Punjab National Bank is in the news. The bank has detected fraudulent transactions worth Rs 11,300 Crores at one of its branches in Mumbai. The fraudulent transactions are more than 8 times Punjab National Bank's annual profit of Rs 1,324 Crores for FY 2016-17.
So, how did employees fool a large public sector bank like PNB? How did fraudsters cheat PNB out of INR 11,300 Crores?
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It all began with some diamond trading firms approaching the Punjab National Bank and opening letters of credit to import rough diamonds. For those who don't know, letters of credit is a letter issued by a bank to another bank (mainly a bank in another country), which serves as a guarantee for payments made to a specified person under specified conditions.
As per the terms of the Letter of Credit, Punjab National Bank would pay the overseas suppliers of rough diamonds, on behalf of Nirav Modi's firms within a certain time period (Usually 3 months). Now, Nirav Modi is a Billionaire Diamantaire.
Nirav Modi, a smart Gujarati entrepreneur, was one of the first to supply diamonds to his clients, catering to their specifications, way back in the 1990s. PNB would then recover the money from Nirav Modi at the end of the letter of credit, tenure.
Before I tell you about this clever fraud, lets understand what is a letter of undertaking (LOU). An LOU is issued by one bank to branches of other banks, based on which foreign bank branches offer credit to buyers. Some clever PNB employees issued fake letters of undertaking (LOUs), and based on these LOUs, foreign branches of some Indian banks, which include Axis Bank and Allahabad Bank, issued dollar loans to PNB.
These Dollar loans (Foreign Currency Loans) were used to fund PNB's Nostro accounts. (A Nostro account is an account an Indian bank has with an overseas bank). The money from these Nostro accounts, was moved to certain parties, based overseas.
After these clever fraudsters issued fake LOUs to foreign branches of some Indian Banks, these clever PNB employees misused the SWIFT Codes. (A SWIFT Code is a unique identification code for a bank). SWIFT Code is used to transfer money between banks. It is used for International wire transfers. (International money transfers). The fraudsters misused the SWIFT network to transmit messages to Allahabad Bank and Axis Bank, stating they needed funds.
How did the fraudsters misuse SWIFT? To use SWIFT, you have to log in to a network and fill up certain fields like the SWIFT Code and the account number. These details are then endorsed by a supervisor. The process is completed, when the bank which receives the message confirms and validates these details.
Why were these clever fraudsters...well, clever fraudsters? These clever fraudsters knew that SWIFT could be used to bypass PNB's core banking system (CBS). A core banking system is the software used to support a bank's most common transactions.
These transactions were never recorded in the banks (CBS), core banking system. Fraudsters tricked PNBs FINACLE software system. So, PNBs management was left in the dark....By the time PNBs management came to know about this, it was too late.
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The Diamond business is a very close-knit business. (Almost Everyone knows Everyone in this Business). So you must ask the question...Who were the suppliers? In the diamond business, the overseas suppliers of rough diamonds and the final exporters of diamonds (Those who cut/polish the diamonds and export them to foreign countries, mainly from their base in Surat), are known to each other and can even be from the same clan, or even from the same family.
Some big Diamond and Gem Companies robbed PNB out of Rs 11,300 Crores. LOUs were issued by fraudster employees from PNB, hand-in-glove with some big diamond merchants. Billionaire Diamond merchant Nirav Modi, who encashed the money abroad, from different public and private sector banks is under investigation by the CBI, for defrauding PNB of Rs 11,300 Crores .
Union Bank of India, Axis Bank and Allahabad Bank were offered letters of undertaking (LOU), from PNB and paid the money to Nirav Modi and Associates. Unfortunately, PNB will have to pay the money back, which is in several Crores.
What do you understand from this scam? Some PNB officials including a deputy general manager were hand-in-glove with big Diamond merchants, way back since 2011 and helped Diamond merchants defraud PNB of Crores of Rupees.
3. How big is this scam?
PNB has written a confidential note to some banks. PNB has warned these banks of the Modus operandi (Mode of Operation) of these fraudsters. Mehul Choksi-promoted Gitanjali Gems, Gili India and Nakshatra, are under the scanner apart from Nirav Modi and Associates.
PNB has filed a case with the CBI against Billionaire Diamond Merchant, Nirav Modi, over fraudulent transactions worth Rs 11,300 Crores. PNB shares have crashed...Big Time....
This doesn't look like the end of the scam and more banks could be affected. Banks have turned very cautious with letters of credit and Insurers are on-guard. Be Wise, Get Rich.
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