On Valentine’s Day, India’s biggest bank scam of $1.77
billion sufaced – social media burst with the news that how did two employees
and famed jeweller tried to fool a stodgy bank. And it remained everyone with a
question “what actually happened?”. So let’s try to find what the PNB fraud
really is?
It began with diamond firms approaching PNB for opening letters of credit for import of rough stones. As per the terms of the LC, a common banking tool, PNB would pay the overseas suppliers on behalf on Nirav Modi’s firms within a certain period (typically three months) and recover the money from Modi. It’s a market practice to extend the LC if the client (i.e, NM) is unable to cough up the money at the end of the LC tenure.
This is done on the basis of letters of undertaking given by the local bank (which in this case is PNB). PNB employees issued fake LoUs, on the back of which foreign branches of a few Indian banks — including Axis and Allahabad Bank — gave dollar loans to PNB. These foreign currency loans were used to fund PNB’s Nostro accounts and from these accounts funds moved to certain overseas parties. A Nostro account is the account an Indian bank (here, PNB) has with an overseas bank.
Based on unauthorised Lo-Us, the PNB employees misused the SWIFT network to
transmit messages to Allahabad Bank and Axis Bank on fund requirement. In using
SWIFT, one has to log into the network to fill up fields like the account
number and SWIFT code, following which it is endorsed by a supervisor. The
process is completed when the bank receiving the message confirms and the
details are validated. While all this was done using SWIFT passwords, the
transactions were never recorded in the bank’s core system — thus keeping the
PNB management in the dark for a long time.SWO Manoj Kharat and authorised signatory of the Nirav Modi Group of Firms
Hemant Bhat were arrested along with Shetty.All three were produced before the CBI special court in Mumbai today and were
sent to police custody till March 3.
What is LoU?
There is a provision of bank guarantee known as letter of undertaking (LOU)
under which a bank allows its customer to raise money from another Indian
bank's foreign branch in the form of a short term credit. The LOU serves the
purpose of a bank guarantee.
How and when it come to light?
In January, the fraud was unearthed when Modi's firm requested further LOUs for
paying the overseas suppliers. On this, the bank officials refused on the
ground that Modi's firm need to keep 100% collateral for the same. The Modi's
firm argued that no such money was kept 'on margin' in the past either.
Following which, the bank officials scanned the records only to discover that
there was no trace of any such transaction. This implies that the guarantees/
undertakings were issued by bypassing the rules in collusion with some PNB
employees.
The violation of banking rules as mentioned above was too glaring a blunder to
ignore. Hence, Punjab National Bank filed a criminal complaint with the CBI on
January 29 accusing Nirav Modi and others of defrauding the bank and causing it
a loss of Rs. 280 crore ($43.8 million). The complaint was filed against three
companies and four people, including Nirav Modi and Mehul Choksi, managing director
of Gitanjali Gems.
Last update on the scam
Last update on the scam
The CBI on Saturday arrested three persons, including former deputy manager of
Punjab National Bank(PNB) Gokulnath Shetty, in connection to the Nirav Modi
fraud case.
Nirav Modi had left India much before the scandal was discovered. The passports
of Nirav Modi and Mehul Choksi have been suspended for four weeks today as CBI
and Enforcement Directorate are carrying out investigations and sought its
revocation.
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