CIA-1

CONTINUOUS INTERNAL ASSESSMENT

LAW AND ECONOMICS
TOPIC: PNB SCAM

SUBMITTED TO: SUBMITTED BY:

Prof. Sonia Mukherjee GURBAAZ SINGH PURI
20213223
4BBA.LLB

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PNB SCAM
What is a white-collar crime?
White-collar crimes are non-violent crimes committed for financial gain. "These
crimes are characterized by deception, concealment, or infringement of trust,"
according to the FBI, the leading agency investigating these crimes. The motive
for these crimes is "acquiring or avoiding money, property, or services, or
gaining personal or business interests." Since a few years, white collar crimes
have mainly altered. They are also considered as committed in huge enterprises
with a wide range of activities. As a result, we may argue that these crimes are
frequent in trade, commerce, education, and health care, among other areas.
Edwin Sutherland, a sociologist from the United States, was the first to define
white-collar crime in the world. In comparison to people who commit regular
crimes throughout the course of their employment, he classified this crime as
being perpetrated by a person of high social rank. White collar crime has a
significant impact on society, and it is not limited to criminals. Because it has a
direct influence on society, it is also known as a socio-economic crime. When a
white-collar crime is committed, it results in significant financial losses for
businesses, which have a direct impact on consumers and society. Our country's
economy is in shambles as a result of these frauds and schemes. Then they raise
the costs to compensate for the losses caused by fraud or other schemes.
Consumers will pay higher prices as a result of rising taxes, government
revenue, and insurance costs. White-collar crime has a significant impact on
society. From commodity expenses to stocks and insurance, there is loss in
every industry.1

INTRODUCTION
THE SCAM
Punjab National Bank (PNB) announced on February 14th, 2018, that it had
been stolen of around 1.8 billion dollars. This news shocked the country, and all
eyes were on the perpetrator, Nirav Modi, a wealthy diamond magnate. This
page explains the exact nature of the crime, its consequences, and how Nirav
Modi and his associates perpetrated one of India's largest bank frauds. The PNB
scandal was essentially a case of financial fraud perpetrated by Nirav Modi and
his friends with the help of senior Punjab National Bank officials.2 The Society

1
https://www.investopedia.com/terms/w/white-collar-crime.asp
2
https://www.livemint.com/Companies/QVrxBXaZBX2t82KkFBSAOL/How-PNB-fraud-happened-A-162page-
report-lays-bare-the-laps.html

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for Worldwide Interbank Financial Telecommunications (SWIFT) is a Belgian
cooperative society. SWIFT's principal function is to transport secure financial
messages from one bank to another. That is, if one bank wishes to send a
message to another, SWIFT transports the message in a safe and secure manner
without modifying it. SWIFT is frequently mistaken as a money transfer
system; however, this is not the case. SWIFT does not settle or clear fund
transfers; it just sends and receives encrypted messages. In the instance of PNB,
the two workers evaded the central banking system (CBS), which handles daily
financial transactions and posts updates, and instead used SWIFT to shift
millions of dollars across borders every hour. A letter of undertaking (LOU) is a
document that importers use to conduct their business. As a result, the Indian
businessman approaches a bank in India and provides security in the amount of
the cost he must pay, in exchange for which he requests that his bank issue a
LOU. The bank issues a letter of credit and sends a message via SWIFT to the
supplier's bank, guaranteeing the money owing by the Indian businessman. This
guarantees that the commercial transaction goes smoothly. In the case of PNB,
LOUs were issued in Nirav Modi's favour, circumventing the bank's reporting
system by sending SWIFT messages to foreign banks without authority. Nirav
Modi was able to obtain LOUs without filing any securities with the help of
senior PNB officials. These LOUs were then sent to banks in other countries via
SWIFT messaging.3

Nirav Modi
The millionaire at the centre of the scandal, Nirav Modi, is a premium diamond
jewellery designer who was placed 57th on Forbes' list of India's billionaires in
2017. He is the founder and creative director of the Nirav Modi diamond
jewellery retail chain, as well as the Chairman of Firestar International, the
Nirav Modi chain's parent company, which has locations in important countries
across the world. 'Hidden Figures' star Taraji P. Henson and Dakota Johnson,
among others, wore his creations to the Oscars and the Golden Globes. Priyanka
Chopra, an actress, is the brand ambassador.
DISCLOSURE OF FRAUD
According to a 2018 Hindustan Times survey, two PNB staff were dispatched.
Unauthorized LOU for the last 7 years. This is because one of them retired
Replaced by a new employee. When the Nirav Modi company requests a new
warranty. In January, a new employee was looking for collateral. Firestar
representative (Nirav Modi and His colleague) said they had never been asked

3
https://amity.edu/UserFiles/admaa/6561aPaper%202.pdf

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for a deposit before. This was triggered Investigations that ultimately led to the
truth that fake LOUs were published.

