The Punjab National Bank (PNB) has charged that foreign branches of other Indian banks may also be involved in what has turned out to be the biggest fraud in the country's banking sector involving diamond trader Nirav Modi.
"There is clear criminal connivance of the group companies of Nirav Modi and Gitanjali Gems with our branch official and also, apparently, with officials of overseas branches of Indian banks," the PNB said in a detailed note sent to 30 Indian nationalized banks, a private bank and a foreign bank.
The PNB virtually accused other banks' foreign branches of not sharing with it information or documents made available to them by these Indian companies at the time of availing buyers' credit from them.
"The Buyers' Credit availed against fraudulent LoU (Letter of Undertaking) was used either to retire import bills or replenish the maturing Buyer's Credit of some other banks," the PNB said.
At the same time, the PNB has admitted to the involvement of one of its retired employees and officials of other Indian banks in the modus operandi adopted by diamond companies to dupe them.
The PNB note said "the suspected fraud had been carried out by the perpetrators in collusion with the staff" at its Brady House Branch in Fort in south Mumbai.
The note, dated February 12, was addressed to the Chairmen, Managing Directors and Chief Executive Officers of these banks, signed by the PNB General Manager, International Banking Division, New Delhi.
The PNB said that on examination of SWIFT (international payment network) trail, it was found that a junior level branch official had unauthorizedly and fraudulently issued Letters of Undertakings (LoUs) on behalf of some companies belonging to billionaire diamond trader Nirav Modi to avail buyers' credit from foreign branches of various Indian banks.
The companies were: Solar Exports, Stellar Diamonds and Diamond R Us, which only had Current Accounts and did not enjoy the privilege of any fund/non-fund based limits with the branch.
"None of the transactions were routed through the CBS System, thus avoiding early detection of fraudulent activity," the PNB's mail said. CBS is the core banking solution system which tracks all transactions.
Worse, the PNB said, the same modus operandi was used by the unidentified PNB official in other diamond majors like Gitanjali Gems Pvt. Ltd, belonging to Nirav Modi's maternal uncle Mehul Choksi, Gitanjali Gems, Gili India and Nakshatra, for issuing similar LoUs and Foreign Letter of Credit (FLCs).
However, these companies enjoyed credit facilities under the fund-based/non-fund based schemes of PNB.
In the case of FLCs, the bank's preliminary investigations made the stunning revelation that while issuing FLCs of smaller amounts by SWIFT, the transaction was routed through the CBS but "subsequently, amendments were made in these FLCs by substantially enhancing the amount of FLC and transmitted through SWIFT, without routing these enhancements through CBS," said the PNB letter.
Later, the official would convey via SWIFT the acceptance of bills for the full amount of the FLC to the overseas negotiating branch, said the PNB, clearly hinting at a possible major exposure of other banks in the fraud.
Further probe revealed that LoU's were opened in favour of foreign branches of Indian banks for imports of pearls for a period of one year although the Reserve Bank of India (RBI) guidelines stipulate a total period of 90 days from the date of shipment.
"This stipulation was overlooked by the overseas branches of Indian banks, who are also required to follow RBI guidelines," the PNB note stated.
The entire fraud came to light only after the retirement of the unidentified official and when the companies again approached the Brady House Bank for availing similar LoUs.
When the current PNB officials demanded a 110 percent margin because they were not sanctioned any FB/NFB limits, the companies informed the branch that they had been undertaking such transactions for several years!
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