There is more to Nirav Modi & Co’s cleverly crafted bank gaming scheme than seems to meet the eye. Punjab National Bank (PNB) had in its letter of February 12 stated that “one junior level branch official unauthorisedly and fraudulently issued Letters of Undertakings (LoUs) on behalf of some companies belonging to Nirav Modi group” and that the “companies were maintaining only current accounts with the branch and were not enjoying any fund/non-fund based limits. None of the transactions were routed through the core banking system, thus avoiding early detection of fraudulent activity”. This, the bank claims, resulted in the transactions not coming to light.
Banking sources said that in some banks the SWIFT system, which is used for international transactions, and the core banking system work independent of each other. In PNB’s case, it said the outstanding LoUs were not available on its core banking system run on Infosys’ Finacle software, and thus the LoUs issued went undetected.
Bankers FE spoke to on condition of confidentiality shared a deeper perspective on how the system works. First, to open an LoU/letter of credit (LC), the bank conducts a due diligence. This may have been waived since the entities concerned already had a banking relationship with the branch. Second, before issuing any LoU/LC, a credit limit is created for the party in the banking system. This was not done. Only after this, based on the limit, is any LoU/LC issued. These protocols, PNB suggests, were not followed.
However, no such transaction is possible without collusion of more than a few officials, points out a banker. “Just like for a pay order, where the person making the instrument needs to get it countersigned, same is the process for any other instrument,” he said. Therefore, collusion is a given.
What’s also important to note is that not everyone has access to the SWIFT system. An official needs to be authorised and must have the required credentials to use the system and transmit any communication to another bank. “We never used to enter the SWIFT room, and every document going in and coming out needed to be registered. You couldn’t just walk in and walk out, and definitely not with any document,” said a foreign banker on condition of anonymity.
What also must be noted, said an ex-banker, is that most banks hesitate to deal with the jewellery and diamond trade, as they have no way of ascertaining the true worth of the goods. He termed the business “high value and high risk”, as bankers have to rely completely on the word of the parties concerned for the value of any transaction. Bankers further point out that the diamond trade the world over is a very specialised one, dominated by close-knit communities and families who mostly trade among themselves. Keeping track of shipments and deliveries in this trade is also difficult. In fact, the few global banks that serve the needs of the trade have specialised teams dedicated for it.
The other possibility, point out bankers, is that entities controlled by the group could have been set up in India and in multiple locations overseas to build-up credibility through trades of significant amounts with on-time payment each time. This could have encouraged the bank to provide “accommodation” for transactions based on just copies of orders from buyers. However, somewhere along the line the system seems to have ballooned out of control. Said an ex-banker, “I don’t know the precise details, but there seem to have been deviations. LCs are usually for 180 days at most, but in this case the instruments seem to have been revolved.” This if undertaken is in violation of banking guidelines.
What also emerges from all of this is that it is not improbable that officials at branches of the beneficiary accounts were involved. In fact, if the entities belonged to members of the family or a close-knit community, the transactions could have been “managed” from the other end as well. Clearly, there is more to the scam than meets the eye.