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Most of the talk around the Nirav Modi-PNB scam, has been pertaining to the fraudulent LOUs (Letter of Undertaking) issued by Punjab National Bank (PNB) officials. Unauthorised issuance of LOUs without making entries in the bank’s core banking system (CBS), has perceptibly led to the whole incident, going unnoticed over seven years. LOUs are bank guarantee allowing a customer to raise money from another Indian bank’s foreign branch in the form of a short-term credit for making payment to offshore suppliers.
But the accused bank officials seem to have also been able to work their way around, to issue fraudulent Letters of Credit (LOCs), despite entry in the CBS. LOCs are a more time-tested and conventional mode of instrument that guarantee payment of a specified sum in a specified currency, provided the seller submits prescribed documents such as bill of lading, air waybill, commercial invoice etc. According to the FIR filed by PNB with the CBI, along with unauthorised LOUs amounting to ₹3,032 crore, the bank officials had also issued fraudulent LOCs amounting to ₹1,854 crore to Gitanjali Group of companies. According to the report, misuse of SWIFT system to benefit Gitanjali Group of companies was also observed for transaction related to Foreign Letter of Credit. “The conniving officer issued LOCs by entering a smaller amount in trade finance module of CBS system and generated the reference number and a SWIFT message was sent for the amount,” the report stated.
SWIFT, or Society for Worldwide Interbank Financial Telecommunications, is a messaging network for securely transmitting instructions for all financial transactions.
Subsequently without making any change in trade finance module of CBS, the bank officials sent modified SWIFT message for enhanced amount under the same reference to the beneficiary bank. The overseas supplier discounted the documents drawn under such LOCs (based on SWIFT message) with overseas banks, according to the report.
In all, unauthorised LOCs amounting to ₹1,854 crore was issued, of which ₹575 crore was to Gitanjali Gems, ₹625 crore to Gili India and ₹599 crore to Nakshatra Brands. Overseas banks were Union Bank of India, Hong Kong and UCO Bank, Hong Kong. The due date for these LOCs range between February and June 2018.
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