Punjab National Bank fraud: Nirav Modi's escape from India indicates malaise runs deep in the system

Three damning facts about the alleged Punjab National Bank (PNB) scam running into thousands of crores point to the pervasive rot in the system.

One, just two employees of a single branch of a bank could orchestrate a swindle that cost the PNB ten times its annual profit. Two, the fraud went undetected for almost six years in spite of mandatory checks and balances. Three, the perpetrator of the fraud and his family were able to escape weeks before the scam could be investigated. All these factors, which are interconnected, underline the systemic failure of various agencies at the highest level of the financial and administrative pyramids in India.

It is difficult to understand how banks in India and abroad could be cheated for years when every transaction has to be accounted for daily at the end of business hours and the RBI is supposed to ensure auditing of every bank's books and ledgers. This task could have been difficult in the days of manual book-keeping. But, in the era of computers and centralised servers, this lapse is almost unimaginable.

Yet, just two employees of the PNB were able to bankroll a fraud for several years. It has now emerged that the bank had an inbuilt mechanism that could be exploited. Its software for international transactions done through SWIFT — a messaging system that allows transfer of money across the world — was not integrated with the bank's core banking system. This meant that while the banks lending money to Nirav Modi's companies on the basis of letters of understanding issued by PNB thought their loans would be repaid by the bank, rogue employees ensured the transaction was not recorded.

File image of Nirav Modi. Image courtesy: Facebook

File image of Nirav Modi. Image courtesy: Facebook

But how could this go on for six years? Letters of understanding are issued for a short-term loan. Did the lenders never approach the PNB for recovering the money lent to i? If yes, why did the PNB management not notice the scam? Also, how could just two employees — a deputy manager and a clerk, both very low in the hierarchy — carry on with the fraud for five years? Were they never transferred, promoted or given different responsibilities, as most bank employees are?

As any ordinary borrower from a bank will tell you, it is almost impossible to get away by not repaying the debt. If you miss even a couple of installments, the banks send notices and initiate legal proceedings; they treat the borrower as a defaulter. How could Modi be allowed the privilege of not repaying short terms loans for almost six years? How could he be allowed the luxury of roll-over credit without being asked to furnish collaterals? Obviously, there is more to the Rs 12,000 crore fraud than just the involvement of two employees.

Then, there is the question of audit. If so many banks — 17 and growing — were being swindled by Modi's companies, how could the RBI not get a whiff of the scam? Does this mean that individual banks are working in silos and, thus, are vulnerable to frauds and scams?

Scams and swindles have existed since the beginning of time. Where there is a law, there is always someone out there trying to find ways to break it. Smart systems and countries, however, deal with this in two ways. One, by learning from mistakes and not repeating them. Two, ensuring swift and strict punishment for those who break the law.

India, unfortunately, has not learnt from a history of frauds that have been exact replicas of each other. Modi's modus operandi is quite similar to the financial frauds perpetrated by Harshad Mehta, Ketan Parekh, Vijay Mallya and many others who borrowed from banks to manipulate the markets. Yet, the banking industry has not plugged its loopholes.

India's law enforcing agencies too have failed to learn from the past. It has now become almost customary for the law to beat its stick after the proverbial snake has fled to some distant safe haven.

There is an eerie similarity between every incident involving a high profile scamster. How could Mallya, Lalit Modi and Nirav Modi flee just before they could be booked and arrested?
To rephrase what Ian Fleming famously said: Once is happenstance, twice is coincidence and thrice is friendly action.

The malaise in the system runs deep. Only a through and fair investigation can reveal how many agencies and people are compromised.

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Updated Date: Feb 16, 2018 15:09 PM

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