The Unholy Trinity: Indian Banking Scams by Achintya Srivastava

Reviewed by Bishakha Jain

“plus ça change, plus c’est la même chose”, the more things change the more they stay the same, a popular quote by French Journalist and Novelist Jean Baptiste Alphonse Karr and it is more than applicable on the ailing Indian Banking Sector. India’s scam-ridden financial world, from banks to stock markets to financial institutions, has fallen for the same tricks by fraudsters over the last quarter century. The first of the bank scams post-liberalisation surfaced in 1992, with the late stockbroker Harshad Mehta doing the honours. The debris of that scam had barely been cleaned up when another scam, this time orchestrated by another sharp market manipulator, Ketan Parekh, took off from 1998. His scam got busted in 2001 when the market couldn’t sustain followed by the failure of Government Bond scheme which went by the name of Unit Scheme 1964. And now, of course, the Punjab National Bank (PNB) fraud by two notorious diamond tycoons, Nirav Modi and Mehul Choksi who were in bed with the PNB officials.Highlighting these cases, however, doesn’t indicate that there weren’t any scams happening between 2001 and 2018, who can forget Vijay Mallya or Bipin Vohra.Nevertheless our focus remains on the trinity scamsters who gamed the system for their benefit ,one clear thread between the three mega scamsters was the money lent against fake documentation, either real or virtual papers, but without the backing of real assets while the bankers were happy to turn a blind eye towards the scamsters as long as they didn’t default. In Harshad Mehta’s case, he used to borrow money from banks using fake Banker’s receipt or BRs. Two little-known banks -the Bank of Karad (BOK) and the Mumbai Mercantile Co-operative Bank (MCB) became useful for this purpose. In Ketan Parekh’s scam, the fake paper involved bank order which did not have money backing.In the PNB case fake LOUs(Letters of Undertaking) were given to Nirav Modi and Mehul Choksi. For example, consider the case of PNB scam where a deputy manager by the name of Gokulnath Shetty from the Brady House branch of Mumbai has been identified who issued fake LOUs to Nirav Modi. The LOUs were sent through SWIFT, Society for Worldwide Inter-bank Financial Telecommunications, it is a messaging system that enables banks and financial institutions worldwide to send and receive information about financial transactions via encrypted codes making the transactions secure. In the Nirav Modi case, the bank found that two junior employees had issued LoUs on the SWIFT system without entering the transactions on the bank’s own system. Such transactions went on for years without detection until the deputy manager retired and the scamsters realised that the game was up. Fake documents were used in Ketan Parekh scam of 2001. A stock market operator who made crores by after rigging prices in his favoured stocks used a similar method to raise money in his operations. He used Madhavpura Cooperative Bank (MCB) to issue fake pay orders, which were then immediately discounted with the Bank of India. The money released from the Bank of India was used to rig the stock market, and as long as the markets obliged by rising, the money could return to the bank that lent them. It was only when the stock market went down south that this cycle was broken, with the fake pay orders being shown up as paper without cash backing. Harshad Mehta was a registered broker who turned into the ‘Big Bull’ in the early 1990s. Mehta was accused of manipulating the Bombay Stock Exchange in 1992 by taking advantage of loopholes in the banking system. He used Ready Forward or RF deal to insert money into the market. RF deals were short-term loans from one bank to another. The deals were generally made with help of brokers, who were paid commissions. He colluded with bank employees to get fake Bank Receipts issued.  BRs were issued whenever banks did not have physical possession of the government securities they were selling forward to counter-parties.  He used these BRs to get other banks to lend him money under the false impression that they were lending against government securities. Mehta rigged the markets forcing other brokers to push up stock prices while squaring up their liabilities. This scam continued until the market actually crashed, and Mehta could not find the resources to keep buying. The fake BRs were discovered when banks started losing money on their money market operations. The common elements in all three frauds were the same: the use of fake papers (LoUs, pay orders, BRs) to generate resources, and keeping the cycle going until something went wrong (a market crash, the retirement of a key insider who was facilitating the scam, etc) and the fraud is discovered. The banking system has become so susceptible that even the white collar criminals don’t feel the need to be a subject matter expert or creative enough to rig it, all they need is identify the loopholes and co-partner with an internal resource to rig the system. Till more accountability and transparency are not introduced in the system, more such scams would follow.

REFERENCES

  • https://www.livemint.com/Opinion/ep5zwxjy8OlyrB9HOljmdO/Why-banking-frauds-are-so-frequent-at-PSU-banks.html
  • https://swarajyamag.com/economy/pnb-fraud-is-tip-of-iceberg-modi-government-simply-does-not-get-it-when-it-comes-to-financial-sector-outcomes
  • https://www.mapsofindia.com/my-india/government/why-indian-banks-are-vulnerable-to-scams
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