Linking CBS to SWIFT: Finmin to pull up PSBs over non-compliance

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New Delhi | Updated: May 15, 2018 4:10:54 AM

Public-sector banks (PSBs) that haven’t yet linked their core banking solution (CBS) with the SWIFT interbank messaging mechanism — which was manipulated at Punjab National Bank (PNB), leading to a $2-billion fraud there — are in for trouble.

PNB fraud case, nirav modi fraud case, nirav modi jeweller, delaware nirav modi, nirav modi money trail, mehul choksi, EDThe PNB fraud was caused by issuing letters of undertaking (LoUs) fraudulently by one of the branches in Mumbai to firms of Nirav Modi and Choksi through the SWIFT system, without making corresponding entries in the CBS, as was the procedure.

Public-sector banks (PSBs) that haven’t yet linked their core banking solution (CBS) with the SWIFT interbank messaging mechanism — which was manipulated at Punjab National Bank (PNB), leading to a $2-billion fraud there — are in for trouble. The finance ministry has decided to pull up any PSB that hasn’t complied with a directive to link the two crucial systems by April 30, to reduce scope for fraudulent activities.

“Any bank that has failed to comply has to make a written submission, giving very strong reasons as to why it couldn’t stick to the deadline. Laxity in fixing systems won’t be tolerated,” a senior finance ministry official said. The ministry has sought a status report from all PSBs in this regard.

Following the fraud at PNB in February, involving jewellers Nirav Modi and Mehul Choksi, the central bank had issued the directive for the integration, which was also endorsed by the finance ministry.

Since the fraud could have been averted had the banking system adopted steps to mitigate risks flagged in three communications by the central bank in 2016 (without a strict deadline, though), both the finance ministry and the Reserve Bank of India (RBI) are strictly monitoring compliance this time around. The linkage will make it extremely difficult for bank employees using SWIFT to bypass scrutiny of senior staff or auditors.

The PNB fraud was caused by issuing letters of undertaking (LoUs) fraudulently by one of the branches in Mumbai to firms of Nirav Modi and Choksi through the SWIFT system, without making corresponding entries in the CBS, as was the procedure. Since both the SWIFT and CBS were not linked then, such illegal activities escaped tighter scrutiny. PNB has now integrated both the systems, a senior bank official said.

The finance ministry had also, in late February, given PSBs a 15-day deadline to take “pre-emptive action” to identify gaps and brace up for increasing operational and technical risks to the banking system. Financial services secretary Rajeev Kumar had directed executive directors and chief technology officers of PSBs to “learn from best practices and pinpoint strategies including tech solutions” to ensure such frauds didn’t recur.

Following the fraud, the central bank said it had confidentially cautioned banks of such possible misuse of SWIFT, at least on three occasions since August 2016, “advising them to implement the safeguards detailed in the RBI’s communications, for pre-empting such occurrences”.

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