How did system allow PNB fraud, asks CVC

How did system allow PNB fraud, asks CVC

Context:

The Central Vigilance Commission (CVC), India’s apex body for checking corruption in the government, has summoned senior officials from the Reserve Bank of India, the Finance Ministry, along with the Chief Vigilance Officer of Punjab National Bank (PNB), early next week to assess how the ₹11,500 crore frauds reported recently.

Three-level audit:

• Banks are audited at three levels : Apart from Internal audit, there is an external auditor and a statutory audit undertaken by the RBI.
• The CVC is keen to understand how none of these audits picked up a red flag on the letters of undertaking that seem to have been issued bypassing the system.
• The RBI blamed internal control failures for PNB’s woes, terming the incident as a ‘case of operational risk’ due to ‘delinquent behaviour’ by one or more employees.

What has happened?

• Recently, PNB found that the SWIFT system had been misused by a junior-level branch officials, who had fraudulently issued letters of undertaking (LoUs) on behalf of some companies for availing buyers credit from overseas branches of Indian banks.
• Preliminary investigation into the alleged fraudulent transactions worth ₹11,500 crore has revealed a complete breakdown of supervision and auditing mechanism in Punjab National Bank’s Mumbai branch and overseas branches of the other banks concerned.
• The transactions remained undetected for almost seven years, despite the fact that the bank conducts internal and external audits on a regular basis.
• Overseas branches of the other banks, which released payments on the request for settlement of import bills, also did not flag the discrepancies for such a long period.
• The bank has pinned the whole blame on the then Deputy Manager, Gokulnath Shetty, and a low-rank staffer for the fraudulent issuance of Letters of Undertaking (LoU) on behalf of the three firms associated with diamond merchant Nirav Modi and his family members.
• It is alleged that bills were also cleared for payments through PNB’s Nostro accounts with other banks that deal in foreign currency
• As per rules, those availing such a credit facility are required to repay the loan within 90 days of the issuance of an LoU.

SWIFT system

• In the PNB case, the accused officials misused the Society for Worldwide Inter-bank Financial Telecommunication (SWIFT) system to verify the fraudulently issued LoUs, conforming to the overseas branches of several banks that they could extend foreign exchange credit to the beneficiaries.
• The SWIFT system is mainly used for clearing international wire transfers.

Accused book under Prevention of Corruption act:

• The Central Bureau of Investigation has booked one retired and one serving PNB employee so far.
• The Enforcement Directorate has registered a money laundering case in the matter.
• It involves Mumbai-based billionaire diamond merchant Nirav Modi.

RBI’s stand:

• The Reserve Bank of India (RBI) said the failure of internal controls was the main reason for the Rs. 11,500 crore fraud that occurred in Punjab National Bank (PNB).
• RBI said it was assessing the situation and would take appropriate supervisory action.

‘Operational risk’

• The banking regulator, in its first reaction since the issue came to light described the fraud as a case of operational risk arising out of delinquent behaviour by the bank’s employees.