Punjab National Bank (PNB) detected alleged fraud of Rs 11,500 crore at its Mumbai branch on Wednesday. The alleged fraudulent transactions were reported to benefit a few account holders in apparent connivance of the some of the bank employees. Letters of Undertakings (LoUs) were fraudulently issued by two of the bank employees and instructions by Society for Worldwide Interbank Financial Telecommunication (SWIFT) were transmitted to the overseas branches of the other Indian banks to raise credit for buyers for companies of diamond jeweller Nirav Modi without making any entry in the account books, PNB informed Bombay Stock Exchange (BSE). The alleged fraud amount of Rs 11,500 is more than double of Rs 5,473 crore, the amount promised by the government under bank recapitalisation plan last year.
Letters of Undertakings or LoUs are a form of lending issued by one bank to the overseas branches of other Indian banks as an assurance to meet a liability on customer’s behalf. Four parties are involved in an LoU namely issuing bank, a receiving bank, an importer and a beneficiary entity situated overseas. LoUs, which represent the bank’s consent, are backed by some security. The present norms by the Reserve Bank of India (RBI) have specified the LoU term to be 180 days. An LoU can be rolled over once for a six month period. These letters are cleared using SWIFT instructions from bank to bank after passing through rigorous three-layered checking mechanism comprising a maker, a checker and a verifier before it’s sent across.
What is Nirav Modi accused of?
Billionaire diamond jeweller Nirav Modi’s firms – Diamond R US, Solar Exports, and Stellar Diamonds – have been accused of presenting a set of import documents to the branch, with a request to allow buyers’ credit for paying suppliers situated overseas, and apparently conniving with two of the bank employees to access the credit based on the fake LOUs. Nirav Modi was ranked 57 in the Forbes list of billionaires in 2017. He is the founder of the Nirav Modi chain of diamond jewellery retail stores and chairman of Firestar International, the parent of the Nirav Modi chain, which has stores situated in different parts of the world.