9^th November 2016, soon after the government announced demonetization, by backdating sales and vouchers.

As on date, assets worth around Rs.6,000 crore were said to have been seized so far from both Nirav Modi and Choksi and clean up operations in respect of unfunded transactions pertaining to other high profile borrowers were initiated both by the Indian Banks and RBI.  

Money trial of Fraudulent Money was also probed and it was noticed that about 250 shell companies were linked to Nirav and Choksi for the purpose of money laundering. These shell firms could have helped Nirav and Choksi to move ill-gotten financial assets by defrauding PNB.

From the above, it can be reasonably believed that the present Government was in no way involved in the fraud.

But, questions were raised against the present Government and Modi in particular as under:

     Why Modi had failed to deduct the fraud?

    Why was Nirav allowed to attend a business meet at the World Economic Forum in Davos and subsequent group photo with Modi around January 23, 2018? – Photo courtesy: Press Information Bureau.

    And most important, why the present Government had not prevented Nirav and Choksi to flee the country? It becomes a repeat of the Vija Mallaya – liquor baron slipping out of the country in March 2016.

There were some interesting Tweets by opposition parties particularly Congress.

1.      Congress posed these: Whether the ‘Chowkdarr’ was asleep when Nirav Modi viz. Chota Modi - escaped. 

2.    Rahul: Modiji ran away with all the money – here he meant – Nirav Modi.

Our Comment: Please note terming Nirav Modi as Chota Modi and Modiji – a direct hit - depicting PM directly as SMALL, Cheat and Thief and such direct remarks could have been avoided. The position attracts some sort of respect and all should maintain Lakshman Rekha – BJP included. 

‘Bail’ Rahul had no moral authority to equate PM Modi with Nirav Modi!

To answer first point: 

As could be seen by the details above, it was purely banking transactions fraud – where the PNB’s internal security, control and audit systems had failed apart from statutory and RBI controls. But, the speed by which the Modi Government had acted to salvage the worst situation needed appreciations.

Here Rahul had failed to realize how his UPA government actually disapproved a dissent note by his own Government Appointed Director of Allahabad Bank by name Dinesh Dubey – a journalist. 

When Choksi’s Gitanjali loan proposal for an enhancement of Rs.50 crore of its existing loan of Rs.1,500 crore – Total Rs.2000 crore - was placed before Allahabad Bank Board for approval, Dubey on September 14, 2013, vehemently opposed the enhancement and demanded for repayment of existing loan itself. 

Again, two months later, at November 22, 2013, the same loan proposal of Gitanjali was placed for approval to the Board and Dubey again objected, but, Allahabad Bank Board overruled Dubey – due to instructions “from above”. 

Dubey wrote about his dissent note to Raghuram Rajan, then RBI Governor and P. Chidambaram, then Finance Minister. Perhaps due to Dubey’s objections, Dubey was asked to resign and he resigned from Allahabad Bank Board in February 2014. Dubey had said that he had not received any reply either from P. Chidambaram or Raghuram Rajan.

I draw the attention of our readers how dare Rahul and Congress now question as to why Modi had not pre-empt the fraud, when UPA Government knowingly enhanced the credit limits of Gitanjali in spite of objection raised by their own appointed Director Dubey.

Another Combo Event – P.Chidambaram & Highly Praised Raghuram Rajan:

Date of Occurrence was 16^th May 2014 (Note: On 26^th May 2014, Modi had assumed charge of PM’s post):

Chidambaram had signed an order of a gold import scheme called 20-80 scheme wherein it was stipulated that at least 20% of the gold imported from abroad was to be made available to the exporters. Dutifully, the RBI under Raghuram Rajan had issued a circular on May 21, 2014 in the midst of the outcome of Lok Sabha election.

Interestingly Mehul Choksi had welcomed the 20-80 scheme at that time before media and said that it will help jewellers. This has raised several questions on the links of the UPA government with Mehul Choksi and his company. Chidambaram had signed the controversial circular barely a week before he had to vacate his office.

A CAG Report about the scheme was: The 20-80 scheme was launched in 2013 by the then UPA government to impose restrictions on gold import. It was expected to deal with the current account deficit of gold. But, the import of gold actually surged under the 20-80 scheme.

It is notable here that the Narendra Modi led NDA government had scrapped the 80-20 scheme in late November in 2014. At that time the Raghuram Rajan governor of RBI had distanced itself from the scrapping order of the scheme and had stated that it is merely issuing the order and the decision has been taken by the government.

And again wife of Abhishek Manu Singhvi – a prominent Congress Leader and Lawyer was said to have purchased jewellery worth over Rs.6.8 crore from Nirav Modi shop. Purchase as such was not an issue, but, she had used cash rs.5.22 crore out of total purchase of rs.6.8 crore – cheque for rs.1.58 crore only clearly violating existing rules for such high purchases in cash. When questioned, she simply said: I had provided my PAN for cash – not a honest reply or action on the face of it. 

Again Anita Singhvi, wife of Singhvi: Fire Star Diamond International Private Limited is one of the Companies of Nirav. It had taken on lease  Advait Holdings in which she was holding shares since 2002. This is not a big issue – but, when Congress wanted to link PM with Nirav with a group photo taken at the World Economic Forum in Devos, this piece of information is stronger and needs answers.

