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File pic of Nirav Modi

New Delhi: Banking operations failure, RBI’s gaffe, auditors’ carelessness and mistakes committed by banks which gave out loans based on LoUs issued by PNB, they all contributed to India’s biggest corporate fraud.

The Punjab National Bank scam was undoubtedly a result of a series of mistakes.

Here are five big mistakes which allowed the massive Rs 11,400 crore scam to go unchecked:

1) Banking operations failure

The first mistake is lack of smooth operation system in the bank. Missing distribution of work and responsibility, inadequate monitoring and gross ignorance of the part of vigilance department or possible compliance to scam could all be the reasons of operations failure. Bank transactions take place on the basis of ‘makers and checkers’ system, which means one person records transactions, other checks it and third approves it. Thereafter, a vigilance department officer monitors the activities. Bank’s internal audit acts as next line of defence.

All bank transactions must be recorded in CBS process. Missing out recording SWIFT transactions of such amounts for so long is a massive mistake. Usually, SWIFT is used for major international transactions of large amounts of money, thus to cut the risks, banks maintain extra precautions. It seems unbelievable that the bank officials continued to send LoUs, without proper cash margins, for six years and no one caught them. It is impossible without collusion.

2) RBI’s gaffe

Despite technological advancements, it is surprising that SWIFT is not part of Core Banking System or CBS. Most of the private banks use the CBS technology for all banking operations, including SWIFT, and maintain real-time reports of all transactions.

Apart from this, several expert inspection teams of RBI must have checked Punjab National Bank’s transactions and operations in last six years, how could they have missed a scam of this magnitude.

3) Auditors’ mistake

Bank operations go through five audits apart from RBI monitoring: Bank credit audit,Bank internal audit ,Concurrent audit,Stock audit ,External statutory audit For six years, all audits missed the scam.

4) Mistake committed by banks which gave out loans based on LoUs issued by PNB 

Banks which gave out loans on the basis of fraudulent LoUs are also erroneous. State Bank of India Union Bank, Allahabad Bank and Axis Bank issued large sums based on LoUs of longer than permissible time limits. These loans were issued to one group of companies, which included several shell companies.

Not verifying or double checking the letters, before issuing the money is a major mistake of the part of these banks.

5) Investigating agencies’ fault

In last few years, alerts have been issued on possible dubious activities afoot in companies owned by Mehul Choksy and Nirav Modi. But the investigative agencies took no cognizance of these alerts. Income Tax department did not act on the reports issued by Financial intelligence unit – a big mistake.

PNB fraud: Issuing of LoUs to Nirav Modi going on since 2008, Gokulnath Shetty tells CBI.

The CBI has registered two cases involving Modi and Choksi. These relate to fraudulent issuance of 150 Letters of Undertaking (LoU) (a kind of bank guarantee) worth Rs 6,498 crore and 143 LoUs worth Rs 4,886 crore.

Key accused in Rs 11,400 crore PNB fraud case, Gokulnath Shetty has told the CBI that issuing of the Letter of Undertakings (LoUs) to fugitive jewellery designer Nirav Modi had been going on since 2008.

The CBI has registered two cases involving Modi and Choksi. These relate to fraudulent issuance of 150 Letters of Undertaking (LoU) (a kind of bank guarantee) worth Rs 6,498 crore and 143 LoUs worth Rs 4,886 crore.

During the argument over the custody of three PNB officials — Bechhu Tiwari, the then chief manager in the Forex department of PNB; Yashwant Joshi, Scale II Manager in the Forex department and Praful Sawant, Scale-I officer handling the exports section yesterday, the premier investigative agency made this disclosure.

All the three were produced before the special court judge SR Tamboli who sent them to police custody till March 3 and observed that there is a possibility of their involvement in diverting the bank money.

Shetty was then deputy manager (now retired) of the PNB’s Brady House in Mumbai. Reports say that Shetty, who retired in May 2017, remained in the Brady House Branch for seven years and issued more than 100 LoUs to Modi and his firms.

PNB is the country’s second largest lender. The bank had earlier said that group companies of Modi and Chokshi in collusion with two of their officials from its Brady House Mumbai branch, were fraudulently receiving LoUs during 2011 to 2017.

Permit me to pay salaries to 2,200 employees: 10 things Nirav Modi said in his letter to Punjab National Bank.The diamond czar said that money went through the bank all these years for the repayments of the advances given by the overseas bank branches under the buyers credit.

Nirav Modi, the man who has been at the centre of the alleged Rs 11,400 crore fraud detected by Punjab National Bank, in a letter to the bank requested them to permit him to pay the salaries to 2,200 employees from the balance lying in the current accounts of his firms. “Whatever may be the consequences I may face for my actions, the haste was, in my humble submission, unwarranted,” he said.

In a letter Nirav Modi wrote on February 15/16 to the Punjab National Bank management, the diamond billionaire even requested the bank to “be fair, and support his efforts to make good all the amounts that are found due by his group to all banks.”

In his defence, Modi even said that there has been no default on the part of any of these firms over all these years. He said that money went through the bank all these years for the repayments of the advances given by the overseas bank branches under the buyers credit.

10 THINGS THAT NIRAV MODI SAID IN HIS LETTER TO THE BANK

1. Beleaguered businessman Nirav Modi said Punjab National Bank’s “overzealousness” shut the doors on his ability to clear the dues.

2. The diamond jeweller claims that the dues were much less than what the bank has claimed.

3. Nirav said his relatives booked in the cases filed by the central agencies had nothing to do with the operations of the firms under their scanner. “My wife is not connected with any business operations at all and she has been wrongly named. My uncle is also wrongly named in this complaint since he has an independent and unconnected business and none of them are aware or concerned with my dealings with your bank.”

4. In his letter, the diamond czar claims that the money his companies owe to the bank is under Rs 5,000 crore. “As you are aware, this is entirely incorrect and the liability of the Nirav Modi Group is substantially less. Even after your complaint was filed, in good faith I wrote to you saying please sell/allow me to sell Firestar Group, or their valuable assets, and recover the dues not just from Firestar Group, but also from the three firms,” he said.

5. Nirav Modi, who left the country before the alleged scam became public, said, “The erroneously cited liability resulted in a media frenzy which led to immediate search and seizure of operations, and which in turn resulted in Firestar International and Firestar Diamond International effectively ceasing to be going-concerns. This thereby jeopardised our ability to discharge the dues of the group to the banks.”

6. Modi said that the bank’s anxiety to recover dues immediately, despite his offer (on February 13, a day before the public announcement, and on 15) have destroyed his brand and the business.

7. He went on to say that this has restricted bank’s ability to recover all the dues leaving a trail of unpaid debts.

8. The letter also refers to the extended discussions between him, and between his representatives and the bank officers, besides his emails of February 13 and 15, 2018.

9. In his letter, Nirav claims that he went on to state that PNB had time and again acknowledged that the buyers credit facility has been extended by it to the three partnership firms for several years, and that there has been no default on the part of any of these firms over all these years. He said that money went through PNB all these years for the repayments of the advances given by the overseas bank branches under the buyers credit.

10. Valuing his domestic business at around Rs 6,500 crore, he said, “This could have helped reduce/discharge the debt to the banking system,” but added that this is not possible as all his bank accounts have been frozen and assets sealed or seized.

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