NiMo scandal pits bank against banks

Indian Youth Congress activists burn effigies of Nirav Modi as they raise slogans against Punjab National Bank fraud case in New Delhi on Friday. PTI Picture

Mumbai: The ripples from the diamond scam have widened, sucking in more officials at overseas branches of Indian banks and an Italian banking group.

In its second complaint filed with the CBI on February 13, Punjab National Bank has named overseas branches of State Bank of India in Mauritius and Frankfurt, Bank of India in Antwerp, Canara Bank in Bahrain, Union Bank of India and UCO Bank in Hong Kong, and Italian bank Intesa Sanpaolo’s branch in Hong Kong.

PNB has accused these branches of the counter-party banks of serious oversight that enabled diamantaire Mehul Choksi and his firms to defraud Rs 4,886.72 crore. The country’s second-largest state-owned bank has already estimated the size of the scam at well over Rs 11,000 crore.

The second complaint focuses on three Choksi entities: Gitanjali Gems, Gili India and Nakshatra Brands.

PNB said rogue officials at its Brady House branch in Mumbai had issued fake letters of understanding (LoUs) with a validity of “360 days ab initio” – and this in itself should have raised suspicions among officials at the counter-party banks that were extending buyer’s credit to Choksi’s firms on the basis of these letters.

The second complaint pertains to 143 LoUs valued at Rs 3,032 crore and 224 foreign letters of credit (FLCs) amounting to around Rs 1,854 crore (the break-up in the PNB complaint adds up to a lower figure of Rs 1,799.36 crore under the FLC column).

The complaint says that “RBI prescribes that credit for import of semi-precious and precious stones including pearls should not be more than 90 days. However, in most cases, the credit allowed under the referred LoUs is much beyond 90 days.

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“This should have evoked suspicion in the minds of overseas branches of Indian banks extending buyer’s credit. These banks never raised any alarm on violation of RBI guidelines and continued to provide funding against fraudulent LoUs.”

Like the first FIR, this complaint accuses retired deputy manager Gokulnath Shetty and Manoj Hemant Kharat of fraudulently issuing the LoUs and without making entries in the banking system to avoid detection.

The complaint says “funds raised through the said LoUs were meant to be used for payment of import bills of the accused companies, whereas it was dishonestly and fraudulently utilized for discharging the earlier liabilities on account of buyer’s credit facility allowed by the overseas branches of Indian banks.”

“There are several discrepancies in the LoUs which could have been easily detected by ordinary due diligence,” the PNB complaint said.

In the case of the FLCs, the conniving officer at the Brady House branch entered a small amount in the trade finance module of the core banking system only to generate a reference number and a SWIFT message was sent for this amount.

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a messaging network that financial institutions use to securely transmit information and instructions through a standardised system of codes.

For instance, the complaint does not actually name Intesa Sanpaolo, the Italian bank. It gives its SWIFT code: BCITHKHH. This refers to the Hong Kong branch of Intesa Sanpaolo with its address at Lee Gardens, 36th floor, 33 Hysan Avenue. This branch had the smallest exposure to the scam: $ 2.2 million through an FLC which enabled Gitanjali Gems to obtain credit.

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The complaint says SBI Mauritius had accepted 39 fake LoUs of which 24 were used by Gitanjali Gems to raise buyer’s credit worth $57.76 million. One was used by Nakshatra Brands for $4.94 million and the remaining 14 were used by group company Gili India to raise $30.2 million.

SBI Frankfurt branch accepted 10 fake LoUs – two favouring Gitanjali Gems, and four each for Gili India and Nakshatra Brands – for a combined amount of $28.5 million.

Bank of India’s branch at Antwerp – which is the global hub for the diamond trade – had accepted 41 LoUs worth $105.08 million.

Calcutta-based UCO Bank’s Hong Kong branch accepted 146 fake FLCs that were valued at $247.49 million by all three Choksi-owned companies.

Another big chunk of the fake FLCs were honoured by Union Bank of India’s Hong Kong branch: 77 instruments that were used to raise $110.21 million.