PNB Scam- INR 11500 crore fraud

Q1Who is Nirav Modi?
Nirav Modi was ranked 57 in Forbes India's Richest People List 2016, with a net worth of $1.74 billion. He founded Nirav Modi chain of diamond stores across the globe, including Hong Kong, Macau, Kula Lumpur and Malasia, under parent company Firestar International. Famous for his glitzy style of branding, his designs have been worn by 'Hidden Figures' star Taraji P, Dakota Johnson, Kate Winslet. Bollywood's very own Priyanka Chopra and actor Sidharth Malhotra were brand ambassadors for his jewellery line.

Q2. Who is Mehul Chinubhai Choksi?
Mehul Choksi, the Managing Director of ‘Gitanjali Gems’ and also the maternal uncle of Nirav Modi

Important terms:-

1. Buyer’s Credit - Buyer’s credit is a short term credit raised by Importers from overseas lenders in USD at low interest rates to deploy their working capital requirements. The overseas banks usually lend the importer (buyer) based on the Letter of Undertaking (a bank guarantee) issued by the importer's bank 
2. Letter of Undertaking (LoU) - It is a guarantee given by a bank branch located in India to a bank situated overseas that it would meet the liability if the borrowing firm defaults. They are usually backed by collateral(security) or Cash margin. LoU to foreign banks are sent through SWIFT.
3. SWIFT - Society for Worldwide Interbank Financial Telecommunication. It is a network between banks worldwide which enables one bank to make payments or to send information about a financial transaction to another.

What is the scam:-

On 14th Feb’s morning, PNB made a startling revelation to various Stock Exchanges that it has detected a colossal fraud worth Rs 115 billion (Rs 11,500 crore) in one of its Mumbai branches which has been defrauded by jeweller Nirav Modi, his maternal uncle Mehul Chinubhai Choksi, and other relatives through some firms they own with the help of the bank employees.

Two employees of PNB Mumbai Branch issued LoUs in a fraudulent manner and instructed overseas banks to pass on Buyer’s Credit to three firms of Mr. Nirav Modi, without proper collateral & due diligence.The LoUs sanctioned carried monetary value of around INR 11500 Crore.

Now since PNB has issued LoUs (which are like a guarantee), they would have to pay back the entire amount which the Nirav Modi’s firms availed as buyer’s credit, in case they(the firms) fail to do so. So the entire Rs. 11500 Crore will now lie as Contingent Liability in the books of PNB.

How it was executed:-

PNB employees misused the SWIFT network to transmit messages & the LoUs to Hong Kong branch of Allahabad Bank, Axis Bank, and Union Bank of India bypassing the bank’s internal record system to avoid detection by not recording them in PNB’s core-banking system (CBS).

Hong Kong branches of the respective banks then lent USD to Modi’s firms based on the terms of the SWIFT message they received from PNB - Mumbai. Modi’s firms used the Buyer’s Credit to settle import bills & laundered the major proportion of Money. Now since all the 3 Firms have defaulted, it becomes liability of the PNB to settle the claim.

How PNB Suffers after this scam:-

• Share Price of PNB - After continuous fall for the fourth day straight, the shares of Punjab National Bank (PNB) recovered .4 per cent (55 points up) to Rs 117.05 
•   Bank’s Recapitalisation plan - A huge damage will be done to the Recapitalisation plan under which govt. had announced to inject INR 2.1 Lakh Crores into PSU Banks for their revival. Since the major part was to be received by the PNB, it will now raise several questions before the govt.

What actions were taken by PNB,CBI,Govt.:-

• The CBI booked billionaire diamond merchant Nirav Modi, his brother Nishal and wife Ami, and business partner and maternal uncle Mehul Chinubhai Choksi on February 5 for allegedly cheating Punjab National Bank of over Rs 280.7 crore during 2017. All of them were partners or linked with Nirav Modi's companies, Diamon R US, Solar Exports, Stellar Diamonds, and allegedly conspired with PNB officials to cause 'wrongful loss
• CBI arrested Vipul Ambani who worked as the president (finance) of Nirav Modi's Firestar Diamond.
• The ED searched Nirav Modi's Mumbai residence at Samudra Mahal apartments in Worli and seized fresh assets worth Rs 22 crore, taking the total seizure to Rs 5,716 crore as raids continue across the country. Stores and facilities of Nirav Modi's company across the country have been raided to find evidence in the case. 
• The CBI has questioned around 13 officials from PNB, of which one is General Manager Rajesh Jindal who was in-charge at the Brady House branch of the PNB in 2011.