Indian Banks Tumble After $2 Billion Fraud By One Of India's Richest Men Emerges

Indian authorities have uncovered a $2 billion banking fraud involving one of the country's 100 richest men, a jeweler who made his name dressing Hollywood and Bollywood actors including Kate Winslet and Priyanka Chopra. His name is Nirav Modi, and on Friday shares of the Punjab National Bank - or PNB - plunged after federal investigators first unveiled their findings in a fraud investigation.

In its complaint to India's the Central Bureau of Investigation, PNB alleged that the fraud was led by Nirav Modi, a jeweler who’s dressed Hollywood and Bollywood actors including Kate Winslet and Priyanka Chopra. Modi’s No. 85 on Forbes’s 2017 list of India’s richest people and, at 47, is one of the youngest names on that list, according to Bloomberg.

The scheme also involved Mehul Choksi, whose Gitanjali Group of companies was intimately involved in the fraud.

PNB on Friday said it had filed complaints against Mehul Choksi’s Gitanjali Group of companies. These include Gitanjali Gems Ltd. and PNB alleges a 49 billion rupee (nearly $800 million) loss from Choksi’s companies, CBI spokesman Abhishek Dayal said in a text message.


Nirav Modi

PNB also claimed that Modi and Choksi worked with a former PNB employee, Gokulnath Shetty, who was posted at a PNB branch in Mumbai from where the fraud originated. Shetty was a deputy general manager in the bank's FX department.

Shelly was instrumental in helping Modi and Choksi pull off the heist.

The details of the scheme will sound familiar to anybody who has read our coverage of China's "ghost collateral" scandal: Modi and his collaborators secured fake guarantee letters from PNB bank, used over a period of roughly six years to secure some $2 billion in loans from overseas branches of Indian banks. During the scheme, several fake guarantee letters were issued by PNB - all without evidence of collateral - that were then used to secure the loans.

The schemers allegedly then bypassed the lender’s internal messaging system in order to avoid detection, and placed instructions via the Swift global payment system asking overseas branches of Indian banks to pay out cash in the form of "secured" loans. The exact details of how this played out haven't yet been made clear.

And the scheme probably would've continued, if it hadn't been for those pesky federal regulators.

Indeed, the scam was uncovered when Modi approached the bank about securing a new loan for its company. But Shetty - his man on the inside - had retired, and his successor declined to honor Modi's request. In an incredibly brazen move, Modi - who had apparently become too comfortable with the success of his scheme - contested the bank's decision to deny him another guarantee.

"At this, the firms contested that they have been availing this facility in the past also but the branch records did not reveal details of any such facility," PNB said in the complaint.

It was only then that the bank and investigators discovered fake letters of undertaking and filed an initial complaint alleging a $44 million fraud. Two weeks later, it filed another complaint covering transactions worth about $1.8 billion, according to people familiar with the matter.

The exposure of the scheme - and the realization that the loans would never be repaid - sent PNB scrambling to try and pin some of the exposure on its counterparties, the overseas branches of Axis Bank and Allahabad Bank.

PNB has alleged that the money was used either to retire import bills or replenish maturing lines of credit with some other banks, according to the document seen by Bloomberg. In its public complaint, PNB names the Hong Kong branches of Axis Bank Ltd. and Allahabad Bank as the overseas counterparties.

Allahabad Bank has exposure of about 40 billion rupees while Axis Bank has a roughly 30 billion rupee exposure, a person familiar with the matter told reporters in New Delhi. Union Bank has about 20 billion rupee exposure with rest accounted to State Bank of India, the person said, asking not to be named as the information isn’t public.

"Allahabad Bank has raised claims of two tranches of $26 million each from Punjab National Bank for underwriting the letter of credit," the Mint newspaper reported citing Usha Ananthasubramanian, managing director at Allahabad Bank. "We want the bank to pay up as the exposure is on PNB."

Axis Bank told the exchanges on Thursday that the transactions were undertaken in the normal course of business and credited to PNB’s nostro accounts. It added it has "sold down all of the referred transactions.”

The Reserve Bank of India has been left to disentangle the mess, and has asked for all parties involved to submit all relevant information about the loans by the end of the week.

India’s government has asked all banks to send reports involving this case or other such incidents latest by the end of this week, the Press Trust of India reported.

The banking bureaucrat Kumar told BloombergQuint that the case is an isolated one. About 10 PNB employees have been suspended pending the CBI investigation, he said. He didn’t name any of the accused.

PNB’s CEO said Modi has reached out to PNB to present a repayment plan but the bank has sought more details. Nirav Modi had left India even before the CBI complaint was filed, according to media reports that didn’t cite any people.

India’s foreign ministry on Friday said it has suspended Modi and Choksi’s passports, and the documents may be revoked if they fail to respond.

"We will seek government intervention to extradite Modi and Choksi and will not allow any settlement that leaves burden on tax payers," C.H. Venkatachalam, general secretary of the All India Bank Employees Association, said in a phone interview. "From the data we are collecting the sense is that the amount is set to become bigger."

Meanwhile, the authorities are seeking to extradite Modi and Choksi and promising that any settlement to help shore up PNB's damaged balance sheet will not saddle taxpayers with the cost of the bailout.

But we imagine that promise is about as genuine as the collateral Modi and Choksi used to "secure" their loans.