The US$2 billion letter of credit (L/C) and letter of undertaking (LoU) fraud at Punjab National Bank (PNB) has raised questions about the auditing and regulatory oversight of India's banks according to Reuters.

The news agency claims it has reviewed documents that suggest misuse of the SWIFT interbank messaging system and other flaws in some banks' information technology systems as early as mid-2016.

It was not until January 2018 that India's second-biggest state-run lender filed a complaint with the Indian authorities alleging that diamond merchants, Nirav Modi and his uncle, Mehul Choksi and others colluded with bank officials to defraud PNB and caused a wrongful loss.

Slow progress

Letters from the Reserve Bank of India (RBI) to senior executives at Indian banks reveal several loopholes and shortcomings in banks' anti-money laundering (AML) systems and the central bank made suggestions as to how some of these deficiencies could be remedied.

But according to Reuters, some of these deficiencies are only now being addressed while efforts to bring the alleged perpetrators of the fraud to justice continue to be thwarted.

Focus on L/Cs

Specifically in respect of L/Cs, the RBI said there was no mechanism at most banks to verify whether every outward SWIFT message related to trade finance had a corresponding underlying L/C, and thus check if an L/C was being fraudulently issued, according to Reuters.

It says the RBI also asked banks to reconcile all L/Cs they had issued through SWIFT and ensure that those were reflected in their accounts. Banks were asked to complete this task by February 2017 and report back to the central bank by March 2017.

While Indian federal police have filed fraud charges against Modi and Choksi, both have absconded from India and denied any wrongdoing.

Modi was arrested in London in 2019 and is fighting extradition to India, although a UK court has cleared way for the sale of his luxury flat in London. Choksi meanwhile has resisted attempts by the Indian government to extradite him from Antigua and Barbuda.

The Reuters article, Loopholes in Indian banks' systems were flagged, but not fixed , can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.