Punjab National Bank's $1.8 billion fraud has taken Indian banking industry by storm and investigative agencies are struggling to find out how the largest financial fraud to take place in the country went undetected for years.
PNB has cautioned other banks about the mode of the operation of the scam that has already ensnared the country's other big lenders.
Here's a quick look at the key people and events that aided the PNB fraud to be pulled off:
PNB's Brady House branch, south Mumbai
It all started around mid-January, when three firms - M/s Diamonds R US, M/s Solar Exports, M/s Stellar Diamonds - approached the bank for 'buyers credit' to make payments to overseas suppliers.
Buyers credit is a short term credit, usually for 90-180 days, provided by international banks or international branches of Indian banks to an importer.
Nirav Modi, his brother Nishal Modi, Nirav Modi's wife Ami Nirav Modi, and Mehul Chinubhai Chokshi were partners in these firms, according to the initial complaint filed by PNB with the Central Bureau of Investigation (CBI).
Indian-born diamond jewellery designer Nirav Modi is the founder of the $2.3 billion Firestar Diamond and was ranked #57 in the Forbes list of India's billionaires in 2017.
His pieces have adorned global icons such as Dakota Johnson, Andreea Diaconu, Rosie Huntington-Whiteley or even PeeCee, among others.
Two corrupt bank officials
Two officials at PNB had fraudulently issued letters of undertaking (LoUs), allowing Nirav Modi group companies to get buyers' credit from overseas bank branches to pay the sellers, according to media reports.
But the officials who had helped them earlier had retired.
LoUs are issued by a bank giving some sort of a guarantee on behalf of a company. Other lenders give credit based on the LoU.
Under the terms of the LoU, PNB was the guarantor of these loans.
However, the surprising fact was the manner in which the transactions were routed. Instead of using the core banking system, bank officials used through SWIFT, the global financial messaging service to get approval.
As a result, the higher authorities at PNB were unaware of the fraud.
SWIFT or Society for Worldwide Interbank Financial Telecommunication is used to send messages to financial institutions. It's more like an SMS or WhatsApp messaging service instead of an official mail.
Fraud comes to light
Now when the three firms approached PNB in January this year for buyers credit, they were denied.
The bank records showed there was no such arrangement between the three firms and PNB. That's when the bank started investigating.
"At this, the firms contested that they have been availing this facility in the past also. But the branch records did not reveal details of any such facility having been granted to the said firms," acording to the complaint filed by PNB to the CBI.
Systemic Failure?
The scam highlights the failure of internal mechanism at Indian banks as such transactions could have been detected only by lender's internal auditors.
"The system of internal control in PNB seems to have collapsed in detecting such activities. Legal process may take its own time to fix responsibility on the people involved in such illegal activities," the All India Bank Depositors Association said in a statement on Thursday.
The onus, once again, falls on the Reserve Bank of India to investigate systemic loopholes in state-owned banks and ensure risk management systems are made more robust.
