A public sector bank in India has reported a Rs. 11, 400 crore ($2,24 billion) scam involving fraudulent transactions that amount to roughly one-third of the bank’s total market capitalisation.
Punjab National Bank on Wednesday informed the stock exchanges in India that some select the account holders at the bank’s Branch in Mumbai had carried out fraudulent transactions using the bank’s Letters of Undertaking for their own benefit with the connivance of some bank officials.
The alleged fraudster had opened a letter of undertaking at the Fountain branch of the bank in Mumbai in 2011.AnLoU is a bank guarantee which means an agreement by the bank to unconditionally repay the principal and interest on a client’s loan. The client could be an importer who uses funds or credit limit with an Indian bank to get cheaper foreign currency loans.
In the current case, a deputy manager at the bank allegedly used his access to the SWIFT messaging system used by banks for overseas transactions to authenticate guarantees given on LoUs without any sanctions. These unsanctioned authentications allowed the end beneficiary to access forex credit from overseas branches of several Indian banks.
In a complaint to India's central investigating agency, the bank has alleged that Nirav Modi, a well-known Indian businessman and a jewellery company carried out the fraudulent transactions. Nirav Modi is the founder of $2.3 billion Firestar Diamond and counts among his clients and brand ambassadors several world-renowned celebrities. He has boutiques across three continents - in London, New York, Las Vegas, Hawai, Singapore, Beijing and Macau.
The embezzlement was discovered when the earlier LoUs matured and the overseas branches of the banks did not get their money. When the banks approached the PNB, it told them the LoUs were fraudulent.
This is said to be one of the biggest fraud cases to hit the Indian banking system. The stocks of the Punjab National Bank plunged nearly 10 per cent after the news of this colossal embezzlement broke.
The bank has suspended ten employees and referred the case to India’s Central Bureau of Investigation and the Enforcement Directorate to look into money laundering.
