$1.8 Billion Indian Bank Fraud Unraveled After 7 Years of Operation
The biggest question is: how this billion-dollar Indian bank fraud lasted 7 years? This greed-crime happened right under people’s noses, while all were sleeping soundly for many nights. Alongside this global fraud are $81 million cyber-heist in Bangladesh, lenders abuse, and a series of missed massive opportunities.
It all began in 2016 after an infiltration from hackers got detected in the Bangladesh central bank’s system. It was also when its Indian counterpart sensed a lurking danger. So, the Reserve Bank of India prompted all the lenders to check if their computer networks were properly integrated with Swift, the system used in the Bangladesh theft for sending transmit payment instructions.
Unfortunately, out-of-the-radar was a rogue employee of the state-owned Punjab National Bank who was allegedly taken advantage of this system flaw. RBI knew nothing about this person’s stealthy deed until 5 years later, which resulted in a $1.8 billion fraud swell.
“The biggest thing that didn’t happen was the linkage between Swift and the bank’s back-end software — they didn’t talk,” according to Abizer Diwanji, a financial services partner at the accountancy firm EY in India. “The ball was first dropped,” when PNB failed to settle the two systems together, he added.
The incident had spread fast, then government agencies performed efforts to investigate. Above all the chaos and mishaps one thing came clear: the ones worth blaming were inferior technology, flawed risk management, and inadequate monitoring. An $800 million loss could’ve been dodged if the fraud had been discovered a year earlier.
Former PNB employee Gokulnath Shetty is being alleged of providing billionaire jeweler, Nirav Modi, and his associates guarantees of acquiring loans from abroad. According to PNB’s complaint, over 2011 to 2017, there had been guarantees issued without collateral worth 65 billion rupees ($1 billion), which was then followed by guarantees worth 49 billion rupees between March to May last year, the same time Shetty retired.
According to R. Gandhi, a former RBI deputy governor, we can link the incident to RBI not integrating the two systems back then, since many Indian banking systems were not compatible to Swift. However, Gandhi added, banks like PNB which didn’t integrate the two systems have been required to perform manual checks to compare Swift’s messages with the banks’ internal records.
According to Tim Phillipps, an Asia-Pacific financial crime specialist at Deloitte, reconciliation between Swift and other bank systems is crucial for banks since there’s a prevalence of fraud across global finance trade. He added that it’s not hard to create an interface that can link the two programs.
“Trade finance operations at banks are one of the riskiest parts of the business they do and also one of the most profitable,” Phillipps said. “Most checks in a world structured environments don’t allow data to be entered directly into Swift because that is where many of the big problems have occurred over the past decade in terms of falsifying information.”
According to the director in the financial institutions group at Fitch Ratings, Saswata Guha, changing costs may have contributed to the continuous upgrades in the Indian bank systems. For years, indian lenders have been struggling from ceaseless rise of loans, and insufficient capital, which Guha believes can turn worse in the upcoming years after new regulations are mandated.
Discovering the billion-dollars Indian fraud
These incidents that took place over the four months played an important role in the discovery of this global crime.
RBI released statement on its site saying it cautioned banks about the misuse of Swift on at least three occasions. “Banks have, however, been at varying levels in implementation of such measures,” the RBI said.
Has justice been served?
Shetty got arrested by federal officials, but shared zero comments on the allegations. PNB had nothing to say as well, and Swift comments none about any allegations or customers.
On the other hand, Modi’s lawyer Vijay Aggarwal told NDTV that Modi denies his involvement in any fraud incidents, although all his transactions with PNB are documented.
Finance Minister Arun Jaitley reminded supervisors and auditors to make sure that any fraud activities must be detected early. According to Bloomberg, “the 10-member Bankex index rose 0.3 percent in Mumbai on Wednesday, snapping a three-day drop, as the main equity gauge advanced 0.4 percent.”
There are on-going efforts to reform India’s banking sector. For years, the Indian government and the central banks have been working together to set up panels, and suggest new recommendations. However, the progress has been sluggish, said Fitch’s Guha.
“If a few people, or connivance of a group of people, can take a bank this large down to its heels with the kind of capital market implications one has been seen, then it poses very serious questions,” he said. “At the core of it, it’s really governance.”
Have a look at this video that goes into more detail about this longstanding bank fraud issue: