Table of Contents
Introduction
Nirav Modi Scam or The Punjab National Bank (PNB) scam of ₹11,356.84 crores is being dubbed as the biggest fraud in India’s banking history. what actually happened in PNB Fraud or Nirav Modi Scam, the man behind it, and how the diamond mogul was able to siphon billions from the country.
Who is Nirav Modi?
Nirav Modi is a luxury diamond jeweler and Designer who was featured on listed containing the diamond kings of India. He was also ranked 57th in the Forbes list of billionaires for 2017. Nirav Modi was born into the diamond business in Gujarat but was bought up in Belgium.
Life
Born in a family of diamond merchants in Palanpur, Gujarat on 27th February 1971, Nirav Deepak Modi moved to Antwerp, Belgium soon afterward. Modi took admitted to the Wharton School, University of Pennsylvania but later dropped out of the same. At the age of 19, Modi and his father Deepak Modi returned back to India and shifted to Mumbai to join his uncle Mehul Choksi and his Gitanjali Group, which was a retail jewellery company with approximately 4000 stores in India. Later, Modi married Ami Choksi, the daughter of diamond businessman Amukuraj Choksi, whom he had met during his Wharton School days.
The following achievements and accolades testify to his excellent business skills:
- In 2010, Modi became the first jeweller hailing from India to be featured on the esteemed covers of Christie’s and Sotheby’s catalogs.
- In November 2010, at a Christie’s auction in Hong Kong, the Golconda Lotus Necklace, owned by Nirav Modi, featuring a rare 12.29-carat Golconda diamond, pink diamonds, and exclusive Aindra cut diamonds, was sold for a staggering price.
- Afterward in 2012, the ‘Riviere of Perfection’, a solitaire collection that was an integral part of the Nirav Modi Jewellery collection and which featured 36 flawless white diamonds and weighed a total of 88.88 carats was sold again at Sotheby’s auction in Hong Kong.
- In 2013, in the prestigious Forbes list, Nirav Modi got featured in the Forbes list of Indian Billionaires.
- Nirav Modi also owned the Patents for Jasmine cut diamond, United States Design Patent USD763118S1, United States Design Patent US D738,777 A, Jewellery Design
In 1999, Nirav Modi founded the Firestar Diamond International Company specializing mainly in high-end jewellery. Further, in 2014 ‘NIRAV MODI’ the brand was born with its first store opening in New Delhi, India. In 2015, Nirav Modi opened stores in Mumbai, Madison Avenue – New York, and Hong Kong. His company is claimed to have made more than $2 Billion in sales. He also has other companies in the name of Solar Exports, Stellar Diamonds, and Diamond R US.
Family
Nirav Modi is married to Ami Modi and they have three children, two daughters, and one son, viz. Rohin, Apasha and Ananya. His wife Ami Modi, brothers Neeshal Modi and Nehal Modi, uncle Mehul Choksi, sister Purvi Modi etc are all getting investigated by the ED Enforcement Directorate for scam, fraud, and money laundering.
Net worth
Before the PNB Scam hit the headlines in 2018, Nirav Modi was estimated to have a net worth of $1.7 billion. Post the fiasco becoming public, his net worth dropped like an inevitable avalanche and Forbes too removed his name from their list of billionaires.
How did Nirav Modi Pull Off the Scam?
The scam which broke out in 2018 had begun way back in 2011. In order to pull off the scam, Nirav Modi made use of a banking instrument known as the LOU (Letters of Undertaking). An LoU acts as a bank guarantee where its customers can raise short-term loans. These loans can be raised from Indian banks’ foreign branches established overseas.
As Nirav Modi imported diamonds from foreign countries it meant that he had to deal with foreign currencies. For this, he had to approach foreign branches of Indian banks for loans that were received at cheaper rates. But what collateral does he have here? This is where LOUs step in. Nirav Modi approached PNB for an LOU which was used as collateral for these short-term loans.
These LOUs, however, are supposed to be given out only when the client has collateral in the domestic bank issuing the LOU. But PNB ignored these requirements and gave out the LOUs on Modi’s guarantee
As these loans were for the short term on their due date Modi was asked to pay back the loan by the foreign branches. But this is where Modi extended the scam. He simply took another LOU from Punjab National Bank of a higher amount. This was used to pay back the old loan and the additional amount was reinvested. Talk about a Ponzi scheme mechanism. By 2018 Nirav Modi had received 1,212 more such LOUs.
His plan, however, was working! Modi had grown his business in a span of 5 years which would otherwise have taken 20 years. But how was he going to pay back all the debt? Modi had planned to eventually list his “successful” company, with securities being sold at a premium. These funds would then be used o pay off the billions in debt.
But unfortunately, in 2018 when the employees of his companies(Diamonds R Us, Solar Exports, and Stellar Diamonds) approached PNB once again for LOUs the bank employees demanded 100 percent cash margins. Nirav Modi’s firms contested this requirement. They claimed that they had availed LOUs without collateral before.
This led the PNB officials to finally take a closer look at their accounts after which they first found irregularities of Rs. 280.7 crores and immediately lodged an FIR with the CBI for fraudulent LOUs issued. As the officials dug deeper, by May 18, 2018, the scam had ballooned to over Rs 14,000 crore.
The Fallout After the News of the Scam Broke Out?
By the time the news broke out Nirav Modi, his wife, younger brother, and Mehul Chowksi had already fled the country. The brunt of the scam fell on the Indian banking sector as although the loans were taken in other countries they were taken from Indian banks. Eventually, the government had to once again step in to save the banking sector.
Several PNB officials were arrested. Top PNB officials claimed that the scam took place as few PNB employees were involved. They also stated that the scam was possible due to the irregularities in the banks’ SWIFT systems. But these charades were impossible to buy as billions could not simply disappear from the bank without top bank officials being involved.
The most interesting turnaround in the case occurred when news broke out of the whistleblowing attempts that took place. These attempts were made by jeweller Hari Prasad. He had sent detailed letters of the scam taking place to the PM’s office back in 2016, highlighting PNB and urging action. These letters were simply acknowledged by the PMO and transferred to the Registrar of Companies.
The RoC simply disposed of the case. This led to the scam taking a political turn. The Opposition blamed the Modi government for being an accomplice. The Modi government, on the other hand, blamed Congress as the initial LOUs were issued when they were in power.
Legal Aspects of the Nirav Modi PNB Scam
- Central Bureau of Investigation (CBI) – (Section 120B) Criminal conspiracy – Indian Penal Code, 1860 – If convicted shall be punished in the same manner as if the convict has abetted such offenses.
- (Section 409)Criminal breach of trust by a public servant, merchant, banker or agent – Indian Penal Code, 1860 – If convicted shall be punished with imprisonment for life, or with imprisonment of either description for a term which may extend to ten years, and shall also be liable to fine.
- (Section 420)Cheating and dishonestly inducing delivery of property – Indian Penal Code, 1860 – If convicted shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.
- Corruption charges under Section 7A and Section 8 – Prevention of Corruption Act, 1988 – If convicted shall be punished with imprisonment for a term which shall not be less than three years and may extend to seven years or with a fine or with both
- (Section 201)Causing the disappearance of evidence – Indian Penal Code, 1860 – If convicted shall be punished with imprisonment of either description for a term which may extend to three years, and shall also be liable to fine.
- (Section 506)Criminal intimidation to cause death – Indian Penal Code, 1860 – If convicted shall be punished with imprisonment of either description for a term which may extend to seven years, or with a fine, or with both.
- Enforcement Directorate (ED)- Money laundering charges under Section 3 and Section 4- Prevention of Money Laundering Act, 2002- If convicted shall be punished with rigorous imprisonment for a term not less than three years but which may extend to seven years and shall also be liable to fine