PNB RELATED SCAMS

GLOWING STARS

Leader Name : Taaniya Basreja

Group Members: Priyanka Udasi
Muskan Gundiyal
Kareena Motwani
Muskan Rohra
Khushbhu Wadhwa
Submit to: Lavina mam
Class: FY(BAF)
 SUMMARY

Punjab National Bank is a PSU working under Central Government of India

regulated by Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949.
Punjab National Bank was registered on 19 May 1894 under the Indian
Companies Act, with its office in Anarkali Bazaar, Lahore, in present-
day Pakistan. The founding board was drawn from different parts of India
professing different faiths and of varying back-ground with, the common
objective of creating a truly national bank that would further the economic
interest of the country. According to Punjab National Bank’s note, a junior level
branch official “unauthorisedly and fraudulently” issued Letters of Undertakings
on behalf of companies connected to the Nirav Modi group. 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. SWIFT stands for Society for Worldwide Inter-bank Financial
Telecommunications. The SWIFT system commenced in 1974 when seven global
financial institutions constituted a cooperative society for transferring financial
messages securely. The Punjab National Bank Fraud Case relates to fraudulent
letter of undertaking worth ₹11,356.84 crore (US$ 1.4 billion) issued by
the Punjab National Bank at its Brady House branch in Fort, Mumbai; making
Punjab National Bank liable for the amount. The fraud was allegedly organized
by jeweller and designer Nirav Modi. The Punjab National Bank fraud has
exposed many banks to credit risk. There is a need to investigate how the process
got diluted, and how a few employees in connivance with clients could lead to a
fraud of large amounts of money for such a long time without raising any red
flags.
 ACKNOWLEDGEMENT

I take this opportunity to thank my Principal, DR. MANJU LALWANI

PATHAK for providing the necessary facilities required for completion of this
project.

I take this opportunity to thank our faculty PROF. LAVINA for there moral
support and guidance.

I would like to thank my College Library, for having provided various reference
books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly
helped me in the completion of the project especially my Parents and Peers who
supported me throughout my project.
 INDEX
PARTICULARS
1) SUMMARY
2) INTRODUCTION OF PNB
3) SCAM
4) CBS
5) S.W.I.F.T.
6) LoUs
7) PNB CASE
About Case
Who is Nirav Modi?
Persons Involved in PNB Scam
How did PNB scam occur?
Investigation
How this go undetected?
How did bank figure out?
What’s irregular about this?
What happens when the foreign bank or branch
receives this guarantee?
How was this detected?
What happens now for PNB?
CONCLUSION
PUNJAB NATIONAL BANK
Punjab National Bank is a PSU working under Central Government of India
regulated by Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949. Punjab
National Bank was registered on 19 May 1894 under the Indian Companies Act, with its office
in Anarkali Bazaar, Lahore, in present-day Pakistan. The founding board was drawn from
different parts of India professing different faiths and of varying back-ground with, the
common objective of creating a truly national bank that would further the economic interest of
the country. PNB's founders included several leaders of the Swadeshi movement such as Dyal
Singh Majithia and Lala Harkishen Lal, Lala Lalchand, Kali Prosanna Roy, E. C. Jessawala,
Prabhu Dayal, Bakshi Jaishi Ram, and Lala Dholan Dass. Lala Lajpat Rai was actively
associated with the management of the Bank in its early years. The board first met on 23 May
1894. The bank opened for business on 12 April 1895 in Lahore.
PNB has the distinction of being the first Indian bank to have been started solely with Indian
capital that has survived to the present. (The first entirely Indian bank, Oudh Commercial Bank,
was established in 1881 in Faizabad, but failed in 1958.)
PNB has had the privilege of maintaining accounts of national leaders such as Mahatma
Gandhi, Jawahar Lal Nehru, Lal Bahadur Shastri, Indira Gandhi, as well as the account of the
famous Jalianwala BaghCommittee.

WHAT WAS THE SCAM?

According to Punjab National Bank’s note, a junior level branch official
“unauthorisedly and fraudulently” issued Letters of Undertakings on behalf of companies
connected to the Nirav Modi group. These were Solar Exports, Seller Diamonds and Diamonds
R Us. The LoUs allowed the companies to get buyer credit – essentially loans meant to be used
to buy material that would be imported into India – from foreign branches of other Indian
banks. In other words, Nirav Modi’s companies were allegedly able to get loans in foreign
currencies, without offering any security. Moreover, the Punjab National Bank note claims that
these loans, which are supposed to be used directly to pay for the imported goods, were instead
used for other things like paying back other loans taken from other banks.

