New Delhi: Recent developments suggest that state-owned Punjab National Bank (PNB) may have taken the largest hit of the massive fraud by fugitive diamantaire Nirav Modi but other banks too were targeted by one of the biggest banking swindler in India.
Four public sector banks, Dena, Corporation, Union Bank of India and Bank of India, are scrambling to recover money after lending branch reported fraud by Nirav Modi.
Mangalore-headquartered Corporation Bank's Bandra branch in Mumbai started doing business with Nirav Modi-owned Firestar International Private Limited in August 2017. On 25 September 2017, the Corporation bank sent a communication through SWIFT to Israel Discount Bank of New York (IDB Bank) for extending the credit facility to the diamond consignment that was supposed to be delivered to another Nirav Modi company Firestar Diamond in US.
Now, technically, the banks having credit facility arrangements for international trade are required to honor the letters of credit. However, instead of genuine purchase and export, round-tripping of diamonds and jewels were consigned and credit facilities were obtained over them, which were eventually siphoned off. The investigation in Nirav scam had zeroed on several transactions where fake invoices were raised to camouflage the round-tripping as authentic deal. Even though the credit extended to his company was genuine, unlike the PNB loans where fraudulent Letters of Undertakings (LoUs) and Swift messages were used to create a sense of false security, this time the modus operandi was to back up the transactions through alleged fake invoices.
In September 2017, two credits were extended to Nirav's firms through IDB Bank on the 25 and 27th of the month. In October 2017, the frequency was increased to five credits on behalf of Firestar International and the last communication to extend credit facility was on 31 January 2018 just days before the PNB scam surfaced in the public domain. In total, the Corporation Bank was defrauded to the tune of more than Rs 39 Crore.
Union Bank of India (UBI) was defrauded by Firestar Diamond BVBA, Nirav Modi's Antwerp, Belgium based company. The consignment against which the credit was issued was meant for the same US based company with its office at 48th street in New York. UBI's London representative office, Union Bank of India (UK) Limited had entered into a facility agreement with Nirav's company in October 2014 and the bank, as the financer, had pledged an on demand invoice discounting facility. Although, the agreement signed by Nirav's younger brother Neeshal Modi had a clause for collection of receivable in case money remain unpaid on their due date, the bank lost more than Rs 22 crore in the fraud.
A certificate signed by Neeshal and Shailesh Anand Jha, Chief Manager Union Bank of India (UK) Limited said: "This is to declare and certify that Firestar Diamond BVBA has pledged all its receivables and claims in accordance with a pledge of receivables agreement to Union Bank of India (UK) Limited. Further to the pledge of receivables agreement, you are hereby instructed to make any and all payments owed by you to Firestar Diamond BVBA solely in accordance with any instructions you may receive of Union Bank of India (UK) Limited or its duly authorised agent."
The circumstances and agreement format make it amply clear that Nirav Modi's intent since the beginning was to defraud the bank in the long run because drawer and drawee were the same set of individuals running various entities. Around the time Corporation Bank started issuing credit to Firestar International Limited, Bank of India's mid-corporate branch at Bandra, Mumbai was also approached by the company. And since September 2017, Bank of India has been defrauded to the tune of Rs 6.8 Crore by Nirav. In this case too, the credits were raised for the same set of companies- Firestar International and Firestar Diamond, USA.
Bank of India's London branch was also targeted. Nirav Modi's Firestar Diamond FZE, based in Dubai, entered into an agreement with the bank's London branch in July 2012 under which the bank agreed to extend the secured overdraft facility. The Firestar Diamond FZE had agreed to pay the bank all financial indebtedness, which may be due or incurred to the bank under the facility. The overdraft limit as per the agreement was capped at $ 5 million and Firestar Diamond FZE was supposed to submit local and export sales invoices duly designated to be charged to the bank. However, despite a clause inserted in the agreement that insulated the bank, Nirav's company failed to pay back the loan. The clause had said: "The rights and remedies of the bank in respect of any misrepresentation or breach of warranty on the part of the borrower shall not be prejudiced or affected by any investigation of the borrower or any other person by or on behalf of the bank or without limitation any other act or matter which, but for this provision, would or might prejudice or affect any such rights or remedies."
Dena bank's Homji Street branch in Mumbai too was deceived using similar modus operandi of credits and seven invoices raised since October 2017 remain unpaid. The credit was extended to Firestar International but Nirav Modi fled with more than Rs.3.8 Crore.
A report by prepared by John J Carney, an examiner appointed by US bankruptcy court investigating three US-based jewellery companies owned by Nirav, sheds further light on his modus operandi. The report identified tens of millions of dollars of purported diamond sales by Nirav's companies to various shadow entities, where payment can be traced to proceeds from the alleged bank fraud. The examiner's investigation confirmed that criminally derived proceeds from these sales flowed from India into the USA and in numerous instances were returned to Firestar in India or were used to fund the debtors' operations, including making payments on loans taken from banks in the USA.
The report also indicated how banks might have been duped since the diamonds sold to or purchased from shadow entities were routinely shipped out the same day or within days after arrival, without ever being opened or inspected by employees to ascertain the contents of the packets. This practice was in complete contrast to shipments that were made to or received from non-shadow entities. The report had also indicated round-tripping of high-value diamonds raising questions over the invoices raised to the public sector banks. It had said that the same diamond seems to have been bought and sold multiple times at varying prices, often at wildly inflated prices, in order to create the appearance of millions of dollars in legitimate transactions and to purportedly facilitate the movement of funds.