Almost two years after the Punjab National Bank (PNB) reported the scandal involving diamantaire Nirav Modi, an exhaustive forensic audit commissioned by the bank has come to light, revealing the depth and extent of the rot and the ease with which fraudulent practices were carried out systematically by his chain of companies, remaining undetected for years.
Belgian auditor BDO, commissioned by PNB in February 2018, days after it complained to the CBI, looked at information supplied until June 2018 and found that a total of 1,561 Letters of Undertaking (LoUs), valued at Rs 28,000 crore, were issued by PNB to the Nirav Modi group.
Of these, 1,381 LoUs valued at Rs 25,000 crore have been described by the auditor as being “fraudulently issued”. It also found that 21 of 23 exporters in whose names the LoUs had been issued were “controlled” by Nirav Modi and subsequently, 193 LoUs of the value of Rs 6,000 crore were “mis-utilized’’ for making payments to the bank.
These form part of a voluminous draft report completed by BDO in August 2018 for the PNB after it submitted five interim reports — the final report has been submitted with a few more annexures. The auditor had been tasked to conduct the forensic audit on Nirav Modi and seven entities/subsidiaries that form part of his group.
The 329-page forensic report of BDO was handed by a whistleblower to the International Consortium of Investigative Journalists (ICIJ) which has partnered with The Indian Express for a series of reports on the findings of the forensic team.
The BDO’s draft forensic report has gone beyond investigating agencies like the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) in mapping the extent of the fraud.
The BDO team listed all the assets (the report contains copies of ownership papers) amassed by Nirav Modi and his family members. In all, the BDO has tabulated 20 properties owned by them in India which have been described as “non-charged” or which have never been used as security for the transactions. Besides this, the diamantaire possessed 15 charged properties in India which have been valued at Rs 1,300 crore and 13 immovable properties outside India.
Incidentally, the forensic report also lists five luxury cars and a boat owned by Nirav Modi among his movable properties. There is a lengthy list of 106 paintings owned by him — valued at Rs 20 crore — which include the works of M F Husain, Jamini Roy, Jogen Chowdhury and Raja Ravi Varma.
Among the other key findings of the BDO team in the report are:
* That the frauds were committed by Nirav Modi by exploiting what is described as the “systemic loopholes” in the systems of the PNB. This included loopholes in their system integration, concurrent audit, early warning signals and data analytics.
* That the fraud was possible only due to collusion with the staff of PNB. For instance, it has been shown that 92% or 1,448 LoUs were issued to Nirav Modi group companies by Gokulnath Shetty, then Deputy Manager, Foreign Exchange. In all, 97% of the fraudulent LoUs were approved by him. He was arrested by CBI in February 2018.
* It has been concluded that 99.93 of the LoU beneficiaries were controlled directly or indirectly by the Nirav Modi group and that 74% of the global sales of his subsidiary company FIL (Firestar International Limited) was also to Nirav Modi-controlled entities.
* There is a full section in the draft report on how the Nirav Modi group inflated their financials (both revenue and receivables) for enhancing “drawing power”. The auditor has revealed how payroll information, organisational structure and so on of the partnership firms were not commensurate with projected business size and scale of the business.