Govt asks fraud-hit Punjab National Bank to conduct forensic audits

The government has asked fraud-hit Punjab National Bank (PNB) to conduct a forensic audit and give a detailed report on why the loans given to jeweller Nirav Modi and his associates, based on fraudulent letters of undertaking (LoUs), were not unearthed from 2011 till now.

This comes after PNB Chief Executive Officer Sunil Mehta said in a press conference on Thursday the Rs 114 billion ($1.8 billion) fraud started in 2011. 

Those implicated are Modi, his brother Nishal Modi, wife Ami, and partner Mehul Choksi. 

Senior government sources told Business Standard the RBI would independently do its enquiry to ascertain which banking and regulatory laws were broken while this fraud was going on.

“One of our priorities is to find how these transactions went unnoticed for such a long time. There will be a forensic audit of the bank’s accounts and it will do a detailed investigation as to what happened between 2011 and now,” said an official. 

The RBI would be part of this process, the person added. 

Financial Services Secretary Rajiv Kumar told media persons PNB had “sufficient funds” to provision for the losses arising out of the fraud. 

“A whole lot of assets will be recovered. Nobody will be spared,” Kumar said. “This is an isolated case of a single branch and will not likely escalate to other banks. We have already frozen the case,” he said, adding all other banks had been alerted about this. 

Later in the day, Kumar briefed Finance Minister Arun Jaitley on the case. 

After the meeting, Kumar told reporters the fraud came to light “because of the pressure on the banks to clean up the system. The LoUs could not be rolled over and the bank itself detected it”. 

On why the fraud went unnoticed for seven years, Kumar said it was a “systemic issue” and had to be looked into. 

Meanwhile, the Enforcement Directorate tweeted it had searched 17 premises of Nirav Modi and Geetanjali Gems in the country. It said that “stocks of gold, diamond & precious stones worth Rs 51 billion seized”. 

Modi is said to have nine properties in India: Three in Surat, four in Mumbai, two in Delhi. 

His residence is in Mumbai. 

Press Trust of India reported that PNB had told the Central Bureau of Investigation that Modi, Choksi, and their associates defrauded the bank by conducting transactions through 150 LoUs. 

An LoU is a letter issued by a bank to branches of other banks, and based on that foreign branches offer credit. 

Kumar’s statement that PNB will make the provisioning for the fraud is significant because the government is worried that other state-owned banks whose overseas branches provided money against LoUs may consider legal action. 

The official quoted above said the government was closely watching this situation.