It has been more than two weeks since Punjab National Bank - one of India's largest state-owned financial institutions - informed the public about a nearly $2 billion lending fraud allegedly masterminded by Nirav Modi, a famous celebrity jeweler and one of India's richest men. And still, investigators are just beginning to piece together the exact mechanics that allowed a celebrity jeweler, working with a handful of rogue bank employees at PNB's Mumbai branch (the bank is based in New Delhi) to pull off the largest financial fraud in modern Indian history.
In their latest update, federal investigators told Reuters and a host of other media organizations that Modi and his uncle Mehul Choksi - who played an integral role in the fraud - successfully bribed bank employee with gold coins and diamonds to help coax them to look the other way when signing off on fraudulent letters vouching for the shell companies receiving the loans.
Authorities have apprehended a retired PNB manager named Gokulnath Shetty, pictured below, who was essentially Modi and Choksi's inside man at the bank.
Last week, we pointed out a disturbing trend whereby large multinational financial institutions were backing away from Indian banks, setting the stage for a painful credit crunch that could potentially destabilize the Indian economy.
The Central Bureau of Investigation (CBI), which has arrested 14 people in the case, on Saturday for the first time said bribes were paid to at least one Punjab National Bank (PNB)official by Modi.
The agency told the court that Yashwant Joshi, who worked as a manager in the forex department of the Mumbai branch that is at the center of the fraud, admitted to having received two gold coins weighing 60 grams and a pair of gold and diamond earrings from Modi.
The articles have been recovered from Joshi’s house in the presence of independent witnesses, the CBI said.
Police have also arrested two low level employees from the Brady House branch of PNB for helping ferry the fraudulent guarantee letters past the bank's internal controls. The two men allegedly helped produce some of the letters of understanding, then recorded them in the bank's internal system, effectively leaving its stewards in the dark. As any expert on India's state-run banks would tell you, the fact that most Indian banks haven't integrated their internal controls with the Society for Woldwide Interbank Telecommunication (SWIFT) leaves them incredibly vulnerable to fraud, particularly when bank employees who have nearly unfettered access decide to take advantage of their position.
In its latest story, Reuters provided a detailed graphic explaining exactly how Modi and his crew managed to secure the fraudulent loans. The fake letters of undertaking that were so vital to the scheme allowed shell companies controlled by the fraudsters to receive loans mostly from foreign branches of Indian banks.
Over the weekend, an Indian federal judge issued a warrant for Choksi's arrest. Both Choksi and his nephew Modi have fled the country, and are believed to be in Hong Kong. Prosecutors are also zeroing in on Modi, who is believed to be the ringleader of the whole scheme.
“Modi appears to be the prima donna in the whole saga of the fraud perpetrated on the PNB,” the directorate said in a filing to the court seen by Reuters.
But perhaps even more embarrassing - and ultimately more problematic - than the authorities' inability to apprehend the ringleaders of the fraud (though they have arrested a total of 14 people over their suspected involvement in aiding or abetting it) is the fact that nothing is being done to strengthen oversight of Indian banks.
Without that, the damage to the credibility to the state-run banking system may never be repaired - and if that happens, it's the small business owners of India who will suffer as credit conditions are rapidly tightened.