nirav modi scam a case study on accounting frauds and scandals

presentation on the case study of accounting frauds and scandals

1. CASE STUDY: ACCOUNTING FRAUDS AND SCANDALS NIRAV MODI: PNB SCAM 2018

2. INTRODUCTION On 29th Jan, 2018 , PNB (Punjab National Bank) filed a criminal complaint with India`s federal investigative agency against three companies and four people , including billionaire jeweller Nirav Modi and his uncle Mehul Choksi , the managing director of Gitanjali Gems, saying they had defrauded PNB and caused a loss of 2.8 billion rupees ($43 million). In a regulatory filing on Feb. 14, the bank updated the sum involved in the fraud to 113.94 billion rupees ($1.77 billion), which it said was determined after further investigation at its Mumbai's Brady branch. This fraud is done by Nirav Modi in 2011 who fraudently raised funds worth of Rs. 1 1 , 636 crore from various public & private sector banks by showing Letter of Undertaking (LOU) issued by Punjab National Bank.

3. The PNB informed the Bombay stock exchange that it had detected ‘fraudulent and unauthorised transactions’ amounting to Rs. 11,400 crores at its Brady House branch in Mumbai.

4. #85 Nirav Modi FORBES MAGAZINE RANK

5. Nirav Modi – Nirav Modi is the Owner of Nirav Modi firm, Diamond R US, Stellar Diamond and Solar Exports and the prime accused in this scam. Mehul Choksi – Mehul Choksi is the Owner of Gitanjali Group and the Uncle of Nirav Modi. PNB Employees – Gokul Nath Shetty (Retired Deputy Manager), Manoj Kharat (Clerk), Hemant Bhat (Clerk and Authorised Signatory), Bechhu Tiwari (Forex dept. Chief manager), Yaswant Joshi, Praful Sawant (They were trying to shift the blames to their colleagues.) MK Sharma – Internal Auditor and Chief manager of PNB. Vipul Ambani – CFO of Nirav Modi Company . Kavita Mankikar – Executive Assistant and Authorised Signatory. Arjun Patil – Senior Executive of Fire Star Group. Kapil Khandelwal – CFO of Nakshtra and Gitanjali Group. Niten Shahi – Manager of Gitanjali Group. Rajesh Jindal – General Manager of PNB. He has headed Brady Branch in between 2009-11. Bishnubrata Mishra – Former internal auditor of PNB. He was responsible for auditing the transactions between 2011-15. Miten Anil Pandaya – Financial Manager of Firestar International Ltd. Sanjay Rambiya – CA firm Sampat & Mehta partner. Ami Modi – Wife of Nirav Modi Neeshal Modi – Brother of Nira v Modi PERSONS INVOLVED IN PNB SCAM

6. PERSONS INVOLVED IN SCAM OF N I RA V MODI’S FAMILY AMI MODI (WIFE) 7 NE E SHAL MODI (BROTHER) N I R A V MODI (SELF) M EH UL CH O K SI ( M A TER N AL UNCLE)

7. (c) RNGC 8

8. Nirav Modi exported rough stone fr o m foreign countries worth crores of rupees. The employees at PNB Brady House branch fraudulently issued a LoU for 365 days without making any provisions for collateral and bypassing Core Banking System (CBS). The Nirav Modi’s three companies named Diamond R US, Solar export and Stellar diamond allegedly raised loans from Axis Bank, UCO Bank and Allahabad Bank by showing LoU. The firm also raised funds from Indian bank's overseas branch for paying to the suppliers. Nirav modi’s firm again requested the bank to issue another LoU but the officials refused on ground that the company has to keep collateral with bank but Modi’s firm argued that no such money was kept on margin for the previous LoU. After that PNB officials started scanning the records and didn’t find any such transactions and then filed a complaint with CBI. HOW DID PNB SCAM OCCUR

9. 10 KEY TERMS Society for Worldwide Interbank F inancial Telecommunication Code

10. SWIFT CODE S WIFT code are mostly used for international wire transfer and are comprised of 8 or 11 alphabetic characters. SWIFT CODE

11. 12

12. (c) RNGC 13

13. PNB SCAM- FLOW CHART PNB transmits SWIFT message to foreign bank Foreign Bank pays to PNB’s NOSTRO Account PNB then transfers money to Suppliers Foreign suppliers receive payment Suppliers send pearls/ diamonds to India to NM NM sells the diamonds in India and receives money NM should payback money to PNB by due date of LoU PNB pays back the Foreign Bank on the due date of LoU with interest

14. The LOUs are delivered to SWIFT which is coded messages that are used in international banking. In India, all the banking records are saved on the Core Banking System (CBS). But surprisingly PNB didn’t use these mechanisms. LOUs are generally given when the home bank has an approved line of credit for the client. PNB should have verified Nirav Modi’s Credit worthiness.

15. 17 INVOLVEMENT OF PNB EMPLOYEE

16. 18 PNB files a case on CBI on January 30 th 2018. The Total loot was of Rs. 11,400 Crores. AND THE TRUTH CAME OUT

17. Nirav Modi and Mehul Choksi left India on January 6 th ,2018. His family moved to New York on January 5 th ,2018. DID CBI ARREST NIRAV MODI?

