PNB fraud: Unanswered questions

The duration (6+ years) and magnitude (Rs.11,400 crores) of the fraud raises too many questions to rule out wider collusion. Some bankers believe that the exposure of Indian banks in this fraud involving jeweller Nirav Modi, his relatives and associated companies may touch Rs 20,000 crore. 

• The accused are retired PNB Deputy Manager Gokulnath Shetty, PNB's Single Window Operator Manoj Kharat and authorized signatory of the Nirav Modi's group companies, Hemant Bhatt. These two junior employees in a bank branch allegedly helped Nirav Modi all along for more than six years. 
• The PNB became suspicious only on Jan 16, 2018 when the accused companies approached it with import documents and a request to issue LoUs for raising buyers' credit for making payments to the overseas suppliers, after the retirement of Shetty. An alarmed bank dug out all such LoUs and LCs showing a mammoth liability towards other banks. 
• Months ahead of retirement of Gokulnath Shetty, at least 143 LoUs were issued in 63 days, starting March 1, 2017, compared to around 150 issued since 2011, when the alleged fraud began. The frenetic pace may appear like frenzy if one were to exclude weekends and bank holidays during the period. In terms of the amount involved, however, the first 150 LoUs that relate to PNB’s case against Nirav Modi involved around Rs 6,500 crore, while the 143 accounted for a tad over Rs 3,000 crore. 
• These two employees avoided employee transfer norms of three years. They circumvented rules crafted to prevent borrower-lender cosy collusion. 
• It also indicates collapse of risk mitigation across the banking system.
• Gokulnath Shetty, for the last seven years, was bypassing core banking system of the bank and issuing LoUs fraudulently.
• The conniving officer also issued Foreign LoU's by entering a smaller amount in trade finance module of Core Banking Solutions (CBS) system and generating the reference number and a SWIFT message was sent for the amount. Subsequently without making any changes in the module of the CBS, the conniving officer sent modified SWIFT message for enhanced amount under the same reference to the beneficiary bank. 
• Why these branch employees were authorised to issue LoUs well above what their pay grade would suggest, running into hundreds of crores? 
• These letters were then accepted by several other banks who never cross verified anything for years. 
• These LoUs, with validity of 6 months to 12 months, flagrantly violated RBI’s limit of 90 days of credit. Yet, none of the 30 overseas lending bank noticed this.  
• An LoU is a bank guarantee. It’s something that should be accounted for somewhere, even if it is a non-funded item. Strangely, the mandatory audit that matches transactions never picked up any irregularities.
• The mandatory 100% cash guarantee for issuance of LoU's was never insisted for Nirav Modi's companies by the PNB all along.
• Not a single external auditor, four at any given point in time, found anything amiss while reconciling transactions and LoU's.
• Only a few years ago, PNB lost Rs.1,800 crores in the Winsome Diamond Group's Rs.6,800 crore LoC scam but still reckless.
• It seems that at PNB, no one from vigilance, bank regulator, board of directors, senior management never focused on tightening up the criteria for issuing LoCs or LoUs, especially to the jeweller community.
• It seems PNB's branch employees received Rs.823 crores as kickbacks from Nirav Modi for the scandalous LoUs in these 6+ years.
• It is impossible to believe that the fraud was pulled off by just two employees with all the business intelligence technology, online updating of computerized accounts and dashboards our banks use.
• PNB’s repeated misadventures is a failure of not just of risk management processes, but also of the banking manager's, regulator’s role and the indifference of the custodians of public money. 
• The Nirav Modi episode, including his undetected departure from India like several other alleged fraudsters before him, sends out a damning message that cuts across political parties about laws and systems that govern the poor and the rich, are not the same.
• PNB is avoiding taking the entire responsibility for the scam. In a letter dated Feb 12, 2018,  PNB CEO Sunil Mehta explained the modus operandi to 30 banks affected by the Nirav Modi scam. The letter said that an LoU was opened in favour of overseas branches of Indian banks for import of pearls for a one-year period against the RBI guidelines that stipulate only a 90-day timeline. “This 90-day timeline stipulated has been overlooked by overseas branches of Indian banks,” the letter says. The letter further says that “there was a clear criminal connivance of group companies of Nirav Modi and Gitanjali Gems with PNB branch officials and officials of overseas branches of India banks”. This shows that there is a veiled attempt to share the blame by PNB. 
• Why PM and FM are maintaining stoic silence on this scandal and unconnected Raksha Mantri is briefing press conferences with unconnected details?
• The banking software provided by Infosys - Finacle needs to be upgraded with more robust one which would block this kind of frauds by junior officers and alerts sent to higher authorities. 
• Whistle blower systems must be encouraged. 
• It is impossible to believe that a few junior employees are behind this himalayan fraud. It is the responsibility the investigating agencies to bring out the truth and catch the big rats within and outside banking system. Higher management must be booked and jailed for this fraud. They can't escape their responsibility by fixing juniors.
• Diamonds as a security are susceptible to fraud. It's almost intangible. Bankers have no expertise in estimating the value of either rough stones or polished jewels and are not trained to differentiate between synthetic diamonds and natural ones either. As a moveable asset class, where lots of precious stones can look very similar, there is more chance of fraud and duplication. Bankers in India have learnt not to trust the diamond trade.
• For many diamond traders, the banks often turn down their credit demand even after submitting documents. For many demands for loans ranging between Rs 1 crore to Rs 20 crore are scrapped. Now PNB has given Rs 11,300 crore to Modi without checking any details. On one hand, the government is vociferous about compliance, and on the other hand banks are lending money without checking any documents. What a dichotomy? 
• If our political system can't manage our banking system properly giving rise to demand for privatization, how can they are competent to run Govt of India? Will they privatize GoI in preference to efficiency?
• The entire PNB Board and Top Management must resign owing responsibility for fraud and consequent losses. This will  facilitate investigating agencies to findout whether they are are involved in the fraud or not without coercion.
• India's government has said the fraud at PNB was a "manifestation of supervisory failure" at the country's central bank. In a letter to the RBI, the government said the failure to detect the biggest ever banking fraud, raised questions about the central bank's "Efficacy of supervision to detect and check systemic failure. Either the framework designed by RBI to prevent and detect such frauds is inadequate or RBI is unable to ensure its effective implementation." RBI is yet to respond.

PNB received the Vigilance Excellence Award, a year ago 

Laws grind the poor, and rich men rule the law.

Such a Himalayan Fraud involving massive amounts, undetected for 6+ years could not have been by few junior bank employees without active support from higher levels in political, bureaucratic and banking circles. Investigating agencies must unearth all these abettors creating such a gigantic  national loss. Every person violating the procedures must be booked and made answerable and accountable in PNB, other banks and every where. While the scam started in 2011 during UPA regime, all the loss causing LoUs dates to past one year, 3 years after NDA & Modi came into power and can't escape responsibility and accountability. While RBI's supervisory failure is a certainty, Govt of India blaming RBI squarely is untenable. Being owner of the bank, GoI, FM are answerable and accountable for not complying the procedures prescribed by RBI.