FINANCIAL AND SYSTEMIC FRAUD - I

INTERNAL ASSESSMENT I

INTERNAL ASSIGNMENT – I

FINANCIAL AND SYSTEMIC FRAUD

IRAC ANALYSIS

TOPIC : Unravelling the PNB Scam: A Shockwave in

India's Financial Landscape

NAME: Harshwardhan Kulsange TOTAL WORDS :

DIVISION: E 1,489 (excluding
footnotes, citations,
PRN: 20010125625
abstract, and references
COURSE: BA LL.B. (H) and bibliography)

BATCH: 2020-2025

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TABLE OF CONTENTS

INTRODUCTION ……………………..……………........................................……………III

CHRONOLOGICAL PROCEDURAL HISTORY……………………………….…………IV

FACTS OF THE SCAM………………………………………………………….…….……IV

LEGAL PERSPECTIVE………………………………………..…………………………….V

IMPACT OF THE SCAM…………………………………...…………………..…………VIII

CONCLUSION……………………………………………………………...……………….XI

REFRENCES AND BIBLOGRAPHY……………………………………...………………XII

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INTRODUCTION

Few crises in India's economic history have severely damaged the country's faith in its
banking system like the Punjab National Bank (PNB) crisis.1 This complex network of
dishonesty, masterminded by a group of businesspeople, bank employees, and middlemen,
shocked the country and the international financial world. The PNB fraud, which was brought
to public attention at the beginning of 2018,2 not only revealed the flaws in India's banking
system but also called into question the efficiency of corporate management and regulatory
supervision.

A multibillion-dollar scam involving Mehul Choksi and Nirav Modi, two well-known
diamond dealers whose brilliant façade covered a maze of financial wrongdoings, was at the
centre of this story.3 The scheme, which is sometimes referred to as India's worst financial
fraud ever, featured PNB personnel issuing false Letters of Undertaking (LoUs) to Modi and
Choksi's businesses without sufficient collateral or due diligence.4 These LoUs gave the
businesspeople access to loans from additional financial institutions, both domestically and
internationally, allowing them to fund their vast jewellery empires.5

When the news first surfaced, it shocked the nation and attracted attention from across the
world. How such a massive fraud could go unreported for years inside the ranks of India's
biggest and most reputable banks was a mystery.6 The consequences were rapid and
extensive, enveloping the entire banking sector in suspicion and prompting worries about the
state of India's financial system as a whole.7

1
Heer Kamdar, Bank Guarantee & Letters of Credit - Analysis of the Fraud Exception and Counter Measures
to Expand the Same, 4 INDIAN J.L. & LEGALRsch. 1 (2022).
2
Aakansh Prakash, The Changing Scenario of Corporate Ethics and the Developing Role of Corporate
Governance in India, 3 Jus Corpus L.J. 121 (2022).
3
Debapriya Biswas, Influence of the Jury on Law, 1 INDIAN J.L. & LEGAL Rsch. 1 (2021).
4
Akshita Sharma, A Study on the Working of the Debt Recovery Tribunals (DRT) in India and Its Way Ahead , 3
Jus Corpus L.J. 193 (2022).
5
Divyanshi Saxena & Gurusha Muniyal, The Landmark Episodes of Corporate Crimes in India, 4 INDIAN J.L.
& LEGAL Rsch. 1 (2022).
6
J. Tanisha & Nishtha Wadhawan, The Revolution on the Face of Corporate Ethics and Leveraging Corporate
Governance in India, 2 INDIAN J. INTEGRATEDRsch. L. 1 (2022).
7
Anuradha Girme, Bharati Vidyapeeth & Mahima Raj, The Diagnosis of Banking Fraud, 5 INDIAN J.L. &
LEGAL Rsch. 1 (2023).

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The PNB fraud is a story about financial malfeasance, but it's also a story that makes us think
about the difficulties and intricacies of contemporary banking.8 It emphasizes the requirement
for a watchful and flexible economic infrastructure that can adjust to new threats and
safeguard the funds of millions of people who depend on the dependability and security of
the banking industry.

