Indian investigators shut bank branch at heart of $2.3 billion fraud

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Investigators question staff of Punjab National Bank over $2.3 billion fraud

Indian investigators closed down a branch of a state-run bank that is at the heart of a US$1.77 billion (S$2.3 billion) fraud and questioned more of its employees as they probed the biggest scam in the country's banking history, police sources said yesterday.

Three people, including two employees of Punjab National Bank (PNB), India's second largest state-run lender, were arrested and presented before a Mumbai court over the weekend in the case that involves billionaire jeweller Nirav Modi.

The Central Bureau of Investigation, which is leading the probe, pasted a notice on the branch premises in south Mumbai barring anyone from entering the office.

The bank has said the two arrested employees colluded with companies belonging to jewellers Modi and Mehul Choksi. They issued fraudulent letters of undertaking to overseas branches of other Indian banks, which lent money to the jewellers based on the guarantee from PNB.

All the letters of undertaking were issued by the two employees who were working at the Brady Road branch in south Mumbai.

Police searched the bank premises on Sunday and also questioned five more PNB officials, a source said, taking the total number of bank staff who have been questioned so far to 11. Police also questioned some executives from Mr Modi's group, the source said.

PNB shares slid for a fourth straight day yesterday.

The sell-off has wiped out about US$1.7 billion, or more than a quarter of the bank's market value, since it disclosed the fraud last Wednesday.

Other bank stocks with exposure to the fraudulent transactions, which PNB says began in 2011, also fell.

UCO Bank, another state-run lender, said over the weekend it had nearly US$412 million in exposure to the fraudulent transactions carried out at PNB, sending its shares down more than 12 per cent in trading yesterday.

Union Bank of India and State Bank of India are among other lenders that said they have exposure to the fraudulent transactions.

Mr Modi, whose clients include Hollywood stars such as Kate Winslet and Dakota Johnson, has not commented on the allegations.

Police have said he and his family left India before PNB filed a complaint on the alleged fraud.

Including direct loans given to companies of Mr Modi and Mr Choksi, Indian banks are at the risk of taking a hit of more than US$3 billion after the fraud, according to an internal tax department note seen by Reuters.