PNB Scam – Who are the Culprits and what is the remedy?

Last two blogs were on the details as to how this scam occured and why it remained undetected for so long. Still, the question remains that whom should be hold responsible for this entire scam.

First and foremost, there is Nirav Modi (NiMo) who is mastermind of the entire scam. It is believed that NiMo along with his uncle Mehul Choksi has diverted around Rs. 11,400/- Crores through fake LoU’s issued by PNB. These LoU’s are issued in favor of various companies floated by NiMo and Choksi. Like Kingfishers Vijay Mallya, NiMo too left India few days before the scam was detected. Passport of NiMo was seized yesterday by GoI. However, it is learned that NiMo is an Belgian citizen. So he can travel any where in the world on Belgian passport as well. As of date, NiMo is currently staying in five star hotel at Newyork.

NiMo and Choksi are believed to be the primary suspects, but there are many other who have helped them in one way or other. Staff of the PNB involved in above scam are equally responsible. First arrests made in the case was of Clerk and Deputy Manager of PNB who actually issued the LoU’s. They are currently in the CBI custody for further investigations. After the duo, CBI has also arrested the Chief Manager of Brady House Branch of PNB, where entire scam occured. CBI had also arrested the General Manager of PNB recently. Chief Manager and General Manager arrested are not personally involved in the issuance of LoU’s, however it is accused that they knew the fraud was happening, but they purposly ignored it. Apart from PNB officials who are arrested, CBI has also arrested few executives working for NiMo’s Company.

Finance Minister Shri Arun Jaitly has blamed the auditors for their ignorance and lethargy in detecting the fraud. ICAI, which is the apex body of the country governing CA profession, has already issued show cause notices to the PNB auditors seeking the information. However, affixing the responsibility on CA firms for misconduct / gross negligence while auditing PNB books is quite lengthy process, which is expected to take few years. Nevertheless, ICAI has assured speedy disposal of this case.

Modi Govt which have assured to bring ‘achche din’ in India, is facing tremendous attack due to this entire scam. However, the efforts of CBI and ED in this entire case is worth appreciating. From the date the scam was detected, ED has conducted massive raids throughout India on the properties / assets on NiMo and his companies. ED has till date seized gems and diamonds of Rs. 5,816/- Crores. NiMo and Choksi owns substantial immovable properties in India as well. ED and CBI have also attached properties located at Mumbai, Nashik, Surat and Pune amounting to approx Rs. 2,500/- Crores. ED has also seized movable assets like imported watches, appearls etc. which can fetch some value if sold. Total assets seized by ED till date in this entire case is above Rs. 8,800/- Crores. CBI and ED expects that majority of the sipphoned funds can be recovered from these properties. Over and above, ED has also sent Letter Rogatories (LR’s) to about 17 countries seeking financial info of the prime accused. Info received from these countries can again be used for recovery from Nimo and his allies.

This entire scam is a result of non integration of SWIFT system with CBS of PNB. RBI has recently directed all the banks to link SWIFT and CBS latest by 01/04/18. This will ensure that another fraud with same modus operandi will not occur in future. 

Whatever has happened in this entire scam, cant be reverted back. Damage caused is irreparable and consequences in near future are unavoidable. Stern measures taken by reguators like RBI, CBI, ED and ICAI can have check on such frauds in future so that such fraud wont take place. If at all scams occur, they are at least detected at primary stage so that future damage caused can be minimised.

Ordinery citizen of India can hardly expect any thing more than this.

Will try to update the developments on this in coming blogs too. Till then, stay tuned and happy reading. 

PNB Scam – How it remained undetected for so long?

PNB scam is undoubtedly the largest scam which has hit the Indian banking industry till date. In last blog we have seen how the LoU’s were used cleverly by NiMo (Nirav Modi) to defraud the bankers. As per initial data available, fraudulent LoU’s were issued through SWIFT since 2011. However, prime accused has today admitted to CBI that this practice of misuee of LoU’s was going on since 2008. (For details as to how the scam took place, please refer earlier blog).

Considering the huge quantum of Rs. 11,300/- Crore and long time period of 6 years, everyone is wondering how it remained undetected for so long. Banking industry, since it deals with public money, has to undergo extensive audit procedures throughout. To name a few, first there is internal inspection, then comes concurrent audit, then there is a Internal audit and lastly there is Statutory audit which is essentially done by empanelled CA firms. On top of it, there is annual inspection by RBI, which is done by employees of RBI. Its quite surprising that PNB scam went undetected through all these layers of audits and inspections.

Main reason due to which the scam went undetected is the fact that there was scope for human intervention in SWIFT operations at PNB. As per initial info obtained, SWIFT software at PNB was not integrated with their CBS i.e. main banking software. SWIFT is used only for foreign transactions that too, only as a mode of communication. Actual banking operations like accepting deposits, giving loans, receiving cash, payment of cheques, booking of income and expenses etc is all done through Core Banking Software (CBS). All the auditors check CBS extensively, since its the main software through which banking is done. Since SWIFT and CBS at PNB was not integrated, entries in SWIFT was to be entered in CBS manually. Fraudsters took benefit of this loophole. They issued fake LoU’s through SWIFT and never entered the same in CBS. Since auditors relied on CBS alone, misuse of SWIFT was not detected.

Take it other way round. Mr. A is using watsapp as well as email. All the frauds were done on watsapp. But these messages were never shown in email. Auditors went on checking emails but never bothered to verify the watsapp. Thus, they found everything in order. Same thing happened at PNB. Scam was done through SWIFT but everyone was busy checking the CBS!

Subsequently, when the LoU’s became due for payment, they were simply rolled over by issuing additional LoU’s. Eg. First LoU is of Rs. 50 Crore. This became due for payment. What NiMo did? He raised another fake LoU of Rs. 70 Crore. From this, payment of earlier LoU of Rs. 50 Crore was done. This went on for years, till the amount of fake LoU’s rose upto mammoth figure of Rs.11,300/- Crores.

By reading this, it seems quite simple. Isn’t it? But its not so. It requires very cunning mind and preplanned set up to cheat and deceive the entire system. And one more thing, letting this thing happen for years, is surely not one person job. Who are probably involved in this and who are the culprits of this entire scam, will try to see in the next blog.

Till then, stay tuned and happy reading 😊