Eyes Wide Closed: India’s $ 1.8 Billion Bank Fraud Goes Undetected


NEW DELHI / MUMBAI (Reuters) – The Punjab National Bank branch in South Mumbai is located right next to the Bombay Stock Exchange and the Reserve Bank of India, at the physical hub of one of the major economies in the fastest growing in the world.

A pigeon walks past the Punjab National Bank logo outside a branch of the bank in New Delhi, India on February 15, 2018. REUTERS / Adnan Abidi

The branch, clad in a majestic colonial edifice, is now also at the heart of a fraud case linked to billionaire jeweler Nirav Modi that has shaken confidence in a state-owned banking sector that accounts for around 70% of the bank’s assets ‘India.

It was here, according to Punjab National Bank accounts PNBK.NS Government executives and investigators, whom a middle-aged manager, later aided by his young subordinate, organized fraudulent transactions totaling around $ 1.8 billion from 2011 to 2017.

The bank says it is still investigating how they were able to do it and go unnoticed for so long. Testimonies from current and former leaders who spoke to Reuters suggest an answer as simple as it is alarming: No one was paying attention.

The still unclear story of how the fraud happened – which includes the alleged misuse of the SWIFT interbank messaging system and incomplete accounting entries – points to a breakdown in checks and balances and standard banking practices, have they declared.

Apparent failure of anyone to notice biggest fraud in Indian banking history through January reveals ‘rot’ in state’s financial sector that goes beyond a single lender, Santosh Trivedi said , who spent nearly four decades at the Punjab National Bank before retiring in 2016 as a senior audit and inspection executive at the New Delhi headquarters.

“Unless this rot is brought under control at this point, to the satisfaction of the international community, it is dangerous for the Indian system,” Trivedi said.


Last month, the Punjab National Bank, known as PNB, filed a first criminal complaint with the country’s Central Bureau of Investigation (CBI), accusing famous jeweler Nirav Modi and others of defrauding the bank. and causing him to lose 2.8 billion Indian rupees (over $ 43 million).

The allegations against a man whose diamond designs have draped Hollywood stars such as Kate Winslet and Dakota Johnson have generated a flurry of coverage on Indian television screens and newspapers. Modi has not publicly commented on the matter. He and his family left the country in early January, according to Indian officials, and a call on Sunday to a spokesperson for a company that has handled media for Modi in the past went unanswered. No charges have been brought against him.

But as more and more details surfaced about what allegedly happened at the state-owned bank, founded in 1894, the stakes rose.

A review of bank and government documents related to the case – and interviews with current and former PNB leaders, bank auditors and experts – highlights a lack of accountability and standards in the country’s public banking system .

As of last September, these banks held about 87% of India’s 9.46 trillion rupees (roughly $ 147 billion) in bad loans that are non-performing, restructured or rolled over.

A preliminary investigation by the country’s tax administration said of the GNP fraud that “the blow that Indian banks would ultimately receive could well exceed” $ 3 billion, according to an internal memo seen by Reuters.

“Yes, there is a problem. We have recognized it, ”the bank’s managing director, Sunil Mehta, said on Friday during an appeal to investors. “We are fixing it. We will see where the loopholes are. The human risk, we are going to mitigate it.

But despite that promise of action, a current senior executive at the bank’s headquarters in New Delhi said other issues could not be ruled out.

“In Indian banks, we are not working in ideal conditions,” said the executive, who declined to be identified, in an interview at his office. “We’re in the risk business, you can’t say there won’t be traffic accidents.”

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According to court documents filed on Saturday by the CBI, the deputy branch manager, Gokulnath Shetty, issued a series of fraudulent letters of commitment – essentially collateral sent to other banks to grant loans to a client. , in this case a group of Indian jewelry companies. .

These letters were sent to branches of overseas banks, believed to be almost all Indian, which then lent money to jewelry companies.

Shetty did this by using the bank’s SWIFT system to log in with passwords that allowed him, and in some cases at least a more junior official, to serve as both the messenger and the messenger. of person who reviewed them for approval, according to the court. documents and interviews with bank executives.

“The involvement and collusion of a larger number of staff and outsiders at this stage cannot be ruled out,” said a CBI document submitted to the Mumbai court.

Shetty is now in custody and has not publicly responded to the allegations. Calls to a cell phone listed for his wife on court documents were not answered.

Asked about password sharing, the senior executive at Punjab National Bank said it was not the best practice, but it happens in the daily turmoil of Indian banks.

