International review Investigation

India: Scam Involving Diamond-Dealer Leaves State Bank Reeling

Billionaire diamond-dealer Nirav Modi
Billionaire diamond-dealer Nirav Modi Source: The Wire.

This material belongs to: OCCRP.

Punjabi National Bank (PNB), India’s second largest state-run lender, lost US $1.41 billion—almost a quarter of its current market value—after disclosing an investigation into a $1.8 billion scam involving a powerful jewel merchant, Reuters reported Friday. 

It seems that officials at a single Mumbai branch allowed a small pool of customers to take out unauthorized loans, steering the money to secretive firms and private accounts which could be accessed by Nirav Modi, a billionaire diamond-dealer.

Nirav Modi is not related to India’s Prime Minister, Narendra Modi.

The fraudsters received letters of credit from PNB’s Mumbai branch and cashed them with other bank branches in Hong Kong. The banks now have $1.8 billion of claims against the Mumbai branch, Venu, a senior financial journalist, explained to AlJazeera.

Modi, who is worth $1.73 billion and sells $1.5 billion worth of diamonds each year, is now being formally investigated by India’s Central Bureau of Investigation (CBI).

He has yet to comment, but reports suggest about a dozen of his premises across India have been raided by the Indian government’s’ financial crimes agency, including his home and various jewelry showrooms, the BBC reported Thursday.

PNB has said a few of its executives even colluded the scam, offering “letters of undertaking” to back the illegal loans, AlJazeera reported on Friday.

The bank said it has suspended at least 10 employees following the fraud revelations, and has asked Modi to come up with a formal repayment plan.

“Nirav Modi and his associates tried to bypass the established banking channels to commit this fraud. Action has been taken to revoke his passport,” Ravi Shankar Prasad, the Indian law minister, said on Thursday.

However, according to AlJazeera, CBI has said Nirav Modi has already left the country.

The fraud may have huge implications for India’s banking sector, which has been struggling with fraudsters making bad loans for a while. The scam involving Modi, comes months after India’s government injected $32 billion into the sector to deal with bad loans, which by some estimates could be as high as $150 billion, The New York Times reports.

In recent months India has had one of the highest rates of non-performing loans in the world.