Nirav Modi-PNB fraud: Why he chose a Mumbai branch over others and how the scam went undetected

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February 16, 2018

The Nirav Modi-Punjab National Bank multi-crore fraud case seems to be getting murkier with each passing day. The Enforcement Directorate (ED) raided 17 locations linked to Nirav Modi and Geetanjali Gems and seized diamond and precious stones worth Rs 5,100 crore on Thursday.

February 16, 2018

The Nirav Modi-Punjab National Bank multi-crore fraud case seems to be getting murkier with each passing day. The Enforcement Directorate (ED) raided 17 locations linked to Nirav Modi and Geetanjali Gems and seized diamond and precious stones worth Rs 5,100 crore on Thursday.

While there is ambiguity on how a Rs 13,400-crore fraud happened, a top Finance Ministry official told India Today that the fraud went undetected despite several layers of audit, including those by the Reserve Bank of India, as the SWIFT system which generates Letters of Understanding (LOUs) was not integrated to the core banking system (CBS) of the bank.

SWIFT stands for Society for Worldwide Interbank Financial Telecommunication and provides an interactive platform to banks. SWIFT is essentially a global messaging network used by banks and other financial institutions to send and receive information, including instructions on money transfer, through a secure coding system.

WHY BRADY HOUSE BRANCH IN MUMBAI WAS PICKED?

Probe agencies suspect the accused company and individuals picked the Brady House branch in Mumbai because the SWIFT system at this Punjab National Bank branch was not integrated to the core banking system.

Operation of the SWIFT system is handled by two people–maker and checker. Probe agencies are certain that both the PNB personnel in this particular branch were hand-in-glove with the diamond merchant company. The fraud was detected only after these two people retired and a new person took over the job.

Sources in the Finance Ministry say that the fraud LOUs were issued in 2011. The LOUs issued were way beyond the sanctioned amount for Nirav Modi's companies. And, these were never "made part of the SWIFT system".

Which means the companies could have drawn much more from other banks than what PNB actually guaranteed to pay these banks. Each of the LOUs had a 90-day "roll over" period. The PNB staff, including deputy general manager Gokulnath Shetty, kept re-issuing the LOUs or simply rolling them over. The PNB staff reportedly charged "commission payments" for the SWIFT transactions to maintain the cover.

WHY WAS THE FRAUD NOT DETECTED?

The SWIFT messages were audited at prescribed intervals but since the log book did not mention the LOUs issued to Nirav Modi companies, the fraud could not be detected.

PNB deputy general manager Gokulnath Shetty retired in May 2017. Finance Ministry sources allege that just before his retirement, Gokulnath Shetty rolled over the LOUs not for the usual 90 days but for 365 days so that Nirav Modi and his associates could continue with their "fraud" without worry of detection.

Sources say that Gokulnath Shetty might be the mastermind behind the act but the fraud could not have been sustained without the knowledge and connivance of higher-ups.

The Reserve Bank of India too faces credibility challenge as the fraud was not detected during the annual audits of the banks or the CBS since 2011.

HOW WAS THE FRAUD UNEARTHED?

The first hint about a fraud came when Nirav Modi's team started looking for avenues to get a fresh extension for the LOUs. Since their pet officials had retired, the request went to a new team which questioned the need for "rolling over" the LOUs.

A PNB official reportedly flagged the matter to the bank headquarters. Subsequently, the hidden records on old LOUs came tumbling out.

PNB, which is the second-largest public sector lender, is in serious trouble. The bank's shares are tanking at a time when it has released a series of television advertisements.

A Letter of Understanding (LOU) is the same as a bank guarantee (also known as Letter of Comfort) from the issuing bank to other banks outside the country wherein the bank guarantees that if the entity fails to pay the amount, the bank which issued the LOU will pay the amount.

That is why PNB, on February 12, wrote to CMDs of most public sector banks informing them about the modus operandi of the fraud and requesting them to inform if the scam had reached their branches.

WHAT IS THE ROAD AHEAD FOR PNB?

Government sources say that some amount of money will be recovered from the seizure and sale of Nirav Modi's properties if the billionaire jeweller continues to evade the law and doesn't pay up.

"PNB would have to honour the lendings based on its LOUs. Eventually, the bank would have to make provisions for the money and it would become part of its already deflated balance sheet," said an official.

Some sources also say that Punjab National Bank may take recourse to an argument that other lending banks should have scrutinised the terms and conditions of the LOUs more carefully before honouring them for payment of loans. However, the major liability will still fall on Punjab National Bank.


Courtesy/Source: India Today

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