Seven years after he fled India just before the discovery of an astronomical Rs 14,000 crore scam, fugitive diamantaire Mehul Choksi was arrested in Belgium on Saturday. The Belgian Justice Department on Monday confirmed to NDTV that the disgraced businessman was in detention. It further said that India initiated the request for his extradition.
The development brought back one of the biggest financial frauds in India’s banking history, involving the state-owned Punjab National Bank, into the spotlight.
What Was The PNB Scam?
In January 2018, Punjab National Bank disclosed that it had detected a massive fraud at one of its branches in Mumbai. It was initially pegged at Rs 13,500 crore before being revised to Rs 13,850 crore. It was orchestrated by celebrity jeweller Nirav Modi and his uncle Mehul Choksi, the managing director of Gitanjali Gems at the time.
This scam, involving fraudulent guarantees, bribery and international money laundering, triggered a shake-up in the country’s financial and regulatory systems.
How Did The Fraud Work?
Choksi and his nephew Nirav Modi, currently in a London jail, siphoned off nearly Rs 14,000 crore from Punjab National Bank’s Brady House branch in Mumbai. They pulled off the mega heist with assistance from bank officials.
To defraud the bank, Choksi and his nephew bypassed legal processes, inflated Foreign Letters of Credit (FLCs) and obtained fraudulent Letters of Undertaking (LoUs).
An LoU is a guarantee issued by Indian banks to help companies obtain short-term credit from overseas branches of Indian lenders. These instruments are meant for legitimate trade transactions, not general lending.
Nirav Modi and Mehul Choksi’s companies, including Firestar Diamond, Diamond R US, and Gitanjali Gems, secured a staggering number of LoUs – 1,212 of them between March 2011 and November 2017 – from PNB’s Brady House branch in Mumbai. While 53 LoUs during this period were legitimate, the rest were allegedly fraudulent.
The SWIFT System And Insider Collusion
Bank officials, including former Deputy General Manager Gokulnath Shetty, were reportedly bribed to issue these LoUs without proper authorisation, collateral or internal recording. This allowed the transactions to remain off the bank’s books.
The fraudsters exploited the SWIFT system (Society for Worldwide Interbank Financial Telecommunication) to route funds abroad without triggering alarms in the bank’s core systems. This systemic weakness, combined with internal collusion, allowed the fraud to go undetected for seven years.
Funds obtained through LoUs were funnelled into shell companies overseas, and the loans were rolled over repeatedly to disguise the mounting debt. Internal red flags were either ignored or deliberately suppressed, delaying detection.
How it was discovered
On January 25, 2018, the Punjab National Bank (PNB) submitted a fraud report to the Reserve Bank of India (RBI). On January 29, the bank lodged a formal criminal complaint with the Central Bureau of Investigation (CBI).
By February 5, the CBI had charged Nirav Modi in a multi-crore cheating case. On February 14, PNB filed another complaint with the CBI, alleging fraud involving Nirav Modi. A day later, February 15, the CBI conducted searches at Nirav Modi’s properties, including his homes, showrooms, and offices in Mumbai, Delhi, and Surat.
On February 16, PNB provided more details to the CBI, revealing that 150 fraudulent Letters of Undertaking (LoUs) had been issued by its officials to Nirav Modi and others involved in the scam.
Systemic Oversight Failures And Auditing Lapses
The RBI had a hands-off approach to bank inspections, focusing on broader systems instead of the specifics of individual operations, NDTV reported back in 2018. In Punjab National Bank’s case, 18 different auditing firms were used over seven years, preventing any deep, sustained examination.
While auditors did meet with key figures, including Gokulnath Shetty, their reports from 2011 to 2017 did not point to anything amiss or alarming. At the time, the RBI had not enforced integration of core banking systems with the SWIFT network, a loophole exploited in the PNB fraud.
The Key Accused: Nirav Modi And Mehul Choksi
Nirav Modi, an internationally known jeweller, owned Firestar Diamond and partnered with several other diamond firms.
Mehul Choksi, his uncle, headed Gitanjali Gems, one of India’s largest jewellery retail chains.
Both are accused of masterminding the fraud, exploiting regulatory loopholes, and fleeing the country before the scam was exposed. Nirav Modi was later located in the UK, where he is fighting extradition to India.
Mehul Choksi had been on the run, until his arrest in Belgium on April 12, marking a turning point in the long-standing investigation.
Why Did The Scam Remain Hidden So Long?
The PNB scam revealed serious flaws in the bank’s internal monitoring and compliance systems. By not integrating SWIFT communications with core banking software, and relying on a few insiders for foreign exchange operations, PNB inadvertently created an environment ripe for exploitation.
Over time, the fraudulent activities became systemic – the debt was hidden through constant loan rollovers, and internal audits failed to flag the discrepancies.
The Aftermath And Reforms
The PNB scam led to wide-ranging reforms in India’s banking sector. The issuance of LoUs was banned for a period, SWIFT systems were better integrated with internal software and banks were urged to strengthen internal checks.
