How Punjab National Bank’s Rs 11,000 cr scam was operated : SWIFT and Tripping

Punjab National Bank (PNB) is witnessing possibly one of the largest scams in banking history, opening a can of worms worth over Rs 11,300 crore (USD 1,771.69 million) for the banking sector.
Fraudulent transactions likely to have been going on for last seven years were unearthed by PNB — the second biggest public sector bank and fourth biggest lender by assets – at one of its Mumbai branches.
Foreign branches of at least two Indian banks including Axis Bank and Allahabad Bank are likely to have been caught in the fraud with an alleged credit offering given based on letters of undertaking (LOUs) issued by PNB allegedly towards group companies of Nirav Modi and Gitanjali Gems.
These banks are said to have recalled the loans given based on the LoUs/FLCs (foreign letters of credit) issued on behalf companies of Gitanjali Gems — Gitanjali Gems, Gili India, Nakshatra — and to Nirav Modi Group firms which include Solar Exports, Stellar Diamonds & Diamonds DU.
Nirav Modi has foreign centres in Hong Kong, Dubai, and New York and has been availing buyers’ credit based on such LOUs from as early as 2010.
How does this work?
Typically, an LOU is a letter of comfort issued by one bank to branches of other banks, based on which foreign branches offer loans or credit to buyers. In this case, it is said the foreign branches of the above mentioned banks, which had relationships with the outlets of the jewellery companies, had given credit against the fraudulent LOU/FLC.
A senior PNB official said, “LOUs are basically just fallback arrangements. They are not direct instruments. The LOUs were given through SWIFT technology and none of the transactions were routed through its core banking solutions (CBS) to avoid detection.”
According to the official, “SWIFT is like a fax which is not integrated with the CBS. The concerned firm manipulated and utilized this technology to send the LOU with the assist of some of our officials who gave access to the LOU fraudulently. The credit was then routed by those foreign branches to PNB through its Nostro account. The foreign bank receiving the message (through SWIFT) while discounting should do the due alertness because it does not show an entry in our system when it gets credited. We do not know the ultimate legal stance. Although there is some misutilisation of some of the facilities from our bank.”
One of the officials of a bank giving the credit said, “Our credit goes to PNB and not to the company. Based on the LOU, we have remitted the amount to the Nostro account of the bank. We have already reported the matter to the regulators.”
A letter dated February 12 by PNB to 30 banks, according to CNBC TV18 channel, said the fraud was detected on the retirement of the PNB branch official and there is a clear criminal connivance of group companies of Nirav Modi and Gitanjali Gems with PNB branch officials and also by officials of overseas branches of Indian banks.
The letter also pointed out that the RBI designated timeline of validity of LOUs for only 90 days from date of shipment was overlooked by overseas branches of Indian banks. The buyers’ credit against LOUs was utilized to retire import bills or replenish maturing credit.
Investigations
The Central Bureau of Investigation (CBI) may register case in the coming week and after that enforcement directorate will also take this matter up for further investigation.
Sources in the department told Moneycontrol, “In most of such cases, company use round tripping of the amount. In this case also, company may use round tripping facility which increments the amount value but actual amount involved is less as compare to total amount.”
Another source said, “It is hard to trust that junior level officers were authorized to sanction such high limit letter of undertaking. Investigation agency may open up old sanctioned files and authorized officers may also be under the scanner.” One former senior executive of PNB waiting to become the CEO of another bank is also under the scanner of the investigation agency.

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