Diamond merchant Nirav Modi, the main accused in the Punjab National Bank (PNB) scam, will be brought to India from Britain. A London court on Thursday ruled that Nirav Modi can be extradited to India to face charges of fraud and money laundering.
What is PNB scam
PNB is India's second-biggest state-run lender. The scam stunned the financial sector of the country after a fraud worth Rs 11, 400 crore was unearthed at a single branch in Mumbai.
The bank discovered that at least 2 of its employees - deputy manager Gokulnath Shetty and clerk Manoj Kharat - from its Brady House branch in Mumbai repeatedly issued Letters of Undertaking (LoU) to Nirav Modi's companies without following the processes. According to the bank, the employees issued the LoUs without securing cash reserve or collateral and without recording the transactions in the bank's core banking software.
An LoU is a guarantee by the issuing bank to the receiving bank and the companies that it would undertake to pay a certain amount of money on a specific date.
Nirav and his companies allegedly leveraged those LoUs in Hong Kong to secure buyers' credit from the local branches of Allahabad Bank, Union Bank, Axis Bank, Bank of India, State Bank of India. These suspect bank officials issued the LoUs and informed these branches via the international cash transfer service called SWIFT (Society for Worldwide Interbank Financial Telecommunication). The service connects all international banks worldwide.
The suspect bank officials knew that PNB had not integrated its SWIFT network with the bank's core banking network. They chose not to record these transactions in the bank's own system.
The fraud was unravelled when the officials from three diamond firms approached the PNB officials for a bank credit to import rough stones from overseas. When the three firms approached PNB in January 2018 for bank credit via a Letter of Undertaking, the official concerned in the bank sought a 100 percent cash margin since there was no pre-sanctioned limit for these firms.
The diamond firms contested the bank's demand and claimed that they have been availing this facility in the past also. However, the branch records did not reveal details of any such facility having been granted to the said firms. This raised an alarm, forcing the bank to launch an internal investigation in the previous bank credits.
The internal probe revealed that two officials of the bank had in the past fraudulently issued LoU to the said firms without following due process. These fraudulent LoUs were then transmitted across the SWIFT messaging system, based on which credit was offered to the said firms.