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.
 What is SWIFT?
Fig No.1

SWIFT (written in capital letters) is a messaging system that enables banks and
financial institutions worldwide to send and receive information about financial transactions
via encrypted codes making the transactions secure. SWIFT stands for Society for Worldwide
Inter-bank Financial Telecommunications. The SWIFT system commenced in 1974 when
seven global financial institutions constituted a cooperative society for transferring financial
messages securely. Before SWIFT, Telex was prevalent as well as lone means of message
confirmation for foreign exchange. However, it faced issues such as low speed, security
concerns, and scope of manual errors.

SWIFT system is used by banks, brokerage institutions, trading houses, securities dealers, asset
management companies, clearing houses, depositories, exchanges, corporate business houses,
foreign exchange brokers.
WHAT ARE LOUS?

Fig. No. 2

A. There is a widely accepted provision of bank guarantees known as a letter of undertaking

(LOU) under which a bank can allow its customer to raise money from another Indian bank's
foreign branch in the form of a short term credit. The LOU serves the purpose of a bank
guarantee for a bank's customer for making payment to its offshore suppliers in the foreign
currency.
B. For raising the LOU, the customer (importer) is supposed to pay margin money to the
bank that issues the LOU and accordingly, they are granted a credit limit. But in Nirav Modi's
case, neither was there a credit limit, nor did he ever give any margin money, reported
Reuters.

C. Once the letter of credit is acknowledged and accepted, the lender (foreign branch of
Indian bank) transfers money to the nostro account of the bank that has issued the LoU. In
this case, Nostro account is the Punjab National Bank's account held in another bank in a
foreign country for the purpose of holding foreign currency.

D. As a matter of fact, letter of undertaking is a letter of credit issued by one bank (let's call it
Punjab National Bank) that paves way for another bank (let's call it Allahabad Bank-AB) to
give money to supplier of Punjab National Bank's customer. As mentioned earlier, the money
is transferred by AB to supplier of PNB's customer via a nostro account that PNB holds in
AB in abroad.

E. The credit is ideally meant for short-term only. In the Nirav Modi-Mehil Choksi case, the
term of loan was allegedly extended far beyond what is prescribed as per the rule book. Even
the PNB and other lenders are slugging out over the loan term, which should not have been
extended, says PNB, longer than 90 days.

PNB CASE :-
Fig. No. 3

The Punjab National Bank Fraud Case relates to fraudulent letter of undertaking
worth ₹11,356.84 crore (US$ 1.4 billion) issued by the Punjab National Bank at its Brady
House branch in Fort, Mumbai; making Punjab National Bank liable for the amount. The fraud
was allegedly organized by jeweller and designer Nirav Modi. Nirav, his wife Ami Modi,
brother Nishal Modi and uncle Mehul Choksi, all partners of the firms, M/s Diamond R US,
M/s Solar Exports and M/s Stellar Diamonds; along with PNB officials and employees, and
directors of Nirav Modi and Mehul Choksi's firms have all been named in a chargesheet by
the CBI. Nirav Modi and his family absconded in early 2018, days before the news of the scam
broke in India.
Nirav Modi is currently in the United Kingdom and is seeking political asylum in Britain
though the Indian government has officially asked for his extradition. The Enforcement
Directorate has begun attaching assets of the accused and is seeking to immediate confiscation
under the Fugitive Economic Offenders Ordinance.
Modi is on the Interpol's wanted list for criminal conspiracy, criminal breach of trust, cheating
and dishonesty including delivery of property, corruption, money laundering since February
2018.
The bank initially said that two of its employees at the branch were involved in the scam, as
the bank's core banking system was bypassed when the corrupt employees issued LOUs to
overseas branches of other Indian banks, including Allahabad Bank, Axis Bank, and Union
Bank of India, using the international financial communication system, SWIFT. The
transactions were noticed by a new employee of the bank. The bank then complained to the
CBI, who is currently investigating the scam apart from ED and RBI.
On a later date, CBI named key officials Usha Ananthasubramanian, former CEO of
PNB, executive directors KV Brahmaji Rao and Sanjiv Sharan in a chargesheet holding them
responsible for failure to implement several circular and caution notices issued by the RBI
regarding the reconciliation of SWIFT messages and core banking systems.
In this case of PNB Scam the Mode of operation was simple as like any LOU issued on demand
of importers. Geetanjali Gems and related firm of Nirav Modi requested for issuance of Letter
of Undertaking from PNB,. hence agrees to repay the principal and interest on their overseas
loan unconditionally. Based on this PNB issued LOU, Nirav Modi firm raised loan from
overseas branches of Indian Bank like Union bank of India, Axis Bank, Allahabad bank etc.
Once the loan account get matured, PNB settle the loan account.
Here the involvement of PNB staff, while delivering the Forex credit, payee bank
usually ask for confirmation through SWIFT messaging system which is used for overseas
transaction and verification of guarantees given on LoUs. PNB branch personnel verified the
SWIFT message from overseas branches of lending bank without taking necessary sanctions.
As a result, overseas branches of many Indian banks gave Forex credit.
The jewellery company, which has shops in foreign locations such as Hong Kong,
Dubai, and New York, had been availing buyers’ credit based on such LOUs from as early as
2010.Problem started when PNB officials had sought additional margin of around 10% on the
jeweller’s exposure for the facilities to continue. As the jeweller was unable to provide this,
the facilities were withdrawn, leading to a collapse.
As PNB refused to honour the LOUs, one of these banks had reported the matter to the Hong
Kong monetary authority, which is the local regulator, and also the Reserve Bank of India.
Bank’s who processed the buyer’s credit said that their exposure was against the PNB bank,
not on the client, Nirav Modi. Based on the LOU, they have remitted the amount.
Nirav Modi companies were maintaining only current account with the branch and were
not enjoying any fund or non-fund based limits. None of the transactions were routed through
/the CBS [core banking solution] system, thus avoiding early detection of the fraudulent
activity. Buyer’s credit were issued for one year where as RBI stipulates 90 days from the date
of shipment. Overseas branches of Many Bank’s overlooked this important parameters while
collecting confirmation through SWIFT.
WHO IS NIRAV MODI?

Nirav Modi was born in Palanpur, Gujarat, and grew up in Antwerp, Belgium. His
family has been in the diamond business for several generations.When he was 19, he and his
father Deepak Modi moved to Mumbai to work in his uncle's business, Mehul Choksi, the head
of Gitanjali Group, a retail jewellery company with 4,000 stores in India.
Modi attended the Wharton School at the University of Pennsylvania but eventually dropped
out.While studying, he met his future wife, Ami, the daughter of a diamond businessman.

PERSONS INVOLVED IN PNB SCAM

NIRAV MODI: Nirav Modi is the owner of the Nirav Modi firm, Diamond RU.S., Stellar
Diamond and Solar Exports and the prime accused in this scam.
Ami Modi: Nirav Modi’s wife
Nishal Modi: Nirav Modi’s brother-in-law
Mehul Choksi: Mehul Choksi is the owner of Gitanjali Group and the uncle of Nirav Modi
PNB Employees: Gokul Nath Shetty (retired deputy manager) , Manoj Kharat (clerk).

HOW DID PNB SCAM OCCUR?

Fig. No. 4
INVESTIGATION
Punjab National Bank (PNB) alleges associates of three firms - Diamond R US, M/s
Solar Exports and M/s Stellar Diamonds- approached PNB on 16 January 2018, with a request
for LoUs to make payment to its overseas suppliers. The bank demanded at least a 100 percent
cash margin for issuing LoUs, but the firms contested that they had received LoUs without any
such guarantee in the past. Branch records did not show any such facility having been granted
to the firms, PNB suspected fraud and began digging into transaction history.
On 29 January 2018, PNB filed a complaint with the CBI, wherein it was alleged that
Nirav, Ami Modi, Nishal Modi and Mehul Choksi, all partners of M/s Diamond R US, M/s
Solar Exports and M/s Stellar Diamonds, in collusion with two bank officials committed the
offence of cheating against PNB and caused a wrongful loss. The PNB official in his complaint
informed the agency that at the Bank’s branch office at Brady House in Fort, Mumbai, two of
its employees, Gokulnath Shetty, retired Deputy Manager of PNB and another bank official
Manoj Kharat, issued fraudulent LoUs to Hong Kong based creditors on behalf of three firms
associated with Nirav Modi and the Gitanjali Group. “The public servants committed abuse of
official position to cause pecuniary advantage to Diamonds R US, Solar Exports and Stellar
Diamonds and wrongful loss of Rs 280.70 crore to PNB during 2017,” said the first information
report (FIR) filed by CBI.
As of 18 May 2018, the scam has ballooned ₹14,356.84 crore (US$2.1 billion) and
Nirav Modi is said to be hiding in London, allegedly travelling on a fake passport.
On 13 June 2018, the CBI approached the Interpol to issue a red corner notice (RCN)
against Nirav Modi's brother Nishal and one of his executives in connection with its probe into
the Punjab National Bank (PNB) fraud. The CBI sent a request to the Interpol to issue a RCN
against Nirav Modi and his uncle Mehul Choksi of the Gitanjali Group.
On 20 August 2018, former MD and CEO of Allahabad Bank, Usha
Ananthasubramanian was granted bail on a surety bond of Rs 1 lakhs by Special CBI court in
Mumbai. A week earlier, the government had dismissed Usha on the last day of her work.
Ananthasubramanian was MD of Punjab National Bank between August 2015 and May 2017
and had also served as its executive director. She was dismissed with immediate effect. [14] On
7 September 2018 one of the accused of the Punjab National Bank (PNB) fraud, Nitin Shahi
filed an application in a special Central Bureau of Investigation (CBI) court to book PNB as an
additional accused in the case. The hearing on the matter is scheduled to be held on September
21. The application filed by Shahi stated that, although the PNB has not been charge sheeted
on the fraud case, there are materials available for prima facie proceeding against the bank. [15]
The CBI registered a disproportionate assets case against a retired deputy manager of
Punjab National Bank, Gokulnath Shetty, a key accused, for allegedly amassing wealth 200
per cent more than his known sources of income.
HOW COULD THIS GO UNDETECTED?

