Mumbai/New Delhi: Even as the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) stepped up their investigation, conducting searches across Nirav Modi’s premises, and the Central Vigilance Commission (CVC) swung into action, it is now evident that several warnings issued by the Reserve Bank of India (RBI) about the possibility of such banking frauds were ignored by bank managements.

Faced with a rising tide of financial frauds, RBI had issued many warnings over the last two years. While its Financial Stability Report of June 2017 referred to the growing volume and value of frauds in the banking sector, former deputy governor S.S. Mundra had, in a September 2016 speech, spoke about instances of misuse of the very SWIFT infrastructure that was used by Modi & Co. to engineer the Rs11,400-crore scam at Punjab National Bank (PNB). SWIFT refers to the Society for Worldwide Interbank Financial Telecommunications. Mint columnist Manas Chakravarty points out in his column that this was precisely the flaw in PNB’s operating system that was used by the scamsters.

RBI has “come across instances of fraudulent messages confirming documentary credits being transmitted using SWIFT infrastructure. Although, the...incidents were mainly a result of failure of internal controls and non-adherence to “four eyes principles", it is also on account of reliance on disparate systems whereby SWIFT transactions could be done without originating a corresponding transaction in the CBS (core banking system)," said Mundra.

Meanwhile, the finance ministry on Monday sought RBI’s response on the fraud case at PNB, two ministry officials said, requesting anonymity. The ministry, particularly the department of financial services (DFS), has asked RBI whether there are systemic concerns in the banking system," said one of the two ministry officials.

“The RBI is a banking regulator and it is their responsibility to highlight any systemic risks and be vigilant about them," said the second ministry official. “The letter from DFS also seeks how the scam went undetected for seven years."

In its June 2017 financial stability report, RBI said that losses incurred from financial sector frauds rose 72% in the five years to fiscal 2017 to Rs16,770 crore. Separately, data from CIBIL shows that banks have filed recovery suits against wilful defaulters worth Rs64,743 crore. Wilful defaulters are companies that have defaulted on bank loan repayments even though they or their promoters have the ability to repay, or they have siphoned off money, or put it to some other use than was agreed on.

While such warnings have been ignored, government arms have swung into action. The ministry of corporate affairs has directed the Serious Fraud Investigation Office to submit a report in six months while the CVC summoned senior PNB officials to question them on alleged vigilance lapses, said two people with direct knowledge of the matter. CVC has also issued a guidance note to all PSU lenders, asking them to transfer senior officers who have been in the same post for three years and clerical staff who have been at the same post for five years as of 31 December, said one of the people cited above.

Separately, ED continued searches in 35 locations belonging to Modi across the country. CBI also continued its searches in PNB’s Brady House branch in Mumbai.

A senior CBI official said that other than the three PNB officials currently in police custody—Gokulnath Shetty, Manoj Kharat and Hemant Bhat—the agency was also questioning 13 more officials up to the general manager level.

On Monday evening, three more PNB officers from the Brady House branch were arrested. They are Bechhu Tiwari, chief manager in charge of the forex department; Yashwant Joshi, a manager in the same department; and officer Praful Sawant, CBI said.

“Tiwari is responsible for supervising the work of Gokulnath Shetty and his manager to ensure entry of authorised SWIFT messages only from the system. Joshi is responsible for supervising Shetty and ensuring daily reports of SWIFT and CBS entries while Sawant is responsible for checking the SWIFT messages daily and reporting," a CBI official confirmed.

On Saturday, CBI had arrested Shetty, a former deputy manager at PNB, Kharat, a single-window operator at the bank, and Bhat, the authorized signatory of the Nirav Modi group.

“Four officials from the Nirav Modi group are also being quizzed—chief financial officer Ravi Gupta, vice president (finance) Vipul Ambani, president of the Nirav Modi group’s international finance division Saurabh Sharma and Subhash Parab, who is the senior finance executive of the Nirav Modi group," said the official cited above. Mails sent to spokespersons for the Nirav Modi group bounced.

A senior ED official said on condition of anonymity that it was “trying to establish whether there was any case of breach in policy and regulatory lapses".

“We are still to arrive at a conclusion whether senior officials of the bank were involved in scam or not. The first letters of undertaking (LOUs) were issued in March 2011 and were then rolled over from 2011 to 2017. We will soon move the PMLA (prevention of money laundering Act) court in Mumbai for attachment of the seized assets," the senior ED official added.

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