Nirav Modi scam reveals deep flaws in India's banking system
One is likely to wonder how Nirav Modi managed to dupe Punjab National Bank (PNB), India's second-largest public lender, of Rs. 11,400cr for seven years without anyone realizing. Reuters reports the answer may be as simple as it is alarming: no one was paying attention to notice. The scam exposes the deep flaws in India's banking system and the absence of checks and balances.
Modi had help from top officials at PNB
Modi was working in connivance with Gokulnath Shetty, deputy manager of PNB's Brady House branch in Mumbai, and his subordinate Manoj Kharat, who issued about 150 fraudulent letters of undertaking (LoU) during 2011-17. With these LoUs, Modi approached foreign bank branches for loans. They served as guarantee that if he defaults, PNB will pay up. Shetty used the SWIFT system for the process.
Misuse of the international SWIFT system and incomplete ledgers
The SWIFT system- Society for Worldwide Interbank Financial Telecommunication- facilitates transactions internationally. There are checks in place, including red-flags for suspicious transactions and breach of limits. Shetty managed to bypass SWIFT and act as both the person who raised a request for Modi's transactions, as well as the approver. But PNB's internal system wasn't linked to SWIFT. Shetty didn't record Modi's transactions manually either.
'You do somebody else's work, somebody else does your work'
According to other bank officials Reuters spoke to, sharing of passwords that allowed Shetty to misuse the SWIFT system happens quite frequently in Indian banks. "When you are flooded with customers in the morning, with 101 demands, you look for shortcuts," one said.
Indian banks to take a hit of Rs. 19,362cr: I-T
But apart from SWIFT's misuse and incomplete ledger entries, there were other violations. Shetty was posted at one branch from 2010-17 despite rules mandating regular rotation. CBI says the fraudulent paperwork adds up to Rs. 6,000cr. Bank executives say the amount tallied by working through internal records is Rs. 11,425.35cr. I-T claims Indian banks would take a hit of Rs. 19,362cr in the end.
ED, I-T zeroes in on 200 linked shell companies
Shetty, Kharat and Hemant Bhatt, director of many companies of the Nirav Modi Group who knew about the scam, have been arrested. Many other PNB and Modi Group's employees have been questioned. In raids at several of his premises, ED and I-T have seized assets worth nearly Rs. 5,700cr. 200 shell companies linked to the scam have also been identified. A multi-agency probe is on.
