Punjab National Bank on Valentine's Day, disclosed that it had discovered a Rs 11,360 Crore scam. At the center of this scam were some unscrupulous PNB employees and a Billionaire Diamond Jeweler with International Connections. The CBI is investigating the scam and Gitanjali Gems, Gili India and Nakshatra are also under the scanner.
This fraud has shaken the banking system in India. Citizens are asking, Could this fraud have been prevented? Did PNB miss the warning signs? How safe are bank systems?
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The PNB Fraud which is the biggest fraud in Indian history, has prompted some interesting questions. Why was a fraud which was going on for the last 7 years, only detected now and that too accidently? PNB Branches are audited by two teams of auditors.
Not only is there an internal audit, there's also a concurrent audit. (A concurrent audit is a systematic and timely examination of bank financial transactions on a regular basis to ensure authenticity and compliance with procedures). So how did two teams of auditors, miss such a big fraud, for so many years?
The PNB Bank had been issuing letters of undertaking (LOUs), to various banks since 2011, to fund diamond merchants. In the LOU the bank, agrees to repay the principal and interest on the client's loan (Nirav Modi), unconditionally. When a LoU is issued it involves an issuing bank, a receiving bank, an importer and a beneficiary entity overseas.
The letters of undertaking were getting rolled over, the moment they expired. This scam was detected, only after the officer handling this account for all these years, retired. So why did the auditors miss the scam? For PNB, its internal CBS (Core Banking System), was not integrated with International Messaging System operated by SWIFT.
So....the audit team missed the massive Rs 11,360 Crore fraud. What about the Statutory Audit? A Statutory Audit is conducted to ensure that the financials of the Company/Bank are in order. So why was the Statutory Audit not able to detect the fraud?
PSU Banks appoint several auditors across cities. These auditors have access to data, pertaining only to a single branch. Now, for auditors, PSU Banks may be a single client. They don't want to get on their wrong side. So, these auditors are not really independent.
Can't really blame the auditors when banks and regulators have failed...Right.
PSU Banks follow ancient methods of appointing auditors. PSU Banks have hundreds of auditors, compared to just a couple of auditors for Private Banks. Take a look at this...A PSU Bank saved Rs 35 Crores, simply by reducing the concurrent auditors from 1,400 to 30.
Imagine these 1,400 auditors generating hundreds of reports. Do you think the bank management had time to go through all these reports? (Many of them were of bad quality). With the concurrent auditors reduced to just 30, consolidated reports were created. This meant the bank management had to go through just 14 reports.
Don't you think PSU Banks should have less number of auditors like Private Banks?
PNB says Gokulnath Shetty, a Deputy General Manager with the foreign exchange department looking after import payments and posted at a PNB branch in Mumbai, was hand-in-glove with Niraj Modi. This was where the fraud of Rs 11,360 Crores originated. Gokulnath Shetty is now retired.
Gokulnath Shetty issued a 365-day letter of undertaking, that allowed Nirav Modi Companies to get money from other banks. An LOU for a diamond trader should be issued only for 90 days. Shetty, most probably wanted to cover the fraud, and the largest scam in Indian banking history was discovered only after he retired.
So where was the mistake? Gokulnath Shetty was allowed to continue at the same bank branch and handle the same assignment for several years.
According to PNB's rules, a scale-1 officer must be shifted to another branch, at least once in 3 years. So, PNB did not follow its own rules. Be Wise, Get Rich.
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