Punjab national bank fraud 2018
INTRODUCTION:
Nirav Modi is a luxury diamond jeweller and designer
who was ranked 57 in the Forbes list of billionaires in
2017. He is also the founder of the Nirav Modi chain of
diamond jewellery retail stores. Modi is the Chairman of
Firestar International, the parent of the Nirav Modi
chain, which has stores in key markets across the globe.
He has 16 stores in diverse locations such as such as
Delhi, Mumbai, New York, Hong Kong, London and
Macau.
PERSONS INVOLVED IN SCAM:
Nirav Modi : Nirav Modi is the owner of Nirav Modi firm,
Diamond RU.S., Steller diamond and solar exports and
the prime accused in this scam.
Mehul Choksi : Mehul Choksi is owner of Gitanjali group
and the uncle of Nirav Modi.
PNB Employees : Gokul Nath Shetty ( Retired deputy
Manager ), Manoj Kharat (clerk), Hemant bhat (Clerk
and Authorised Signatory ), Bechhu Tiwari (Forex
dept.Chiief manager), Yaswant joshi ,Praful sawant
(They were trying to shift the blames to shift the blames
to their colleagues.)
MK Sharma : Internal Auditor and chief manager of PNB.
Vipul Ambani : CFO of Nirav Modi company.
Kavita Mankikar : Executive Assistant and Authorized
Signatory.
Arjun Patil : Senior Executive of fire star group.
Niten Shahi _Manager of Gitanjali group>
Rajesh Jindal : General manager of PNB. He has headed
brady branch in between 2009-11.
Bishnubrata Mishra : Formar internal auditor of PNB. He
was responsible for auditing the transactions between
2011-15.
Sanjay Rambiya : CA firm sampat & Mehta partner.
OVERVIEW:
A massive fraud of Rs. 11, 400 crore at Punjab National
Bank by its own officials has landed India's second
largest bank in a huge controversy. The PNB fraud came
to limelight on February 14 after the bank complained to
the CBI that its own officials violated rules and put out
illegal guarantee documents to help celebrity jeweller
Nirav Modi secure credit from banks abroad. PNB is now
making attempts to recover the dues from the jeweller
who fled the country last month. Two central agencies -
the Central Bureau of Investigation (CBI) and the
Enforcement Directorate (ED) - are investigating the
matter, Raids have also been conducted on Nirav Modi's
firms and jewellery, luxury cars, watches and other
assets have been seized. property, bank accounts
associated with him have also been attached.
WHAT HAPPENED ?
India's second- -largest state-run lender disclosed that it
has been hit by the nation's biggest ever bank fraud
Billionaire. jeweller Nirav Modi and his associates
colluded with a rogue employee at Punjab National Bank
to obtain fraudulent guarantees worth $1. 8 billion
dollars over seven years. They then used these
documents to obtain loans from lenders abroad. The
country's second-largest public sector bank (PSB] said
that two of its employees were involved in the scam,
where the bank's core banking system was bypassed to
raise payment notes to overseas branches of other
Indian banks including Allahabad Bank, Axis Bank, and
Union Bank of India, using the international financial
communication system, SWIFT.
The two of the accused bank officials gave the fake
Letter of Understanding and they haven't mentioned
any of the details to the book of account of the bank
and this thing was going on from 2011.
The bank haven't issued only one but near about 145
Letter of Understanding and these all amounts to 11
thousand crore.
LoU THE KEY TO THE FRAUD:
The latest fraud uses an age-old method employed to
defraud the banking system. It involved LoUs raised at
the PNB's Mumbai office by firms owned by Modi and
his family ALOU is issued by bank to an importer (in this
case Modi). It works like a bank guarantee, which the
importer can sell to other banks at a discount. The
importer receives the money, or letter of credit, and
pays his client. The issuer bank messages overseas
branches of other banks through the SWIFT network,
and that bank immediately pays the client against the
LoU. The bank that holds the LoU then goes back to the
issuer bank (PNB in this case) and gets its due.
The issuer bank (PNB) recovers its due against the LoU
from its client (Modi), Since the LoUs are used for
importing goods and involve foreign currency. A vostro
account (client's overseas account) is used to deposit
the credit by the bank accepting the LoU However,
issuance of the LoU involves a lot of process and to
mitigate the risks of fraud, banks insist the client deposit
an equivalent amount of assets, mainly cash, in the local
branch, to avail of the overseas facility.
