Is fraud at PNB tip of an iceberg?

An initial complaint of an alleged fraud involving an amount of Rs 280 crore at Punjab National Bank (PNB) last month has ballooned into a massive Rs 11,000 crore fraud and may run into Rs 20,000 crore.

Government officials warned that the amount and numbers of banks involved may go up.

"This fraud amount could reach more than Rs 20,000 crore as other banks record are under scrutiny process," a corporate affairs ministry source told DNA Money on condition of anonymity.

It all started when on January 16, Diamond R US, Solar Exports and Stellar Diamonds approached the PNB's Brady House branch in Mumbai, presented import documents and asked for buyer credits for making payment to the overseas supplier.

According to the complaint, Nirav Modi, Nishal Modi, Ami Nirav Modi and Mehul Choksi were partners in these firms. However, Choksi, in his February 7 statement said he had no dealing with Solar Exports and Stellar Diamonds and had retired from Diamonds R US in 1999.

His firm Gitanjali Gems on Wednesday said its managing director MehulChoksi has been "falsely implicated" in a Rs 280 crore cheating case and will take legal steps to remove his name from the list of accused in the FIR.

There was no sanctions limit against all these four firms. So the bank official concerned asked them to submit at least 100% margin to get letter of undertakings (LoUs).

LoU is a sort of guarantee given by a bank on behalf of the client to another bank.

The firms claimed that they have been availing such facilities in the past too. But the bank did not have any record of such kind of facility.

Investigations by the bank found that the alleged fraud was being done through LoUs issued to a bunch of alleged fraudsters, especially related to jewellery business, without any entry into the system of the bank and discounted abroad through three other banks.

Further PNB probe found that two of its officials had facilitated LoUs in the past by circumventing rules. A bank official Gokulnath Shetty, who retired in May 2017, and posted at the branch since last eight years, had fraudulently allowed such credit without any documentation with the help of another official Manoj Kharat. They made a swift instruction to foreign branches of Indian banks for raising buyer's credits. These funds were raised for the payment of import bills, but were not used for that.

A source told DNA Money that PNB was planning to issue a press statement, but deferred it for two-three days as the internal investigation was going on and a much bigger scam was waiting to be unearthed.

In its original complaint, PNB said that five LoUs were issued in favour of Allahabad Bank at Hong Kong and three LoUs were issued in favor of Axis Bank at Hong Kong.