India is investigating a $1.77bn fraud case at the state-run Punjab National Bank (PNB), according to government officials.
The bank in a statement issued on Wednesday said it had “detected some fraudulent and unauthorised transactions in one of its branches in Mumbai for the benefit of a few select account holders.”
PNB has said a few of its executives colluded with perpetrators by illegally issuing “letters of undertaking” to aid Nirav Modi, 47, a billionaire jeweller, and companies linked to him.
Letters of Undertakings, or LoUs, are a banking instrument issued by a bank providing a form of guarantee or an assurance to meet a liability on customer’s behalf.
“Based on these transactions other banks appear to have advanced money to these customers abroad,” PNB said in a statement.
— Reuters India (@ReutersIndia) February 16, 2018
The bank officially reported the fraud in a regulatory filing on Wednesday.
Modi and firms linked to him, Solar Exports, Stellar Diamonds and Diamond R US, are now being formally investigated by India’s premier investigative agency, the Central Bureau of Investigation (CBI).
According to details published on his official website, Modi, worth $1.73bn, grew up in Belgium’s Antwerp, the diamond-cutting capital of the world.
Modi founded Firestar Diamond in 1999 that buys and sells diamonds worth $1.5bn annually.
He has 16 stores in locations such as New York, Hong Kong, London, New Delhi, Mumbai and Macau.
Enforcement Directorate, the Indian government agency that fights financial crime, conducted multiple raids at the offices, showrooms and Mumbai home of Modi on Thursday in connection with the fraud.
Experts say the incident would amplify questions about distress in India’s financial sector, which has been reeling from bad loans.
Facing criticism from the opposition, the government of Narendra Modi, which came to power on anti-corruption plank, said “there will be a thorough probe”.
“Nirav Modi and his associates tried to bypass the established banking channels to commit this fraud. No one shall be spared in the banking system. Action has been taken to revoke his passport,” Ravi Shankar Prasad, Indian law minister, said on Thursday.
JUST IN: Indian state-run banks reported 8,670 "loan fraud" cases totalling $9.6 billion over last five financial years – RBI data reviewed by Reuters pic.twitter.com/BjoHsQoLB9
— Reuters India (@ReutersIndia) February 16, 2018
However, the federal investigative agency CBI has said Nirav Modi has already left the country.
MK Venu, one of the founding editors of thewire.in news portal, said the “full scale of this fraud is still being discovered”.
“The fraud was detected in early January involving Nirav Modi’s company as well as those of his family members. They all have fled the country and the investigation agencies have been very late in moving in on them,” Venu, a senior financial journalist, told Al Jazeera.
“Essentially they got letters of credit issued fraudulently by PNB in Mumbai against no real trade transactions. And this letter was encashed with other bank branches in Hong Kong.
“Now those banks are claiming $1.8bn from PNB. There is deep collusion between bank officials and businessmen. Only a full inquiry will reveal the extent of fraud. It may be bigger than this.”
On January 31, PNB filed a case of “criminal conspiracy and cheating” against the gem trader, members of his family and others two weeks ago alleging a 2.8 billion indian rupee ($44m) fraud.
PNB says suspicions about the fraud came to light on January 16. Thereafter they filed a police complaint Pon January 29.
The lender, India’s second-largest state-run lender with assets of $120bn, said it had suspended at least 10 employees following the disclosures, and has asked Modi to come up with a formal repayment plan.
Financial experts say basic checks and balances were ignored while issuing the LoU.
“This is very significant … it’s a huge hole in their balance sheet. It remains to be seen how much they can recover from Nirav Modi. In banking there should always be a maker and checker. So why wasn’t anyone checking before these transactions were made? Or both maker and checker were involved?” Hemindra Hazari, an independent banking analyst, told Al Jazeera.
“Corruption is endemic in the financial sector globally and in India. But internal systems should prevent this. Here basic checks and balances seem to have broken down.”
The incident renews focus on India’s state-run lenders’ bad-loan crisis. The proportion of non-performing loans – loans on which the borrower is not making interest payments or repaying any principal – in India has surged to be among the highest in the world.
Last week, the State Bank of India, the nation’s largest lender, said an audit by the central bank showed soured debt was about $3.6bn higher than what the state-run lender reported for the end of March 2017.
Nirav Modi, a third-generation diamond trader who has dressed stars including actors Kate Winslet and Priyanka Chopra, was part of a CEOs meeting with Indian Prime Minister Modi on January 23 on the sidelines of the World Economic Forum in Davos.
The opposition parties directed criticism at the government after reports of the fraud surfaced.
If this person had fled India before the FIR on Jan 31, then he is here, photographed at Davos with PM, a week before the FIR, after having escaped from India? Modi govt must clarify. #NiravModi #PublicMoneyLoot pic.twitter.com/gQQnKQNjDo
— Sitaram Yechury (@SitaramYechury) February 15, 2018
“If this person had fled India before the FIR on January 31, then he is here, photographed at Davos with prime minister [Modi], a week before the FIR, after having escaped from India? Modi government must clarify,” Sitaram Yechury, leader of the Communist Party of India (Marxist), said on Twitter, referring to speculation that Nirav Modi had left the country before the raids began.