An ongoing investigation into a ₹11,500 crore ($1.8 billion) fraud at the Punjab National Bank (PNB) that involves billionaire jeweller Nirav Modi and his uncle Mehul Choksi, who heads the Gitanjali diamond group and owns several diamond jewellery brands like Gili and the erstwhile De Beers brands Nakshatra, Asmi and Sangini, has undermined banks’ confidence in the gem and jewellery industry, according to senior industry stakeholders.
These stakeholders worry the current case could adversely impact bank credit to the gem and jewellery industry, which is already struggling with inadequate institutional finance.
The country’s Enforcement Directorate (ED), which deals with economic offences, has carried out raids in 13 places in Mumbai, Surat and Delhi, including the residences of both Modi and Choksi, who are both reportedly out of the country at this time. Modi also reportedly holds a Belgian passport and is said to have been overseas even before the first information report (FIR) was filed in the case.
Two officials of the PNB, Gokunath Shetty (now retired) and Manoj Kharat have been arrested for allegedly conniving in the fraud.
Five years ago in 2013, the PNB was the bank with the largest exposure of ₹1,800 crore ($282 million) in the Winsome Diamonds fraud case involving a total of ₹6,800 crore ($1.1 billion), with a startlingly similar set of circumstances. Jatin Mehta and his family, who were the promoters of Winsome Diamond, have citizenship of St. Kitts & Nevis and reside in Dubai and Singapore.
The current case first came to light with the booking of Modi, his wife Ami, brother Nishal and uncle Choksi, all partners of Diamond R US, Solar Exports and Stellar Diamonds, by the Central Bureau of Investigation (CBI) over a ₹280.7 crore ($44 million) fraud case in the PNB in 2017.
Subsequent investigations revealed that the fraud was of many times the magnitude as many transactions had been routed through the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system and not reported on the PNB’s own core banking system (CBS) software. The PNB now says the fraudulent transactions altogether now amount to $1.8 billion.
It began with the cited diamond firms approaching the PNB for letters of credit (LCs) to import rough diamonds. The LC system has the bank in question paying the supplier the required money for the shipment of goods to its client. The money is supposed to be made good by the client firms after the LC tenure has expired — usually the raw material has been processed and sold to generate the funds.
Additional funds that the companies in question may require can be secured by the local bank (in this case the PNB) issuing letters of undertaking (LoUs) affirming the ability of the firms to pay back any funds loaned. PNB officials reportedly issued fraudulent LoUs and transmitted these on the SWIFT network without logging into PNB’s own CBS system, to overseas branches of several Indian banks including Axis Bank and Allahabad Bank. These banks in turn issued large dollar loans based on the fraudulent LoUs.
The fraud came to light when, on January 16 last, the accused firms presented documents seeking buyers’ credit to pay overseas suppliers. As they didn’t have a pre-arranged credit limit, a bank officer asked the companies to put down collateral for the full amount so that the bank could issue LoUs for the credit.
The firms argued they had availed of credit facilities without having to put down full collateral in the past. The bank found no such transactions in its records. It was then found that a lower level bank official had issued LoUs on the SWIFT system without logging it into the bank’s CBS.
The PNB has reportedly issued a confidential warning to other lenders stating a similar method was used by the Choksi-promoted Gitanjali Gems, Gili India and Nakshatra to secure funding. Initial LCs and LoUs were routed through the bank’s CBS system, but the LCs were subsequently altered to reflect substantially higher amounts and the modified documents transmitted on the SWIFT network without going through the bank’s CBS.
The PNB has said there is “clear criminal connivance” between the Modi and Choksi promoted companies and officials of the bank.
In the Winsome Diamonds case, the banks had issued standby letters of credit or SBLCs, which are similar to guarantees, in favour of international bullion banks which supplied gold to Winsome Group companies.