Modus Operandi

In search of clues

Print edition : March 16, 2018

Enforcement Directorate officials leaving a jewellery shop at Viviana Mall in Thane on February 19 after conducting a raid. Photo: PTI

Law enforcement agencies struggle to unravel the complex modus operandi in the PNB scam.

ON January 29, when Punjab National Bank (PNB) filed a criminal complaint with the Central Bureau of Investigations (CBI) against a set of partnership firms helmed by Nirav Modi, Nischal Modi, Ami Nirav Modi and Mehul Chinubhai Choksi for allegedly cheating and defrauding it of Rs.280 crore, the matter did not attract widespread attention. But more than a fortnight later, when the public sector bank informed the stock exchanges that it had “detected some fraudulent and unauthorised transactions” in one of its south Mumbai branches cumulatively valued at $1,771.69 million, or Rs.11,400 crore (approximately), the nation woke up to the existence of a major scam.

The revelation that an internationally renowned billionaire had taken a large sum of public money fraudulently and left the country before he could be arrested attracted wide attention. In the coming days, more details about the alleged modus operandi of the fraudulent transactions started spilling out.

PNB registered a second criminal complaint with the CBI “for addition to FIR against Mehul Choksi, promoter of Gitanjali Group Companies for having committed offences of cheating and fraud thereby, causing loss of $754.92 million equivalent to Rs.4,886.72 crore to the banks”. This was a day before its disclosure to the stock exchanges with an updated figure about the fraudulent transactions, which cumulatively tally up to Rs.11,400 crore. How did the figure increase from Rs.280 crore to Rs.11,400 crore? According to an official, the CBI relied upon the text and evidence presented by PNB in its official complaint. “In its first complaint, PNB had mentioned that eight letters of undertaking [LoUs] were fraudulently issued to the accused. Subsequently, this figure rose to 150 for Nirav Modi’s firms and 143 for Mehul Choksi’s firms. There were 233 foreign letters of credit [FLCs] issued, too. Cumulatively, these 293 LoUs and 233 FLCs add up to a sum of Rs.11,400 crore [approximately],” a senior government official told Frontline.

An LoU is essentially a written assurance given by one bank to another about its readiness to meet a liability on behalf of a customer. It is akin to a letter of credit and is used in international banking transactions.

In its complaint to the CBI, the bank described how LoUs and FLCs were “fraudulently” given to the companies owned by Nirav Modi and Choksi. It named two PNB officials and said: “They have fraudulently issued LoUs without following bank’s prescribed procedures of obtaining required request applications, documents, approval of the authorities thereto, etc. and without making entries in the banking system avoiding detections of the transactions, so made, transmitted with SWIFT [Society for Worldwide Interbank Financial Telecommunications] instructions to the overseas branches of Indian bank under buyer’s credit. Credits received under the buyer’s credit in the bank’s nostro account/s were, however, utilised for payment of earlier raised buyers’ credit in many cases. Such SWIFT messages for remittances were also issued by above officials. RBI prescribes that credit for import of semi-precious and precious stones, including pearls, should not be [for] more than 90 days. However, in most cases the credit allowed under referred LoUs is much beyond 90 days. For outstanding buyers’ credit, LoUs are established for about 360 days abinitio. This should have evoked suspicion in the minds of overseas branches of Indian banks extending buyers’ credit. These banks never raised any alarm on violation of RBI guidelines and continued to provide funding against fraudulent LoUs. There is no documentary evidence available to prove that these import transactions are bona fide trade transactions. There are several discrepancies in LoUs which could have been easily detected by ordinary due diligence.”

Noting that the SWIFT system, a specific communication system used by banks internationally to relay sensitive financial information, was misused, the PNB complaint stated that the Gitanjali group of companies, especially, benefited from this. “The conniving officer also issued FLCs by entering a smaller amount in trade finance module of CBS system and generating the reference no. and a SWIFT message was sent for the amount. Subsequently, without making any change in trade finance module of CBS system the conniving officer sent modified SWIFT message for enhanced amount under the same reference to the beneficiary bank. The beneficiary/overseas supplier had discounted the documents drawn under such FLCs [based on SWIFT message] with overseas banks.”

On its part, the Enforcement Directorate (E.D.) swiftly began seizing and attaching properties. A day after PNB disclosed the fraudulent transactions to the stock exchanges, the E.D. said it had “seized jewelleries, gold, diamond, precious metal and stones at stock price of Rs.5,100 crore in the Nirav Modi case yesterday. Independent valuation has been started.” Further searches at 35 locations across India led to the seizure of diamonds, gold and jewellery worth Rs.549 crore at book value. The total seizure was claimed to be worth Rs.5,649 crore. This announcement attracted criticism from opposition parties, which pointed out that stock prices were not reliable estimates and that these numbers might have been released with an intention to influence public perception about the government initiating a crackdown on corruption.

In fact, the Congress refused to accept PNB’s statement blaming two middle-rung bank officials for “conspiring” with Nirav Modi and his business partners. Its larger narrative was expressed thus: “The entire system was bypassed. All regulatory mechanisms broke down. Everything escaped the eyes of auditors and investigators. ‘Risk Management’ and ‘Fraud Detection Ability’ came to a naught. Yet, the Narendra Modi government would have us believe that this entire fraud was being perpetrated by two employees.”

The open criticism energised the anti-government mood and added pressure on the law enforcement agencies to show action. Thus, the CBI, the E.D., the Central Vigilance Commission (CVC) and the Income Tax Department were forced to show visible action against the alleged fraudsters. The CBI and the E.D. especially undertook several actions even as pressure was building on the government to enforce the law, which had evidently been bypassed in this case. According to informed sources, a group of at least 12 officers, aided by others given specific tasks, has been working full time in the Mumbai office of the CBI to probe the case. The Joint Director of the CBI has also been in Mumbai to oversee the probe.

In the light of the revelation that the CVC had awarded PNB for its performance, public criticism peaked and the CVC was forced to issue a clarification. It said: “For the award in the category ‘Timely Completion of Disciplinary Proceedings’, there were four eligible entries. Of them, CVO [Chief Vigilance Officer] PNB had the best disposal of 92% (187 out of 203) cases. The next best was 56% (58 out of 103) cases. Hence, an award was given to CVO, Punjab National Bank in 2017. The award was for ‘Outstanding Contribution’ in the category of ‘Timely Completion of Disciplinary Proceedings’ for the year 2016. The receipt of an award by any person or organisation has to be seen in the context in which it was issued. The Commission has not vetted or validated awards being given by other organisations and professional associations.”

It asked PNB to submit a report explaining how the fraud was allowed to go on for so long. In late February, reports emerged about the E.D. having contacted Nirav Modi, who, over an email, expressed his inability to appear for questioning, citing cancellation of his passport. There were multiple reports of his exact whereabouts, but Nirav Modi reportedly refused to reveal the location in his communication to the E.D.

Indian law enforcement agencies are clearly struggling to grasp the speedily unfolding scandal.

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