Neerav Modi, a prominent figure in the corporate world, gained notoriety for his involvement in one of the most infamous corporate scams in India. As a diamond merchant and the founder of Firestar Diamond, he orchestrated a multi-billion-dollar fraud that shook the financial landscape. Modi's fraudulent activities came to light in 2018 when Punjab National Bank disclosed unauthorized transactions amounting to over $2 billion. This elaborate scam involved the issuance of fraudulent letters of undertaking, allowing Modi and his associates to obtain credit from foreign branches of Indian banks. The Neerav Modi corporate scam raised concerns about regulatory oversight, corporate governance, and the need for stricter measures to prevent such financial misappropriations.
2. WHO IS NIRAV MODI?
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PNB.
National Bank(PNB) of over 11400 crore’s has fled the country.
Nirav Modi is an importer of diamonds
Basically importers prefer to take loans in foreign currencies as interest rates
He is into Diamond trading business. He is the founder and creative director
on that are lower.
of the NiravModi chain of Diamond jewelry .
In this case a loan is taken from any overseas bank which is guaranteed by
NiravModi , the billionaire jeweler who along with others scammed Punjab
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3. INTRODUCTION TO SCAM
● On 29thJan 2018, PNB (Punjab National Bank) filed a criminal complaint with India’s
federal investigative agency against three companies and four people , including
billionaire jeweler NiravModi and his uncle MehulChoksi, the managing director of
GitanjaliGems , saying they had defrauded PNB and caused a loss of 2.8 billion rupees
($43 million).
In a regulatory filing on Feb 14 , the bank updated the sum involved in the fraud to
113.94 billion rupees($1.77 billion),which it said was determined after further
investigation at its Mumbai’s Brady branch. This fraud is done by NiravModi in 2011
who fraudulently raised funds worth of Rs. 11,400 crore from various public & private
sector banks by showing Letter of Undertaking (LOU) issued by Punjab National Bank.
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4. MEMBERS INVOLVED IN THE SCAM
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NiravModi : NiravModi is the owner of the NiravModi firm, Diamond Ami
Modi : NiravModi’s wife.
MehulChoksi: MehulChoksiis the owner of GitanjaliGroup and the uncle
PNB Employees: GokulNathShetty (retired deputy manager), Manoj
RUS ; Stellar Diamond and Solar Exports.
NishalModi : NiravModi’s brother in law
of NiravModi.
Kharat (clerk).
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5. ANALYSIS OF THE SCAM
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PNB Employees issued the fake Letter of Undertaking (LOU) which could
lead to fraud. The two employees of PNB directly used SWIFT and while
doing it, they did not pay attention on the core banking system (CBS).
THE FIR contained the details like those PNB employees were issuing
LOUs in unauthorized way for 7 years.
Afterwards, one of them retired and the new employee came on his
designation. In January , when the officials of the firm demanded fresh
LOUs from PNB , the new PNB officer asked for the collateral security.
The officials of frim mentioned that this had been never asked by the
PNB manager in the last 7 years.
Now the bank got signal that something wrong has taken place.
The new Bank officer got doubt on the past 7 years LOU issuance and he
looked into the concerned matter in detail.
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● The PNB reported to the RBI and CBI.
An Indian bank (A) issues an LOU (Letter of Undertaking) at the request of a
third party who is overseas. The third party generally is the beneficiary or the
The importer sells the goods and repays the loan. LOUs as corporate leading product
corporate to a bank in a different country (B), guaranteeing a loan that (B) gives
to a
importer.
is a common practice by banks in India.
As it is a high risk lending . LOUs are generally issued against collateral.
Regulatory compliance requires the LOU cannot be issued for more than 90 days.
After deal investigation, it found near about 100 LOUs issued to these firms
without asking for collateral security . PNB became the victim of the fraud.
It faced the problem amounting to about 11,400 crores.
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7. SCAM OPERATION
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NiravModiexported rough store from foreign country worth croresof
The employees at PNB Brady House branch fraudulently issued LOU for
Banking System (CBS).
the suppliers.
rupees.
365 days without making any provisions for collateral and by passing Core
The firm also raised funds from Indian banks overseas branch for paying to
NiravModi'sfirm again requested the bank to issue another LOU (letter of
undertaking) but the official refused on ground that the company has to keep
collateral with bank but Modi'sfirm argued that no such money was kept on
margin for the previous LOU.
After the PNB official started scanning the records and didn't find any such
transactions and then filed a complaint with CBI.
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8. FRAUD DETECTION
● According to the complaint filed by PNB
with the CBI on January 28, the
fraudulent issuance of letters of
undertakings (LOU)
was detected at the mid corporate
branch, Brady House in Mumbai.
A set of partnership firm-Diamond R
US,solarexports and Stellar Diamonds -
approached the bank on January 16 with
a set of import documents and requested
buyer's credit to make payments to
overseas suppliers.
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9. LEGAL PENALTY
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This case comes under cheating i.e. . under section 420 of IPC.
imprisonment of either description for a term which may extend to seven
This case comes under also Criminal Conspiracy under section 120 B of
● According to section 420 IPC the person shall be punished
with years, and shall also be liable to fine.
Indian Penal Code.
10. ETHICAL CONCERNS
● Ethics in the banking industry is simply defined as banks must comply with
all the laws, rules and regulations levied by the competent
authority to enhance the confidence of the society.
Following are the Ethical Issues Involved in the case –
1) Not following corporate governance norms.
2) Tempering the financial data.
3) Misleading the bank as well as the government.
4) Putting self-interest first.
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11. CONCLUSION
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even create social unrest, discontent and political violence.
The passiveness of banks to fraud has been heightened by technological
The impact of frauds on entities like banks, and the economic cost of frauds
can be huge in terms of likely disruption in the working of the markets,
financial institutions, and the payment system.
Besides, these scams can have a potentially weakening effect on confidence
advancements in recent times.
in the banking system and may damage the integrity and stability of the
economy.
It can bring down banks, undermine the central bank's supervisory role and
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