Probe finds staff collusion, systemic failure at PNB

Agency questions MD at length on why the bank took so long to detect the fraud

Punjab National Bank’s (PNB’s) managing director and chief executive, Sunil Mehta, admitted the collusion of employees in the letters of undertaking (LoUs) scam while being questioned by the Enforcement Directorate (ED) on Thursday, according to sources.

Mehta’s statement was recorded by the probe agency under the Prevention of Money Laundering Act, in connection with the case registered against Nirav Modi and Mehul Choksi in the ~127-billion fraud at the government-owned lender.

Mehta was in the ED office at Ballard Pier here for nearly six hours. He was summoned soon after being questioned in the same matter by the Central Bureau of Investigation (CBI).

According to ED sources, he said the fraud took place due to “systemic failure” and “procedural lapses”, owing to lack of interface or proper links between the core banking software and the SWIFT interbank messaging system.

ED officers questioned Mehta on procedural aspects of the banking system and whether he was aware about the malicious use of the SWIFT infrastructure. Also, to explain the inefficiency of the system in not generating alerts despite LoUs getting encashed at regular intervals.

The ED underlined its present focus was on operational issues at the bank, not the criminal aspect. "Top bankers were called to gather information about the rationale of the issues. We would decide further action depending on the outcomes," said an ED official.

Messages sent to PNB officials remained unanswered.

The ED is also said to have cited Reserve Bank of India (RBI) cautionary notes and alerts on SWIFT misuse, issued to banks since August 2016. Their sleuths asked PNB why it did not act on those or if the alerts did not come under its lens.

Mehta, who took charge in 2017, reiterated he had no clue about the external and internal factors which had contributed to the fraud.

He reportedly said he came to know about the mega fraud only on January 3. Two employees did unauthorised transactions, the bank began an internal inquiry and registered a complaint with the CBI on January 29.

So far the biggest fraud in Indian banking in size, two junior employees at its Mumbai branch are accused of colluding with Modi and Choksi to issue unauthorised LoUs. Which were eventually used by the Modi and Choksi companies to get credit from foreign branches, mostly of Indian banks.

PNB itself has stated the fraud was on since 2011 and remained undetected as the employees did not enter the transactions into its Core Banking System, after sending instructions to banks abroad by using SWIFT.

The ED has asked Mehta to corroborate the details in his statement with supporting documents, said the source. Their officers indicated he could be asked to come again, if they required more information. "It seems (PNB) had not fully implemented all the measures required to prevent potential misuse of SWIFT,” said the ED official cited above.

The sources also said the ED was waiting to question PNB’s retired deputy manager, Gokulnath Shetty, among the prime accused and now in custody. The agency believes Shetty’s statement would be crucial in the matter. Other top executives could be called after the CBI questioning, which is on. Apart from Mehta, the central agency had last week questioned ICICI Bank executive director N S Kannan and former PNB chief executive Usha Ananthasubramanian, currently heading Allahabad Bank.

On Thursday, the CBI had arrested a retired chief auditor of PNB, responsible for concurrent audit between 2011 and 2015 at its Brady House, Mumbai, branch, where the LoUs were issued. CBI sought his custody from court, as he was apparently responsible for auditing the procedures and practices followed during the period.