Introduction
“To be a jeweller, it’s all about having trust.”. These are the words of Nirav Modi, a man who once dreamt of creating “India's first luxury brand”, to rival global icons. Ironically, his story ended with the biggest fraud case in India’s banking history—a tale of deceit, unchecked ambition, and a 'house-of-cards' global financial system.
The Making of a Mogul
Modi was born in Surat, Gujarat, a place known as the “Diamond City”. He came from a family of jewellers; their business is about processing and polishing raw diamonds. When Modi was 19, he went to work for his uncle, Mehul Choksi, a man known for his deceitful approach to doing business. The experience gave Modi his first idea of what trade should be.
With this background and tradition, it was natural for Nirav Modi to later on follow his family’s footsteps, and enter into the jewellery business. However, Modi was no ordinary Indian jeweller. He was bold, risk-loving and ambitious, envisioning something as big as a “Tiffany by India” - a luxury jewellery brand made by Indians.
He started by studying the catalogues and attending auctions to really get a feel on what people were wearing and what sold for the highest price. But Modi also understood that the key to business success is branding so he and his team spent a substantial amount of resources to create a coherent brand - both for the business and for Nirav Modi himself.
It was common to see the Nirav Modi brand at global fashion events and on social media, being endorsed by celebrities, all to create an aura of legitimacy and desirability around the brand and the business. He also strategically placed his stores in luxury locations like Madison Avenue in New York and Bond Street in London to associate his brand with exclusivity and wealth. And of course, each store opening in a new location came with a bang. The brand’s launch in New York 2015 was attended by lots of celebrities and important figures, including Donald Trump Jr., Naomi Watts and Nimrat Kaur.
All to create an aura of great visions, glamour, and luxury, which helped to hide the brand from questions and doubts.
The Fraudulent Empire
The high-end jewellery industry is a capital-intensive arena. To fund his business, Modi needed access to a substantial amount of funds. For these he turned to a financial instrument unique to India - the Letter of Undertaking (LOU). It is simply a letter your country’s bank gives you to get credits in foreign banks, in order to raise foreign funds without having to pay enormous conversion fees. It is used a lot by businesses as an inexpensive way to source USD and GBP. Naturally, the LOU has to be backed by collaterals, which equate to a percentage of the loan.
The LOU was the perfect solution to Modi’s capital problem. Over the years, he took a large number of LOUs from Punjab National Bank, using bribery to cover up the fact that the Letters were not backed by cash collaterals. Modi also exploited loopholes in the banking system, particularly the lack of stringent checks on the issuance of Letters of Undertaking. Data on the payments and LOUs were entered into PNB’s system manually by data entry clerks, who were on the Modi payroll, accepting bribes for years. These officials have to process 30 to 40 payments daily, a huge amount of work. That means that accuracy must be sacrificed. Details of the fraud were then hidden away behind these documents that were not checked carefully.
But there was more. Diamond is also a good with complex pricing. Their prices are usually determined on the market, based on the value of the transactions taking place. Modi would take the diamonds and inflate their value via shell companies, set up in his relatives’ names. Diamonds were sold between the shell companies, each time multiplying its value. The shell companies also helped obfuscate the origin of funds and create a complex web that was difficult to trace. Modi also used them to create fictitious transactions and sales to artificially inflate company revenue, which in turn boosted the company’s creditworthiness.
Although people wondered where the money was coming from, they did so very quietly. The brand's allure captivated many people, pushing any questions about the money's source to the back of their minds, while Modi himself hobnobbed with Bollywood stars.
“Diamonds Aren’t Forever”
By 2017, Modi had been taking out LOUs from PNB for around 6 years without issues. But his house of cards started to come down when one of the two bank officials he had been bribing retired. In 2018, one of his representatives came to the bank asking for more Letters of Undertaking. When asked to provide collateral, they responded carelessly that they have never had to provide this before. The bank officials were puzzled, and upon research, they realised that a number of LOUs requested by Modi’s team, amounting to $1.8 billion, did not have any kind of cash collateral backing them.
The company was immediately investigated, stores shut down, and factories closed. The Modi family fled the country. It all happened overnight.
The case, known in the media as “Niravgate”, was the biggest fraud in India’s banking history.
The Role of International Networks
It's easy to point fingers at the government, blaming weak regulations and oversight, or to dismiss the case as just another example of rampant corruption in a troubled country. But that’s far from the whole story.
Digging deeper, we can see that behind every billion dollar fraud case, and every financial criminal, there is often a level of legitimate business mixed in with the illegal. In order to extract funds to their ultimate aim - much of the volume ended up in six entities in the UAE used for luxury villas, yachts and other assets for the use of the Modi family - some of the funds originally obtained fraudulently from PNB were used for retail diamond trading and sales.
Modi needed international banks to funnel his money abroad and create the illusion of a fully-legitimate business empire, international lawyers to create complex financial structures to mask the true ownership of assets, and tax havens like the British Virgin Islands, Cyprus, and the Cayman Islands to launder money, evade taxes, and host his shell companies. It was a secretive form of corruption, built in countries like the UK and Switzerland.
Modi also collaborated with international auction houses to sell overvalued diamonds, making the transactions appear legitimate and boosting the perceived value of his brand. His team leveraged international trade agreements to move goods between countries, making it difficult for any single jurisdiction to track the flow of money and assets.
Conclusion
Modi’s rise and fall is a story worthy of a movie (streaming services have likely noticed). It underscores the dangers of unchecked ambition and the moral compromises made in the pursuit of power and wealth. The case also highlights the vulnerability of global financial systems, where the lack of coordination between countries allows criminals to exploit loopholes across borders. It calls for stricter international regulations and more transparent banking practices, which we can say have been getting much better ever since 2018.
The strange thing is that these financial instruments, such as the LOUs, are expected to be dealt with with machine-like precision, but instead, they are given to humans with human errors and biases. Unfortunately, that has not changed since the case broke out in 2018.
At Complidata, we are on a mission to change that. By using AI and machine learning, we have helped over 20 banks in North America and Europe digitise and enhance their trade finance and AML compliance processes, reducing human errors, retrieving valuable information from unstructured data in trade documents, and assisting in fraud detection/prevention. Our goal is to create a more secure and efficient financial landscape, where cases like Nirav Modi's become relics of the past and the stuff for movies and not real life.
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