This is where the allegedly crooked Punjab National Bank official comes in. According
to the bank’s note, this “junior level branch official” sent instructions to the foreign branches
of the other banks that Punjab National Bank had issued LoUs on behalf of these companies.
These instructions were sent through the messaging system of the Society for Worldwide
Interbank Financial Telecommunication, or SWIFT. This system is trusted by banks all over
the world almost implicitly, because it needs to be endorsed by supervisors before instructions
are issued.

Software comes into it as well. Although the instructions regarding the LoUs were sent
through SWIFT, they were not logged on or tallied against Punjab National Bank’s core
banking system, which uses Infosys’ Finacle software. This meant that the instructions,
essentially promises to other banks that Punjab National Bank would pay them back for credit
extended to Nirav Modi, were not noticed by the PNB management.

SO HOW DID THE BANK FIGURE IT OUT?

Punjab National Bank, in its note, claims that after the conniving official retired, the
companies again approached the same branch asking for LoUs. This time they were asked to
provide a 110% cash margin, since they only had current accounts with the bank with no built-
in credit allowances. The companies told the branch they had been availing LoUs without
providing cash margins for several years now, which is when the alarm bells were raised. The
bank then went through the SWIFT trails to examine what actually had been going on in the
branch, and that is when the scam emerged.

This, of course, cannot be the end of the story and there are several questions that this
raises, starting with why the companies would go back to the branch and reveal their method
of operation if they knew the allegedly conniving official had retired. Considering SWIFT
instructions also require some further clearance, it is clear more than one official was involved
and indeed the bank has suspended a total of 10 employees. The most pressing question is how
these SWIFT instructions could bypass the bank’s core banking system altogether, in such a
way that the transactions went unnoticed.

On 14 February, state-owned Punjab National Bank (PNB) disclosed that it

has discovered $ 1.77-billion (around Rs 11,400 crore) worth of fraudulent transactions at one
of its Mumbai branches. In a complaint to the Central Bureau of Investigation, the lender named
firms and people associated with billionaire jeweller Nirav Modi to connived with some of its
officials to defraud the bank using bank guarantees. For those who came late, here is a primer
based on CBI’s first information reports and public information available so far:
What is the fraud about?
Two PNB employees sent unauthorised letters of undertakings (LoUs), essentially bank
guarantees, to foreign branches of Indian lenders, on behalf of firms related to Nirav Modi and
the Gitanjali Group. The LoUs basically told these other lenders: Lend money to Nirav Modi
firms so that they can pay for their imports. If they don’t pay up, we will make good this
payment.

WHAT’S IRREGULAR ABOUT THIS?

In the normal course, when an importer goes to a bank to ask for such a guarantee, one
of two things happens. One, the bank asks him for collateral before it gives a guarantee. This
collateral could be property in his name, or a fixed deposit with the bank. Second, the bank
sanctions a credit limit. That means it will evaluate the importer (just like a lender asks for your
income proof and address proof before giving you a home loan) and says he is good to be given
a loan for a certain amount; but no money actually changes hands.

In the PNB fraud case, the bank employees had sent these guarantees in the absence of credit
limits and collateral security (in Modi’s case). Secondly, they didn’t make an entry in the
bank’s core banking system – the software used to support a bank’s most common transactions,
which also acts as a record keeper. In some cases, they made a corresponding entry in the core
banking system, but for lower amounts.

WHAT HAPPENS WHEN THE FOREIGN BANK OR BRANCH

RECEIVES THIS GUARANTEE?

