The Punjab National Bank branch in south Mumbai sits just down the road from both the Bombay Stock Exchange and the Reserve Bank of India. The branch, clad in a stately colonial edifice, is at the heart of the fraud case linked to the billionaire jeweller Nirav Modi.
It was here, according to accounts from the bank’s executives and government investigators, that the branch’s Deputy Manager Gokulnath Shetty, later aided by his subordinate, engineered fraudulent transactions totalling about $1.8 billion from 2011 to 2017.
No one paid notice
The bank says it is still investigating how they were able to do so and go undetected for so long. The accounts given by current and former executives suggest an answer as simple as it is alarming: no one was paying attention.
The still unravelling story of how the fraud happened, which includes the alleged misuse of the SWIFT interbank messaging system and incomplete ledger entries, points to a breakdown in checks and balances and standard banking practices, they said.
The apparent failure of anyone to notice the largest fraud in India’s banking history until this January reveals a “rot” in the State financial sector that goes beyond one lender, said Santosh Trivedi, who spent nearly four decades at the PNB before retiring in 2016 as a senior manager of audit and inspection in its New Delhi head office.
“Unless this rot is controlled at this stage, to the satisfaction of the international community, it is dangerous for the system,” Mr. Trivedi said.
Lack of accountability
A review of bank and government documents related to the case and interviews with current and former PNB executives, bank auditors and experts, points to a lack of accountability and standards in the country’s public banking system.
As of last September, those banks held about 87% of the banking system’s ₹9.46 trillion of soured loans that are non-performing, restructured or rolled over.
A preliminary investigation by the Income Tax Department said the PNB fraud that “the hit banks would take in the end may well exceed” $3 billion, according to an internal note.
“Yes, there is a problem. We have recognised it,” the bank’s Chief Executive Officer, Sunil Mehta, said during an investor call on Friday. “We are in the process of fixing it up. We’ll see wherever the loopholes are there. The people-related risk, we are going to mitigate.”
But despite that promise of action, one current senior executive at the bank’s headquarters in New Delhi said further problems could not be ruled out. “In Indian banks, we don’t work under ideal situation,” the executive, who declined to be identified, said during an interview at his office. “We are in the business of risk, you can’t say there won’t be road accidents.”
Fraudulent guarantees
According to court documents filed on Saturday by the CBI, Mr. Shetty issued a series of fraudulent Letters of Undertaking (LoUs), essentially guarantees sent to other banks so that they would provide loans to a customer, in this case a group of jewellery companies.
These letters were sent to overseas branches of banks, thought to be almost all Indian, that would then lend money to the jewellery firms.
Mr. Shetty did so using the bank’s SWIFT system to log in with passwords that allowed him, and in at least some instances a more junior official, to serve as both the person who sent messages and as the person who reviewed them for approval, according to court documents and interviews with bank executives.
“The involvement and connivance of more staff members and outsiders at this stage cannot be ruled out,” said a CBI document submitted to the court in Mumbai.
After entering the transactions on SWIFT, the CBI documents said, Mr. Shetty, who worked at the same branch from 2010 to 2017 despite normal bank practices of regular rotations, did not record them on the bank’s internal system. Because PNB’s internal software system was not linked with SWIFT, employees were expected to manually log SWIFT activity. If that was not done, the transactions did not show up on the bank’s books.
There were at least 150 such fraudulent LoUs during a seven-year period, a CBI official said.
