What can be done to prevent another PNB scam? A comprehensive financial crime detection system.

Last February, Punjab National Bank (PNB) was defrauded of INR 114 Billion and the financial repercussions are still felt in the banking sector.

The alleged scamsters were aided by junior employees of the bank’s Brady house branch. The modus operandi was to issue Letter of Undertaking through the SWIFT terminals without any margin money or pre-approved credit limit. It is alleged that the promoters also raised fraudulent Letter of Credit in favour of foreign suppliers.

Waking up to the PNB scam.

The scam came to light when the firm requested for buyer’s credit for making payments to overseas suppliers without the cover collateral.

Apparently, insider employees had issued LOUs over the SWIFT interbank messaging system for years without a blip in the audits. The bank’s lapse in terms of checks and balances and governance gaps resulted in a domino effect. The firm presented the fraudulent LOU’s to extract loan from other banking entities resulting in huge NPAs for all.

Could a financial crime detection and payment screening system prevent the PNB scam?

The answer is a big “Yes,”

The red flag here is the failure to implement the necessary controls and checks within the banking systems and policies. Employees were provided unfettered access to SWIFT terminals without periodic audits of the transactions undertaken. The individual departments and payment systems like SWIFT worked in siloes leading further gaps in customer screening.

A comprehensive financial crime detection software like Combat can catch the scam in the nick of time. The rule-based engine reconciles the SWIFT transactions with the Core Banking system to ensure that the enough funds are in place to cover the credit margins.

Furthermore, all banks are supposed to verify SWIFT messages pertaining to credit/trade finance and capture the same in the book of accounts. In PNB, the SWIFT messages issued for Trade Finance were not reconciled with the outstanding payments. Moreover, the SWIFT terminals and the CBS transactions work in siloes creating an inherent mismatch in auditing. In-built KYC and Re-KYC features along with trade finance screening models trigger suspicious payment alerts that are dispersed across the system.

Another glaring gap has been the proliferation of free format MTn99 message series. This gambit provides an aura of authenticity to the LOU. Payment screening solutions have the Maker/Checker features that leverage the 6-eye validation to block free format messages.

Banks need to incorporate wide-ranging reforms to prevent future scams like the PNB scam. A comprehensive crime detection software is the first step towards evolving system that consistently monitors suspicious activities.