Awaiting the second phase of his extradition in the multi-crore scam, Nirav Modi is currently cooling his heels in London’s Wandsworth prison ever since his arrest in March 2019. He is currently set to appear before the court next month via video-link after his 7th bail application was rejected on 26th Oct 2020, as he is deemed a flight risk. An Interpol global arrest warrant has been issued against his wife Ami Modi as she was found to be the beneficiary of a purchase of 2 apartments at Central Park in New York. Interpol has issued a Red Corner Notice (RCN) against his brother Nehal, who allegedly shifted employees, on whose names several shell companies were being run, from Dubai to Cairo, after destroying cell phones, laptops, and servers. These persons, employees of Nirav Modi Group companies, were forced to sign certain documents to show that they were the real owners of those companies in Dubai and Hong Kong, which were shown as engaged in export and import with the three accused firms -- Diamonds R US, Solar Exports and Stellar Diamond -- all controlled by Nirav Modi, the CBI has alleged.
Interpol has also issued a red corner notice against Purvi Modi, a Belgian national and Nirav Modi's sister along with Mihir R Bhansali, a top executive of Modi’s US business concern. Mehul Choksi of the Geetanjali Group along with his nephew Nirav Modi are being investigated by the Enforcement Directorate and the Central Bureau of Investigation on charges of perpetuating the largest scam in Indian financial market history. Special Judge V C Barde permitted the Enforcement Directorate (ED) to confiscate those assets owned by Nirav Modi that are not mortgaged or hypothecated to the PNB. The court, in its order, said the assets shall be attached by the ED under the provisions of the FEO Act. The agency till now has attached assets worth Rs 2,348 crore of Nirav Modi under the Prevention of Money Laundering Act.
Modi primarily used a financial instrument called a Letter of Undertaking which, in the international banking system, is a provision of bank guarantee, under which a bank allows its customer to raise money from another Indian bank’s foreign branch in the form of a short term credit. The LoU serves the purpose of a bank guarantee.
He also inflated the value of the diamonds by buying and selling them at inflated prices between shell companies registered under the names of close relatives, all controlled by Modi.
The Brady House branch of Punjab National Bank, India's second-largest Public Sector Bank is guilty of gross negligence which led to the 13700 crore scam by the Modi-Choksi companies. The failure to comply with existing banking security procedures include:
The basic rule for issuing a letter of undertaking in case of high-value LoUs is cleared and vetted by senior bank officials which was not followed by PNB.
The process of sending the LoUs through swift involves 3 banking officials who act as “maker”, “verifier” and “authoriser” and are required to use 3 different login IDs and passwords, but at PNB only 1 staff below the expected rank had acted in two capacities.
All SWIFT transactions are done thru the CBS which records all transactions of all bank branches that are involved in the process. The PNB branch had delinked CBS from SWIFT transactions by fraudulent bank officials, this was failed to be detected for 7 years.
For all high-value LoUs reports of CBS-SWIFT transactions are done daily, this was missing in the case of the LoUs issued for Nirav Modi.
The foreign branch of the lending bank which issues the actual loan writes to the controlling office of the issuing bank to confirm the realisation of the LoUs. The branch of PNB claims that it received no such request from the lending foreign branch.
Cascading effects of PNB scam on Indian economy
Nirav Modi’s fraud case has not only affected his company and the Punjab National Bank but in fact, has impacted the jewellery and banking industry as a whole.
The most immediate effect of the scam coming to light would be its effect on the stock market. The share value of Geetanjali gems fell by 18%, PC jeweller’s stock by 19.5%, and Tangamayil jewellery by 2%.
The banking sector was also hit with Unions banks stock falling by 8.5%, Allahabad bank by 11%, Axis, and SBI by 4.4% and 5.75% respectively. In the wake of this scam, many banks have run internal audits and reviews and are more conscious and suspicious of their clients especially businessmen. Oriental Bank of Commerce and Bank of Maharashtra filed two new complaints of loan fraud with the CBI soon after the PNB scam came to light.
Possible privatisation of state-run banks:-State run Indian banks have the highest ratios of bad loans in the world, which risks the availability of loans that are much needed for small and medium-size businesses. Privatisation might help Indian banks to combat problems existing in state-run banks.
The diamond business may shift to Belgium or Israel:- a scam of this magnitude has shaken the diamond industry, as it is widely said that 14/15 diamonds in the world are polished in India. The damage caused to the image of the Indian diamond industry may cause the chuck of the polishing industry to shift to other countries which may deprive the Indian GDP of a large figure.