We know that Nirav Modi, the billionaire jeweler who along with others scammed Punjab National Bank (PNB) of over 11400 crores and later fled the country. The Bank initially reported a scam of rupees 280 crores. But it was later realized to be rupees 11400 crores. This is one of the biggest in India’s banking history. Punjab National Bank registered a case against Nirav Modi, His Brother Neeshal Modi & His Uncle Mehul Choksi on February 13, 2018. The CBI has registered a case against Nirav Modi on January 29, 2018. In March 2019, Nirav Modi was arrested in London.

Nirav Modi is an importer of diamonds. Basically, importers prefer to take loans in foreign currencies as interest rates on that are lower. In this case a loan that is taken from any overseas bank guaranteed by PNB. Then what Modi had to do was approach PNB & ask for buyer’s credit. In order to do this PNB had to issue a “Letter of Undertaking” to an overseas bank. LoU guarantees an overseas bank that if it gives money for a specified period to identified client by the home bank (in this case PNB) then the home bank will assure that the money will be returned to the overseas bank.

LoUs are generally given when the home bank has an approved line of credit for the client. PNB should have verified Nirav Modi’s credit worthiness The LoUs are delivered to Society for Worldwide Interbank Financial Telecommunication (SWIFT) which is coded messages that are used in international banking. In India, all the banking records are saved on the Core Banking System (CBS). But surprisingly PNB didn’t use these mechanisms.

Till December 2017, everything seems very smooth and fine as the partner in crime Mr. Gokulnath Shetty, has retired from his office of deputy manager of PNB, Brady Road branch. The scam exposed in January 2018, when the officer received a call from the representative of Nirav Modi to renew the LoU and the new officer found no equivalent worth of collateral is extended from the client asking for LoU. Digging deep into the matter, this banking malpractice was conducted by Mr. Shetty, Since 2011. Mr. Shetty, the then Deputy Manager at Brady House branch of the PNB, had continued in the same seat for seven years and issued fraudulent LoUs with impunity. Mr. Shetty misused his position that empowered him clearance of MoUs as he is proficient in Finacle, an ERP software program, internally used by PNB to verify large transaction. He bypassed PNB’s core banking system Finacle and issued LoUs fraudulently.

CBI investigations revealed that messages for fraudulent LoUs were sent to overseas banks by misusing international messaging system for banking called SWIFT platform and without making their subsequent entries in Finacle that is instrumental for core banking system and thus Mr. Shetty was bypassing any scrutiny of such funds in the bank.

In this fraud of Rs. 11400 Crore, that goes to the hands of Nirav Modi and Mehul Choksi, CBI found nearly Rs.5 Crore of disproportionate assets of Mr. Gokulnath Shetty which amounts to 0.25% of the fraud amount. With this unethical practice the retired banker is now in jail.

Is there any gain to anyone in this scam?

• Nirav Modi’s Business which has got a very famous brand name is shut-down.
• Mehul Choksi’s Promoted Gitanjali Gems and Jewellery is closed.
• The shareholder of Gitanjali gems have lost their wealth as the stock price was grounded due to the legal matters.
• The retired Deputy Manager of the PNB Branch is in jail and could not enjoy his post-retirement life with his near and dears.
• Top authorities of the Bank showed their low IQ as they know there is a need for syncing the CBS with SWIFT. So that bypassing the payment without maintain record against payment won’t be possible.
• The tax-payers money is diverted to compensate the loss of the bank due to fraud instead of using the fund in social infrastructure building and economic development.
• Both the UPA government and the Modi government proved themselves that they were unable to manage the banking system and allowed the fraud to flee away from India after doing a mega loot.

In 2016, the PMO office received an application against the Gitanjali Jewellers and its Promoter Mr. Mehul Choksi that alarmed a possible mega fraud similar to Vijay Mallya but the PMO decided to keep silence on the ongoing fraud.

The scam is a clear example of Operational inefficiency of the bank from multiple points.

1. Generally, the bankers perform various tasks on a rotation basis in the branch. Then, why Mr. Gokulnath Shetty was handling the LoU for continuous seven years?
2. The IT officers and the officers of Database Management must be very much aware that the domestic CBS and the global SWIFT were not synced and thus there could be a chance of banking malpractice.
3. The auditors have not checked the SWIFT records minutely.
4. Despite the repeated circulars of RBI, reconciliation of CBS and SWIFT messages was not done.
5. RBI as the supreme authority did not audited the PNB.
6. PMO’s silence on the whistle blower’s application discourages whistle blowing against unethical practice and encourages the frauds to fraudulent practice.

I understand the readers of this small report must understand the benefits of doing business ethically and the cost of fraudulent practice in long run. Operational inefficiency leads to operational risk and finally the financial and business risk to any organization.

Author:
Dr. Tushar Panigrahi, Unitedworld School of Business (UWSB)

Disclaimer: The opinions / views expressed in this article are solely of the author in his / her individual capacity. They do not purport to reflect the opinions and/or views of the College and/or University or its members.