PNB scam: Had warned banks thrice against misuse of SWIFT infrastructure, says RBI

Mumbai: Amid multi-agency probe into the Rs 11,400 crore fraud at PNB, the Reserve Bank today said it had cautioned banks thrice since August 2016 on the risks arising from potential misuse of SWIFT infrastructure, which was created by banks for their business needs. The central bank has also decided to constitute an expert committee under Y H Malegam, a former member of the Central Board of Directors of RBI, to look into the reasons for high divergence observed in asset classification and provisioning by banks and the steps needed to prevent it.

The committee has also been tasked to looking into the factors leading to an increasing incidence of frauds at banks and the measures (including IT interventions) needed to curb and prevent it. “In the wake of SWIFT-related fraud involving significant amount, reported recently by Punjab National Bank, RBI has today reiterated its confidential instructions and mandated the banks to implement, within the stipulated deadlines, the prescribed measures for strengthening the SWIFT operating environment in banks,” RBI said in a statement.

PNB has been defrauded of Rs 11,400 crore allegedly by jewellery designer Nirav Modi and his associates. The alleged fraud took place through use of fraudulent Letters of Undertaking (LoUs). The fraud is being probed by several agencies including Enforcement Directorate, CBI, SFIO and Income Tax Department.

The RBI said that as part of ongoing efforts for strengthening of the supervisory framework in the country it has been issuing necessary instructions to banks from time to time on a variety of issues of prudential supervisory concern, including the management of operational risks inherent in the functioning of banks. The risks arising from the potential malicious use of the SWIFT infrastructure, created by banks for their genuine business needs, has always been a component of their operational risk profile, it said.

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“RBI had, therefore, confidentially cautioned and alerted banks of such possible misuse, at least on three occasions since August 2016, advising them to implement the safeguards detailed in the RBI’s communications, for pre-empting such occurrences,” it said. The banks have, however, been at varying levels in implementation of such measures, it added.

The Malegam panel will also look into role and effectiveness of various types of audits conducted in banks in mitigating the incidence of divergence and frauds. The members of the committee are, Bharat Doshi (Member, Central Board of Directors, RBI), S Raman (former CMD, Canara Bank and former Whole-Time Member, SEBI); and Nandkumar Saravade, (Chief Executive Officer, Reserve Bank Information Technology).

A K Misra, Executive Director, RBI will be the Member-Secretary of the committee. SWIFT (Society For Worldwide Interbank Financial Telecommunication) is an infrastructure to provide secure financial messaging services across the globe. SWIFT messages and data flows are encrypted, and both logical and physical security measures are implemented and monitored for continued effectiveness.