Thursday, July 9, 2020
Home News Reports Nirav Modi financial fraud : All you need to know

Nirav Modi financial fraud : All you need to know

Also Read

Ashutosh Muglikar
Articles on Corporate Laws, Policy, Economics and Politics. Maverick. Lover of Ideas. Slayer of Hoaxes.

Yesterday the Indian financial sector was rocked by a startling revelation of a fraud that took place in one branch of the State-owned lender Punjab National Bank. In the cacophony of accusations, both from the party in power and the opposition, the voice of reason is lost. Here is my attempt to explain the modus operandi and what could be done to avoid this in future.

But before that a simple explanation of certain terms used:

Basic Terminology and Usual procedure:

In an import-export transaction, the parties involved generally do not meet face to face. Hence they involve their respective bankers to bring a level of trust and faith to the transaction. Banker solves the very basic issue that “what if Indian person sends money to the supplier and he doesn’t supply goods at all or what if the supplier sends the goods and the Indian person doesn’t pay up”? That’s where the Bankers come into the picture.

A Letter of Undertaking (LOU) is a confirmation issued by a local bank (in this case PNB) on behalf of its customer (in this case Nirav Modi and his entities) to another bank outside India (in this case branches of Axis Bank etc) for conducting an international transaction. The letter simply states that if the customer fails to pay for the goods then the Bank (read PNB) shall pay on its behalf. So once a banking entity confirms payments, the foreign supplier has nothing to worry about and they may supply the goods (in this case diamonds).

Once the foreign Bank/Branch receives the LOU they approve the “buyer’s credit” for the borrower (in this case Nirav Modi and his entities), which is then transferred to an account called the “Nostro account” of the bank which issued the LOU. In simple terms, the “Nostro account” is a foreign currency bank account held in another bank for cross-border transactions. To initiate this transfer the Banks don’t communicate via emails etc but use a very secure system called SWIFT to send messages. Once the SWIFT message is sent by Indian Bank and confirmed by the foreign banks the money transfer is initiated.

The Modus Operandi:

As per the reports, 2 of the bank staffers were involved in this fraudulent activity. Firstly they would issue the LOU’s from their branch but never made relevant entries in the Bank accounting systems. Moreover, it is alleged that Nirav Modi’s entities did not have credit facilities with PNB which entailed them access to LOU’s. So it can be said that these LOU’s were off balance sheet items.

After this, the Complaint filed by PNB with the Central Bureau of Investigation, also alleges that the staffers sent SWIFT messages to foreign bankers and completely bypassed the Core Banking System/software. Foreign bankers trusting the SWIFT instructions and LOU’s extended credit and transactions were happening all this while. As per further reports, the total value of such transactions is well over INR 11000 crores.

Systemic Failure:

As is clear from the above, that a gap in the process and system seems to have been unduly used by just two people which has caused a flurry in the Indian banking system. This is nothing but a clear case of systemic failure, audit failure on the part of internal auditors, risk managers and even the management as well as the RBI and Finance Ministry. Heavily depending on my corporate governance background, I can say that a simple reconciliation of SWIFT messages and outstanding liability could have detected this fraud long ago. That this reconciliation is not happening since 2011, is nothing short of shocking.

To dig further, it must also be probed if there was any gap in the software that is used by the Bank. How can a single person access, approve and complete a transaction by bypassing the system altogether that too over such a long period and for such high-value transactions? If one branch knew this loophole, is it ok to say many others could well be aware of this too? I shudder to think on those lines.

For now, we wait for further information to trickle in. The Enforcement Directorate has conducted raids and the main accused have apparently fled the country in the first week of January itself.

  Support Us  

Whether NDTV or 'The Wire', they never have to worry about funds. In name of saving democracy, they get money from various sources. We need your support to fight them. Please contribute whatever you can afford

Ashutosh Muglikar
Articles on Corporate Laws, Policy, Economics and Politics. Maverick. Lover of Ideas. Slayer of Hoaxes.

Trending now

From Vikas Dubey has reached Nepal to he may be encountered ‘because he knows dirty secrets’: Read how conspiracy theorists spun yarns

As Vikas Dubey was on the run, the journalists kept themselves busy conjuring up various conspiracy theories.

Kanpur encounter: Notorious gangster Vikas Dubey arrested at police station in Ujjain

The notorious gangster was arrested by the Madhya Pradesh police after he had managed to escape after unleashing terror on the Uttar Pradesh policemen on July 2 late night killing eight policemen including a DSP.

