The PNB Fraud Case Study: Forensic Accounting and Risk Management Perspective

I first heard about the Punjab National Bank (PNB) fraud from Shubham, an MBA in Finance working in the forensic accounting and risk management department. Nothing could have prepared me for the jaw-dropping story of the PNB fraud, even though Shubham had always entertained me with amazing humorous stories from his field of work.

It was a typical evening in our bachelor life, 4 friends sitting in a rented flat talking about how to make more money, starting our own company and all, when Shubham mentioned the PNB fraud case, a scandal that had erupted in early 2018.

“Imagine this,” he said, “over Rs 14,000 Crores in fraudulent transactions uncovered at one of India’s largest banks.” For us, who were struggling to find a break, this amount was the size of a mountain. He went on to clarify that the fraud was based on Letters of Undertaking (LoUs), something that I was not familiar with at first but after learning that it is an important document for international trade, It all started to make sense.

Shubham went into detail about the scheme’s planning. The well-known diamond merchant Nirav Modi and his uncle Mehul Choksi had come together with a few dishonest workers at PNB’s Brady House branch in Mumbai. These workers had issued fake LoUs by taking advantage of the bank’s secure international financial messaging system, SWIFT. Nirav Modi and Mehul Choksi were able to obtain credit from foreign banks because of these LoUs, which acted as sort of guarantees. And they did this without requiring any collateral or recording the transactions in PNB’s internal system.

“What’s a LoU?” I asked.

“It’s like a letter that says, ‘We guarantee this person’s loan, so you can lend them money,'” Shubham explained. “But in this case, they were issuing these letters without any actual guarantee or records. It was like printing money.” “If there had been proper Forensic Accounting done for these, it could have been uncovered long before reaching this number. I should have been there for the risk management, would have caught the scam easily” He said with a smug smile.

Okay so our narrator was a specialist, he had all the rights to act and say that. but to me, it was still unclear how they managed to keep it unnoticed, and that too for so long and an amount so huge! Also how risk management or forensic accounting works so i asked him to outline Forensic accounting and risk management first for my understanding

Forensic accounting

So he started “Forensic accounting involves the investigation of financial records to uncover fraud and irregularities. Like in the PNB case, Forensic accountants would closely examine the PNB case’s transactions in order to pinpoint the fraudulent issuing of Letters of Undertaking (LoUs) that were avoided by the bank’s internal processes. They use advanced techniques to track the movement of illegal money and reveal PNB staff’ and businesspeople Nirav Modi and Mehul Choksi’s cooperation. Forensic accountants also help determine the amount of financial loss and supply crucial evidence for court cases by reconstructing the fraudulent activity.”

likewise, forensic accounting audits are not just conducted in India’s corporate world. Certified Forensic Accounting Professionals look into instances of tax evasion. They also work together with compliance and law enforcement organizations to find financial crimes and fraudulent activity.

Risk Management

“Now about Risk Management – Identification, evaluation, and mitigation of any threats to an organization are all part of risk management. Serious flaws in risk management were identified by the PNB scam, mainly the absence of internal controls and verification procedures. Strict duty segregation to prevent insider collusion, frequent internal audits, and real-time transaction reconciliation were all essential components of effective risk management. Banks can prevent large financial losses and identify abnormalities early by putting these procedures in place.” He said

Now that I was aware of the fundamentals of Forensic Accounting and Risk Management I could connect the dots and the whole thing was clearer than ever. Basically PNB employees reviewing a new request for a LoU found the inconsistencies, which led to the revelation of the scheme. The enormous scope of the fraud was discovered during an internal audit.

“It was like pulling a thread and watching the whole fabric unravel,” in Shubham’s words. The country as a whole as well as the financial community were stunned by the disclosure.

PNB Fraud Case Study: The Investigation

As a Forensic Accountant, Shubham’s work frequently involves examining these types of scams. He pointed out that serious shortcomings in risk management and internal controls were brought into focus by the PNB fraud:

Internal Controls: 

• The bank’s internal systems did not include any records of the fake LoUs. This suggested that the reconciliation process had suffered a serious setback.
• The bank’s operations lacked any kind of verification system.

Collusion: 

• The participation of reputable bank representatives demonstrated how insider threats may bring down the system.
• This could have been avoided with proper task division and worker rotation on a regular basis.

Systemic Deficits:

• The fraud was able to remain undiscovered for years due to a strong dependence on the SWIFT system and insufficient cross-checking with internal documents.

The Impact

The affair had far-reaching consequences. The whole Indian banking industry was impacted, and PNB’s reputation took a serious hit. Regulators tightened guidelines around LoUs, and banks started modernizing their risk management frameworks.

I was curious about the culprits’ fate and inquired, “What happened to the guys behind this?”

“Nirav Modi and Mehul Choksi fled the country before the scandal broke,” Shubham stated. “Nirav Modi was ultimately taken into custody in London, and both of them are currently being pursued for extradition. Their assets were taken by the government, but the legal dispute has not ended.”

When I heard Shubham’s detailed analysis, I became aware of how important strong internal controls and careful supervision are in the banking industry. The PNB fraud revealed serious vulnerabilities as a result of a systematic failure rather than being the result of a few bad apples.

I was speechless at the inventiveness and sophistication of the scam as we were ready to seize the day. The PNB case was an unsettling example of how internal plotting and weak control can bring down even the most established organizations. For Shubham, it was just another day in the life of a forensic accountant. But for me, it was a fascinating look into the realm of high-stakes financial crime.

By the end of this whole case, we all (the roommates) forgot about our case! The how to make more money case! It may have sidelined our conversation But it got me interested in knowing more about Risk management and Forensic Accounting. If not to pursue this field, the bare knowledge of the subject gives a perspective into knowing what to look at or into when you are trying to set your foot into a business. Imagine knowing the ins and outs of Forensic Accounting and Risk Management!

A case study in disguise? Or an entrepreneur’s guide to getting started on what to do and what not to do? Call it what you like!