PNB Fraud

Rs 11,400 crore transaction fraud case in PNB.

This is in addition to the 280 crore fraud case that he is already under investigation for, again filed by PNB.

Nirav Modi, the billionaire in the middle of this controversy, is a luxury diamond jewellery designer who was ranked #57 in the Forbes list of India’s billionaires in 2017.

According to the complaint filed by PNB with the CBI, the fraudulent issuance of Letters of Undertakings (LOU) was detected at the Mid Corporate Branch, Brady House in Mumbai.

A set of partnership firms — Diamond R US, Solar Exports and Stellar Diamonds — approached the bank on January 16 with a set of import documents and requested for Buyer’s Credit to make payments to overseas suppliers.

The firms have Nirav Modi, his brother Nishal Modi, Mr. Nirav’s wife Ami Nirav Modi, and Mehul Chinubhai Chokshi as partners.

Buyers Credit is, typically, a short-term loan facility extended to an importer by a bank to finance goods and services. It is a common mode of transaction in international trade where a bank extends credit to the importer and a finance agency based in the exporter’s country guarantees the loan.

As there was no sanctioned limit in the name of the firms, the branch officials requested the firms to furnish 100% cash margin for issuing the LOU for raising the Buyer’s Credit. At this, the firms contested that they have been availing this facility in the past; but the branch records do not corroborate this.

On digging further, the bank officials discovered that two of its employees had fraudulently issued LOUs in the past without following prescribed procedures and approvals. The employees had then transmitted SWIFT instructions to the overseas branches of Indian banks for raising Buyer’s Credit without making entries in banking system to avoid detection.

The complaint also said that the funds so raised for the payment of the Import Bills have not been utilised for such purposes in many cases.

As per the FIR, five of the SWIFT messages (SWIFT is a messaging network used by financial institutions to securely transmit instruction) were issued to Allahabad Bank in Hong Kong and three to Axis Bank in Hong Kong.

Banks are audited at three levels — apart from an internal audit, there is an external auditor and a statutory audit undertaken by the RBI. The CVC is keen to understand how none of these audits picked up a red flag on the letters of undertaking that seem to have been issued bypassing the system.

CA regulator seeks details from PNB, CBI, ED and SEBI to ascertain if there were wrongdoings by auditors; sets up high powered group to examine systemic issues

The Institute of Chartered Accountants of India (ICAI) had asked Punjab National Bank (PNB) as well as probe agencies, including the CBI, Enforcement Directorate (ED) and capital markets regulator SEBI to provide it with the details regarding the alleged Rs. 11,500 crore scam to ascertain whether there was professional misconduct/wrongdoings by auditors.

In a statement, the ICAI said it had set up a high-powered group to examine whether there were systemic issues. The group would also suggest remedial measures and improvements in the banking system to prevent the recurrence of such incidents.

The Central Vigilance Commission (CVC), India’s apex body for checking corruption in the government, has summoned senior officials of the Reserve Bank of India and the Finance Ministry, along with the Chief Vigilance Officer of Punjab National Bank (PNB), early next week to assess how the Rs. 11,500 crore fraud reported by the government-owned PNB, slipped past all the in-built checks and balances in the banking system.

An official aware of the development said the CVC would like to ascertain if there is a systemic issue that needs to be corrected, as it isn’t convinced by the bank’s claims that junior employees colluded with the fugitive diamond merchant Nirav Modi and other banks were to blame for not carrying out due diligence on the letters of undertaking (LoUs).

The Reserve Bank of India (RBI) said the failure of internal controls was the main reason for the Rs. 11,500 crore fraud that occurred in Punjab National Bank (PNB).

The banking regulator, in its first reaction since the issue came to light on described the fraud as a case of operational risk arising out of delinquent behaviour by the bank’s employees.

The fraud in PNB is a case of operational risk arising on account of delinquent behaviour by one or more employees of the bank and failure of internal controls.

RBI said it was assessing the situation and would take appropriate supervisory action.It has already undertaken a supervisory assessment of control systems in PNB and will take appropriate supervisory action.

RBI denied directing PNB to pay other banks.

One of the worrying aspects of the scam is that in its statement, PNB says that based on the fraudulent transactions, other banks appear to have advanced money to the customers abroad.

It goes on to add that these transactions are contingent in nature and any liability arising out of these on the bank will have to be decided based on the law and genuineness of underlying transactions.

However, the 11,400 crore scam comes at a time when the Central government is attempting to provide a breather to ailing PSBs, having announced a 2.11 lakh crore capital infusion to the sector in October 2017.

The CBI and the Enforcement Directorate conducted searches on Mr. Modi’s firms and his associates across the country.

The External Affairs Ministry suspended his passports along with that of his relative Mehul Choksi.

The Ministry said it would revoke their passports if they failed to respond to the notice of suspension within one week.

The Rs. 11,500-crore fraud in the state-run Punjab National Bank (PNB) has brought back into focus the importance of Know Your Employee (KYE) norms for banks, according to some experts.

As early as 2005, when the banking sector was in the initial stages of adopting technology, Reserve Bank of India (RBI) had highlighted the importance of banks enforcing KYE norms which would act as a firewall against frauds committed in connivance with employees.

The latest scam at PNB involves issuing unauthorised Letters of Undertaking (LoUs) in favour of companies for availing buyers’ credit, allegedly in connivance with a former employee and a present employee.

In September 2005, the central bank had cited the recent cases of technological mishaps, resulting in mainly employees or ex-employees of banks-induced financial losses which had also damaged the lenders’ reputation.

G Padmanabhan, the then chief general manager of RBI, had urged the banking community to enforce KYE norms not only prior to staff recruitment but even more vigorously thereafter.

Proper and systematic employee background verification is the need of the hour but the number of public sector units that opt for background checks are low in India because human resources practices have not evolved and there is a resistance to change.

There has been a rise in number of private sector banks and NBFCs that are not only conducting background screening but are also doing regular credit checks on their employees who at the end of the day handle large amounts of clients’ money.

Not only the banking regulator but the central vigilance commission (CVC) has also talked about the importance of KYE recently.

According to a vigilance manual released last year, CVC said that several frauds were insider jobs or perpetrated with the help of insiders.

It had asked banks to take extra care and have continuous vigil on their staff while highlighting the need for KYE and Know Your Partner norms.