Answer for the second question – Modi Group Photo with Nirav Modi – Inspite of Modi’s photo shoot, Nirav Modi was not spared – Law had actually taken its SWIFT course.

With same yardstick, we hope that Rahul will not question UK Royal family for having a photo with Nirav, as he was questioning our PM Modi.

Compare this with Rahul Gandhi attending a promotional event of  Gitanjali Gems on September 13, 2013, when the same Gitanjali Gems was suspended for 6 months from doing business on NSE in 2013 and the UPA government’s insistence of enhancement of limits to Rs.2000 crore clearly overruling its own appointed director Dubey – details are above. The proposal for enhancement was placed in Allahabad Bank on 14^th September 2013 and the promotional event was held on September 13, 2013 – rare coincidence!

Answer to third question: About Nirav Modi and others fleeing the Country, it becomes a black mark for Modi Government after Vijay Mallay case – though preventing such high profile business men will boomerang on the Government’s image with the business community.

Just imagine: Modi Government tried to stop Nirav Modi to travel abroad – The court may take a different stand in the absence of fraud not come to light but only initial suspicion and human rights violation etc. apart from the opposition party targeting Modi – as a Man against Business Growth, Against Development etc. Defaulters could not be targeted as Fraudulent Borrowers and all – including PNB had treated Nirav as a good borrower till LOUs fraud surfaced.

Nirav Modi, till scam surfaced in February 2018, was the Jewel in the eyes of all in India and abroad – in 2010, Nirav was the first Indian jeweler to have been featured on the covers of Christie’s and Sotheby’s Catalogues, in 2013 again, he was featured on the Forbes list of Indian billionaires apart from his achievements of making Golconda Lotus Necklace with a rare 12.29 carat Golconda diamond, pink diamonds and Ainra brand cut diamonds sold at Christie’s Hong Kong auction in November 2010 and the Riviere of Perfection with 36 flawless white diamonds weighing a total of 88.88 carats sold at Sotheby’s Hong Kong auction in 2012.

With such celebrity status, it may be highly risky – politically and economically – to stop Nirav’s free movements in India and abroad without any valid evidences and FIRs.

But, as the extradition of such fugitives like Nirav and Choksi is very difficult, the present Modi Government will be facing political problems – denting its image of no tolerance for scam and its declaration of ‘neither we permit scam nor allowing others to do scam’ and the BJP will be saddled with explanations to defend its action/inaction in Nirav case of fleeing India.

Extradition is possible only in cases that are seen as crimes in both the countries in question. Further India should have extradition treaty with the country where Nirav has taken refuge. As of now, India has extradition treaties with 43 countries and even though India has an extradition treaty with the UK, India could not succeed in bringing back Vijay Mallaya and Lalit Modi, both accused of financial bungling, back to face trial in Indian Courts. Among the many reasons, which can potentially become the ground for an extradition request being turned down, seem to be the condition of Indian jails and the non-abolition of death sentence in India.

Bookie Sanjeev Chawla's extradition request floundered because of the concern over the state of prisons in the country. The argument that worked in Chawla's favour was that his rights would stand compromised if he is made to spend time in Indian jails. Further many countries have a provision that stops them from extraditing people to their host countries if they face the prospect of a death penalty, which is seen to contradict fundamental human rights. With these hurdles, many extradition requests will not fructify giving a fairly happy life abroad in their chosen hawala havens. 

Unconfirmed report says that Nirav and his wife Ami (an American citizen) are already in St. Kitts where they have bought a villa which is helping to speed up the paper work for his citizenship. This small island country – despite being part of the Commonwealth and a friendly nation – does not have an extradition treaty with India. One can get citizenship status provided he has money – good or bad – to contribute around Rs.1.6 crore in the Sugar Industry Diversification Foundation, a public charity or by investing to the tune of about rs.2.8 crore in a pre-approved real estate project. St.Kitts tourist visa is not required for Indian citizens for a stay of up to 30 days and it is likely that Nirav may settle there permanently.

Hence escapes of Nirav and Choksi along with their families from India is going to haunt the BJP and Modi politically – though the Modi Government might not have helped them in any way to leave India – as against Congress Government aiding Union Carbide Chairman Warren Anderson to leave the country!

To gain confidence and escape from its so-called failure to prevent Nirav and Choksi to leave India, Modi Government should concentrate on the recovery process first instead of wasting its time and energy to bring them to India and putting them in Jail. 

Trace the investments with ill gotten money by them here and abroad, encash them and close their accounts – should be their first priorities and declare that entire money was recovered and that there was no loss to the banks. 

Thereafter, try them in courts to get maximum punishments for their scam.

‘Make Those Fraud Borrowers Poor and Powerless’ policy may be an awakening call to other rogue business communities to realize the realities and take all corrective steps before things become worst.

Let us pray that this is leading to ‘Wake up call for Scam Free India’. 

And to my mind and considering all factors without any bias, Modi can do and do it fast.

Let us not lose hope and Let us give Modi adequate chance to set right things which had become rotten during the last so many years.

THINK INDIA THINK.