The Motivations for defaulting with banks

The first thought that struck me, when I was reading about how Nirav Modi leveraged the banking system where he was accused of obtaining fake LOUs ( Letters of Undertaking ) worth $1.77 billion from PNB ( Punjab National Bank ), was why would a billionaire want to do that? After all, there are many ways to raise funds, private equity, family and so on. Nirav Modi had made it to no 71 on the Forbes 100 Riches Indians list in 2016.( $1.74 billion revenue at age 45). The diamond king of India, he was diamantaire extraordinaire, to the biggest celebrities in the world from Kate Winslet, Dakota Johnson to Priyanka Chopra. So I was puzzled by why someone who already has so much money would want more of it and that too by an illegal method?

It is one thing to have only fame or only fortune, but when you have both what could motivate a man to misuse public funds and commit a fraud is the question.

The ACFE (Association of Certified Fraud Examiners ) defines fraud as “any intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means”.

The motivation to defaulting with banks which arises from a dire financial need is a common motivator and perhaps easier to understand. However, a motivation that arises from greed which is also a common motivator is much more complex and more difficult to with.

The Fraud Triangle

The most widely known theory for fraud was written a long time ago in 1950 by Donald R Cressey. Cressey was a penologist, sociologist criminologist who made several innovative contributions in the field of crime.

Let us look at the top of the fraud triangle to understand what pressures Nirav Modi might have been going through at the time he considered to default on his credit in the PNB system.

Cressey's theory says that a person who commits fraud is typically under some pressure; which means he is under some threatening professional or personal circumstances.

KE Tippet in his paper The Individual's Motivation for fraud, quotes John Hunter of Corporate Compliance Insights "One of the more intriguing ideas in relation to fraud is rather than fraud serving the end of acquiring resources, those who commit fraud do so to avoid losing what they already have and have usually acquired quite legitimately". In Nirav Modi's he was already successful and he might have felt that if he didn't raise resources he may have lost what he had already built as a global brand.

The other pressure that he could have been under is the one created by ambition or the gap between where he was and where he would like to be. His ambition was to have a 100 stores by 2025, and he had stores in New York, Hong Kong, and London besides Mumbai and Delhi of course. If he wanted to fund several more shops across the world, that could have ultimately led him to create the PNB fraud with false LOUs.

The 100 global stores were also the opportunity which would catapult Nirav Modi to even further global fame. The 100 stores were a valuable target both for personal gain and professional gain which for him might have rationalized the need for a bank fraud. He might have rationalized his actions because only what he was doing would help create a truly global brand called Nirav Modi.

Organisational Fraud

Then, of course, one wonders what drives staff at public sector banks in India to be accused of fraud.

 "The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets "

2014 Global Fraud Study

The 2014 Global Fraud Study pointed out that the motivations for fraud were the following:

• Living beyond their means. (44% of the cases.)
• Financial difficulties ( 33% of cases.)
• Unusually close association with a vendor or customer (22% of cases).
• Control issues, or an unwillingness to share duties (21% of cases).

It's a pity that Nirav Modi moved from being an extraordinary diamond jeweler and designer that ranked with the best in the world, to an extraordinary financial defaulter. But such is the nature of both human need and greed combined as suggested the Fraud Triangle by Donald R Cressey!

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