Unravelling PNB rot: Hong Kong module in over Rs 13,000 cr scam comes under India scanner

New Delhi: Investigators in the Punjab National Bank (PNB) scam have questioned many auditors in the country and have now zeroed-in on a cobweb of Hong Kong-based book-keepers who audit all Indian banks in the special administrative region of China.

Sleuths from various investigative agencies said they would soon be questioning Indian bank officials and auditors in Hong Kong. Sources revealed they are trying to verify antecedents of G Natarajan, the founder of Singapore-based certified public accountancy firm -- MGI N Rajan Associates.

They also seek to probe rotation norms of the Reserve Bank of India (RBI), which mandates change of auditors at regular interval, to find out if it was violated in the Nirav Modi and Mehul Choksi episode -- a colossal loot of public money primarily through Punjab National Bank (PNB).

Little-known Chinese firms such as Charles H C Cheung & CPA Limited and W Y Lam & Co have been auditing PNB, State Bank of India (SBI), Allahabad Bank, Union Bank of India, Axis Bank, UCO Bank and Bank of India for the past few years.

The Firstpost investigation revealed that the bank’s board, audit committee and banking regulator Reserve Bank of India (RBI) had approved these firms. Sources also confirmed that despite the massive scandal, they continue to audit around 10 banks in Hong Kong.

Charles H. C. Cheung & CPA Limited is a local accounting firm based in Sheung Wan and claims to have been established some 30 years ago. The company says it provides audit, accounting, taxation and company secretarial services to clients, both local and overseas from a variety of business sectors.

Charles Cheung of Charles H C Cheung & CPA Limited told the Firstpost that G Natarajan is principal auditor of almost all the public sector banks in Hong Kong on behalf of his firm. Charles further said they have been auditing the books of about 10 banks at Hong Kong including SBI, PNB, Allahabad Bank, Union Bank of India, Axis Bank, UCO Bank among others.

“We have been auditing the books for a very long time. Mr. Natarajan has vast experience as an auditor and I believe he is doing the bank audit works for the last 20-30 years. I do not exactly remember since when we have been auditing books of Indian banks but I can tell you that we are doing the audit as per the guidelines issued by Hong Kong Monetary Authority (HKMA),” Charles said.

When contacted by Firstpost, W Y Lam & Co CPA located at Wan Chai, Hong Kong, confirmed about working with Indian banks but refused to divulge details of auditors and clients.

 Unravelling PNB rot: Hong Kong module in over Rs 13,000 cr scam comes under India scanner

File image of Nirav Modi. News18

P S Somasekharan, a partner in MGI N Rajan Associates Singapore told Firstpost: “You may wish to kindly be in touch with Mr. G. Natarajan with regard to the information sought (auditing of Hong Kong based Indian banks). Our firm (Singapore based) has nothing to do with Charles Cheung & Co.”

A detailed questionnaire was sent to Shanthini, who looks after secretarial matters at MGI N Rajan Associates, seeking response from Natarajan. But no reply was received till the time of publishing this story.

Central investigative agencies – the Central Bureau of Investigation (CBI), Income Tax Department, and the Enforcement Directorate (ED) -- intend to examine how banks could keep under the wraps huge fraud despite regular audits, said government sources. This raises serious questions: Why the serial attempts were not flagged even once in Hong Kong, despite balancing the books of Indian banks now linked to the Modi-Choksi scandal, for the whole period from 2010 to 2018? Did banks engage auditors who were also keeping the books of loan seekers?

A senior PNB officer in Hong Kong, requesting anonymity, told Firstpost that Natarajan and the Chinese audit firms were involved in auditing the books of his bank, but that no LoU and LC were raised on the bank. “Our bank branch at Hong Kong had no exposure to fraudulent LOUs and LCs. Even the Nostro account of our branch in Hong Kong is different from the PNB Nostro account that cleared credit, for Nirav Modi and Mehul Choksi's firms, for other Indian government owned banks in Hong Kong,” he said.

To a question whether audit documents have been shared with the investigative agencies including the CBI and the ED, he confirmed that some papers were recently sent from Hong Kong to the Punjab National Bank (PNB) head office, but clarified that he was not aware about subsequent developments.

“Our Head Office has asked for certain documents, which we have forwarded. As per our internal procedure, we do not directly deal with central investigative agencies,” he further added.

Banks, RBI keep mum

Top sources in the investigative agencies said that during the questioning of bank officials, they asked for documents including audit reports lying with overseas branches of Indian banks, which have exposure to the massive banking fraud, to ascertain why the auditor failed to identify the scam and did not raise an alarm. Another aspect that investigators are going to explore is why the eligibility norms of the RBI were flouted in the auditor’s appointment in Hong Kong, ignoring the audit rotation requirement of the Indian banking regulator.

