SWIFT Technology & PNB Fraud of Rs.11400 Crores

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Society for Worldwide Inter-bank Financial Telecommunication (SWIFT) is the mode of communication for transmission of funds and messages amongst the international financial institutions sending messages of financial transactions in an encrypted format, may it be fund based or non fund based.  It is a messaging system it does not use to hold money and manage accounts. This practicing system has been prevailing in the financial world.

This technology came into limelight after the PNB bank scam which was hit by 11,400 Crore rupees fraud. There came eyebrow raising questions on the security systems of banking institutions and in a wake step, the RBI set up panel to look preventive measures to prevent these frauds and to strengthen the SWIFT OPERATING SYSTEM. Below is given a detailed discussion on SWIFT and other related technology related to financial transactions and their working schemes.

How SWIFT works?

It is an international payment messaging system which is used to transfer trillions of money each day across the world. For example, in case a client wants to remit funds to one of his relative residing in New York USA, having an account in American Express Bank, he approaches his own banker in India with a request to remit the funds in latter’s account with detail of account number and SWIFT code of American Express Bank in New York. His banker will send message through SWIFT system to the beneficiary’s bank. Once the beneficiary bank receives the message they would credit the account after proper verification. Similarly vice versa messages are received and beneficiary’s accounts are credited in India. Apart from this, same is process while sending SWIFT messages pertaining to non fund transactions i.e. Bank Guarantees (BG), Letter of Credit (LC and Letter of Undertaking (LOU) etc. and on the basis of Bank Guarantees, Letter of Credit, Letter of Undertaking, the Foreign Banks do transactions on behalf of their customers.

Core Banking System

  • A Core Banking Solution (CBS) is Finacle software developed by Infosys Service Provider that supports bank’s internal transactions and accounts.
  • Server and backup Server of CBS are centrally located and any of the customers can transact from anywhere in India subject to certain conditions where the Bank Branch of the particular Bank is located.
  • Many Banks in India including private Banks use CBS system in their day to day functioning.

Modus Operandi in Case of Punjab National Bank’s Rs.11,400 Crore Fraud:

It is alleged that one of the officers of PNB, Mumbai’s Brady House Branch issued Letter of Undertaking through SWIFT on behalf of Nirav Modi’s Firms who in turn got Huge Credits from various Banks in India and abroad. These Transactions went undetected as they were not routed through CBS system of PNB. Since in PNB SWIFT technology is not linked with CBS system, the non fund transactions went unnoticed. This went in for years until the officer concerned retired from his services and Nirav Modi’s did not honor foreign commitments raised out of Letter of Undertakings issued by PNB. Next development was, new officer in the same branch refused to issue fresh LOU since it was alleged that this arrangement was not sanctioned by the higher authorities and previously the same was continuing on the verbal instructions of higher authorities.

According to SWIFT, it is a technology concerning inter-bank messaging system and does not deal with individual accounts and transactions; therefore, SWIFT had to carry out the instructions given by PNB.

Nirav Modi’s Firms did not honor commitment of BGs, LCs, and LOUs, therefore outstanding dues piled up with foreign banks and other Indian banks. These banks reported to RBI who in turn took up the matter with PNB and thus fraud was detected

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