Page 47 - Banking Fiannce March 2018

FEATURE

PNB FRAUD: HOW THE SYSTEM

WAS GAMED

T he alleged fraud was carried out through misuse relatively less compared to rupee funding. And for banks,

of Letters of Undertaking or LoUs issued by Punjab
this is good business — if all goes well.
National Bank. What are LoUs, and how do they
What is the process that is normally followed
work?
to issue LoUs and transmit messages by SWIFT?
In trade finance, which is the business of imports and Requests for loans or LoUs for large amounts have to be
exports, companies need funds to pay overseas suppliers in approved by the senior management. The other part of the
foreign currency. When an Indian company approaches its story is the transmission of the messages. This is usually a
banker for such funding, designated officials will approve a
three-layer process that takes place either at the branch or
credit limit for which an LoU can be issued. Once the LoU
its offices. One bank official is designated as a maker,
— essentially an undertaking by a bank to the overseas
branches of other Indian banks to meet a liability on behalf another a verifier, and a third is the authoriser. All have
of a customer — is issued, a message regarding the funding different logins and passwords, and work independently of
each other.
is sent from India to the bank abroad using the Society for
World Interbank Financial Telecommunication (SWIFT)
platform. SWIFT is a secure global financial messaging What went wrong in the PNB case?
service used by over 11,000 financial institutions in more SWIFT transactions are linked to the Core Banking Solution
than 200 countries. (CBS) of banks, which contains transaction histories and
other data of all customers, and can be accessed by all
On receiving the SWIFT message, the branch (which is branches where a customer has an account. SWIFT
mostly of an Indian bank in the case of Indian companies) transactions, therefore, are automatically recorded, and are
abroad provides credit against import documents, normally seen by officials from regional managers to general
for 90 days. (It could be that the LoU-issuing bank does not managers and, when the amount is big, by the top
have operations in a particular foreign country.) Margins on management. In the PNB case, the scamsters allegedly
the borrowing depend on the risk profile of the borrower delinked SWIFT from CBS in the case of companies that
and the company’s credit rating, and the terms of the credit were linked to Nirav Modi and Mehul Choksi. However,
limits set by the issuing bank. This is essentially a short-term LoUs of other companies were routed through the SWIFT-
foreign currency loan, on which banks charge 60 to 90 basis CBS system. This meant that funds were provided to the
points over the London Interbank Offered Rate or Libor, the Modi-Choksi companies without being recorded in the
international benchmark for pricing loans or lending. bank’s CBS.

This facility is used regularly by companies in the business of Also, according to the CBI’s FIR, two officials at the foreign
gold, gems and jewellery. Companies prefer this form of exchange department at PNB’s Brady House branch in
funding also because the costs of raising money overseas are Mumbai allegedly issued eight LoUs worth Rs 280 crore in

BANKING FINANCE | MARCH | 2018 | 47