India’s second biggest Public Sector Unit, Punjab National Bank detected fraud transactions worth Rs.11,400 crore ($1.77 billion) at one of its Mumbai Branches. This is one of the biggest transaction frauds ever.
How it Happened?
It started when diamond companies approached PNB for opening LC (Letters of Credit) so that they can import rough stones. LC is a banking tool under its terms, on behalf of Nirav Modi’s three Diamond Jewellery companies – Solar Exports, Stellar Diamonds and Diamond R US – PNB would pay diamond suppliers abroad and recover it from Modi. This LC can be extended if the client couldn’t meet the deadlines of the LC tenure.
Two PNB employees issued fake Letters of Undertakings (LoUs) and on its basis Axis Bank and Allahabad Bank sanctioned foreign currency loan to PNB in its Nostro account which has rights to move funds to the banks in other countries.
To transmit messages to Axis and Allahabad Bank on required funds, these two PNB employees used SWIFT network which is endorsed by the supervisor after submitting its own unique login details. Once details are validated, the process is complete and no further checks are needed. But the surprising thing is that these fraud transactions were never been recorded by the core system of the bank and it made it almost impossible for the PNB management to track it.
Moreover a banker said, “It is not known whether Axis and Allahabad still have the loans on their books or they have offloaded some of it to other banks.”
How this fraud was detected?
On 16 Jan 2018, these diamond companies presented import documents and requested to pay overseas suppliers as their buyers’ credit. This time PNB officials asked them to enter entire amount as collateral so that LoUs can be issued to authorise the LC.
On this, these companies told officials that they had never kept any margin money in the past and were entertained with the facility. It was suspicious.
Then PNB officials scanned all the previous records and found out that LoUs on the SWIFT network was entering the transactions in bank’s own system and these transactions were never detected, not even when Bank accounts were audited on quarterly and/or annual basis.
Right now, PNB is in big mess. PNB stock has already fallen up to 20% in last two trading sessions. Though there’s no near term resolution, things can get from bad to worse. However support of the government may help the bank to recover the huge amount through all possible means.