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Over A Year Before PNB Fraud, RBI Had Warned About Loopholes In System

In what is India's biggest banking fraud worth Rs. 11,400 crore, celebrity jeweller Nirav Modi and others were able to get two PNB officials at a single branch in Mumbai to issue fake guarantees or Letters of Undertaking to get loans from banks overseas. The fraud went undetected for years as the officials shared their passwords to the SWIFT network and also didn't register the transactions on the account books.
Over A Year Before PNB Fraud,
In the case of PNB, fake guarantees were routed to the foreign bank branches through SWIFT system.

Long before the Punjab National Bank (PNB) scam erupted, the Reserve Bank of India had cautioned banks about the abuse of the SWIFT interbank network, for "unauthorised transfer of funds". A circular put out by the central bank in August 2016 has emerged just after the government called the PNB fraud a result of "supervisory failure" at the central bank.

In what is India's biggest banking fraud worth Rs. 11,400 crore, celebrity jeweller Nirav Modi and others were able to get two PNB officials at a single branch in Mumbai to issue fake guarantees or Letters of Undertaking to get loans from banks overseas. The fraud went undetected for years as the officials shared their passwords to the SWIFT network and also didn't register the transactions on the account books.

The bank also says its core banking solutions were not integrated with SWIFT, which made detection even more difficult.

rbi-circular
The RBI circular referred to its advice that banks set up a Cyber Security Framework.

Seventeen months before the PNB revelations, the RBI had cautioned banks on the abuse of SWIFT after an attempt was made to swindle another government bank, the Union Bank of India.

The RBI circular referred to its advice that banks set up a Cyber Security Framework. Banks had been requested to "strengthen the controls over payment instructions sent to correspondent banks and reconcile transactions in real time so that any abnormality is noticed immediately," said the central bank.

"You are also advised to get the SWIFT infrastructure comprehensively audited immediately for malicious software script/activities. Appropriate steps may also be taken to rectify malicious activity and to patch vulnerabilities if any," said the circular.

SWIFT (Society for Worldwide Interbank Financial Telecommunications) is a messaging system used by banks the world over to send information and instructions in an encrypted format through a secure channel.

In the case of PNB, fake guarantees were routed to the foreign bank branches through the SWIFT system. According to Reuters, the government has said in a letter to the Reserve Bank of India (RBI) that the failure to detect the fraud raised questions about the central bank's "efficacy of supervision to detect and check systemic failure".

Reports quoted the letter as saying: "Either the framework designed by RBI to prevent and detect such frauds is inadequate or RBI is unable to ensure its effective implementation."

Rajeev Kumar, the top government bureaucrat overseeing banks, told Reuters in New Delhi the finance ministry had written to the country's banks to take effective steps to avoid a repeat of a PNB-like fraud. Kumar declined to comment if the government had written to the RBI.

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