Nirav Modi Fraud Case: Understand Here


Punjab National Bank on Monday detected fraudulent transactions worth Rs 11,300 crore at its Brady House branch in Mumbai. The PNB in its cautionary note to other public and private sector banks said that the suspected fraud was carried out by the perpetrators in collusion with the staff. It went on to explain the modus operandi of the scam and said: “It was found through SWIFT trail that one junior level branch official unauthorisedly and fraudulently issued Letters of Undertaking (LoU) on behalf of some companies belonging to Nirav Modi Group for availing buyers’ credit from overseas branches of Indian Banks.” It further said that none of the transactions were routed through the Core Banking Solution or CBS system, thus avoiding early detection of fraudulent activity.  So, what is the CBS that the bank official bypassed to issue fake LoU by using SWIFT:

What is LoU?

Letter of Undertaking is a bank guarantee and is issued for overseas import payments. A bank, while issuing LoUs for a client (here Nirav Modi), agrees to repay the principal and interest on the client’s loan unconditionally. When an LoU is issued it involves an issuing bank, a receiving bank, an importer and a beneficiary entity overseas. PNB officials allegedly used their access to SWIFT messaging system (used for overseas transaction) and verified guarantees given on LoUs without taking necessary sanctions. As a result, overseas branches of many Indian banks gave forex credit.

What is SWIFT?

When an LoU is issued, the message of credit transfer is conveyed to overseas banks through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. This is a significant information as it gives the bank’s consent and guarantee. To issue SWIFT, an official has to log in and fill up confidential information such as the account number and SWIFT code. It generally has three layers of security – a maker, a checker and a verifier within the core banking system before it is issued.

What is CBS?

CBS refers to Core Banking System where all branches are inter-connected to ensure that the bank customers – regardless of their home branch – are able to operate their account and transact in any of the member branch located anywhere in the world. After the advent of this system, a customer is no more customer of a branch, but s/he becomes customer of bank. All the transactions are updated real-time. So, if you are wondering why the PNB couldn’t detect the fraud earlier, it is because the PNB official did not rout the transactions through CBS, which would have given real-time data on transacted business.

How did the scam come to light?

In January, when a couple of LoUs matured but the banks did not receive their payments, they approached PNB for repayment of the loans. Also, one fraudulent LoU was issued on January 16, 2018, for and on behalf of Modi’s firms. The bank officials asked the firms to submit 100% cash margin for the LoU, to which the firms said that they had availed similar facility in the past. An internal inquiry by PNB found that fake LoUs were issued, opening the can of worms.



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