Loose ends and unanswered questions of the PNB scam

The loopholes in the banking system and the questions that they have thrown up in the wake of the PNB scam

Updated - November 28, 2021 07:58 am IST

Published - February 28, 2018 01:15 am IST

 State-owned Punjab National Bank has said in a statement that fraudulent transactions totaling $1.8 billion had been discovered in its Brady House branch in Mumbai.

State-owned Punjab National Bank has said in a statement that fraudulent transactions totaling $1.8 billion had been discovered in its Brady House branch in Mumbai.

Loose ends

Why is the CBS/SWIFT integration important?

Normally a credit limit is first set in the CBS, which in turn triggers SWIFT messages confirming the bank’s commitment − in this case the guarantee it extends through LoUs. Non-integration of SWIFT and CBS in the case of PNB has allowed stand-alone messages to be sent out without making entries in the CBS.

If the integration is not smooth...

Even if integration is not done, banks have to regularly reconcile Nostro accounts immediately on receipt of the statements from the correspondent banks with Nostro mirror balances. According to bankers, most banks receive Nostro account statements through SWIFT MT940 and MT950. Banks without SWIFT get a soft copy of the statement either by email or a hardcopy delivered from the local branch of the correspondent bank. Reconciliation can be done manually or can be automated through specialised solutions.

Despite integration...

According to the CBI FIR filed by PNB dated February 15, 2018, along with unauthorised LoUs amounting to ₹3,032 crore, the bank officials had also issued fraudulent LCs (Letters of Credit) amounting to ₹1,854 crore to the Gitanjali Group of companies.

The conniving officer issued LCs by entering a smaller amount in the trade finance module of the CBS system and generated the reference number; a SWIFT message was sent for the amount. Subsequently, without making any change in the trade finance module of the CBS, the bank officials sent modified SWIFT message for an enhanced amount under the same reference to the beneficiary bank.

The overseas supplier discounted the documents drawn under such LCs (based on the SWIFT message) with overseas banks.

As this illustrates, a failure of all control systems and checks can lead to fraud, irrespective of software systems

1,854 cr11,394crore3,032 cr6,228 crFraud amountwhich appearsto have accruedbefore 2017Amount issuedthrough 8 LoUsdue for payment on January 25, 2018Value of 143 fraudulentLoUs issued to theGitanjali Group ofcompanies betweenMarch 1 and May 2, 2017Unauthorised Lettersof Credit that werealso issued to theGitanjali Group ofcompanies280 cr

Unanswered questions

    SWIFT entries may have been generated fraudulently, but how could entries in PNB’s Nostro account remain undetected for 7 years?

    While SWIFT messages were dispatched without making entries in PNB’s trade finance module of the CBS system, how could CBS not catch inter-bank fund transfers when funds were remitted by Indian banks overseas into the Nostro account of PNB?

    In the normal course of business, a bank and its branches are subject to internal audit, concurrent audit and statutory audit, apart from the regular inspection by the RBI. How did a scam of this proportion happen when swarms of external auditors are scrutinising banks?

    The entries of remittances have to also be recorded in the books of the India bank (Nostro Mirror account). Assuming that this didn’t happen, how did an audit process, which requires reconciliation of the two accounts not throw up anomalies?

    According to the guidance note on bank audits, the auditor has to consider whether a system of periodical reconciliation was in place and whether confirmations from the overseas banks are obtained on a periodic basis, either through physical confirmations, SWIFT messages or emails. Why was this not done for several years?

    The concurrent branch audit is a real-time audit. A sudden surge in surpluses in the Nostro account on a day-to-day basis should have been enough to trigger an enquiry. Why didn’t it?

    Banks also invest surpluses in Nostro account in money market. How can a bump in treasury income in a particular account not catch the attention of the auditor or even the CFO?

    How did the fee that PNB would have earned through LoUs not catch the eye of the management or auditors?

    Why did the other banks acting on the fraudulent LoU issued by PNB not do the needed due-diligence before depositing money into PNB’s overseas accounts, which was subsequently transferred to the supplier of Modi’s companies?

    The RBI-prescribed credit for import of semi-precious and precious stones is up to 90 days. But it appears that the credit allowed in most cases was for a much longer period − even 360 days. How did this violation of norms not evoke suspicion by other banks extending credit based on PNB’s LoUs?

    The bigger question is what is the real scale of this scam? Have other banks also issued LoUs without collateral or margin money? If SWIFT and CBS are not integrated in most PSU banks, how many such fraudulent transactions are waiting to tumble out of the closet?

09-02-201710-02-201714-02-2017Each line indicates an LoU transaction, with colours * Amountin $ mnDiamond R USSolarExportStellar DiamondAxis Bank, HK4.44.335.945.846.095.855.865.87Allahabad Bank, HK

Clarifications from PNB

The CBI sealed the bank’s MCB Brady House branch in Mumbai as part of the ongoing investigation. Implications?

PNB : The bank is discussing with the CBI to allow normal operation in the branch during business hours. However, the bank has a Core Banking Solution through which any customer of bank can transact at any branch of his convenience. The bank has made enough arrangements to ensure that no customer is put to any inconvenience.

The quantum of the fraud was initially reported by the bank as ₹280 crore and in a subsequent disclosure the amount was reported as approx. ₹11,000 crore. Can the bank clarify on the increased amount reported in sequential filings?

PNB : On February 5, 2018, we, on the basis of a preliminary investigation report, informed simultaneously to our board as well as to BSE and NSE of initial fraud case of ₹280.70 crore. Upon receiving further investigation reports, we enhanced the fraud amount to ₹11,394.02 crore. ($1.77 billion) and filed information with BSE and NSE at 9 am on February 14.

What has been the impact of the event on the financials and operations of the bank?

PNB : We have enough assets / capital to meet any liability which is decided as per law.

Has PNB closed all options to recover the dues by going public?

PNB : We have followed lawful avenues available to us as per the law of the land to recover our dues

GitanjaliGems NakshatraBrand GiliIndia l LoC l LoUThree firms benefited from the LoUsand LCs issued by PNB. The firms andwhat they received

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