OUTCOME OF THE SCAM

PNB was left with bank guarantees worth more than Rs 11,400 crore, which it
must pay to a variety of parties, including the State Bank of India, Allahabad
Bank, and Union Bank. The payments were expected to be made in the coming
months. Furthermore, as the case's results were made public, the banking,
jewellery, and insurance industries were severely hampered, with substantial
negative consequences. Big doubts were raised about the trustworthiness of
public sector banks as a whole, as well as whether regulators like the RBI and
SEBI were doing their jobs properly. To prevent further abuse of the medium,
the Reserve Bank of India immediately prohibited banks from issuing
guarantees in the form of letters of undertaking (LOU). Commercial banks were
also ordered to stop granting Letters of Understanding for trade-related credits
for imports in India with immediate effect. The RBI has also given banks until
April 30 to connect their basic banking systems (CBS) to the SWIFT system.
Meanwhile, Nirav Modi was arrested in London after an arrest warrant was
issued for him on charges of criminal conspiracy, cheating, dishonesty, fraud,
breach of trust, and breach of contract.4

CONCLUSION
The PNB scam left a noticeable dent in the Indian banking sector. The positive
result of this is that the government is more vigilant and adapts to the banking
sector and its various events. Fraud also gives both governments and reserve
banks the opportunity to enact reforms. The Escape Economic Crimes Act is
certainly a good start, but it should not remain the only law in this regard. It is
important to continue to drive reforms in the banking sector so that long-
established banks like the PNB do not damage their reputation in the future.
IMPACT ON THE STOCK MARKET
The total amount of PNB fraud is said to be nearly 50 times the bank's net profit
of Rs 230.11 as of the end of the third quarter of 2018. In particular, five well-
known banks were directly affected by the fraud because they offered loans
based on LoUs issued at the request of the PNB. The institutions mentioned
were UBO Bank, Allahabad Bank, Axis Bank, and Union Bank of India.

4
https://www.business-standard.com/article/finance/pnb-scam-to-impact-other-lenders-increase-their-bad-
loans-provisions-now-118021500070_1.html

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HOW DOES LAW AND ECONOMICS PLAY A ROLE IN
INCREASING THE EFFICIENCY IN JUDGEMENTS IN SUCH
CASES?
White-collar crime is on the rise, and there are numerous causes for this,
including greed, a lack of public awareness, a lack of stringent regulations and
laws, a lack of accountability, peer support, legal loopholes, technical and
industrial advancement, and so on. This crime has been caused by the
improvement of science and technology, as well as human avarice, which has
seen a great increase in white collar crimes. In India, statutory laws have been
enacted to combat the problems of white-collar crime. The government has
enacted a number of laws aimed at detecting and combating white collar crime.
The Prevention of Corruption Act 1988, the Prevention of Money Laundering
Act 2002, the Companies Act, 1960 (now Companies Act 2013), the Income
Tax Act, 1961, the Indian Penal Code, 1860, and the Black Money (Undisclosed
Foreign Income and Assets) and Imposition of Tax Act, 2015 are the laws in
question. The Anti-Corruption Act of 1988 came into force in a new way with
broader scope and influence by abolishing the Anti-Corruption Act of 1947. The
Anti-Corruption (Amendment) Act of 2018 came into force on July 26, 2018
due to the passage of time, the rapid development of technology, and the social
and economic structure of society. This change has significantly changed the
legislative framework. As a result, the combination of law and economics can
determine the severity of a particular problem.5
• Summary courts must be set up nationwide to enforce the law efficiently.
•More stringent rules, regulations and laws should be introduced with better
execution and implementation.
•More awareness and education should be provided to general public regarding
White Collar Crimes so that they could not be trapped into these offences.
•Government should establish an independent body for focusing on these crimes
and provide punishment for the same.
•Investigating agencies of India such as CBI etc. should adopt strong regulating
policies to curb white collar crimes

5
https://economictimes.indiatimes.com/industry/banking/finance/banking/newslist/62929480.cms