Fall from grace: The glitter fades with Rs 11,400-cr fraud

Probing a fraud worth Rs 11,400 crore, carried out by a group of companies owned by billionaire jeweller Nirav Modi and his uncle Mehul Choksi, the investigating agencies have found that it was a systemic failure on the part of banks. Companies owned by Modi and Choksi siphoned off Rs 11,400 crore from Punjab National Bank (PNB). Not only are the employees of PNB under the suspicion of investigating agencies, but also the employees of overseas branches of Indian banks that allowed the fraud to happen, ignoring the basic principles of banking.

There are 33 India-based banks, including the State Bank of India, Allahabad Bank, Axis Bank, Union Bank of India and foreign banks. The Central Bureau of Investigation (CBI) and Enforcement Directorate (ED) have simultaneously registered two separate cases to probe the fraud carried out by the accused firms after PNB knocked their doors.

After realising that four of the prime accused — Nirav Modi, his wife Ami Modi, brother Nishal Modi and uncle Mehul Choksi — have fled India, the CBI has issued a look out notice against the rest of the accused, including suspended PNB officials and directors of all the involved companies, and have sought help of Intelligence Bureau and local police intelligence units to help locate and trace them. The CBI has also sought information from the immigration department, pertaining to the movement of all four accused. The CBI has sought information about other directors. The agency has also appealed to people affected and franchises of these companies to come up with their complaints if they have been cheated by these groups of companies. The agency has formed a task force headed by the Deputy Inspector General of Police, which has been given full authorization to search and arrest the absconding accused.

In the meantime, the ED has sought help of Federal Bureau of Investigation of the US (FBI) to trace and locate Modi, who is hiding in the US. The ED has also decided to reach out to the 16 members of Eurasian group on combating money laundering and financing of terrorism known as EAG, 41 members of the Asia/ Pacific Group (APG) on money laundering and 35 members of Financial Action Task Force (FATF) to locate shops and showrooms of Modi and Gitanjali.

Sources in the ED stated that the first task is to seize as many properties as they can, not only in India, but also abroad. The agency has also directed all the accused companies — Gitanjali Gems, Gili, Nakshatra, Solar Exports, Stellar Diamonds, and Diamonds R Us — not to carry out sale and purchases at any stores or outlets of their companies. The agency has got a list of outlets (stores) of these companies that are spread across the world. These companies have 16 Indian brands and 16 foreign brands and the agency has also asked all these brand outlets not to carry out any sale and purchases.

Interestingly, the Financial Intelligence Unit and Income Tax department have been pressed into service to help the CBI unearth the whole web of fraudulent activities and transactions carried out by the banks in providing loans to these companies. The agencies have been asked to seize all properties associated not only with the accused, but also their relatives. "We have been given clear direction from the Ministry of Finance to seize all properties of the accused companies and people," said a senior IT officer, adding that they have also been entrusted to probe quid pro quo in the case.

The investigating agencies found that it was more than just a failure on the part of PNB, which issued several Letter of Undertaking (LoU) and Letter of Credit on behalf of which Modi and Choksi took money from foreign branches of India-based banks. The CBI found that a total 293 Letters of Undertaking (LoU) and 224 foreign letters of credit were issued. The CBI said that the cheating and fraud happened during 2017 and 2018.

The agency stated that the Reserve Bank of India (RBI) prescribes that credit for import of semi-precious and precious stones, including pearls should not be more than 90 days. However, in most cases, the credit allowed under referred LoUs are much beyond 90 days. "For outstanding buyers' credit, the LoUs are established for about 360 days ab-initio. This should have evoked suspicion in the minds of overseas branches of Indian banks extending credit to buyers. These banks never raised any alarm on violation of RBI guidelines and continued to provide funding against fraudulent LoUs," said a senior CBI officer.

The agency found that PNB employees fraudulently issued letters of undertakings on behalf of firms — Solar Exports, Stellar Diamonds, and Diamonds R Us — that is owned by Nirav Modi, for availing of buyers' credit from overseas branches. The same branch officials fraudulently issued LoUs and foreign letters of credit to companies — Gitanjali Gems, Gili, and Nakshatra — belonging to Mehul Choksi.

"But interestingly, none of the transactions was routed through the core banking system (CBS), thus avoiding early detection of fraudulent activity," CBI spokesperson Abhishek Dayal told DNA.

He further said that the modus operandi with regard to the foreign letters of credit is that they were opened initially for smaller amounts by creating purported entries in core banking solution (CBS) system and sending the relevant foreign letters of credit through SWIFT messages.

"The accused bank official, pursuant to the conspiracy, unauthorisedly and dishonestly enhanced the value of foreign letters of credit manifold and issued amendments to the said letters of credit through SWIFT messages, without recording them in CBS, which led to the overseas branches of Indian banks discounting the bills submitted by the beneficiary suppliers," he said.

The agency stated that bank officials deliberately did not make entries in CBS and purportedly issued LoUs and foreign Letters of Credit to 'avoid detection'.

MONEY TRAIL

• Sources in the ED stated that the first task is to seize as many properties as they can, not only in India, but also abroad. 
   
• CBI has sought info from the immigration department, pertaining to the movement of all four accused

 
Mehul Choksi