DNA MONEY EXCLUSIVE: RBI was misled on Nirav Modi scam

The Reserve Bank of India admitted to a parliamentary panel that it was fed with incorrect compliance reports in the Rs 14,000 crore Nirav Modi scam. It said in a written response to the parliamentary standing committee on financethat the blame for the fraud lay on the bank's board for allowing the letter of undertaking (LoU) scam to continue for years. During this period money was being pilfered out of the bank's swift system without any checks, the house panel was told.

"PNB furnished a compliance report which turned out to be factually incorrect," RBI said in a written reply to the panel's query on the LoU scam. The fraud led to PNB reporting a colossal loss of Rs 13,417 crore during the fourth quarter ended March 2018. This was the biggest quarterly loss to be reported by any bank so far.

The first official response from RBI on the fraud came on February 16 when it said that the "the fraud in PNB is a case of operational risk arising on account of delinquent behaviour by one or more employees of the bank and failure of internal controls."

The risk managements systems in PNB had failed, and the scam was going on for a while in the Brady House branch of Pnb the panel was informed . The apex bank also said that it does not have the bandwidth to supervise 1,16,000 branches in the country.

Diamond merchants Nirav Modi and his uncle Mehul Choksi along with a few employees of the bank's Brady House branch diverted over Rs 14,000 crore from the nostro account of PNB using the swift system of the bank.

It told the panel that enterprise wise, risks of the bank were to be managed under three lines of defence all of which had failed. The first line of defence is the ability of managing the risk, being close to the risk taking activity, primarily responsible and accountable for assessing and controlling the risk arising from their own acts. The second line of defence is the risk monitoring function that specialises in overseeing the risk and the third line of defence should have been the audit functions. RBI said 'in case of PNB there seems to have been failure of all the three lines of defence resulting in perpetration of such a large value fraud."

When the panel asked RBI whether CAG audits of public sector banks would help, RBI was of the view it would ONLY add to one more layer of investigation. RBI TOLD THE PANEL there are already three layers of audit like the concurrent audit which is highly transaction FOCUSED. An internal audit which monitors compliance with laid down systems and procedures. The third one e the panel was told is the statutory audit which will ensures that the bank's statements present and disclose a true and fair picture of its financial position.

RBI ON THE PNB FRAUD

• PNB compliance report to RBI was factually incorrect
   
• RBI says all three lines of defence against risk failed
   
• PNB board responsible for the LoU scam
   
• RBI lacks the personnel to supervise the 1,16,00 branches in the country
   
• No option but to rely on internal control system of banks
   
• 2017-18 5904 frauds reported involving Rs 32361.27 crore