Punjab National Bank fraud surfaced on Valentine’s Day. Two employees tried to fool the bank in the largest diamond house.
In raising funds and moving money out of Punjab National Bank, two employees of this state-owned lender directly used SWIFT— the global financial messaging service to move millions of dollars across borders every hour — and bypassed the core banking system (CBS) which processes daily banking transactions and posts updates.
What Exactly Happened?
It began with diamond firms approaching PNB for opening letters of credit to import rough stones. As per the terms of the LC, a common banking tool, Punjab National Bank would pay the overseas suppliers on behalf on Nirav Modi’s firms within a certain period (typically three months) and recover the money from Modi.
It’s a market practice to extend the LC if the client (i.e, NM) is unable to cough up the money at the end of the LC tenure.
Fake Letter of Undertaking Issued
PNB employees issued fake LoUs, on the back of which foreign branches of a few Indian banks — including Axis and Allahabad Bank — gave dollar loans to Punjab National Bank. These foreign currency loans were used to fund PNB’s Nostro accounts and from these accounts funds moved to certain overseas parties. A Nostro account is the account an Indian bank (here, PNB) has with an overseas bank.
Based on unauthorised Letter of Undertakings, the PNB employees misused the SWIFT network to transmit messages to Allahabad Bank and Axis Bank on fund requirement. In using SWIFT, one has to log into the network to fill up fields like the account number and SWIFT code, following which it is endorsed by a supervisor. The process is completed when the bank receiving the message confirms and the details are validated. While all this was done using SWIFT passwords, the transactions were never recorded in the bank’s core system, which kept the PNB management in dark for a long time.
How This Fraud Will Hurt Business?
Banks will cut down on credit limits and insurance companies will turn cautious. In fact, a large American insurance company alerted all its offices not to take any exposure to two companies linked to Nirav Modi and his associates.