Know How The PNB Scam Was Pulled Off
February 16th, 2018
Punjab National Bank on Monday revealed that it had detected fraudulent transactions worth Rs 11,300 crore from its single branch in Mumbai. The scam allegedly connected to the famous jewellery designer and billionaire Nirav Modi. But what has actually happened? A note released by Punjab National Bank to other banks gives more details of the scam.
The scam was detected in the third week of January, as reported by The Quint quoting Sunil Mehta, MD, PNB. He said that they have promptly investigated it over 3-4 day and approached CBI on 29 January. An FIR was booked on 30 January. 18 employees from PNB has been suspended so far and Nirav Modi’s home and offices were raided by the Enforcement Directorate (ED). Officials informed that Modi along with his family fled from India in the first week of January, days before the case was registered.
Nirav Modi allegedly took advantage of the loopholes in the banking system by seeking the Letters of Understanding (LoU).
“It was found through SWIFT trail that one junior level branch official unauthorisedly and fraudulently issued Letters of Undertaking (LoU) on behalf of some companies belonging to Nirav Modi Group for availing buyers’ credit from overseas branches of Indian Banks,” the cautionary note by PNB stated.
What is Letters of Understanding (LoU)
Letters of Understanding or LoU refers to the bank guarantee issuing for overseas import payments. While issuing an LoU, a bank agrees to the client to repay the principal and interest unconditionally. Here, the bank allows the customer to raise money from another Indian bank’s foreign branch, in the form of a short-term credit. Through LoU, one bank tells another they would meet customer’s liability.
The customer has to pay a margin money to the bank issuing the LoU and he will be granted a credit limit. But in this case, there was no credit limit and Nirav Modi did not give margin money.
Nirav Modi’s three firms- Diamond R Us, Solar Exports and Stellar Diamonds managed to pay rough stones to its customers on a regular basis. The payment was made through loans by different banks including Allahabad Bank, and Axis Bank. Modi’s firms raised the loans by showing the LoUs issued by the PNB. But there was no official record of any Letters of Understandings in the PNB.
In a situation when a customer fails to repay the loan, the bank issuing the LoU have to pay all these banks that give loans to a borrower on the basis of the LoU issued by the lender.
A complaint was filed by PNB with the CBI accusing Nirav Modi and others of defrauding the bank and causing loss of Rs 280 crore. The PNB, according to a report by the Scroll has said that it would repay back the liabilities they were responsible for.
What is SWIFT?
The instructions regarding LoU is sent through a system called Society for Worldwide Interbank Financial Telecommunication (SWIFT). This system is trusted by all other banks since it has to be endorsed a supervisor. According to the note by PNB, junior level branch official sent instructions to the foreign branches behalf of the PNB which was unnoticed by the bank.
What is CBS?
CBS stands for the core banking system where all branches are interconnected. It enables customers to operate their accounts to avail banking services from any branch of the bank on CBS network. The customer here comes to the bank’s customer and no more acts as a branch customer. Customers of CBS branches will get all the banking facilities from any other CBS branch from anywhere in the world. In CBS all the transactions are updated on a real-time basis. The PNB could not detect the fraud since the official did not route the transactions through CBS.