18. 20 Rs. 5100 Crore in Gold and Diamond Jewellery was seized by Enforcement Directorate. ASSETS SEIZED

19. The 51 -year-old, who has been behind bars at Wandsworth prison in south-west London since his two previous bail applications were rejected following his arrest on March 20 19 , is to appear before Chief Magistrate Emma Arbuthnot at Westminster Magistrates' Court in London on May 8 for a third attempt. The application for bail will be heard before Judge Emma Arbuthnot at Westminster Magistrates' Court," said a spokesperson for the Crown Prosecution Service (CPS). ON 8th MA Y , 2019 Bail of Nirav Modi denied again despite his lawyers saying condition in UK jail 'unlivable' A n UK court on Wednesday denied bail to Nirav Modi for the third time , saying the fugitive diamond merchant who is the main accused in the Punjab National Bank fraud and money laundering case amounting to up to USD 2 billion would fail to surrender. CURRENT SCENARIO OF NIRAV MODI

20. The Following are the reasons for the same: The failure of Auditors – Auditors failed to detect any frauds which took place in PNB Brady branch, Mumbai Not linkage of SWIFT with CBS – Society for Worldwide Interbank Financial Telecommunication (SWIFT) and Core Banking System (CBS) was not linked with each other. Management Failure – The management system was very weak and couldn’t detect any fraud because the Deputy Manager of branch himself was involved in the fraud. No rotation of Employees – According to Reserve Bank of India (RBI) guidelines ,every employees working in banks should be rotated from one position to other position in every three years but the same was not done in the PNB Brady Branch. WHY THE SCAM COULD NOT BE DETECTED EARLIER

21. MK Sharma the senior internal auditor of PNB Brady branch was responsible for auditing the system and practices of Brady branch and to report any fraud with zonal office. MK Sharma was knowing about the fraud but didn’t file any complaint with audit office. According to ICAI , it is mandatory for every auditor to verify and scrutinize every transaction which takes place through SWIFT. But in this case the auditor deliberately didn’t verify the transactions done through SWIFT. The internal auditor, concurrent auditor & statutory auditor of the bank should have been checking the transactions which was done through SWIFT but they deliberately ignored all the transactions. The audit committee of the board checks quarterly report, particularly on the foreign exchange dealing of the branch. But they didn’t examine the quarterly report of foreign exchange dealing. On march 2013, Non fund based loan of PNB was Rs.407 crore, on M arch 2014 it zoomed to Rs.3458 crore and on march 2017, it raised to Rs.4302 crore. ROLE OF AUDITORS

22. On July 26, 2016 Bangalore based Entrepreneur Hari Prasad had written to the prime minister’s office (PMO) drawing the attention of the authorities towards what he thought could lead to a huge scam. According to Prasad, the balance sheets clearly gave out all the details. He said that he had filed a complaint against Mehul Choksi – one of the prime accused in the Rs.11,380-crore Punjab National Bank scam – after the latter’s company cheated him f or Rs 13 crore. He then registered a complaint with the Bengaluru Police against Choksi and his group companies in 2015. A year later, he wrote to the Enforcement Directorate, the Central Bureau of Investigation, the Securities and Exchange Board of India, the Ministry of Corporate Affairs and even the Prime Minister’s Office. WHISTLE BLOWER

23. Moody and Fitch places PNB under review for downgrade . Moody’s has rated PNB ‘ Baa3’ and Fitch has rated ‘ BB ’. The stock price of PNB ha d fallen down from Rs. 160 to Rs.95.5 as on 9 th Mar,2018. The NIFTY Bank also fallen down 25810.25 to 24477.65 ( 1332.66 Points). RBI has said to PNB to pay all debts to other banks. The share price of Gitanjali Gems fallen down from Rs.64.2 to Rs.15.8 as on 09th Mar,2018 Sanjay Rishi (American Express), Gautham Mukkavilli (Ex.Executive pepsico), Suresh senapaty (Ex.CFO of Wipro), Kirthiga reddy (Ex.MD of FB India)resigned from Nirav modi’s Firestar Co board. The RBI stops banks to issue LOU. Because of the fraud, PNB has lost Trust of People. EFFECT S OF THE SCAM

24. Sudden decrease in Share Prices after PNB SCAM. DECREASE IN SHARE PRICE OF PNB

25. POST FRAUD LESSONS Ensure that all banks have automatic interface between SWIFT messaging systems and CBS. Ensure that all Swift messages are routed through the CBS. No modification should be allowed directly in SWIFT. It should carried out through CBS. Encourage rotation of staff dealing in swift/ treasury. Ensure that Internal and external audit must check on swift transaction reconciliation. Ensure regular onsite inspection of critical functions of banks RBI’s inspection must also review swift transaction reconciliation on sample basis. Tight oversighting from board levels

26. ‘’Shining Diamond trader took away the PNB’s shine’’

27. THANK YOU