The Anatomy of Nirav Modi’s Scam

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Arif Banka

The latest scam worth Rs 11500 crore that occurred at the Mumbai branch of India’s second largest bank, Punjab National Bank is yet another setback for the Indian economy. This happened at a time when the economy is already in deep shambles due to the several reformations taking place since the BJP came into power, no matter whether implemented properly or timely. The fault lines are seemingly widening. The faith over financial system has hit harshly.
In the middle of this whole scenario, irony is that, how a perception is being created among public who is made to believe that this is merely a systematic and operational failure and this scam has taken place with the help of certain Junior Level Bank Officers at the branch level. Media trials are going on, prime time debates are set to discuss it, blame games are played by political parties, perceptions are built upon, but what is least discussed is how actually Nirav Modi colluded with the system; on whose behest and what made it possible to happen and get unnoticed despite filtrations, checks and balances, from branch level to highest level in management at bank level and more importantly by dodging the regulations of the central bank, the RBI.
To get a perspective on it, one needs to understand the scam thoroughly and its modus operandi. Only then one can realize whether it is really a systematic failure or has this Nirav Modi taken the advantage of both-loopholes within the banking system in collusion with the bank management and political class as well. Because merely a few employees, that too at branch level can master mind this scam, to the tune of Rs 11500 crore is simply indigestible given the regulations, checks and balances at each hierarchal level within the bank and most importantly internal and external audits, review meetings and so on.
As per the PNB official statement, two of its employees were involved in the scam, where the bank’s core banking system (CBS) was bypassed to raise payments to overseas branches of other banks, including Allahabad bank, Axis bank and Union Bank of India, using the International Financial communication system, SWIFT. But, this is not enough to rely upon. Many questions need to be asked to unfold the actual truth.
At the heart of this matter lies the gaming of the SWIFT messaging system. SWIFT, or Society for Worldwide Interbank Financial Telecommunications, is a messaging network for securely transmitting instructions for all financial transactions through a standardized system of codes. Used by more than 11,000 financial institutions worldwide, SWIFT is a secure message carrier- its core role is to provide a secure transmission channel so that Bank ‘A’ knows that its message to Bank ‘B’ goes only to Bank B.
This telecommunication system is a common platform used by all the foreign exchange enabled banks across the world. To route the message of a particular underlying transaction, the message is passed through 3 hierarchal levels, that is, enterer, verifier and authorizer, only then is it received by the corresponding bank and then acted upon. Now, in the particular case of the Nirav Modi scam, what is believed has happened as per the reports is that on the instructions of the Nirav Modi Company, Letters of Undertaking (LOU) have been initiated by PNB Mumbai Branch to foreign branches of Indian Banks to raise the loan for payment of foreign Import bills. (Not once, but many times over a period of many years).
What actually is this letter of undertaking (LOU) and how does it function? LOU is a financial instrument used in International trade. Ideally a bank guarantee, an LOU allows a customer (Nirav Modi here) – to raise money from another Indian bank’s foreign branch in the form of a short-term credit to pay offshore suppliers in foreign currency. Technically, the bank which initiates the LOU on behalf of the customer (Nirav Modi again) is liable to the foreign bank (receiver of LOU) if the customer turns defaulter at the time of repayment. Hence, it is obvious itself if the bank issues an LOU on behalf of any customer, it has to take its liability into consideration in case the customer turns defaulter.
In this particular case of Nirav Modi, as per reports, the Mumbai branch of PNB has been constantly issuing the LOU’s since many years on the instructions of Nirav Modi company without any collateral or margin at place, which got exposed when one of its LOU got devolved in the month of January. This is questionable. Secondly, each branch is vested with certain powers, beyond that higher management at the zonal or circle level is taken into the loop for decision making in every respect. Like, for example, in this case, it is impossible that to the tune of Rs 11500 crore loan could be sanctioned at the branch level. It is normal practice in banking that higher the value of transaction or higher the value of loan proposal, higher would be the sanctioning or decision making authority. So, again, how LOU’s to the tune of Rs 11500 crore were issued at the branch level, is doubtful and demolishes the base of the argument that only branch level officers were involved in this whole scam. Thirdly, this whole process of issuing LOU’s is not so simple that the branch would issue LOU’s and the customer would utilize the amount received and then everything would go unnoticed. The whole process affects the balance sheet of the bank, it is reflected everywhere. It involves the branch management and obviously the treasury of the concerned bank. The transaction under LOU shoots the NOSTRO accounts of bank. (NOSTRO account refers to an account that a bank holds in a foreign currency in another bank). Hence, obviously this must have been scanned through the internal and external audits done on regular basis. Fourthly, each branch’s’ position is reviewed after every quarter or when needed like its Profit or Loss, NPA’s, Assets and liabilities and so on. So, again how this got skipped through the review meetings, is suspicious and mystery laden.
When all these factors are summed up, one can realize how it is impossible that the fraud could pass through multiple levels and several audit processes without getting undetected and unnoticed. Rather, it is clear such scams happen only with the blessings of the god fathers-political elements and their political patronage The fact of the matter is political corruption and political interferences are everywhere and have got deeply institutionalized and engrained everywhere in the system, not only in PSU’s. Earlier, we have been through similar kind of scams like 2G scam, Commonwealth Games scam and so on where politician and bureaucrats were involved in close nexus. Since Nirav Modi stands already exposed and all the agencies CBI, ED and others are running after the perpetrators and till now claiming that assets worth Rs 6500 crore have been seized, what really would be interesting to see how the investigations are conducted, and how quickly tax payers money would be taken back from the Nirav Modi or will the government, once again, start recapitalization with tax payers’ hard earned money.

—The author, a Delhi based Forex Professional, can be reached at: