PNB SCAM

Punjab National Bank Scam

1. OBADIA LALTHAZUALA (20BC318)
HARDIK AGARWAL (20BC320)
#Auditing & Corporate Governance
PNB SCAM

2. INDEX
01 04
02
03
05
06
Introduction Responses and Reactions
The PNB Scam Unravelled
Timeline of Events
Lessons Learned & Future
Implications
Conclusion

3. I. Introduction

4. PUNJAB NATIONAL BANK
PNB Indian public sector bank based in New Delhi
Commenced operations on April 12, 1895, from Lahore, with authorized capital of Rs. 2 Lakh &
working capital of Rs. 20,000
Since inception, 9 banks merged/ amalgamated with PNB. Currently, 3rd largest public
sector bank in India (in terms of business volumes) & 2nd largest (in terms of network)
It has over 180 million+ customers, 12,250+ branches, and 13,000+ ATMs
Industry - Banking and Finance
Founder - Dyal Singh, Lala Lajpat Rai
Revenue - ~Rs 88,339 crore (FY22)
Operating income - Rs 21025 crore (FY22)
No of employees - 103,000+ (FY22)
Source: pnbindia.in/annual-reports.html

5. PNB IN THE INDIAN BANKING CONTEXT
PNB: One of 12th Scheduled Commercial Bank, active for
125+ years
Served millions of people across India
Served national leaders like Nehru, Shastri, and Gandhi
Top 3 largest public sector banks in India
Considered a pillar of the Indian banking industry
PNB known as "People's Bank" since inception in 1895
Atul Kumar Goel
MD & CEO of Punjab National Bank
(01-02-2022 to Present)
Source: pnbindia.in/md-ceo-profile.html

6. RBI is the central bank - regulates bank. Banking Regulation Act, 1949 empowers RBI1
SEBI regulates the securities market, including securities issued by banks2
IRDAI regulates the insurance sector, including insurance products offered by banks3
Ministry of Finance sets policy guidelines for banks4
Banks are also subject to laws & regulations of other government agencies - Income
Tax Department, Companies Act & Prevention of Money Laundering Act.
5
REGULATORY FRAMEWORK FOR
BANKS IN INDIA

7. II. PNB Scam Unravelled

8. 01
Gokulnath Shetty
(Deputy Manager)
makes SWIFT
Letters of
Undertakings
02
Bypasses PNB's
internal banking
system
03 04
150 fraudulent
LOUs, amounting
to $1.77 bn were
transmitted
Nirav Modi and his
uncle Mehul
Choksi received
Bank credits from
overseas
branches using
these LOUs
DESCRIPTION OF THE MODUS OPERANDI OF
THE FRAUDSTERS

9. Gokulnath Shetty
Gokulnath Shetty is the
retired Deputy Manager
of Punjab National Bank
who was involved in
issuing fake LOUs
Nirav Modi
Nirav Modi was in the
business of luxury
diamond jewellery. He is
the prime accused and
alleged mastermind of
the PNB Scam
Mehul Choksi
Mehul Choksi, Nirav Modi's
uncle, is the owner of
Gitanjali Group, a retail
jewellery company with
4,000 stores in India.
Usha
Ananthasubramanian
She served as MD of Punjab
National Bank between
August 2015 and May 2017.
Prior to that, she served as
CEO of Allahabad Bank.
THE ROLE OF KEY PLAYERS IN THE SCAM

10. LETTER OF UNDERTAKING (LOU)
LOUs
LoU is a bank guarantee for international trade
Bank promises to pay a specified amount if a customer defaults
Businesses can get credit without collateral or margin money
LoUs are regulated by central banks and government agencies

11. SWIFT
A key element of the scam
was the Society for
Worldwide Interbank
Financial
Telecommunication
(SWIFT) system.
SWIFT has been gamed by
miscreants on a number of
occasions throughout the
world
A bank that is part of SWIFT
can use the system to
convey credit instruments
(LOUs) to other banks
located overseas.
SWIFT is a messaging
network that connects
banks and other financial
institutions across the
world.
Even the Reserve Bank of
India had warned Indian
banks about the prospects
of misuse of SWIFT at least
three times since August
2016.
PNB's Core Banking Solution
(CBS) internal information
systems were not linked to
SWIFT. Thus, huge fund
transfers made via SWIFT to
companies by a few PNB
employees went unnoticed
for almost 7 years.
Source: Moneycontrol

12. How it Started?
What the Rule says?
Payment Scandals
Fraudulent LOUs
Missing Margin Money
Fraud started in 2011 with smaller
amount of Rs. 800 crores.
However, in order to raise the
same, customer is required to pay
margin money to issuing bank &
accordingly credit limits granted. The payment made through
loans made by banks including
Axis Bank, UCO Bank (Rs 2636
crores), & Allahabad Bank (Rs
2000 crores)
For 7 years, Nirav Modi & his firms
allegedly procured Letters of
Undertaking (LoUs) from PNB's
Brady Road branch, in Mumbai.
But in this case, both credit limit &
margin money were missing.
Incidentally, no official record of such
letters of undertaking in the books of
PNB recorded
FRAUD STORY: UNRAVELLING THE SCAM
Source: Hindustan Times

13. First instance of Fraud Detection
Reason for Fraud Detection
How it Ended?
Reason for Fraud Detection
PNB x CBI
Fraud discovered in Jan 2018,
when representatives of Modi's
companies approached PNB
for fresh loan.
Firms claimed to have used the facility
without collateral in past. Branch
records didn't have any details to
support this claim.
Nirav Modi, Mehul Choksi &
their associates fled the
country & took shelter in
London to escape CBI probe
As there wasn't any pre-arranged
credit limit, branch official asked the
companies to put down full amount
as collateral so the bank could issue
LOUs.
Subsequently, PNB filed a
criminal complaint with
the CBI for the alleged
fraud worth $1.8 billion.
FRAUD STORY: UNRAVELLING THE SCAM
Source: Hindustan Times

14. People were allowed to remain in a position for a long
time without job rotation/transfers.
Non-integration of the SWIFT system with the
mainstream core banking system led to the possibility
of isolated transactions.
Lack of systemic control on NOSTRO account
reconciliation where funds have landed.
Advice from LOU honouring bank about a grant of loan
facility at an overseas branch was prevented from
reaching the management. Some fraudulent
arrangement was made to intercept it.
Failure of all forms of systemic controls, like audits, RBI
inspections, and concurrent audits.
REASONS FOR
THE FRAUD

15. The entries of inward and outward remittances have to
be recorded in the books of the Indian bank (a NOSTRO
mirror account) and the audit process should have
thrown up anomalies.
The auditor has to consider whether a system of
periodical reconciliation was in place and whether
confirmations from foreign banks are obtained on a
periodic basis. None of this appears to have been done,
shockingly, for several years.
A sudden surge in surpluses in the NOSTRO account on
a day-to-day basis should have been enough to trigger
an enquiry.
The fee that PNB would have earned through such LOUS
has apparently also not fallen under the auditors' radar.
REASONS FOR
THE FRAUD

16. III. TIMELINE OF EVENTS

17. PNB employee starts giving
fraudulent LOUs to Nirav
Modi and his associates
RBI sends a circular to all
Indian lenders, advising them
to make sure their internal
software CBS is properly
integrated with Swift
RBI issues stronger circular, citing "decentralized"
operations that hinder compliance and a "high
number of Swift user IDs at banks that increased
the risk of misuse, according to a document seen
by Bloomberg RBI asks banks to "explore" straight-
through processing of CBS and Swift
Hackers make off with $81
million by sending fake
messages through the
Bangladesh Bank's Swift
interbank messaging
2011
Aug 2016
Nov 2016
Feb 2016
Source: Economic Times
TIMELINE OF EVENTS
LEADING UP TO THE
DISCOVERY OF THE SCAM

18. Banks were due to complete an
RBI-mandated verification of all
their Swift messages, especially
those pertaining to trade finance
PNB employee who was
allegedly colluding with Modi
retires
Nirav Modi leaves India
PNB employee who was
allegedly colluding with
Modi retires
Feb 2017
May 2017
Jan 1, 2018
March 2017
Source: Economic Times
TIMELINE OF EVENTS
LEADING UP TO THE
DISCOVERY OF THE SCAM

19. Mehul Choksi, Nirav Modi's
uncle and owner of
Gitanjali group, too, leaves
India
Jan 6, 2018
Jan 16, 2018
Jan 25, 2018
Jan 29, 2018
PNB alleges that billionaire
jeweler Nirav Modi's
associates sought fresh
funds from PNB: PNB begins
digging into transaction
history
PNB says it found first evidence of
fraud. PNB tells customers it will
immediately start updating its
CBS to the latest version, which
will be used starting Jan 29
PNB submits report on fraud
to RBI and files complaint
with CBI
Source: Economic Times
TIMELINE OF EVENTS
LEADING UP TO THE
DISCOVERY OF THE SCAM

20. A lookout notice is issued
against Nirav Modi by CBI
RBI tells banks to revisit controls
outlined in 2016 advisories. ED
conducts raids on properties of
Nirav Modi and Mehul Choksi
Gokulnath Shetty is arrested
by CBI for alleged collusion
with Nirav Modi
PNB discloses $1.8 bn fraud
Feb 4, 2018
Feb 15, 2018
Feb 17, 2018
Feb 14, 2018
TIMELINE OF EVENTS
LEADING UP TO THE
DISCOVERY OF THE SCAM
Source: Economic Times

21. 2.
PNB officials said
the SWIFT and the
CBS system were
not linked all these
years because the
bank was waiting
for an upgraded
version of banking
software, Finacle.
4.
1.
Two officials of bank
allowed to remain in
same branch of
bank handling same
account for number
of years. This was
unusual as banks
follow system of
rotation of accounts
and compulsory
transfer every two to
three years.
3.
For every SWIFT
transaction, a new
reference number is
supposed to be
generated. In this
case, it was the
same number that
was in use for the
past 7 years.
The banks are
supposed to conduct
an on-site inspection
of borrower units
where loan facilities
are extended. Even
visits of internal
inspection teams of
the bank to borrower
units are necessary
to re-verify and
ensure proper end-
use of loans.
5.
The periodical
reconciliation of
NOSTRO accounts
where the buyer's
credit in foreign
currency is credited
is to be done from
time to time which
was not done
WHERE DID THE INTERNAL CONTROL
SYSTEM OF PNB FAIL?

22. IV. Responses and Reactions

23. CBI & ED
FOCUS
Responsible for Investigating Crimes
such as corruption, economic offenses,
major crimes such as murder &
terrorism
Focus on Violation of Criminal Law such
- cheating, forgery, criminal conspiracy
ROLE
Investigated Criminal Aspects of the
Scam
FOCUS
Specialised Agency focusing on
Economic offenses including Money
laundering & Foreign Exchange Violation
Focus on Tracing proceeds of Scam,
Identifying beneficiaries, & seizing
assets
ROLE
Investigate Money Laundering Aspects
of the scam
Central Bureau of Investigaton Enforcement Directorate

24. 01
FIR & Complaints
Filed Complaint with
CBI & ED against
Modi & assn
For Fake LOUs & FLC's
from Brady House
Branch Mumbai
Filed complaint with
SEBI, RBI
02
Employee
Suspension
03 04 05
Internal Control
& Investigation
Found LOU & FLC's
lauched without
SOP, Authority by
employees
Improved Internal
Control , use SWIFT,
strenghten SOP,
Training
Collaboration &
Asset Seizure
Collaborated with
ED, CBI & Interpol
with scam
PNB requested Govt
to seize assets of
Nirav Modi
Funds Recovery
External
Auditors
Latest court Rs 500
Cr recovered from
asset of Nirav Modi
Appointed PWC as
external auditors in
Mar 2018
ACTIONS BY PNB
Suspended
Employees
Include Deputy Gen
Mg, Brady House
Branch

25. ACTIONS BY THE GOVERNMENT
High Level Committee
Formed by Ministry of Finance
headed by JL Meena (Jt Sec, MOF)
in Feb & submitted report in April.
Include SEBI, RBI, IRDAI, PNB Officials
01
Revoked Passport
Ministry of External Affairs revoked
Passport of Nirav Modi, Mehul
Choksi
& sought extradtion for the two
02
Multi-Agency Team
Ministry of Home Affairs
constituted Multi- Agency probe
team including CBI, ED and
Income Tax Dept to investigate
scam
03
Amending Fugitive
Economic Offenders Act
04
Govt amendment Fugitive
Economic Offenders Act, 2018.
Widened Scope, Disentitlement to
Defend etc

26. ACTIONS BY THE MINISTRY OF
CORPORATE AFFAIRS
Launched investigation into Companies belonging to Nirav Modi involved
in scam. Done by Serious Fraud Investigation Office (SFIO)
Identified violations of corporate govt norms & accounting standards.
Failed to classify LOUs as Contingent Liability. Failing to comply banking
regulations (unauthorised LOUs)
Initiated action against auditors of companies & propose changes to
companies act. Filed petition against Deloitte Haskins & Sells and BSR &
Associate for 5 year ban (2020)

27. ACTIONS BY THE RBI
Investigation
Investigated Banks, Auditors,
Regulators & identified lapses like
Inadequate implementation of
SWIFT, Not following KYC norms
01
Termination & Regulation
RBI discontinued issue of LOUs as
there were loopholes. Tighter
regulations for LOC's: Additional
doc rqd, extra monitoring etc
02
Madatory SWIFT
RBI Mandated SWIFT for
messaging related to trade
finance. Directed bank to
reconcile SWIFT with core
transactions on daily basis
03
Central Fund Registry
04
RBI set up the Central Fund
Registry to track funds
Set up Ombudsman for digital
transactions

28. 2. FREEZING OF ASSETS
ACTIONS TAKEN BY SEBI
1. INVESTIGATION
3. DISCLOSURE
REQUIREMENTS
In FEB 2018, SEBI Mandated all companies
to disclose frauds within 1 day of
occurence Also, disclose proposed actions
to be taken
Asked company to create Whistleblower
mechanism so that employees can report.
SEBI Launched Investigation into PNB
Scam
Focus on how PNB fraud impacted
the securities market and Indian
Economy
4. IMPROVED CORPORATE
GOVERNANCE
Introduced Listing Obligations and
Disclosure Requirements (LODR).
Mandated greated disclosure and
transparency. Eg - Rdq to discall all
related party transactions, to have
1/3 of BOD as Independent Directors
SEBI directed freezing assets of
Nirav, Choksi & his associates
Include Bank AC. Shares, Mutual
Funds & other investments
Total value of asset frozen by SEBI,
ED & CBI is estimated = Rs 7,000 Cr

29. ACTIONS TAKEN BY CBI
Initiated investigation into scam & arrested several employees of bank
as well as directors of companies involved in scam
Filed charges against accused in the case, including Nirav Modi, Mehul
Choksi & other employees of bank
Searches and Seizures, Property Attachment, Extradition request
Issue of INTERPOL Red Notice agaisnt Nirav Modi who fled country
NIRAV MODI

30. Criminal
Conspiracy
120 B
Criminal breach
of trust by
public servant,
merchant,
banker or agent
409
Cheating and
dishonestly
inducing delivery
of property
Corruption
Charges
Causing the
disappearance
of evidence
IPC
Criminal
intimidation to
cause death
IPC
Money
Laundering
charges
PMLA
420
7A & 8
201
506
3 & 4
IPC
IPC
IPC
PCA
IPC = Indian Penal Code 1860 PCA = Prevention of Corruption Act, 1988PMLA = Prevention of Money Laundering Act, 2002
LEGAL PROCEEDINGS
CBI & ED filed several chargesheets against Nirav Modi and Mehul Choksi & their
associates
Nirav Modi & Mehul Choksi declared Fugitive by Indian Govt & extradition proceedings
initiated against them from where they take refuge
NIRAV MODI

31. STATUS OF LEGAL PROCEEDINGS
ONGOING INVESTVATION
Convictions & Sentences
Feb 2021, Special CBI
Court convicted 31
people including PNB
Officials & executives
of Nirav Modi's
Companies.
Mar 21, 8 of accused
sentenced to prison.
NIRAV MODI MEHUL CHOKSI
Arrested in UK (Mar 2019)
Indian govt seeking
extradition since then
2019, UK Court cleared
way for Nirav Modi
Nirav Modi appealed
Ongoing case in UK Court
Fled india in Jan 2018 &
took refuge in Antigua &
Barbuda
May, 2021 - arrested in
Dominica after he
entered illegally
Currently custody in
Dominica & Indian Govt is
seeking extradition

32. PUBLIC OPINIONS: TWITTER TWEETS
Source: Twitter

33. PSB'S STOCK FALL
Source: NSE

34. 161 per share at Jan end to 74 on Mid
of May
55% decline in shares
Also effect on LIC, exposed bank
UCO, Allahabad, SBI, Jewelery & PSB
Stocks
PNB STOCK PRICES: 2018
Source: Yahoo Finance

35. 2011
First
2017
Last
POLITICAL BLAME
Both parties blame each other as it happended during Congrees & BJP Reign
BJP Blamed Congress: Blamed Rahul having close connection with Nirav Modi
BJP Defence Minister did press conference to blame solely Congress
Whistleblower Hari Prasad wrote detailed letter to PMO in 2016. PMO
acknowledged received. No Action by CBI, ED
Several instances showed close connection with PM Modi & Mehul/Nirav

36. WHISTLEBLOWER PROOFS
Source: Moneycontrol

37. CONGRESS PRESSURE ON BJP
Source: Twitter

38. MEDIA COVERAGE

39. V. Lessons Learned and
Future Implications

40. KEY
TAKEAWAYS
01
Massive financial fraud involving
fake LoUs.
02
Estimated $2 billion scam, one of
India's largest banking frauds.
03
Exposed major lapses in internal
controls and regulations.
04
Need for stronger international
cooperation to prevent cross-
border financial crimes.
05
Fallout led to erosion of investor
confidence and criminal
charges/extradition proceedings.

41. 2.
Collaboration
between Banks
4.
Enhance
regulatory
oversight of banks
HOW COULD IT HAVE BEEN PREVENTED?
1.
Strengthen
internal control
system of Banks
3.
Implement stricter
norms for
International Trade
5.
Introduce tech based
Risk Management
Solutions

42. Raised concerns on Risk Mgt
practice, effectiveness of
regulatory oversight, sector
called into qstn, domestically &
internationally
Reputational Damage
Strengthening KYCs, Introduced
Central Fraud Registry,
Amending Banking regulation
act, 2017 etc
Regulatory Changes
For PNB - Increased NPA & whole
sector suffered declining credit
growth - affect levels of NPAs
Increased NPA
Tighten Credit Standards - YOY
Credit growth declined from 7.1%
in 2017 to 0.7% in 2018. Especially
- Jewellery sector 15.7% to - 0.8%
in 1 year
Decrease in Lending
PNB alone suffered 14,000 cr.
Other banks with exposure
suffered losses. Total estimates -
$ 3 Billion. Decline share price -
erode wealth
Financial Losses
McKinsey Study - Compliance
cost on borrwing inc by 15-20%
after PNB scam. Also increase in
borrowing cost
Increase Compliance
& Borrowing Cost
IMPACT OF SCAM ON BANKING INDUSTRY

43. 01
Implement Best
practices
02
Enchancing
Regulatory
Oversight
03
Strengthening
Legal Framework
04
Strengthening
Customer
Protection
05
RECOMMENDATIONS
Strengthening Risk
Management
Framework

44. VI. CONCLUSION

45. FINAL THOUGHTS
PNB scam highlighted need for stronger controls and risk management in Indian
banking.
1
Scam caused financial loss, reputational damage, and loss of trust2
Regulatory changes were introduced to improve risk management and
transparency
3
Scam is a reminder of the importance of effective risk management and constant
vigilance
4
Banking industry must monitor and improve risk management to prevent future
frauds
5

46. Q & A
What were the key factors that led to the PNB scam?
What legal actions were taken against the individuals involved in the
PNB scam?
How did PNB respond to the PNB scam and its aftermath?
What steps have been taken to prevent similar incidents from
happening in the future?
What lessons can be learned from the PNB scam?
1.
2.
3.
4.
5.

47. REFERENCES
https://www.pnbindia.in/BoardofDirectors.aspx
https://www.news18.com/photogallery/india/in-gfx-from-modi-choksi-fleeing-india-to-latter-being-
held-in-dominica-a-timeline-of-pnb-fraud-case-3795920-2.html
https://www.business-standard.com/about/what-is-pnb-scam
https://blogs.lse.ac.uk/southasia/2018/05/30/public-sector-banks-in-india-revisiting-regulatory-and-
corporate-governance-in-the-light-of-the-pnb-scam/
https://economictimes.indiatimes.com/markets/stocks/news/timeline-to-the-discovery-of-indias-
biggest-bank-fraud/articleshow/63012827.cms
https://www.business-standard.com/article/finance/pnb-rs-113-bn-fraud-impact-56-customers-
prefer-private-banks-to-govt-ones-118021600607_1.html
https://blog.ipleaders.in/all-you-need-to-know-about-the-nirav-modi-
scam/#Effect_of_PNB_scam_on_Nirav_Modis_family

48. THANK YOU!