CHRONOLOGICAL PROCEDURAL HISTORY

1. In early 2018, one of India's largest public sector institutions, Punjab National Bank,
disclosed that it had been defrauded of approximately $2 billion by Nirav Modi and
his uncle, Mehul Choksi. From the bank, they allegedly obtained fraudulent letters of
undertaking (LoUs) and foreign letters of credit (FLCs).
2. First Information Report and First Information Reports (2018): The Central Bureau of
Investigation (CBI) promptly lodged a First Information Report (FIR) against Nirav
Modi, Mehul Choksi, and several PNB personnel for their alleged involvement in the
scandal. Multiple FIRs were filed in multiple jurisdictions to investigate the intricate
web of financial transactions.
3. Interpol issued Red Notices against Nirav Modi and Mehul Choksi in 2018,
designating them as fugitives sought for extradition. They escaped the country before
the scandal became public knowledge.
4. Extradition Requests (2019-2021): The Indian government formally requested the
extradition of Nirav Modi, who was detained in London in March 2019, and Mehul
Choksi, who obtained citizenship in Antigua and Barbuda.
5. Nirav Modi launched legal proceedings in the United Kingdom when he contested his
extradition in 2019. The Westminster Magistrates' Court in London held multiple
hearings, and in February 2021, a magistrate ruled in favour of his extradition to
India. Nirav Modi filed an appeal, and the case is still ongoing.

8
Shree Shishya Mishra & Aishwarya Surana, Financial Crimes: Disturbing the Ease of Doing Business in
India, 5 RGNUL FIN. & MERCANTILE L. REV. 285 (2018).

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6. Mehul Choksi's legal challenges in Antigua and India persisted, with the Indian
government pursuing his extradition. Choksi asserted that, as an Antiguan citizen, he
could not be deported.
7. The extradition process of both Nirav Modi and Mehul Choksi remains a significant
legal and diplomatic issue from 2021 to the present. Due to its importance and
implications for financial fraud and extradition laws, the case has attracted
international attention.

FACTS OF THE SCAM

Essentially, Nirav Modi and his friends' involvement in the PNB scam was a financial
deception, which they did with the help of top Punjab National Bank officials. The LOUs
were distributed in favour of Nirav Modi who circumvented the bank's reporting procedure
by sending unapproved SWIFT messages9 to foreign banks while both of their staff members
utilized SWIFT to transfer hundreds of millions of dollars throughout borders regularly. The
CBS handles everyday financial transactions and publishes notifications. Nirav Modi was
able to acquire LOUs without providing any security with the aid of senior PNB officials. 10
Then, these LOUs were transmitted to institutions in other nations using SWIFT messaging.

Two PNB workers have reportedly been submitting unauthorized LOUs for more than seven
years, according to a 2018 story by the Hindustan Times. This continued until the moment
one of these left the company and was replaced by a different worker. When Nirav Modi's
company requested additional guarantees in January, the new employee sought security. In
response, the Firestar reps (Nirav Modi and co.) stated the company had never previously
been requested to provide a guarantee. This sparked an inquiry, which brought the fake
LOUs' deception to light and brought the matter to a close.

The absence of a connection between the SWIFT system and the bank's main record-keeping
system, or CBS, offered Nirav Modi 11 and his allies a shadowy space in which to use
9
Richa Rajpal & Twinkle Rajpal, Frauds in Banking Sector in India: Analysis and Preventive Measures, 2
INDIAN J. INTEGRATED Rsch. L. 1 (2022).
10
Nitin Joy, The India-UK Extradition Treaty and How Can India Improve Its Extradition Success Rate, 3
INDIAN J. INTEGRATED Rsch. L. 1 (2023).
11
Kartik Agrawal, Critical Analysis of Economic Offenders Act, 4 INDIAN J.L. &LEGAL Rsch. 1 (2022).

