Diamond merchant Nirav Modi is the prime accused in the recently surfaced banking scam and is guilty of transmitting funds worth about 11,500 Crore from Punjab National Bank which is a Public Sector Bank. This scam is considered as one of the Biggest banking scams in India and across the globe as well. This has come to light after various banks which had extended credit to a noted financial criminal Vijay Mallya and were yet to recover from a shock of major default of loans Mallya gave them. The main factor in this recent scam is the Society for Worldwide Interbank Financial Telecommunication whose acronym is SWIFT. SWIFT is a messaging network that connects banks and other financial institutions across the world. Among other things, a bank that is part of SWIFT can use it to convey credit instruments (the document that serves as an evidence of debt) called letters of undertaking (LoUs) to other banks located overseas.
An LoU is simply a request made to another bank in the SWIFT network to loan or give money to a client in simple terms. The bank that issues the Letter of Understanding essentially guarantees the bank that receives the LoU request that it stands by the creditworthiness of the borrower. That is, in case a default happens, the bank that issued the LoU stands liable to compensate the bank that made the loan to the borrower.
The Punjab National Bank alleges that employees at one of its branches in Mumbai issued fraudulent LoU’s which were not authorized by its top management. These LoU’s allowed Nirav Modi’s companies to obtain loans from the overseas branches of various Indian banks. The question that arises here why did such a thing happen?
It is primarily because PNB’s internal information systems may have not been smoothly and continuously linked to SWIFT. Was this deliberately done? Was it a management or Information Control failure? It is claimed that the huge fund transfers made via SWIFT to Modi’s companies by a few Punjab National Bank employees went undetected for many years.
The fraud is not simply a matter of the failure of PNB’s internal control system. Instead, there are deficiencies in the ownership and management of the various public sector banks in India which also includes the recent scam hit Punjab National Bank.
In fact, the PNB scam came to light only after a whistle-blower exposed it. Who was trying to hide such a big scam since long? In India and overseas, we have witnessed many big scams in the recent past. Be it the scams related to banking or due to corporate governance failures. They include Harshad Mehta & Ketan Parekh Stock Market Scam – 5000 Crore, Satyam Scam -14,000 Crore, Commonwealth Games Scam-70,000 Crore, 2G Spectrum Scam-1,76,000 Crore , to name a few.
The recent one, that is, the PNB scam is seen due to SWIFT system compromise and manipulation. Is this the first time the scam like this has happened due to SWIFT?
No! The SWIFT has been manipulated unscrupulously by miscreants on a number of occasions. In 2016, there was an online monetary theft of $81 million from Bangladesh’s central bank by hackers. Russia’s central bank recently reported that $6 million was stolen from a Russian bank last year by exploiting and compromising the SWIFT system. Even the Reserve Bank of India last week stated that it had privately warned Indian banks about the prospect of misuse of SWIFT at least three times since August 2016. Interestingly, the Government had announced capital infusion to six public sector banks which involved an amount of Rupees 5473 Crore to PNB as well. The process would be completed by March 2018. Now who is to be blamed here? Nirav Modi? The Government of India? PNB ? Or the RBI?
—The author is doing his MBA in Financial Management from the Department of Management Studies, Kashmir University. He can be reached at: firstname.lastname@example.org