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Nirav Modi fraud, PNB’s in-house clean chit to auditors, blames foreign branches of Indian banks

The investigating agencies begin their probe, an in-house enquiry by state-owned Punjab National Bank (PNB), which was allegedly defrauded of Rs 11,360 crore by diamond merchant Nirav Modi and his maternal uncle Mehul Choksi, has given a clean chit to its auditors and blamed foreign branches of Indian banks.

The PNB has also contradicted itself by admitting that there are several loopholes in Letters of Undertaking (LoUs), which could have been easily detected.

In its latest complaint to the Central Bureau of Investigation (CBI), an exclusive copy of which is with Firstpost, the PNB gave vague responses to the investigators’ questions and directed them to the in-house probe.

The bank, responding to questions about the roles of its chartered accountants, statutory auditors and empaneled valuers said, “As per in-house investigation report, no role of professionals is mentioned.” The bank however, added: “ There are several discrepancies in LoUs which could have been easily detected by ordinary due diligence.”

“Foreign Letters of Credit (FLC) issued to Gitanjali Group were entered in banking system though the transactions were in small amounts. But when it was credited by foreign branches of Indian banks, huge sums were shown on the record. It must have reflected in the monthly reconciliation report of the bank examined by the auditors with complete due diligence. In several previous NPA cases, we’ve noticed that attempts are made to protect big fish, but those guilty will be brought to justice,” CBI sources said.

PNB told the CBI that Society for Worldwide Interbank Financial Telecommunication (SWIFT) system was misused to benefit Gitanjali Group of companies owned by Choksi for transactions related to FLCs, while admitting that they were registered in the core banking system.

“The conniving officer (Gokulnath Shetty and Manoj Karat) also issued FLCs by entering a small amount in trade finance module of CBS system and generating the reference number and SWIFT message was sent for the amount. Subsequently, without making any change in trade finance module of CBS system, the conniving officer sent modified SWIFT message for enhanced amount under the same reference to the beneficiary bank. The beneficiary/ overseas suppliers had discounted the documents drawn under such FLCs (based on SWIFT message) with overseas banks,” the PNB told the CBI.

Unauthorised LoUs worth Rs 3,032 crore and unauthorised FLCs amounting to Rs 1,854 crore were issued to Gitanjali group.

The PNB sought to shift the blame on overseas branches of Indian banks: State Bank of India’s Mauritius and Frankfurt branches, Bank of India’s Antwerp branch, Canara Bank’s Bahrain branch, UCO Bank’s Hong Kong branch and the to foreign branches of Union Bank of India, Axis Bank and Allahabad Bank for not raising alarm over fake LoUs.

The PNB told the CBI that the Reserve Bank of India (RBI) prescribes that outstanding buyer’s credit for import of semi-precious and precious stones, including pearls, should not be extended for more than 90 days. However, in most cases, the credit allowed under referred LoUs extended for a period much beyond 90 days: LoUs were established for around 360 days, the PNB stated.

There is no documentary evidence to prove that these import transactions are bona fide trade transactions. Interestingly, the PNB in a statement on 16 February, claimed it decided to come down heavily on everyone involved in fraudulent activities to “pursue clean banking and reform agenda of the government”.

Among the three companies that CBI is probing, Gitanjali Gems Limited was issued LoUs worth Rs 2,144 crore, Gili India Limited Rs 566 crore and Nakshtra Brands Limited Rs 321 crore. The three companies were issued FLCs amounting to Rs 1,854 crore. Intesa Sanpaolo, a bank based in Hong Kong, also fell prey to the alleged scam.

An FLC worth Rs 14.16 crore was issued to Gitanjali Gems. Between 2 March, 2017, and 14 March, 2017, thirty-three LoUs were issued for State Bank of India’s Mauritius branch, the financing bank. On at least four occasions: 8, 9, 10 and 14 March, at least 5 and 7 LoUs were issued within a day in favour of Gitanjali Gems and Gili India Limited. The total exposure of SBI’s Mauritius branch is $42 million.

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