NEW DELHI – India was rocked by a massive banking scandal on Thursday after its economic intelligence agency, the Enforcement Directorate launched a country-wide operation over allegations of fraud in which the Punjab National Bank was allegedly cheated out of around 113 billion rupees ($1.77 billion) by a famous diamond merchant and two employees of the bank.
The ED, which specializes in financial crimes, raided shops, properties and houses of billionaire jeweler Nirav Modi, who has been accused by the PNB – the country’s second biggest bank – of perpetrating the fraud through a branch of the bank in Mumbai.
According to the allegations, over a period of seven years, various firms linked to Modi obtained Letters of Understanding – used by importers to acquire credit abroad in conditions favoring their transactions – which were not authorized or registered in the bank’s records.
The bank employees were able to sidestep internal controls and directly access the international transaction system SWIFT, establishing direct contact with the lenders, who received the bank guarantees and carried out legitimate transactions that were never returned.
PNB’s CEO and Managing Director, Sunil Mehta on Thursday acknowledged in a press conference that the fraud started in 2011 and was not detected until the third week of January this year.
The bank chief said that after assessing the situation, the bank approached the Central Bureau of Investigation on Jan. 29, and the authorities opened a formal investigation the next day.
The bank said that two of its employees carried out unauthorized and fraudulent transactions in connivance with companies of two groups, accessing the SWIFT system without making entries in the bank’s internal system CBS.
Foreign branches of Indian banks, including the private Axis Bank and state-owned Allahabad Bank, have also been affected by the scandal.
Mehta said that PNB had the capacity to overcome the crisis, and the finance ministry was closely following the case.
He also said that the bank would honor the payments if the investigations found it was responsible.
Banking experts consulted by EFE stressed that the fraud involves an amount that is eight times the net profit registered by the bank last year, making it almost certain that it would need government support to overcome it.
A photo of the accused Nirav Modi with other businessmen and the Indian Prime Minister Narendra Modi has been circulated in Indian news media at the World Economic Forum in Davos, taken on Jan. 23 – six days before the bank filed a complaint. The jeweler remains missing.
The opposition has pointed fingers at the prime minister, with the Congress party spokesperson, Randeep Surjewala, raising the possibility that the accused was warned of the impending complaint, drawing parallels with earlier corporate fugitives wanted for financial crimes, such as Lalit Modi and Vijay Mallya.
The Aam Aadmi Party (Common People’s Party) leader and Delhi Chief Minister Arvind Kejriwal questioned whether Nirav Modi could have left the country without the government’s active compliance.