PNB SCAM

Punjab National Bank (PNB) is a Banking and Financial Service bank owned by Government of India. Its headquarter is in New Delhi, India. The bank was founded in 1894. As of June 2019, the bank has over 115 million customers, 7,036 branches and 8,906 ATMs.

A handful of bank officials perpetrated the fraud at India's second largest public sector bank leading to unauthorised issue of Letter of Undertaking(LoU) to jeweller Nirav Modi's firm have been bought under the scanner. the central Vigilance has stepped in and asked Punjab National Bank to name the officials involved in the scam and identify the senior management officials who have taken action to prevent the fraud.In the entire blame game, the auditors are found only with shaky references. While the question arises, the fraud at PNB was going on since almost a decade but no alarming bell gave a knock to anyone. due to which many hard hitting question were raised, on the manner the auditors carried their affairs.

A Seven-year saga unfolds

Jeweller Nirav Modi wanted to import the diamond to design the high end collection, for that he approaches PNB and ask for a Letter of Undertaking(LoU).So LoU is a bank guarantee that allows a customer to raise money from another bank off-shore in the form of short term bank loan. LoU is issued by PNB to the foreign bank through S.W.I.F.T messages, it is a messaging network for securely transmitting instructions for all  financial transactions through a standardised system of codes. usually, bank ask for a cash margin normally 100%.in this case, there was no scheduled credit limit and no margin was demanded and a fun fact, the entry for LoU was not recorded in the PNB core banking system.Colluding officials sent SWIFT message to the off shore bank from one of PNB branches offering unauthorised LoU. Generally, SWIFT message consist of 3 security level basically a three layer security system: a maker, a checker and a verifier. In PNB case . LoU had been issued by the branch officials through SWIFT without the approval of the competent authorities and the necessary  document of import. PNB failure to integrate SWIFT and CBS allowed stand alone message to be sent out without matching entries in the CBS. Under RBI guidelines, buyer's credit for import of gems should not exceed 90 days from the shipment date;in this case,however, they were rolled over separately.not knowing Nirav Modi credit history,the over seas bank extends the credit based entirely on PNB LoU's. overseas bank remit the fund to PNB Nostro account,what is it?when a bank maintain foreign currency stock in the form of bank account with their overseas branches. In a normal course , on a due date, PNB should remitted the amount due to overseas bank  and recovered the amount from Nirav Modi. while having used the imported stones for his business.should have sold his wares and settled his due wit PNB. But in Nirav-PNB case , LoU kept getting rolled over. according to the reports the money was not paid back by Nirav Modi b rolling over the subsequent LoU repaid the dues on the earlier LoU's. the scam went on and on for shocking seven years;151 LoU were issued in 2017 alone.then finally on January 25, PNB confirmed  the first maturity of LoU liabilities  as fraudulent  credit against the bank. a fraud report was sent to the RBI in the following week;it detailed a total of Rs 280.7 Cr.

REFORMS

On 1 March 2018, the government approved the Fugitive Economic Offenders Bill to deter economic offenders from evading the process of Indian law by giving powers to the government to confiscate assets of a fugitive, including Benami Assets of absconding loan defaulters.The bill covers a wide range of economic offenders which include: loan defaulters, fraudsters, individuals who violate laws governing taxes, black money, Benami properties, financial sector, and corruption. On 12 March 2018, the government introduced the bill in the Lok Sabha

In March 2018, the Reserve Bank of India scrapped banking instruments such as the Letter of Understanding (LoU) and Letter of comfort (LoC) that in an attempt to plug a loophole and improve banks’ due diligence in trade credit. Some bankers said that LoUs and LoCs led to receiving banks depending completely on the issuing bank on creditworthiness

sources: Business lines, 
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