When the foreign bank or branch receives the guarantee, for example from PNB, it will
give a loan to the importer. That means it will deposit money either in the account of the
supplier who’s selling goods to the importer, or in PNB’s account held with it. The tenure of
this loan varies from ninety days up to even five years for capital goods. The money gets used
to settle the payment for imports. Then, when the term of the loan is up and the importer makes
money from reselling the goods he imported, he will pay this sum to PNB with interest. PNB
in turn will settle with the.

HOW WAS THIS DETECTED?

According to the FIR, two junior employees of PNB had been sending these
unauthorised guarantees for seven years. Then one of them retired. In January, when
representatives of Modi firms asked for a fresh guarantee, the new PNB employee in that
position asked for collateral security. On being told that this was never asked for in the past,
the bank started investigating and found hundreds of guarantees relating to these firms.You
mean no one thought to check this earlier?
 PNB’s defense is that the SWIFT messaging system used to send these guarantees was
not linked to its core banking system. SWIFT stands for the Society for Worldwide Interbank
Financial Telecommunication. Experts also said that a concurrent audit — an audit of
transactions done as they happen by internal or external auditors — should have caught this.
Won’t someone look at the money deposited in PNB’s overseas accounts? Won’t someone
reconcile SWIFT messages with the money that was transmitted through PNB’s systems? The
jury is out on how many people at different executive levels are involved — either directly or
because of negligence.

WHAT HAPPENS NOW FOR PNB?

Fig. No. 5

PNB is left holding bank guarantees worth Rs 11,400 crore which it has to pay to,
among others, State Bank of India, Allahabad Bank and Union Bank. These payments are due
over the next few months. The bank has tried to shift some of the blame to these banks. In a
caution notice to the chiefs of other banks it essentially said this: You should have done more
due diligence before giving out loans. Didn’t you notice that these guarantees are for one year,
much above the RBI allowance of 90 days for the diamond industry?

Other banks aren’t buying these arguments. They say: We took an exposure on PNB, a state-
owned bank (and an implicit bet on the Indian Union) not on a diamond merchant. It is still a
gray area on who will actually pay up and how the burden will shared.
 CONCLUSION

The Punjab National Bank fraud has exposed many banks to credit risk. There is a need to
investigate how the process got diluted, and how a few employees in connivance with clients
could lead to a fraud of large amounts of money for such a long time without raising any red
flags.In the PNB case, the process of checking a transaction before disbursing a non-funded
loan was not robust enough. This was an Operation Risk lacuna, which translated into a CR
(credit risk)-related loss. As explained earlier in the 5w2h analysis, the internal operations of
the bank should follow a standard operating procedures with effective control measures.
Another compliance failure that facilitated the Rs 11,400 crore scam was the unmonitored
usage of the SWIFT financial messaging system. The collateral free swift transactions which
had been taking place with the co-conspirators of the banks and Nirav Modi had eluded the
eyes of other officials. It is also surprising that it had not been identified even during the
external audit process, for a period of seven years. The risk management system of the bank
should be improved.

The bank had been constantly hit by frauds which indicates the internal risk
management is very fragile and non-planned. Monetary loss could be prevented with proactive
follow-up with the concerned paying/intermediary banks, the incident has reinforced the fact
that the various stakeholders have not learnt the lessons yet. The role of the regulator of the
banks is under question now. Though RBI has come up with various risk management
processes for banks, RBI should empower the banks to deal with fraudsters in a swift manner
thereby avoiding unwanted redtapism. More than the large amount involved, the reputation of
the banking industry is at stake, especially at a time when global attention is focused on
stabilising bank reforms and greater efficiency of the financial sector is expected. Massive
capital infusion through recapitalisation bonds is intended to resurrect the public sector banks
(PSBs) that are burdened by a huge pile of non-performing assets (NPAs) and low capital
adequacy. The government may have to rework its capital infusion plan in the light of these
frauds.
BIBLIOGRAPHY

https://en.wikipedia.org/wiki/Nirav_Modi
https://thelogicalindian.com/news/mehul-choksi-one-of-the-two-accused-in-pnb-scam-
claims-innocence-in-open-letter-to-employees/
https://en.wikipedia.org/wiki/Punjab_National_Bank_Scam
https://amp.scroll.in/article/868825/explained-how-did-the-alleged-rs-11000-crore-nirav-
modi-punjab-national-bank-scam-go-unnoticed
https://in.search.yahoo.com/search?fr=mcafee&type=E211IN826G0&p=PERSONS+INVOL
VED+IN+PNB+SCAM