Netizens ask Netflix to cancel comedian Kenny Sebastian’s special show after he hurls obscene abuses

Social media users are demanding that Netflix reconsiders special show of Indian comic Kenny Sebastian after he was allegedly found hurling obscene abuses to people on his Instagram page.

Uttar Pradesh: Two aides of criminal Vikas Dubey shot dead by the police, 3 killed so far

Prashant Mishra, an aide of Vikas Dubey, was shot in the leg while trying to escape during his transit to Kanpur. He was admitted in hospital in a critical condition and later succumbed to injuries.

Jammu and Kashmir: Ex-BJP district President Wasim Bari killed by terrorists, father and brother also murdered

Former BJP Bandipora President Wasim Bari killed by terrorists who shot at him outside his shop

Turkey govt plans to convert Byzantine cathedral Hagia Sophia into a mosque again. Read about this historical symbol of Muslim-Christian rivalry

Hagia Sophia, originally a Christian cathedral, was converted into a mosque and then into a museum, will be converted to mosque again

Recently Popular

Australian surfer Carmen Greentree abducted and raped for 2 months in a houseboat in Kashmir in 2004, pressurised to convert to Islam

Carmen Greentree has penned a book titled "A Dangerous Pursuit of Happiness" narrating her abduction and rape in Kashmir.

Jyoti Basu is the mass murderer India forgot

Please don’t feel bad about speaking ill of the Late Jyoti Basu. If there is another world, be certain that there are (at least) 28,000 voices from the other side backing you up.

Only Muslims go to heaven, Ravish Kumar-like non-Muslims can only hope for a mild level of hell: Dr Zakir Naik explains

Naik said that virtues like honesty and charity cannot ensure qualifying marks for heaven or Jannah. Only Muslims can go to heaven and non-Muslims will go to hell by default, he says.

Payal Rohatgi’s Twitter account suspended, the actress says she is being targeted by ‘liberals and extremists’

Payal Rohatgi has stated that her efforts to share facts has been projected in a bad light by liberals and extremists who control Twitter.

The dark, disturbing world of mean and hateful ‘sly’ Bollywood insider gossip featuring Rajeev Masand, PinkVilla and others

Following Sushant Singh Rajput's suicide, prominent film journalists and critics were accused of writing vile 'blinds' aka unverified, vile gossip.

Netizens ask Netflix to cancel comedian Kenny Sebastian’s special show after he hurls obscene abuses

Social media users are demanding that Netflix reconsiders special show of Indian comic Kenny Sebastian after he was allegedly found hurling obscene abuses to people on his Instagram page.

Bangladesh: Video of Muslims destroying fence of 200-year-old Hindu temple goes viral on social media

Hindus in Bangladesh claim that fence of 200 year old Shiva temple was destroyed by Muslims, video goes viral

From Vikas Dubey has reached Nepal to he may be encountered ‘because he knows dirty secrets’: Read how conspiracy theorists spun yarns

As Vikas Dubey was on the run, the journalists kept themselves busy conjuring up various conspiracy theories.

Kanpur encounter: Notorious gangster Vikas Dubey arrested at police station in Ujjain

The notorious gangster was arrested by the Madhya Pradesh police after he had managed to escape after unleashing terror on the Uttar Pradesh policemen on July 2 late night killing eight policemen including a DSP.

Netizens ask Netflix to cancel comedian Kenny Sebastian’s special show after he hurls obscene abuses

Social media users are demanding that Netflix reconsiders special show of Indian comic Kenny Sebastian after he was allegedly found hurling obscene abuses to people on his Instagram page.

Uttar Pradesh: Two aides of criminal Vikas Dubey shot dead by the police, 3 killed so far

Prashant Mishra, an aide of Vikas Dubey, was shot in the leg while trying to escape during his transit to Kanpur. He was admitted in hospital in a critical condition and later succumbed to injuries.

Latest updates and important links about COVID-19 coronavirus

Live statistics and tracking of news related to COVID-19 coronavirus with focus on India.

The Print’s columnist expresses glee over the murder of BJP leader Wasim Bari in Kashmir

Vij had earlier used similar words to mock the murders of truck drivers and traders in Kashmir.

Veteran Bollywood actor Jagdeep dies at 81

Jagdeep is father of Bollywood actor Javed Jafri.

Jammu and Kashmir: Ex-BJP district President Wasim Bari killed by terrorists, father and brother also murdered

Former BJP Bandipora President Wasim Bari killed by terrorists who shot at him outside his shop

Connect with us

235,230FansLike
401,495FollowersFollow
271,000SubscribersSubscribe