Page 19 - Bloomberg Businessweek July 2018

Bloomberg Businessweek
THE HEIST ISSUE

green tea in his special flask and cup, and then he’d have one of Modi’s import companies to the New York branch
lunch even if we were waiting for a meeting with him. He of another Indian bank, from which Modi’s company was
took his own crockery between this office and the other.” borrowing U.S. dollars to fund American diamond pur-
This fastidiousness contrasted with Modi’s verve as chases. The second bank would then deposit the money
a businessman. The other former employee, once a into PNB’s nostro account (a dollar account in a U.S.
Firestar executive, calls Modi “reckless, a risk-taker.” institution), and PNB would in turn release the money to
On the face of it, the gambles paid off. By 2017, Firestar’s Modi’s company. PNB repaid the lending bank with inter-
revenue had reached $2.3 billion, according to figures est, in U.S. dollars, while the company repaid the amount
filed with India’s Registrar of Companies. Modi’s name to PNB at home, in rupees, adding a low fee for the ser-
was everywhere. He mingled with models and actresses, vice. It was a circuitous way to buy and import diamonds,
becoming the kind of lavish sophisticate who flies the but it would have been more expensive to take out a loan
Italian chef Massimo Bottura to Mumbai for an i nvitation- in rupees, convert them into dollars, send them to New
only dinner attended by celebrities. Even so, the fraud York, and pay interest on the principal at home.
accusations came as a shock, the former executive says. On the mid-January day when Modi’s companies
“If you’ve taken the country’s money to this extent—well, applied for new letters, the official in charge asked for
I can’t digest that at all.” collateral, in cash, on the requested amount of foreign
currency, usually the standard practice. Modi’s executives
he stage for the giant swindle was a branch demurred—for them, a big mistake. They’d
Tof PNB, set into a jammed road in south secured many similar letters in the past,
Mumbai. On a recent visit, the building, they told the bank, without being asked
Brady House, was trussed up in scaf- to provide collateral.
folding and green tarpaulin. A lone Puzzled, bank officials con-
security guard loitered in the dark sulted their database. “The branch
corridor leading to the lobby. There records did not reveal details
were no counters or tellers and prob- of any such facility having been 57
ably no cash; Brady House is, as the granted,” Nepalia wrote. Then they
gilt lettering on a wall proclaimed, a checked the logs for the Society for
“mid corporate bank,” serving mid- Worldwide Interbank Financial
size companies. A red sofa, a golden Telecommunications (Swift) sys-
Buddha, cramped plywood cubicles, tem, which held all the transfer
tacky red linoleum on a flight of steps— and payment instructions transmit-
the type of lackluster premises that house ted from Brady House to institutions
every state bank branch in the land. overseas. Nepalia’s complaint is a sober doc-
The way Avneesh Nepalia described it, it was sheer ument, betraying no shock at what the bank found—that
carelessness that brought the cat tumbling from the bag. unapproved letters of undertaking, backing Modi’s and
A deputy general manager with PNB in Mumbai, Nepalia Choksi’s companies in return for little or no collateral,
registered the first complaint about Modi and Choksi in a had been issued for years. PNB had been guaranteeing
two-page letter to India’s Central Bureau of Investigation loans without its officers’ knowledge. The first complaint
(CBI) in January. Two weeks prior, Nepalia wrote, repre- counted about $44 million of credit, issued across eight
sentatives from three smaller diamond-importing com- letters of undertaking.
panies owned by Modi had come to Brady House and As its investigation deepened, PNB found more and
asked for new letters of undertaking. more letters promising to pay more and more money.
A letter of undertaking was a uniquely Indian financial It filed another complaint, then another. The smoking
instrument—a relic from the economy’s statist years, when hole in the bank’s balance sheet expanded to $2 billion.
the government controlled the flow of foreign exchange In the second complaint, Nepalia wrote that when the
and importers could use only state-owned banks to pay loans had come due, Modi and Choksi had used some
suppliers abroad. India’s central bank recently eliminated of the money guaranteed by newer letters to pay debts
them, but they were once a bank’s guarantee for a sum of incurred by earlier ones. Arun Jaitley, India’s finance min-
money in an exchange transaction. ister, told Parliament in March that at least 1,213 fraudu-
Ordinarily, PNB might have sent a letter in the name of lent letters of undertaking had been issued to Modi’s
“I COULDN’T UNDERSTAND HOW THIS COULD HAVE HAPPENED. THIS WAS ALL RISK MANAGEMENT 101”