Why the Nirav Modi case invokes a sense of deja vu

Given parallels between the frauds perpetrated by Jatin Mehta, a CBI-chargesheeted diamond and jewel trader, and Nirav Modi, shouldn’t banks have exercised due diligence in the latter case? 

Any fraud involving Rs 11,500 crore ($1.77 billion) certainly qualifies to be tagged as the largest financial swindle in India’s banking history. It also calls for an urgent revamp of the checks and balances in the system which allows a crime of this magnitude to take place without detection. The mega defrauding of Punjab National Bank (PNB) by the companies run by the suave and well-connected diamond and jewellery trader, Nirav Modi will long be remembered as an unfortunate example of how lax processes can be exploited by those with criminal intent.

The scam itself has unleashed a political blame game between the Bharatiya Janata Party (BJP) and the Congress. The former has been alleging that it dates back to when the “devious” United Progressive Alliance (UPA) was in power, while the latter has been maintaining that the Nirav Modi-PNB scam is one that took place under the present BJP-led government.

It has been a no-holds barred PR battle fought on television and the social media which the BJP is slowly but surely losing. The FIR filed by the Central Bureau of Investigation (CBI) in the case is certainly not helping the government’s cause. It clearly reveals that a majority of the dubious transactions listed took place in 2017 and not since 2011 as alleged. So, there is little by way of substantive proof that BJP spokespersons can offer to establish that this was a UPA era scam which recently surfaced. In desperation every small strand of information from the past is being mined to prove Nirav Modi’s links to Congress leaders. But that is obviously not working since the facts don’t add up.

How PNB was defrauded

But what is the Nirav Modi-PNB scam all about? Like many other frauds this one too was simple in its execution. It has now come to light that all it took was for a deputy manager and a clerk in PNB’s Brady House branch, Mumbai to be compromised to script the billion-dollar scam. The duo issued several Letters of Undertaking (LoUs) to Nirav Modi’s companies and banks abroad without going through the due process of securing cash as security or other collaterals.

An LoU is a guarantee issued by one bank to another in which it agrees to meet its customer’s credit liability and is used to facilitate payments abroad. Such an undertaking by a bank ensures that a company can avail of credit to make payments in forex for import orders it places in a foreign country. In a typical case a company which has secured an LoU can go to the bank specified in London or New York and seek credit which will be issued on the strength that it will be paid back by the bank issuing the LoU.

In PNB’s case the LoUs were all encashed by Modi’s companies in various branches of Indian banks abroad. They willingly offered credit on the undertaking that had ostensibly been given by PNB. Moreover, the bank officials in Mumbai who had connived with Modi had even sent detailed instructions relating to the LoUs issued through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system which is honoured by banks internationally and treated as a confirmatory note.

But higher ups in PNB were unaware of any such commitment because the LoUs were fake in the first place. To make matters that much more opaque and convenient for the fraudsters, the SWIFT system is not directly linked to PNB’s central computer grid since the two are not compatible. As a result, the commitments made over SWIFT were not taken note of by senior officials.

The entire scam finally came to light when Modi’s companies demanded fresh LoUs from the same Brady House branch of PNB. They were asked by an official to furnish cash as security. To which they said that it may not be necessary since they were issued LoUs without any collateral in the past. That set the alarm bells ringing and the entire scam came to light following an in-house investigation.

Enforcement Directorate (ED) officials familiar with investigations into bank scams in the recent past are not exactly surprised at the ease with which PNB was defrauded. They say that something like this was waiting to happen given that banks and the financial sector in general are slow to learn from past mistakes.

Like Mehta, like Modi

They point out that it was only two years ago that another diamond and jewel trader with high connections, Jatin Mehta, had successfully evaded the law after owing banks close to Rs 7,000 crore. Mehta and his flagship firm, Winsome Diamond and Jewellery Ltd, had obtained SBLCs (Standby Letters of Credit) from a consortium of Indian banks led by Standard Chartered Bank for that amount which the company later failed to honour.

There are some close parallels between the frauds perpetrated by Mehta and Modi. The SBLCs issued to Winsome were bank guarantees, similar to the Letters of Undertaking (LoUs) that Modi secured fraudulently from PNB. In Winsome’s case, the guarantees were given to three bullion banks – Standard of South Africa, Standard Chartered London, and Scotiabank of Canada which were supplying gold to Winsome on credit. The undertaking was that if the company failed to honour its committed payments, then the Indian banks would have to pay up for the bullion supplied.

Winsome’s declared line of business involved buying gold in the international market and converting it into jewellery in India and then selling it abroad. The company came into the news in 2013 after it began defaulting on payments claiming it had run up huge losses caused by distributors in the UAE failing to pay up $ 700 million owed to it. However, a probe by a New York-based risk management agency commissioned by Standard Chartered concluded that the reasons cited by Winsome were not credible. The probe noted that speculation was rife that the bullion had been sold and the monies routed back to India and invested in the construction industry and other sectors.

Even though the case came to light in 2013, it was only in April 2017 that the CBI finally filed cases against Winsome Diamond and Jewellery Ltd and its promoter Jatin Mehta. But much before that – investigators suspect in 2014 – Mehta and his wife Sonia had fled the country to take up citizenship in the Federation of St Kitts and Nevis, a tax haven in the Caribbean which has no extradition treaty with India. The couple now run a business in the UK and shuttle between Singapore, London, Europe and the US and are known to maintain Swiss bank accounts.

Were the Mehtas allowed to flee the country? There are those who suspect that the couple must have been given safe passage and could not have fled the country without the knowledge of the investigating agencies. It is also pointed out that despite the low profile that the Mehtas maintained they were well connected and influential. For instance, their son Suraj is married to Krupa, the daughter of Vinod Shantilal Adani, the brother of Gautam Adani, who is perceived to be close to senior BJP leaders including the Prime Minister.

According to a former ED official, given the Winsome case and its embarrassing fallout, banks should have exercised due diligence when dealing with people in the diamond and jewellery trade. “The minute PNB came to know of the fraud it should have acted. The CBI should have nabbed whoever it could lay its hands on. If Nirav Modi was abroad it could have at least detained his associates still in India. Hopefully the case won’t go the Winsome Diamond way with all those wanted giving up Indian citizenship and moving to some tax haven beyond the reach of Indian law,” he says.

As of now Nirav Modi is reportedly in the US. He left on January 1 with his brother Nishal, a Belgian citizen. Modi’s wife Ami flew out on January 6 and his uncle and partner Mehul Choksi two days before that. The last available photograph of Nirav Modi was clicked on January 23 in which he is seen in a group photo of Indian CEOs with the Indian Prime Minister at Davos.

It remains to be seen if Nirav Modi will be brought to justice. Or will he join his other billionaire brothers in exile – Vijay Mallya, Jatin Mehta and Lalit Modi…

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