Nirav Modi Case: PNB Could Have Detected Scam At Various Stages

CBI is probing the nexus between PNB officials and Nirav Modi which helped him flee the country in January.

Attempts were made to cover up the Nirav Modi fraud.

(Photo: The Quint)

On Thursday evening, the CBI filed a second FIR in the Punjab National Bank scam with the alleged loss of over Rs 4,886 crore against Nirav Modi’s uncle Mehul Choksi and his companies Gitanjali Group, Gili and Nakshatra. The CBI has named 16 companies and individuals in this FIR. This FIR was based on the complaint filed by Punjab National Bank (PNB) on 13 February 2018.

The scope of the probe of the first FIR which was registered by CBI on 31 January 2018 against Nirav Modi, his family and his companies including PNB officials, has been enhanced from Rs 280 crore to Rs 6,498 crore.

The massive swindle has thrown up several questions, like how could a scam go on for several years without anybody noticing it, how Nirav Modi and his family managed to escape in the first week of January 2018, and what kept the CBI waiting after registering the first FIR?

How Did Modi Manage to Escape?

Usually, when an FIR is registered by the agency, searches are conducted on several places in the next couple of days. In Nirav Modi’s case too, after registering the FIR on 31 January, CBI conducted searches in Modi’s residence, along with his wife’s, brother’s and uncle’s residence. They also checked his office premises on 3-4 February 2018, giving the CBI an inkling of Modi and his family’s disappearance from the country.

A lookout Circular (LoC) was issued on 4 February by the Interpol. However, the pressing question is – from 4 February to 13 February, when PNB sent more complaints on Rs 11,000 crore worth of fraudulent transactions, what was the CBI doing? The CBI alleges that they have no clue where Modi and his family members are.

According to the CBI sources, PNB officials may be involved in helping Modi and his family escape.

We are looking into this aspect whether there is any nexus between the PNB officials and Modi in their escape. We have already started questioning PNB officials in this regard.

CBI Source

CBI issued a Diffusion Notice on 15 February 2018 to find out the location of Modi and his family. But why the delay? Why didn’t the CBI act on it earlier?

The Quint spoke to former Director of Punjab National Bank, Dr Sunil Gupta, to understand the process of issuing Letter of Undertaking (LoU) and Foreign Letters of Credit (FLC).

According to Gupta, LoUs can be issued by the bank branch level officers but in this scam it was illegally issued by the bank officials without following protocol and producing proper documentation.

Despite the fact that the LoUs were fraudulently issued by bank officials, it could still have been detected at three different levels.

Level 1

The LoU is cleared or discounted by the overseas branches of the Indian banks, only if it gets a confirmation on the issuance of the LoU via SWIFT (Society for Worldwide Inter-Bank Financial Telecommunication) message from the India-based branch. Gupta further added that SWIFT messages are sent directly to the bank headquarters.

The Overseas branch of the Indian bank cannot discount the LoUs without receiving a confirmation from the PNB bank that issued the LoUs. And if the overseas branch has discounted the LoU without receiving confirmation from PNB on the issuance of LoU, then possibly, a few bank officials of the overseas branch could be in connivance with Nirav Modi. 

The PNB in it’s letter to other banks has said that the fraud was detected through SWIFT trail. PNB also said that none of the transaction was routed through Core Banking System (CBS), thus ‘avoiding early detection of fraudulent activities’.

But the question remains how SWIFT messages go undetected for such long periods, especially when the amount is so huge and the messages are directly sent to the headquarters of the respective bank?

Level 2

All banks hold Nostro account with each other for foreign currency transactions. In a day, several transactions take place in several branches of a particular bank. The Nostro account reflects all transactions that happened in a day. This account is monitored by a group of bank officials headed by a very senior officer.

According to Gupta, if messages were sent via SWIFT to PNB Headquarters by the overseas branches, then Nostro account should show up. Then how is it that the fraudulent transactions made to the tune of over Rs 11,000 crore were missed by the bank officials?

Level 3

Another pertinent question is how the fraud escaped the lenses of PNB’s regular audits. According to Gupta, four different audits happen over a year.

Internal and concurrent audits happen every month. Statutory audit happens quarterly and the RBI’s audit happens annually. Then how could a two-step auditing process miss out on spotting the unaccounted transactions?

On Friday, the CBI examined four PNB bank officials including an auditor of the bank. However, it’s still unknown whether senior bank officials were complicit or intentionally chose to overlook the scam brewing under their nose.