Apart from the treachery of various officers in the Punjab National Bank (PNB), there are a several other lapses that took place leading to the Rs 12,600 crore banking fraud. Questions have been raised about the negligence of the senior officers of the Punjab National Bank to the Reserve Bank of India for not keeping an eye out for such transgressions. At the end of it all, the most impertinent question is whether it was just Nirav Modi and Mehul Choksi who defrauded with the bank’s money or is there more that meets the eye? Let’s have a look at how the fraud unfolded.
On February 14, the Punjab National Bank sent a notice to the Bombay Stock Exchange stating that it had detected a fraud amounting to $1.8 billion at its Brady Branch House with a connivance of a few select account-holders. In the heart of the matter was billionaire diamantaire Nirav Modi and his uncle Mehul Choksi, who is also the promoter of Gitanjali Gems, who were believed to have used the letters of undertaking (LoU) issued by the PNB branch to borrow money from some other overseas banks as well. The matter was referred to the Central Bureau of Investigation (CBI) who immediately issued lookout notices for Modi, Choksi and their family. However, the two jewellers had already left the country in January accompanied by a few others.
While the investigation is still on, here are some of the lapses that have emerged till now:
- A junior officer at the Punjab National Bank Brady House branch issued letters of undertaking (LoU) in connivance with a few of Nirav Modi’s men
- LoUs are like bank guarantees that allow customers of one bank raise money from other banks overseas. LoUs are issued based on collaterals. Nirav Modi and Mehul Choksi never produced any collateral for the LoUs
- LoUs are transmitted to other banks through SWIFT messages. Each SWIFT transaction generates a new reference number. In the Nirav Modi case, the same number was used for seven years
- The money advanced by the foreign banks had to be used to pay for imports of diamonds. However, the funds were often diverted to repay other loans
- LoUs are issued for 75 days. In this case the PNB issued LoUs for 365 days
- No entry was made of these LoUs in the NOSTRO account which is the book of LoUs
- The same officer who has now been charged for corruption had not been transferred from his desk for many years unlike the usual practice in the banking sector
- The general manager who is supposed to conduct internal audits in the branch every quarter did not raise alarm about the LoUs, claiming he was unaware of the matter
- The Reserve Bank of India conducted the last audit of the Brady branch in 2009. No audits were conducted post that year
The fact that there have been so many lapses raises questions on the possibility of connivance at different levels. Is the Rs 12,600 crore-fraud just the tip of the iceberg unearthed by the CBI and is there more? These questions are yet to be answered.