Mehul Choksi, a fugitive diamond merchant who has acquired Antigua citizenship and lives there, has given an interview to Business Standard in which he claims to be a victim of wrongdoing by Punjab National Bank (PNB). In the sand, sand and glee of Antigua, a world drenched with sun and sweet spirits, this could be a reality. But in the rest of the world, especially in India, Choksi and his nephew Nirav Modi almost defrauded PNB. 14,000 crore, with the help of some bank employees, careless bank management and poor supervision by bank auditors.
The banking regulator, the Reserve Bank of India, defence, is that it cannot be present in every bank’s nook and corner to oversee the front-desk staff who facilitate the scams. Nirav Modi is fighting extradition from the UK to India, where he had fled, days before the scandal story broke, perhaps inspired by the success of yet another absconding billionaire Vijay Mallya on his own to oppose extradition to India. For the banking humiliation of.
They also serve, those who stand up and cheat. Thanks to the PNB scam that surfaced in March 2018, the public at large was educated about Bank Letters of Undertaking (LoUs), Nostro and Vostro accounts, SWIFT messaging and core banking solutions.
The modus operandi of the scam was as follows: According to Central Bureau of Investigation disclosures, Nirav Modi and his uncle owned several companies in India and abroad, including Hong Kong. Indian companies imported rough diamonds from foreign companies, including companies linked to the importers (this led to allegations of round-tripping). To pay for the imports, the importer will ask PNB to issue LoUs to another bank which will carry forward credit in foreign currency. PNB issued LoUs to the Hong Kong branches of Allahabad Bank and Axis Bank, essentially stating that if the importer fails to pay, PNB will meet the losses. The bank to which the LoU was issued will deposit the amount in the PNB account of that bank. This overseas account is called Nostro account by PNB, and the same account is sent by the bank to the Vostro account where the account is opened. Nostro and vostro mean ‘our’ and ‘your’ respectively, and are derived from Medieval Latin, the language of banking in Italy where modern banking originated (banca means a bench, and benches were used by money dealers in early times). Used as temporary desks by Florentine bankers.
The LoU is sent using SWIFT system of messaging. SWIFT stands for Society for Worldwide Interbank Financial Telecommunications. The Society was founded in Belgium in 1973 by 200-odd financial institutions from 15 countries, and over the years more and more banks and countries associated with it. SWIFT does not do fund transfer or settlement. It simply sends secure messages from one bank to another, and provides SWIFT codes to the banks. It is ripe for replacement by better systems of fund transfer such as blockchain.
Now, when an Indian bank sends a message over SWIFT, it needs to be logged into the core banking solution (CBS) of the bank, which is a complex software that captures all bank transactions. At PNB’s Brady House branch in Fort, Mumbai, some employees managed to send SWIFT messages bypassing PNB’s CBS. When the money was transferred to PNB’s Nostro account, it was not matching with any of the instructions of PNB, which the auditors of PNB failed to notice. Nor does the banking supervisor RBI have any system to correlate Axis Bank advances in PNB’s Vostro account with the matching paperwork in PNB.
The scam came to light when some employees of the Modi-Choksi company approached PNB’s Brady House branch for an LoU and the PNB employee demanded 100% cash margin for sending that LoU. The diamond traders told the employee that they were being sent to LoU without any margin money. With this the inquiry has started. It was learned that since March 2011, the Brady House branch had issued 1,213 LoUs to Choksi-Modi firms, of which 53 were in order, and the rest were bogus. A second LoU will be issued when the time comes for settlement of advances made on the basis of one LoU. So, nominally, these short-term loans given by Axis Bank and Allahabad Bank to Choksi-Modi firms were repaid, but through continued grants of new, unrecorded loans by PNB, the volume of which continued to grow, Also to pay accrued interest. Close to final dues 14,000 crores.
One particular PNB employee, Gokulnath Shetty, has been convicted for sending the LoU, which has neither matching margin money nor any record in CBS. How did Shetty stay in the same position in the same branch for seven years to execute the scam? There is no clear answer to this question. The only systemic reform implemented so far for all banks is to ensure that all SWIFT messages are routed through the CBS of the respective banks. Concurrent audit of transactions between banks by checking the books of accounts of all the banks involved is still a far cry.
PNB trying to recover It had to be recorded as a deficit and made an arrangement of Rs 14,000 crore from its own resources. It has also recovered personal assets worth few hundred crore rupees of Modi-Choksi clan. The main beneficiaries remain out of the country even three years after the scam came to light.
Choksi’s Exploitation Abroad – A tour of Dominica, which he claims was abducted by Indian agents, even another version presents it as a pleasure ride with a female friend Yes – works as a distraction. His fervent declaration of innocence and deep desire to clean up the mess, if only PNB would unfreeze his accounts, and his health would allow, should be seen as part of the drama.
The money has not been recovered and the accused lives abroad. However, we in India are left with some lessons.
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