“When you’re inundated with customers in the morning with 101 requests, you’re looking for shortcuts,” he said. “You are doing someone else’s job, someone else is doing your job. You are not working in an ideal situation.

A second senior executive at the bank’s headquarters, who also asked that his name not be used, echoed the sentiment.

After entering transactions on SWIFT, according to CBI documents, Shetty – who worked at the same branch from 2010 to 2017 despite normal banking practices of regular rotations – did not record them in the bank’s internal system.

Since PNB’s internal software system was not linked to SWIFT, employees had to manually log SWIFT activity. If this was not done, the transactions would not appear in the books of the bank.

A SWIFT spokeswoman said in a statement last week that the company does not comment on individual customers.

In total, there have been at least 150 such fraudulent letters of engagement over a seven-year period, according to a CBI official who requested anonymity.

In addition to detaining Shetty and the junior employee, the CBI arrested a man she described in court documents as both “aware of the modus operandi of all the scams” and as a director in “15 to 16 companies of Nirav Modi Grouper”.

An older brother of the man, Hemant Bhatt, told a courtroom on Saturday that he was innocent and that the allegations resulted from a “media trial”. The brother did not give his name.

An uncle of the young bank employee, Manoj Kharat, told a Reuters reporter outside the courthouse that his nephew “was only following orders from his superiors” and added “that he was not in the courtroom. aware of what he was doing ”.

All three are to be kept in detention until March 3. No charges have yet been brought against them.

Police raided the bank’s southern Mumbai branch on Sunday and also questioned five other national officials in the Punjab, the CBI official said, bringing the total number of bank employees questioned to 11. ‘now.


A February 12 note seen by Reuters, sent from PNB to other banks and marked “confidential”, read: “None of the transactions were routed through the CBS system” – the bank’s internal network – “thus avoiding the early detection of fraudulent activity.”

The Reserve Bank of India did not respond to a request for comment on whether it had previously detected anomalies in the operations of the Punjab National Bank or whether it would take further steps to audit the banks.

In a statement released on Friday evening, the central bank described the PNB fraud as “an operational risk case resulting from delinquent behavior by one or more bank employees and a failure of internal controls.” He also said the central bank “has already undertaken a prudential assessment of the PNB’s control systems and will take appropriate supervisory measures.”

CBI documents indicate that fraudulent letters of commitment are likely to reach “around” 60 billion rupees, or more than $ 930 million. Bank executives say the amount calculated by reviewing internal files is $ 1.77 billion.

With assets of around $ 120 billion in December, according to bank documents, PNB will be able to cover any associated losses, although this is still a huge success for a bank with a market value of only 6. , $ 1 billion before revealing the details of the alleged fraud last week. Since then, $ 1.4 billion has been wiped out of this market capitalization.

The mechanisms of the fraud and what it says about the industry’s underlying culture are of concern, said Abizer Diwanji, India’s national leader in financial services at accounting firm Ernst & Young.

“Checks and balances exist in public banks as well, but they are not being followed seriously,” said Diwanji, who has followed India’s financial services industry for more than two decades.

“This is where the discipline, the culture is not there. I still think we don’t have the culture to manage risk, even operational risk. PNB is not an outlier in this area.

To control these risks, most private sector banks require branches to route SWIFT messages through their central offices, Diwanji said. They also usually integrate their own software and SWIFT systems, which means that an activity such as a letter of commitment sent would be recorded automatically.

Nor is the PNB or most state-owned banks in India, Diwanji said.

Representatives from two of the external audit firms listed in PNB’s annual report for fiscal year 2016-2017 said they could not find out what had happened.

“It was off the books, so listeners won’t be able to detect it,” said Sudesh Punhani, partner at Chhajed & Doshi.

When asked if the bank’s failure to integrate its software and SWIFT system was a cause for concern, Neeraj Golas, partner at R. Devendra Kumar & Associates, also the bank’s external auditor, said: “C It’s true, it’s true – we really have to get in there and figure out what all of these things are.

($ 1 = 64.2400 Indian rupees)

Reporting by Krishna N. Das, Aditya Kalra, Devidutta Tripathy and Tom Lasseter; Additional reporting by Abhirup Roy, Rafael Nam and Rajendra Jadhav in Mumbai and Manoj Kumar in New Delhi; Writing by Tom Lasseter; Editing by Alex Richardson

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