Nirav Modi, via his three firms, Diamond R Us, Solar
Exports and Stellar Diamonds, managed to pay to its
suppliers of rough stones on a regular basis. The
payment was made through the loans by banks
including Axis Bank, UCO Bank (Rs. 2,636 crore) and
Allahabad Bank (around Rs. 2,000 crore). The loans were
raised by Nirav Modi's firms on showing the letters of
undertakings issued by the PNB.
Incidentally, there was no official record of such letters
of undertaking in the PNB records as the bank
discovered early this year before reporting the matter to
the CBl.
HOW DID IT COME INTO
LIMELIGHT ?
It came to light last month, when representatives of
Modi's companies approached PNB for a fresh loan, the
details of which have been made public. By then, Shetty
had retired and his successor declined to honor Modi's
request. At this, the firms contested that they have been
availing this facility in the past also but the branch
records did not reveal details of any such facility. This
was when it discovered the fake letters of undertaking
and filed an initial complaint alleging a $44 million fraud.
Two weeks later, it filed another complaint covering
transactions worth about $1.77 billion, according to
people familiar with the matter.
WHY DID IT HAPPEN ?
PNB's internal information systems were not seamlessly
linked to SWIFT. It is claimed that the huge fund
transfers made via SWIFT to Mr. Modi's companies by a
few PNB employees went undetected for many years.
Many critics, contend that the fraud is not simply a
matter of the failure of PNB's internal control system.
Instead, they blame flaws in the ownership of public
sector banks. In fact, the PNB scam came to light only
after a whistle-blower exposed it.
Following Bangladesh Bank heist in 2016 of USD 81
million, Reserve Bank of India (RBI) had issued an
advisory to all the banks asking them to ensure that
their computer systems running core banking solutions
(CBS) were properly integrated, wherever required, with
SWIFT (Society for Worldwide interbank) - a messaging
service for interbank transactions across the globe.
Now, PNB has said that due to system upgrade process,
its CBS was not integrated with SWIFT for several years.
Some experts have estimated that had the PNB taken
the RBl advisory seriously and detected the fraud even a
year early, it could have kept the loss to bank limited to
USD 800 million. The current estimate is that the PNB
fraud cased a loss of USD 1.8 billion or Rs 1 1,400 crore.
WHAT BANKS MAY DO IN FUTURE ?
All the banks should review their critical systems and
processes including the IT segment regularly, Ethical
banking practices should be preferred. Disclosures to
RBI, SEBI and other regulators should be made with
consistent periodicity.
Banks should ensure that there are adequate systems
and controls in place to identify potential risks and that
they are being followed at all relevant branches. SWIFT-
CBS linking must be made mandatory for all LoUs.
Confirmation from lending foreign branches must be
done for each of the LoUs.
All internal and external audits must be completed on
time at branch level, The audit reports should be shared
with the government's auditors and examined by the
RBl, which should conduct a separate audit every year,
In the PNB fraud case, the bank has told the finance
ministry that the last audit by RBI was done in March
2009.
STEPS TAKEN BY THE GOVERNMENT:
The Union government signalled a zero-tolerance
approach to white-collar crime, approving a new law
targeting economic offenders fleeing the country, and
creating a regulator for chartered accountants and audit
firms.
The actions, came two weeks after Punjab National Bank
(PNB) went public with a multi-billion-dollar fraud, are
part of a series of steps the government has initiated to
mitigate the financial and political fallout of the scam.
These include banking and bankruptcy reforms,
disqualification of directors of errant companies, striking
shell companies off the records and stringent action
taken by various regulators in the last few weeks against
those who allegedly duped banks.
The Fugitive Economic Offenders Bill 2018, which will be
tabled when the budget session of Parliament resumes,
provides for proclaiming an economic offender who has
fled the country as a fugitive, issuing an arrest warrant
against the person and confiscating his or her assets
before conviction.
Finance minister Arun Jaitley said that the bill provides
for confiscating all assets of such offenders including any
benami assets, not just the proceeds of crime.
Only offences above Rs100 crore will be pursued under
the Fugitive Economic Offenders Bill 2018 in order to
prevent overcrowding of courts.
CONCLUSION:
This is a clear case of Falsification/Fabrication as the
records were manipulated by the employees of the PNB
and false LOU was issued by them to the foreign banks.
Apart from this even the banking system of PNB was not
that strong because of which the employees were able
to manipulate the things. If the SWIFT system would
have been linked with the CBS, then definitely the
records of issuance of LOU could be easily found and it
won't be possible on their end to do the transactions 8
times in a due course of 6 years. Hence, it is learnt from
this case that upgradation of the banking system of PNB
is highly required and all the employees should abide
the laws of the organization they are associated with.
