Nirav Modi case: Bank officials may have made close to Rs 823 crore in PNB fraud

nirav_modi

 

INDIA TODAY

Virendrasingh Ghunawat

Mumbai

19 February 2018

Isaac GomesOfficials at Punjab National Bank's (PNB) Brady House branch in South Mumbai may have made close to Rs 823 crore after receiving kickbacks for issuing fraudulent LoUs (letters of undertaking) to Nirav Modis firms. A chartered accountant has shared damning details of how the PNB staffers were allegedly handed out two per cent hush money per annum for several years.  In terms of LoUs which were issued by PNB, the amount comes close to Rs 823 crore. For example, LoUs worth Rs 280 crore (in first complaint), Rs 4880 crore (in second complaint) and LoUs worth Rs 5000-Rs 6000 crore were given between 2011 and 2016-17.

It is indeed very astonishing that this scam has escaped all statutory audits including that of the RBI!

Three Cs are considered critical in the business of lending- character, capacity and collateral coverage of the borrower. The Punjab National Bank (PNB) has undoubtedly faltered on these banking principles while issuing the LoUs to firms linked with diamantaires Nirav Modi and his uncle Mehul Choksi.

An eye-opener in India Today. Reminds one of the James Bond movie "Never Say Never Again!"  But this is real.  A royal ride for taxpayers! Isaac Gomes, Asso. Editor, Church Citizens' Voice.

Image result for never say never again

Image: James Bond Movie "Never Say Never Again" 

As per the information shared by a CA with India Today, PNB officials were charging a commission of around two per cent on each LoU per year, which was never shown in the bank's account's books.

Giving a break up of how PNB officials were allegedly charging commissions, the source explained: For instance, if the LoU amount is Rs 500 crore, then two per cent for one year – which comes to Rs 10 crore – was being charged as commission. Hence, for Rs 11,400 crore, the total commission that PNB officials may have charged would be around Rs 228 crore per year.

HOW SWIFT CODES WERE USED

  • What makes the PNB fraud more scandalous is how SWIFT codes were used by unauthorised officials.
  • A SWIFT message cannot be sent without the authorization of at least three bank officials.
  • Its only when all three bank officials put in their codes, can a SWIFT message be sent.
  • Manoj Kharat, who worked as a single window operator allegedly obtained access to SWIFT password.
  • The lowest-ranking official allowed to use SWIFT at the PNB branch was Gokunath Shetty who had one of the passwords.
  • Apart from Shetty, there were two senior level officials who had these passwords for clearance.
  • It is highly unlikely that the DGM of PNB branch office may not have been aware about the alleged fraud.
  • In addition to high level clearance, SWIFT messages for the entire year are audited by four different auditors.

In terms of LoUs which were issued by PNB, the amount comes close to Rs 823 crore. For example, LoUs worth Rs 280 crore (in first complaint), Rs 4880 crore (in second complaint) and LoUs worth Rs 5000-Rs 6000 crore were given between 2011 and 2016-17.

What makes the PNB fraud more scandalous is the way SWIFT codes were allegedly used by unauthorised officials. A SWIFT message cannot be sent without the authorization of at least three bank officials. Its only when all three bank officials put in their codes, can a SWIFT message be sent.

Manoj Kharat, who worked as a single window operator (SWO) at PNB had allegedly obtained access to SWIFT password. On Saturday, Kharat was remanded to 14 days CBI custody.

A bank has different audits – statutory audit, internal audit, audits during quarterly closing, RBI audit during inspections and a concurrent audit. A concurrent audit is recommended if lapses are found in any branch.

What is surprising is that for all these years fraudulent activities were going on at PNBs Brady House branch without any auditor catching a whiff of hundreds of crores of rupees in taxpayers money being swindled.

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Enforcement Directorate team raids the Viviana Mall after a complaint filed by Punjab National Bank over Nirav Modi's fraud case, in Thane on Feb 16. Photo: PTI

 

Note:

What is LoU?

Letter of Undertaking is a bank guarantee and is issued for overseas import payments. A bank, while issuing LoUs for a client (here Nirav Modi), agrees to repay the principal and interest on the client's loan unconditionally. When an LoU is issued it involves an issuing bank, a receiving bank, an importer and a beneficiary entity overseas. PNB officials allegedly used their access to SWIFT messaging system (used for overseas transaction) and verified guarantees given on LoUs without taking necessary sanctions. As a result, overseas branches of many Indian banks gave forex credit.    

What is SWIFT?

When an LoU is issued, the message of credit transfer is conveyed to overseas banks through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. This is a significant information as it gives the bank's consent and guarantee. To issue SWIFT, an official has to log in and fill up confidential information such as the account number and SWIFT code. It generally has three layers of security – a maker, a checker and a verifier within the core banking system before it is issued.

What is CBS? 

CBS refers to Core Banking System where all branches are inter-connected to ensure that the bank customers – regardless of their home branch – are able to operate their account and transact in any of the member branch located anywhere in the world. After the advent of this system, a customer is no more customer of a branch, but s/he becomes customer of bank. All the transactions are updated real-time. So, if you are wondering why the PNB couldn't detect the fraud earlier, it is because the PNB official did not rout the transactions through CBS, which would have given real-time data on transacted business.   

How did the scam come to light?

In January, when a couple of LoUs matured but the banks did not receive their payments, they approached PNB for repayment of the loans. Also, one fraudulent LoU was issued on January 16, 2018, for and on behalf of Modi's firms. The bank officials asked the firms to submit 100% cash margin for the LoU, to which the firms said that they had availed similar facility in the past. An internal inquiry by PNB found that fake LoUs were issued, opening the can of worms.

PNB has suspended ten members of staff based on the suspicion that they were hand in glove in executing the fraud.

  • As shown in India Today Channel today, LoUs worth Rs 4,886 crore were issued during 2017-18 and LoUs worth Rs 6,594 crore were issued in 2010-17. So NDA's claim that it is a UPA period scam does not hold water.  Both regimes are involved.
  • The Income Tax Returns for 2014-2017 revealed that several of Nirav Modi's partners paid Zero tax.  Nirav Modi has not paid any tax in the last two years.
  • According to Enforcement Directorate, most of the Rs 11,400 crore funds has been siphoned off abroad.
  • As per an interview in Republic TV with Prema Sridevi, Santosh Srivastava, a very close aide of Mehul Choksi, Promoter of Gitanjali Gems and uncle of Nirav Modi revealed to a question that fake diamonds (synthetic diamonds made with Chemical Vapor Deposition) were reportedly being mixed with natural diamonds.  He said that unlike gold, diamond prices were highly and arbitrarily inflated.  As an example he said if natural diamond cost Rs 50,000/-, synthetic diamond would cost Rs 3,000-4000.  He said this trend is prevelant in the Diamond Industry and it started flourishing from 2014. He advised that it would be best for buyers to get the diamonds they purchase certified by Gemological Institute of America (GIA) or Geological Survey of India (GSI).  The fees were not much, he added.

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