The logo of the Punjab National Bank outside a branch in London. Photo: Reuters

India’s top investigation agency has sealed off a branch of the Punjab National Bank to assist their probe into the country’s biggest banking scam.

The Central Bureau of Investigation (CBI) is looking into a scam involving state-owned Punjab National Bank (PNB) and jewellers Nirav Modi and his uncle Mehul Choksi.

Investigators sealed off PNB’s Brady Road branch in Mumbai, where the scam allegedly took place, according to TV reports.

The agency is also questioning officials of the bank plus companies owned by Modi. Both Modi and Choksi are believed to have fled abroad.

Bankers reportedly fear that the scam is much bigger than the initial estimate of US$1.8 billion – and that exposure to Modi, his relatives and associated companies may total Rs 200 billion ($3.1 billion). That amount would include bonafide credit to related firms that now risks being classified as bad debt, as the promoters have been accused of fraud, the Economic Times has reported.

Apart from Modi and his relatives, companies under the scanner include Solar Export, Stellar Diamond, Diamond R US, Gitanjali Gems, Gili India, Nakshatra and Chandri Papers.

Modus operandi

According to CBI documents a lone middle-aged manager of PNB, Gokulnath Shetty, aided by a young subordinate, engineered fraudulent transactions from 2011 to 2017, Reuters has reported.

CBI officials claim at least 150 fraudulent Letters of Undertaking were issued during the seven-year period. The bank officials allegedly misused the SWIFT interbank messaging system and made incomplete ledger entries.

Shetty allegedly issued a series of fraudulent Letters of Undertaking – essentially guarantees sent to other banks so that they would provide loans to a customer. These letters were sent to overseas branches of banks, thought to be almost all Indian, that would then lend money.

Shetty reportedly did so using the bank’s SWIFT system to log in with passwords that allowed him, and in at least some instances a more junior official, to serve as both the person who sent messages and as the person who reviewed them for approval.

After entering the transactions on SWIFT, Shetty did not record them on the bank’s internal system. Because PNB’s internal software system was not linked with SWIFT, employees were expected to manually log SWIFT activity, Reuters said. If that was not done, the transactions did not show up on the bank’s books.

How the scam came to light

The first hint of the fraud came when Nirav Modi’s team started looking for ways to get a fresh extension for the Letters of Undertaking. But their favored official had retired, so the request went to a new team which questioned the need for “rolling over” the Letters of Undertaking.

A PNB official reportedly flagged the matter to the bank’s headquarters, and the hidden records on the old Letters of Undertaking were discovered.

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