Investors worldwide got quite a scare from India’s Punjab National Bank (PNB) with the announced discovery of $1.8 billion in fraudulent activity at one of its branches, according to Reuters reports. The bank said in a statement that “a few select account holders” appear to have been involved.
One of those account holders is jeweler Nirav Modi, famous for bedazzling the rich and famous around the world.
PNB has filed an official complaint with the Central Bureau of Investigation accusing Modi of using a series of fraudulent shell companies to snap up PNB guarantees worth 100 billion rupees ($1.6 billion USD). Those funds appear to have been used to receive more loans from abroad, according to sources that requested to remain anonymous.
The bank further alleges that Modi took advantage of the inexperience of junior banking personnel to receive the letters. A case has already been filed against him by PNB claiming he was behind 2.8 billion rupees in fraud and noting the financial institution would check to see if the impact ran deeper.
Today’s announcement to the exchanges confirmed the fraud was on the order $1.8 billion USD and was detected at a single branch in India’s financial hub.
Thus far, Modi has made no public comment on the case. As of the end of January, PNB had officially asked investigators to issue a “lookout notice” so Modi and his alleged accomplices “may not leave the country to avoid [the] process of law against them.”
The complaint alleges Modi — aided by his wife, brother and “other unknown persons” — sought and obtained letters of understanding from PNB in 2010 without following due procedure. Modi claimed the funds were used to pay import bills, but PNB alleges the funds were used for other unspecified purposes.
The case came to light when Modi’s companies sought a fresh loan last month and were forced to work with a new official as their former connection had apparently left the bank. When PNB requested a 100 percent cash margin to issue the letters of understanding, Modi’s companies pushed back and insisted they had used the facility before without the requirement.
This made PNB curious enough to investigate.
“So far, there is no clarity on the impact on the lender’s bottom line from this,” said Ashutosh Kumar Mishra, a Mumbai-based banking analyst at Reliance Securities Ltd. “There is no clarity on whether these transactions are reversed, whether the bank is holding collateral that could back part of these transactions or whether enforcement authorities will be able to recover this amount.”
The case points to ongoing concerns about the security and stability of India’ banks, which are currently also saddled with one of the worst bad-loan ratios among big economies. It will also create massive challenges for CEO Sunil Mehta, who took charge last May approximately a year after PNB was one of 12 lenders fined for violating rules on some $1 billion in foreign exchange-related deals.