Story behind PNB fraud: PNB Fraud

• Whats the scam

The two employees of Punjab National Bank directly used SWIFT the global financial messaging service used to move millions of dollars across borders every hour and bypassed the core banking system (CBS) which processes daily banking transactions and posts updates. It was a strategy to avoid immediate detection: the SWIFT messages used to raise overseas credit were not readily available in PNB’s FINACLE software system as these were issued without entering into the banks CBS.
What Really Happened
Three firms M/s Diamonds R US, M/s Solar Exports, M/s Stellar Diamonds approached the bank for buyers credit to make payments to overseas suppliers. According to the complaint, Nirav Modi, Nishal Modi, Ami Nirav Modi and Mehul Choksi were partners in these firms. Choksi, in his February 7 statement, said he had no dealing with Solar Exports and Stellar Diamond and had retired from Diamonds R US in 1999.
As per the terms of the LC, a common banking tool, PNB would pay the overseas suppliers on behalf on Nirav Modi’s firms within a certain period (typically three months) and recover the money from Modi. It’s a market practice to extend the LC if the client (i.e, NM) is unable to cough up the money at the end of the LC tenure.
Buyers credit is short term credit (90-180 days) provided by international banks (or international branches of Indian banks) to an importer. This credit is typically provided based on a letter of comfort issued by the importers local bank.
Fake Letter of Understanding (LOU) were issued
PNB employees issued fake LoUs, on the back of which foreign branches of a few Indian banks including Axis and Allahabad Bank gave dollar loans to PNB. These foreign currency loans were used to fund PNB’s Nostro accounts and from these accounts funds moved to certain overseas parties. A Nostro account is the account an Indian bank (here, PNB) has with an overseas bank.

Story behind PNB fraud: PNB Fraud

According to the note, LoUs were opened for pearl import for which total time period allowed by RBI is 90 days. Some of the overseas branches of Indian banks overlooked the rule. PNB has alleged “clear criminal connivance” of group companies of Modi and Gitanjali with some officials of PNB and other banks.
Overall Impact
In total 30 banks are affected due to this fraud among various state owned banks and PSUs, some private lenders are also involved such as ICICI, Axis, IndusInd and Standard Chartered Bank
Companies involved in exports sector may also get affected as lenders might do more scrutiny and be more cautious ahead while issuing LOUs and LCs
 
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