Atul Khurana

Atul Khurana

The hot topic of these days is PNB scam. Everyone is sharing on social platforms that PNB is involved in the fraud of Rs. 11,500 crores approx. but everyone is not aware about the way it has happened.

So, let us discuss about the one of the biggest scams of the country, The PNB Fraud or Say PNB Scam.

**For the purpose of this article, Foreign Bank means “Foreign branch of an Indian Bank”

Before proceeding further, we should know about the LoU i.e. Letter of Undertaking:

Letter of Undertaking (LOU): In simpler terms, it means an agreement between the following:

1) The person who is importing some goods (importer) from foreign market and

2) An Indian bank

The process of LoU is as follows:

1) An Indian person who wants to import some goods will need foreign exchange (foreign currency) for the payment.

2) That importer will then approach an Indian bank of his choice (where he is having the account) and ask the bank for the payment on his behalf.

3) The Indian bank will ask for the sufficient collateral security and issue a letter of undertaking on behalf of importer which will be used by the importer for import of goods by giving that letter to the supplier.

4) The supplier in turn handover the goods to the importer and then approach his bank for the payment and in turn the foreign bank will approach the Indian bank for the payment.

5) The Indian bank will pay the amount to the foreign bank and then will approach its client (importer) for the payment.

In this way the process of LoU takes place.

NOTE: As per the guidelines of the RBI, an Indian bank can issue LoU for maximum period of 90 days.

Now what has happened in this case:

The accused importer approached the Punjab National Bank (Mumbai Branch) for the agreement regarding Letter of Undertaking and the bank had issued the same to the importer after signing the agreement.

There were two major flaws in the agreement:

1) The collateral security was missing i.e. the agreement was entered without the consideration of any security.

2) The LoU was issued for 1 year i.e. they had violated the directions of Reserve Bank of India because the maximum period for which it can be issued is 90 days.

The Role of Bank in the fraud:

As you have read above that the bank had entered into the flawed agreement and still the agreement has executed. For understanding the same, let us understand one more term i.e. SWIFT.

Meaning of SWIFT: Society for Worldwide Interbank Financial Telecommunication code.

It is an internationally-recognized identification code for banks around the world.

SWIFT codes are most commonly used for international wire transfers and are comprised of 8 or 11 alphanumeric characters.

Working of SWIFT:

Whenever an Indian Bank issues LoU then the Bank has to communicate about the same to the foreign bank of the supplier via SWIFT that they (Indian bank) has undertaken the guarantee for the payment of money on behalf of importer.

Before communicating the same,the Indian Bank has to record this transaction as a Liability in their books of accounts.

Now what has happened in this case:

Some of the officials of Punjab National Bank entered into the flawed agreement with the intention of the fraud as I had mentioned above and after issuing the LoU which was against the law and the rules of RBI, the bank officials had communicated to the foreign bank that they i.e. PNB has undertaken the guarantee for the payment but the major fraud was: No such accounting entry was booked/recorded as Liability in the books of accounts of the bank. This means as in reality there was no such liability for the Punjab National Bank for the payment and the LoU was fake.

When the foreign bank approached the Punjab National Bank for the payment then PNB had checked their books of accounts and denied the payment as no such accounting entry was there in the books.

But in reality, the foreign bank was in the possession of Letter of Undertaking.

Then the Punjab National Bank has approached the investigation authorities so as to find out what exactly has happened and from the investigation the whole fraud was detected.

The fraud could have been prevented:

The foreign bank should have examined properly that the LoU was issued for more than 90 days and it was against the law but they had mistaken too. So, in another way they are also responsible for the same.

Accused Parties:

1) Nirav Modi

2) Mehul Choksy, Partner of Nirav Modi

3) Ami, Wife of Nirav Modi

4) Nishal, Brother of Nirav Modi

Bank Personnel who were involved:

1) Gokulnath Shetty

2) Manoj Kharat

Action taken by the CBI (Central Bureau of Investigation) & ED (Enforcement Directorate):

The Raid has been conducted at total 9 places till now out of which 3 units are located in Surat, 4 in Mumbai and 2 in Delhi. The property pertaining to Nirav Modi including his residential property at Mumbai has been sealed by the authorities, in total amounting to Rs. 1300 crores.

Also the passports of all the accused persons has been suspended/in the process of suspension.

The new information which is in the air is that there are various other properties of Nirav Modi in New York, Malaysia and other countries.

(For any queries in the above mentioned article, the author can be contacted at [email protected])

Also Read-

No instructed PNB to meet its commitments under LOU: RBI

PNB clarifies on alleged Scam by Nirav Modi and Gitanjali group

PNB issue Caution Notice in Suspected Fraud case

Steps initiated by ICAI on Punjab National Bank Matter

Author Bio

Qualification: CA in Job / Business
Company: PwC AC Kolkata
Location: Panchkula, Chandigarh, India
Member Since: 12 Jun 2019 | Total Posts: 33
Published Author - An Insight Into Tax Audit by Young Global Publications, New Delhi View Full Profile

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  1. C R Shetye says:

    Good explanation!
    However, an important point has been missed. The report says the issuance of LoU started in 2010. Assuming it was for one year, the foreign banks must have requested for payment after one year, did PNB pay the amount, if yes from which account? If no, why did the foreign banks did not raise an alarm?
    Most important point is, how come it was not detected at either end, PNB or foreign bank, by the auditors?



  3. Soumya Prakash says:

    You point out that RBI guidelines only permit LOU with a maturity period of 90 days. Can you kindly mention the Guideline number or provide the link to the same.?

  4. Jatin says:

    Explained the terms and procedure very good. But I have question about, how they are doing this process since long from 2011 and there is also a fact that they are taking buyers credit and repaying it, though it was without collateral security. It was came to know when the said official of PNB was retired and this process was again started then the new official of PNB asked to give some collateral security, then they said we are doing this in past without any security. And alarm bells.

  5. mittal says:

    Respected Sir,
    Here one more flaw at the level of foreign bank, before giving any credit/amount/facility to Nirav Modi and group, it should have verified from the Punjab National Bank, at Mumbai branch

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October 2021