RBI bans LoU by banks - a lesson from PNB's multi-crore scam

New Delhi : Better late than never! Reserve Bank of India on Tuesday imposed a ban on Letter of Undertaking (LoU) issued by banks. 

LoUs were primarily used by Nirav Modi and Mehul Choksi in executing 12,600 crore fraud on state-run Punjab National Bank (PNB).

Earlier, on the day, the government informed Parliament about two circulars RBI issued to banks mentioning about the misuse of SWIFT (Society for Worldwide Interbank Financial Telecommunication) system.

Apart from diamantaire Nirav Modi and his uncle Mehul Choksi, some PNB employees have been accused of misusing their access to the bank's SWIFT electronic messaging system used for overseas funds transfers. None of the fraudulent transactions were registered on the bank's internal transaction messaging system, the Core Banking Solution (CBS), enabling the fraud to go undetected for long.

"Reserve Bank of India (RBI) has apprised that it had issued two circulars to banks in the months of August and November 2016, related to security and operational controls in the SWIFT environment," Minister of State for Finance Shiv Pratap Shukla told the Rajya Sabha in a written reply.

"As per RBI inputs, compliance with RBI's instructions is the bank's responsibility and the Compliance Officer in the bank monitors the same."

"The RBI monitors compliance to its instructions on an ongoing basis and during RBI inspections and, where necessary, enforcement action is also initiated," he said.

After the unearthing of the PNB scam, an RBI notification last month said: "The risks arising from the potential malicious use of the SWIFT infrastructure has always been a component of their operational risk profile. RBI had, therefore, confidentially cautioned and alerted banks of such possible misuse." 

(With IANS inputs)