Entire banking industry is shaken & rattled by the biggest fraud in the Indian banking system. It further raises serious question on the role of internal control system presently prevailing in the banking industry. None of the regulators & system were able to put forth the fraud since last 7 years is a matter of great concern for the Indian banking system. Fraud like this is indeed for a bad news for Indian economy. At the same time, it also opens up more opportunities for Risk Professionals & internal auditor.
Let us first have a look at the Modus Operandi of the present fraud.
According to details included in the initial complaint filed by PNB with the CBI, the issue was detected at the bank’s mid corporate branch at Brady House, Mumbai in mid-January.
Three firms – M/s Diamonds R US, M/s Solar Exports, M/s Stellar Diamonds – approached the bank for ‘buyers credit’ to make payments to overseas suppliers. According to the complaint, Nirav Modi, Nishal Modi, Ami Nirav Modi and Mehul Choksi were partners in these firms. Choksi, in his February 7 statement, said he had no dealing with Solar Exports. And Stellar Diamond and had retired from Diamonds R US in 1999.
Buyers credit is short term credit (90-180 days) provided by international banks. (or international branches of Indian banks) to an importer. This credit is typically provided based on a ‘letter of comfort’ issued by the importer’s local bank.
When the above three firms approached PNB in January for buyers credit via a ‘letter of comfort’, the concerned official sought a 100 percent cash margin since there was no pre-sanctioned limit for these firms.
At this, the firms contested that they have been availing this facility in the past also. But the branch records did not reveal details of any such facility having been granted to the said firms.
PNB Complaint To CBI
The complaint adds that preliminary investigations have shown that two officials of the bank had in the past fraudulently issued Letters of Undertaking (LoU) to the said firms without following due process.
These fraudulent LoUs were then transmitted across the SWIFT messaging system, based on which credit was offered to the said firms. In its original complaint, PNB specifies that 5 LoUs were issued in favor of Allahabad Bank at Hong Kong and 3 LoUs were issued in favor of Axis Bank at Hong Kong. BloombergQuint could not determine whether subsequent investigations had found LoUs issued in favor of other banks as well.
An email sent to Allahabad Bank and Axis Bank was not immediately answered.
Two officials have been named in PNB’s complaint. BloombergQuint is not naming the officials since it could not contact them directly. According to Rajiv Kumar, secretary in the Department of Financial Services, ten officials from PNB have been suspended
The question remains, How it could stay hidden for such a long period of time. Despite existence of various internal control and effective audit system. Was it pointed out by the concurrent, statutory and internal audit mechanism in the banking system? More shocking is the fact that the bank was not just audited by one auditor but a team of auditors in the last 7 years. Statutory auditor, concurrent auditor, internal auditor, RBI inspection, and what not. It is worth noting here that the incidents came on the paper only after the offices involved retired from the bank.
Recently, a bank has removed majority of branches from concurrent audit system for the reason that it is not fit from cost vs. Benefit perspective.
This is the best time for ICAI to be proactive and offer insights in to the failure of banking system.
Committee should be set up for studying it tp present. All facts within a shorter span of say 15 days and should be appropriately taken with the Government. Also, this is the time to revisits the quality of the work done by its members. And ensure required skills and improvement. This is also the time when RBI should remove the autonomy of the PSU Bank in appointing their auditor. Appointment of auditor should be done by the RBI or CAG.