State-owned lender Punjab
National Bank (PNB) has informed the Bombay Stock Exchange that it has detected
fraudulent transactions worth $ 1,771.7 million (over Rs 11,000 crore) in its
mid-corporate branch at Brady House, South Mumbai. PNB has alleged that two
employees had “fraudulently issued Letters of Undertaking (LoUs) and
transmitted SWIFT instructions to the overseas branches of Indian Banks” to
raise buyers credit for companies of billionaire diamond jeweller Nirav
Modi without “making entries in the bank system”.
So, what is an LoU, and how is
it issued?
An LoU is an assurance given by
one bank to another to meet a liability on behalf of a customer. The LoU is
akin to a letter of credit or a guarantee. LoUs are used in international
banking transactions. An LoU is issued for overseas import remittances and
involves four parties — an issuing bank, a receiving bank, an importer and a
beneficiary entity overseas. According to norms, the term of an LoU is 180
days, and can be rolled over once for six months. Since LoUs are a form of
lending, they are typically backed by security.
LoUs are conveyed from bank to
bank through Society for Worldwide Interbank Financial Telecommunication
(SWIFT) instructions, which pass through a triple layer of checks. A SWIFT
instruction, which represents a bank’s consent, is cleared by a maker, a
checker and a verifier before it is sent across. There is no reported instance
so far of a breach in SWIFT instructions anywhere in the world.
What are the specific
allegations by PNB in the present case?
PNB has alleged that two of its
employees “fraudulently” issued LoUs and “transmitted SWIFT instructions to the
overseas branches of Indian Banks” to raise buyers’ credit for Nirav Modi’s
firms, Diamond R US, Solar Exports, and Stellar Diamonds, without making
entries in the bank system
The bank has alleged that one
such fraudulent LoU issuance took place on January 16, 2018, for and on behalf
of Modi’s firms, which allegedly presented a set of import documents to the
branch, with a request to allow buyers’ credit for making payments to suppliers
overseas. When bank officials requested the firms to furnish 100% cash margin
for the LoU, the firms argued that they had availed this facility in the past as
well.
However, branch records did not
have the details of any such facility having been granted to the firms. An
internal probe by the bank then found that a few of its employees had
fraudulently issued LoUs for Hong Kong branches of two Indian banks for and on
behalf of Modi’s firms. PNB has alleged that the buyers’ credit based on the
fake LOUs may also have been paid through a Nostro account — which is an
account that a bank holds in a foreign currency in another bank.
What is SWIFT?
The Society for Worldwide
Interbank Financial Telecommunication (SWIFT) provides a
network that enables financial institutions worldwide to send
and receive information about financial transactions in a secure, standardized
and reliable environment. SWIFT also sells software and
services to financial institutions, much of it for use on the SWIFTNet Network,
and ISO
9362. Business Identifier Codes (BICs, previously Bank Identifier Codes)
are popularly known as "SWIFT codes".
SWIFT transports financial
messages in a highly secure way but does not hold accounts for its members and
does not perform any form of clearing or settlement.
SWIFT does not facilitate funds
transfer: rather, it sends payment
orders, which must be settled by correspondent accounts that the
institutions have with each other. Each financial institution, to exchange
banking transactions, must have a banking relationship by either being a bank
or affiliating itself with one (or more) so as to enjoy those particular
business features.
SWIFT is a cooperative society under Belgian law
owned by its member financial institutions with offices around the world. (Founded
1973)
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