The Famous Nirav Modi Scam- All You Need To Know

In last few days you must have heard a lot about the PNB fraud or the Nirav Modi Scam case. You must have seen people blaming the government, RBI, banks and everyone they can. It must have raised many questions in your mind that what actually happened and how such a humongous scam took place.

Read on to get all your questions answered in very simple way:

Who Is At Fault ?

Banks are the pillars of any country’s financial discipline. On one hand bank encourages people to save their money and on the other hand ensures that same money is mobilised for investment purposes. Banks are the government’s source to fulfill every objective of planned economic development. As per a survey by the government under the Pradhan Mantri Jan Dhan Yojana. A total of 21.22 crore house holds were surveyed where it was found that 99. 99 percent of people have their bank accounts.

This shows how much faith citizens have on the banking system of this country. When PNB uncovered the illegal transactions worth Rs. 11,400 crores it shook the faith of all these people who deposited their money in the bank with the trust that their money is safe with the banks. This scam came at a time when country is struggling from a whooping amount of Rs. 8 lakh crores Non Performing Assets (NPAs are the loans where banks are not able to recover the loan repayment.)

In this article we will try to understand how PNB Fraud or Nirav Modi scam took place. Before that we need to understand some basic banking terms.

Letter of undertaking

When we go to bank for taking a loan, banks ask for a security. So, in case we default in repayment of our loan, banks can use that security to recover its money.

In the same way when an importer wants to take short terms loan from foreign branch of Indian bank a Letter of Undertaking (security for foreign bank) is issued by importer’s  India’s Branch.

  • LoUs facilitates foreign bank to give loan to the importer.

  • It assures the foreign branch that if importer defaults in loan repayment, importer’s bank will make payment to foreign branch.

  • Since importer’s bank is taking a big risk by providing the guarantee. Bank demands a Cash Margin whenever a LoU is issued to any importer.

Society for Worldwide Interbank Financial Telecommunication- SWIFT

When a LoU is issued, one message is sent By Indian Branch Bank – (Punjab National Bank in Nirav Modi scam case) to foreign branch (Allahabad & Axis Bank) signifying PNB’s consent and guarantee for the loan. It is an important message and an officer of PNB has to log in and provide details like account number and SWIFT message number to Allahabad & Axis bank. SWIFT have three-layered check and no cases has been reported till now in the world for breach in SWIFT transactions.

Now, let us understand how this whole episode of Nirav Modi scam took place:

nirav modi scam

This is normal course of transaction in international banking.

So what is the fraud in Nirav Modi’s case?

  • The LoUs issued by PNB were fraudulent and SWIFT messages were never recorded in PNB’s Banking System.

  • Two employees of Punjab National Bank issued fraudulent LoUs.

  • After the issuance of LoUs they used the id & passwords of SWIFT and generated SWIFT message and sent to Allahabad Bank & Axis Bank’s foreign branch.

  • Verification of SWIFT message sent by PNB was done and then Allahabad Bank & Axis Bank issued loan to Nirav Modi.

  • On 16th January 2018, some official from Nirav Modi’s Firm went to PNB to get another LoU on Nirav Modi’s’ behalf.

  • Those employees involved in fraud were retired hence another bank officer entertained them.

  • As per normal course of business he asked for 100% cash margin to issue a LoU.

  • Representatives from Nirav Modi’s firm argued that same kind of LoUs are issued by your bank without any margin.

  • When Bank verified the previous transactions it could not find any track in banks’ books of accounts.

On further investigation by PNB it was found that the employees engaged in fraud activities never recorded the SWIFT messages in the PNB’s Banking system (Finacle).

SWIFT is a triple layered check system where three parties are involved. One person who initiates the SWIFT transaction, another who approves and third who verifies it.

Important thing to notice here is that SWIFT was not linked to PNB banking software. Hence, bank officials were supposed to manually enter into PNB’s banking software (Finacle) whenever any activity is performed on SWIFT. Since these were never recorded so it didn’t come to notice of other PNB officials.

The fake LoUs were issued during a period of 6 years (2011 to 2017) which in total have accumulated to Rs. 11,400 crore of scam.

Tax payer’s money is wasted like this. Moreover, this is not the first time such scams have happened with PNB. Similar kind of cases namely Winsome Diamonds & Jewellery Ltd, Forever Precious Jewellery & Diamonds Ltd and Zoom Developers Ltd have already happened with PNB in past.

In fact PNB is having the highest number of wilful defaulters as well as the largest amount outstanding from such accounts as per the CIBIL website.

Hope PNB, government, RBI and all other banks in the system takes a lesson from this scam and tax payer’s hard earned money is not wasted on billionaires and frauds like Nirav Modi.

Hope this gave a much clear picture on the Nirav Modi scam.

Shoot in your views via comments section.

Divya Rai

A CA by profession, currently working as a tax expert with India's leading Government Petroleum firm.

5 thoughts on “The Famous Nirav Modi Scam- All You Need To Know

  • February 25, 2018 at 2:11 pm
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    If big branches go for Risk Base Audit as per RBI 2004 guidelines, this scam can be found in early stage only.

    Reply
  • February 25, 2018 at 8:23 pm
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    Great work Divya. U have summarized the very complicated looking scam in simple language. I expect many such articles. If u can come up with analysis of Economic Survey and Budget. 😊😊

    Reply
  • February 25, 2018 at 8:30 pm
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    Impressive articulation & simple language makes this article a wonderful read.

    Looking forward to next one from ChirpyBrains Team.

    Reply
  • February 25, 2018 at 8:53 pm
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    Well explained. Very nice

    Reply
  • February 26, 2018 at 12:42 pm
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    Effortless reading…briefly addressed all the aspects which are easily understandable to new peers.

    Well written…

    Reply

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