“It is possible that some banks may have developed comfortable working relationship with the Chinese audit firms. But, the bank officials’ connivance in putting things under the carpet also cannot be ignored. We are probing whether these Chinese firms are directly or indirectly linked. If they are auditing the defaulters, then there is a clear case of a deep entrenched network with bank officials. We will request our counterpart in Hong Kong for assistance to probe into the conduct of bank official’s," said sources in investigative agencies.

As far action against Chinese firms are concerned, the Hong Kong Monetary Authority needs to act, explained sources.

The PNB officer quoted above further revealed his bank is rotating auditing firms, though he admitted that audit process was not satisfactory.

When contacted by the Firstpost, the Chief Executive of the Union Bank of India in Hong Kong, Ashutosh Kumar, refused to confirm or deny the names of their auditors, and said that only the bank's headquarters in India is authorised to reveal such information.

An email sent to the Union Bank of India remained unanswered. A total of 77 LCs were raised to the Union Bank of India, Hong Kong, for Choksi owned Nakshtra, Gili India and Gitanjali Gems. Similarly other banks with exposure in the Nirav Modi and Mehul Choksi scandal, namely UCO Bank, Allahabad Bank and SBI kept mum on Firstpost's queries on audit firms and why these banks failed to comply with RBI norms for audit rotation requirement. No response was received from these banks till the time of publishing the story.

Only Axis Bank responded to posers and confirmed that its Hong Kong Branch has availed the services of Charles H C Cheung and CPA Limited as External Auditors, whose appointment has been made after all necessary approvals. However the auditor made no adverse observation on buyers credit transactions out on the back of the PNB LoUs. Axis Bank’s official spokesperson said Axis Bank, Hong Kong (HK) Branch is recognised as a foreign branch of Axis Bank by the Hong Kong Monetary Authority (HKMA). M/s S. R. Batliboi & Co. LLP, an affiliate of the global audit firm, E&Y, is the bank’s statutory auditor, who also conducts the audit of Axis Bank's Hong Kong branch.

“In compliance with the HKMA regulations in Hong Kong, our HK Branch has availed of the services of Charles H C Cheung and CPA Limited as External Auditors, whose appointment has been made after all necessary approvals. No adverse observations were made by the said External Auditors on the buyers credit transactions carried out on the back of the Punjab National Bank(PNB) Letters of Undertaking (LOUs). It may be mentioned that none of the importer firms nor the exporter beneficiaries under the LoUs hold their banking accounts with Axis Bank, HK Branch. The Branch has provided buyers credit loan into the nostro account of PNB against their LoUs duly authenticated through the swift network,” Axis Bank official spokesperson said.

The CBI, which has arrested and interrogated two internal auditors of PNB  - MK Sharma and Bishnubrata Mishra, suspects that external auditors in overseas Indian bank’s branches may have helped the bankers keep the skeletons in the closet.

“We are calling bank officials in overseas branches for questioning to probe into buyers credit extended to Nirav Modi and Mehul Choksi. So far many bank officials from Canara Bank, Bahrain, Bank of India Antwerp, SBI Frankfurt and Mauritius branch is being examined in the scam, which has now touched Rs.13,578 Crore but could go up in the coming days,” the investigators argued.

The RBI did not respond to queries on the issue of appointment of auditors in Hong Kong. The Hong Kong Monetary Authority responded, stating that it would not comment on the affairs of individual institutions.

On the issue of appointment, review and rotation of an auditor, the HKMA's official spokesperson said these issues have been left to the banks to take decision as per their satisfaction. “In case where a bank is required to procure the service of an audit firm, the management of the bank have to satisfy themselves that the service will be performed by qualified and competent professionals,” the HKMA official said.

Future course of action

According to top sources, the senior management of Indian banks exposed to the Modi-Choksi scandal are worried that re-auditing of books could reveal a lot of mess that may expose other defaulters and banking irregularities. They said there are three action points, which need to be taken by the RBI and Indian banks -

Firstly, Indian banks in Hong Kong should be asked to get the last seven-years' accounts re-audited by top accountancy firms.

Secondly, the RBI should send its own team to audit the books.

Thirdly, Indian Banks should file a complaint to the Hong Kong Institute of Certified Public Accountants (HKICPA) and the Financial Reporting Council Hong Kong about the shoddy job done by Indian bankers.

“The banks should be subjected to a review of their audit reports to identify if these transactions in the PNB scam were identified but not reported or if these were not even identified, which would suggest that they did not employ very basic internal banking process. It seems not only their systems were failing but the bank officials were also deliberately failing the system. If the checks and balances at PNB were missing, what about the other banks?” sources asked, indicating agencies' future course of action.

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Updated Date: Apr 13, 2018 12:14:42 IST