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unauthorized Letters of Understanding. In this case, the bank's CBS was not used because of
SWIFT. Since the Indian bank branches abroad believed their Indian colleagues, they quickly
granted loans to Nirav Modi as well as his companies without carefully examining the credit
quality.12 Furthermore, even though these Letters of Understanding were issued for import-
related settlements, Nirav Modi and his associates utilized them to pay off prior debts and for
other purposes. For over seven years, Nirav Modi, Mehul Choksi, and their friends carried
this out unnoticed in the dark with the help of dishonest PNB employees.13

LEGAL PERSPECTIVE

Simply the definition of fraud is any fraudulent act or behavior that gives one person a
competitive edge over others or is done with the express goal to do so. In a scam, the victim
suffers a loss both directly and indirectly.14 The Indian Penal Code does deal with the
elements of fraud in several areas, however, it does not explain or address fraud in full. This
encompasses deceit, secrecy, counterfeiting, forging, and violation of trust.15

Fraud16 is defined in a commercial sense as any action taken by one of the parties to a
contract, with that party's express permission or instructions, or by that party's agents, to
mislead the other person or his agent or persuade someone to agree.

This entire document should be interpreted in line with Contract Act section 17.17

Fraud in the banking sector is on the increase and more common than ever in the modern era.
The amount taken in crimes like financial fraud is thousands of times larger than it would be
in regular theft and robbery instances. 18 Most nations have laws that make bank fraud a
federal offence. Banking fraud is, to put it simply, the use of possibly unlawful methods to
12
Dhairya, Banking: It's Loopholes Leading to the Rise of NBFC and Challenges Faced by Them, 4 INDIAN
J.L. & LEGAL Rsch. 1 (2022).
13
Avikshit Moral, Aditi Joshi & Timur Bondaryev, Cross Border Real Estate, 53 ABA/SIL YIR (n.s.) 305 .
14
Shreya Ghosh Dastidar, A Brief Analysis on the Financial Crimes Committed by Individuals, 3 INDIAN J.
INTEGRATED Rsch. L. 1 (2023).
15
Daizy Thakur, The Anti-Corruption Armoury of India, 3 INDIAN J. INTEGRATEDRsch. L. 1 (2023).
16
Akshi Narula, Financial Crimes in India, 5 RGNUL FIN. & MERCANTILE L. REV. 216 (2018).
17
Ridhya Mahajan, An Analysis of the Biggest Scams in the Corporate World, 5 INDIAN J.L. & LEGAL Rsch.
1 (2023).
18
Khushi Mehta, Extradition: Will India Be Able to Extend the Long Arm of Law?, 1 LAW Essentials J. 136
(2021).

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acquire cash, possessions, or other property that belongs to or is held by a financial
organization. It may also, in certain situations, include stealing funds from customers by
impersonating a bank or another financial organization.19

IMPACT OF THE SCAM

 In essence, PNB was left with bank guarantees totalling more than Rs 11,400 crore
that it must pay to several parties, particularly the State Bank of India, Allahabad
Bank, and Union Bank. These payments were anticipated to be made over the next
months.
 Additionally, once the case's conclusions were made public, the banking, jewellery,
and insurance industries all suffered major setbacks.
 There were serious concerns about the public sector banks' overall trustworthiness, as
well as whether authorities like the RBI and SEBI were carrying out their
responsibilities to the necessary level.
 To stop further abuse of the medium, the Reserve Bank of India promptly forbade
banks from providing assurances in the shape of certificates of undertaking (LOU). It
was also determined that commercial banks would immediately stop granting Letters
of Understanding (LoUs) for trade-related loans for imports into India.
 Additionally, by April 30 of the same year, banks were required by the RBI to link
their core banking networks to the SWIFT system. In the meantime, Nirav Modi was
detained in London after a police warrant was issued for him on suspicion of illegal
conspiracy, deception, breaking a contract, theft, fraud, and cheating.

CONCLUSION
19
Pratik Banerjee, Robbing Blind - How Come Hell or High Water, Financial Crimes in India Have Been on the
Rise and the Waterdogs Are Attempting to Curb the Evil, 5 INDIAN J.L. & LEGAL Rsch. 1 (2023).

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The PNB fraud has significantly damaged India's banking industry. This has the advantage of
making the government more vigilant and aware of the banking industry's varied
developments. The swindle offers the government and reserve bank the chance to implement
changes. The statute known as the Fugitive Economic Offenders Act is undoubtedly an
excellent place to start, but there has to be other legislation as well. We must keep pushing
for banking sector reform to save vulnerable institutions like the PNB suffering getting their
image tarnished in the future.

REFRENCES AND BIBLOGRAPHY

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1. Heer Kamdar, Bank Guarantee & Letters of Credit - Analysis of the Fraud Exception
and Counter Measures to Expand the Same, 4 INDIAN J.L. & LEGALRsch. 1 (2022).

2. Aakansh Prakash, The Changing Scenario of Corporate Ethics and the Developing
Role of Corporate Governance in India, 3 Jus Corpus L.J. 121 (2022).

3. Debapriya Biswas, Influence of the Jury on Law, 1 INDIAN J.L. & LEGAL Rsch. 1
(2021).

4. Akshita Sharma, A Study on the Working of the Debt Recovery Tribunals (DRT) in
India and Its Way Ahead, 3 Jus Corpus L.J. 193 (2022).

5. Divyanshi Saxena & Gurusha Muniyal, The Landmark Episodes of Corporate Crimes
in India, 4 INDIAN J.L. & LEGAL Rsch. 1 (2022).

6. J. Tanisha & Nishtha Wadhawan, The Revolution on the Face of Corporate Ethics and
Leveraging Corporate Governance in India, 2 INDIAN J. INTEGRATEDRsch. L. 1
(2022).

7. Anuradha Girme, Bharati Vidyapeeth & Mahima Raj, The Diagnosis of Banking
Fraud, 5 INDIAN J.L. & LEGAL Rsch. 1 (2023).

8. Shree Shishya Mishra & Aishwarya Surana, Financial Crimes: Disturbing the Ease of
Doing Business in India, 5 RGNUL FIN. & MERCANTILE L. REV. 285 (2018).

9. Richa Rajpal & Twinkle Rajpal, Frauds in Banking Sector in India: Analysis and
Preventive Measures, 2 INDIAN J. INTEGRATED Rsch. L. 1 (2022).

10. Nitin Joy, The India-UK Extradition Treaty and How Can India Improve Its
Extradition Success Rate, 3 INDIAN J. INTEGRATED Rsch. L. 1 (2023).

11. Kartik Agrawal, Critical Analysis of Economic Offenders Act, 4 INDIAN J.L.
&LEGAL Rsch. 1 (2022).

12. Dhairya, Banking: It's Loopholes Leading to the Rise of NBFC and Challenges Faced
by Them, 4 INDIAN J.L. & LEGAL Rsch. 1 (2022).

13. Akshi Narula, Financial Crimes in India, 5 RGNUL FIN. & MERCANTILE L. REV.
216 (2018).

14. Avikshit Moral, Aditi Joshi & Timur Bondaryev, Cross Border Real Estate, 53
ABA/SIL YIR (n.s.) 305 .

15. Shreya Ghosh Dastidar, A Brief Analysis on the Financial Crimes Committed by
Individuals, 3 INDIAN J. INTEGRATED Rsch. L. 1 (2023).

16. Daizy Thakur, The Anti-Corruption Armoury of India, 3 INDIAN J.

INTEGRATEDRsch. L. 1 (2023).

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17. Ridhya Mahajan, An Analysis of the Biggest Scams in the Corporate World, 5
INDIAN J.L. & LEGAL Rsch. 1 (2023).

18. Khushi Mehta, Extradition: Will India Be Able to Extend the Long Arm of Law?, 1
LAW Essentials J. 136 (2021).

19. Pratik Banerjee, Robbing Blind - How Come Hell or High Water, Financial Crimes in
India Have Been on the Rise and the Waterdogs Are Attempting to Curb the Evil, 5
INDIAN J.L. & LEGAL Rsch. 1 (2023).

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