Officials investigating the Nirav Modi-Punjab National Bank case believe that the alleged scam involving a sum of Rs 11,400 crore, which had been going on for eight years, could not have taken place without the connivance of the PNB’s top management. It is obligatory upon all branches of a bank to conduct two separate audits every year and, hence, it is unlikely that the bank’s top authorities were not aware of the slip-backs.

Every bank branch, especially the mid-corporate group branches (that handle a portfolio between Rs 50 crore and Rs 500 crore) are subjected to two levels of audits every year, apart from the “spot audit or surprise audit” that are carried out randomly.

Central audit (done by the bank itself) and statutory audit (carried out by an independent chartered accountant firm of long standing repute empanelled by the bank) are done every year by banks to make sure that instances of fraud are identified before it is too late. For “risky” businesses, a Risked Focus Internal Audit (RFIA) is also carried out by certain branches.

Multiple bank officials with whom The Sunday Guardian spoke to said that the idea that the PNB scam was carried out by mid and low level employees was laughable.

“PNB Brady House branch is an MCG branch and, hence, apart from the regular auditing, as per the rules, a full time auditor is also supposed to be posted there. So, in theory, the branch was going through three different levels of inspection from different auditors. It is laughable that none of these three levels of auditing was able to identify the scam that had begun in March 2011 and went on till January 2018. Speak to any banker, they will tell you that a wrongdoing of such huge scale, done over a period of eight years, would not have happened unless it was being supported by the top officials. Those who have been arrested are just the executors, who must have got a flimsy cut from Nirav Modi. But what about those who planned the whole thing?” an official with State Bank of India (SBI) asked. According to him, the internal audit conducted by the bank, which goes on for seven to 10 days, is the best as it looks into every minute details. According to officials, it was clear that the auditing mechanism had failed in its sole purpose of identifying fraud. “The world over, diamond and gold sectors are treated as not-safe sectors by bankers and even in Belgium, banks shy away from giving loans to such enterprises. However, despite this, Nirav Modi enjoyed a comfortable ‘honeymoon’ here for so many years as those who should have been concerned simply looked the other way,” he added.

The recent scam has forced a hassled RBI to constitute an expert committee under the chairmanship of Y.H. Malegam, a former member of the Central Board of Directors of RBI, to look into the effectiveness of audits and suggest ways to make these more effective. Officials also ridiculed the PNB’s excuse that the accused employees, who were helping Nirav, did not enter the details of the SWIFT transaction while generating the LoU (Letter of Undertaking) in the bank books. “Every SWIFT transaction involves at least three people and at the end of the accounting day, it has to be entered in the bank records since it is a transaction, though it is taking place through an electronic messaging system. LOUs are contingent liability and hence are ‘off-balance sheet items’, but it is mandatory to write them in the footnotes of the accounting book. It is the job of the auditors to make sure that it is mentioned. How could successive auditors ignore this?” a senior official, who is involved in an auditing role in SBI, said.

The fact that the RBI had issued three caution notices since August 2016 on certain fraud risks that it had detected from the malicious use of SWIFT system should have jolted the PNB officials in checking out basic things like was there any employee who was working on the system for an abnormally long period.  “The rationale behind not keeping an employee in a particular post for more than three years is to mitigate instances of fraud, something that was not done in this case. That again points out to the complicity of senior officials, as unless and until the guilty employees did not have the support of their seniors, they would not have stayed in the same place for so many years (eight years),” an official with the Ministry of Finance said.

As a fallout of this, mass scale transfers were reported from public banks, including SBI, where urgent orders were issued to transfer officials who were in a post for over three years or in one place for over five years. The directions issued also said that such officials were to be relieved within 24 hours of the transfer order, something that is done only in exceptional cases.

According to the ED official, the first letter of understanding (LoU) was issued to Nirav Modi’s firm in March 2011, after which the letter was issued every subsequent year despite the principal amount never being repaid, while LoU kept getting rolled over to the next year. “It was a scam that could have been easily identified if the auditors had done their job or if the human resource department had raised a red flag over how an employee was working in the same place for so many years or if the top officials had raised questions over the collateral taken by the bank while issuing the LoUs. It cannot be a co-incidence that none of these things were done,” a retired senior official of a public bank said.

In July 2015, as a step to improve oversight of operations within banks, especially in the branches, the RBI revised the rules for the concurrent audit, which called for doing examination of the financial transactions at the time of happening or parallel with the transaction and had stated that the concurrent audit at the branches should cover at least 50% of the advances and 50% of deposits of a bank. In 2016, the RBI had set up a Central Fraud Monitoring Cell at Bengaluru for monitoring instances of fraud and suggest a mechanism to deal with them. In July 2016, the RBI had issued a master circular on fraud that had exhaustive details on steps that the banks are required to take to mitigate instances of fraud. In 2016, the Central Vigilance Commission, which is mandated to deal with corruption in banks involving officers of the rank of Scale V and above in public sector banks, had awarded punishment to 3,220 bank employees, including 588 cases of dismissal from job.

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