First, that the mama-bhanja duo of Mehul Choksi and Nirav Modi used the services of a deputy manager, Gokulnath Shetty, and some other crooked junior employees of PNB’s Brady House branch in Fort Mumbai, allegedly operating by themselves from little cubby holes, to defraud the bank of Rs 11,397 crore. Second, Shetty repeatedly issued fraud banking instruments called Letters of Undertaking (LoU) in favour of Modi’s and Choksi’s firms, which allowed correspondent Indian bank branches abroad to pay for their diamond imports. Third, contrary to all rotational practices, Shetty remained at the same critical post for seven years. That’s not all. Fourth, most of these LoU-based transactions occurred outside PNB’s core banking system (CBS), which tracks every debit and credit for all PNB accounts across the globe and reconciles these on a daily basis. Fifth, none of the correspondent bank branches abroad appear to have officially acknowledged PNB’s LoUs that they were honouring. And if they did, these documents disappeared in some Brady House rabbit warren. Sixth, neither PNB nor the correspondent banks ever smelt a rat. This is strange. Diamond trade financing is a dicey business — with PNB itself having earlier suffered a large scandal involving Winsome Diamonds, whose promoter, Jatin Mehta, escaped to become a citizen of a balmy and ethical Caribbean island called St Kitts and Nevis. And, last of all, the fraud came to light after Shetty had retired. A foolish man from a Modi firm went to Shetty’s successor to ask for a fresh LoU without any cash margin, claiming that it was never needed in the past. No commentator can yet claim to know all the “real facts” of this scandal. Instead, let me pose some uncomfortable questions. An LoU is a good place to start. It is a perfectly sound instrument through which a bank (PNB, Brady House), on behalf of a customer (a Modi firm), undertakes to honour a payment made by another corresponding bank (say Allahabad Bank’s branch in Hong Kong) for imports by its client. Subject to an LoU’s financial limits, the overseas bank offers short term buyer’s credit to the importer, usually for 30 to 90 days. For any LoU, the issuing bank earns a fee; the overseas bank earns interest which is LIBOR plus a spread; and the importer accesses significantly cheaper overseas credit. No problems up to here. Now start the uncomfortable questions. Why were these LoUs repeatedly issued without any margin money? Moreover, any LoU sent to an overseas bank is automatically acknowledged. How could these acknowledgements disappear? Now to SWIFT. Globally, inter-bank instructions for financial transactions are transmitted through SWIFT, a messaging system that requires a clear set of codes. Any SWIFT message must be vetted by three different people in the sending bank: A maker who keys in the message, a checker and a verifier — the last doing the transmitting after being satisfied that everything is in order. How could Shetty blithely use other people’s login identities and passwords for seven long years to show that these SWIFT messages involving increasingly larger amounts were executed as prescribed? PNB was one of the first public sector banks to implement full-fledged computerisation which included the CBS. Brady House’s SWIFT system was delinked with PNB’s CBS. Was this done manually by Shetty? Or is there no link whatsoever between all PNB originating SWIFT transactions and its CBS? The former is the act of a rogue; the latter the making of a systemic catastrophe. On to nostro accounts. Italian for “ours”, nostro signifies “our bank’s money held in another bank”. When an overseas SWIFT transaction occurs, the corresponding foreign currency amount is put into a nostro account, which is automatically acknowledged by the overseas bank. The counterpart overseas bank is supposed to send a SWIFT message confirming the amount in the nostro account. How can PNB, Brady House, have no records of these nostros? After the overseas bank offered buyer’s credit to pay the supplier abroad for the sparklers imported by Nirav Modi, it should have debited the corresponding amount from the nostro account, and informed PNB, Brady House, of the final position against the corresponding LoU. Where are these documents? Why were these not eventually reflected in PNB’s CBS? If Nirav Modi paid in full on the due date against every LoU issued, there would be no fraud. He didn’t. Because he was expanding his business too fast, and needed more and more gems, without enough cash for these. So, Shetty obligingly created even larger LoUs with no margin money, used SWIFT, circumvented CBS, which were then presented to the banks abroad for even more buyer’s credit to purchase the next consignment of sparklers and pearls. Over the years, each of the overseas bank branches was presented larger and larger PNB-originated LoUs. What were the overseas managers smoking? How come no one thought something was amiss and kept extending more buyer’s credit without any serious cross-checking? What about “abundant caution”, a term reverentially used by bankers? Next, who did the internal audits, branch audits, concurrent audits and statutory audits? What kind of audits were these, with some Rs 11,400 crore slipping through the cracks? Were PNB’s board of directors and audit committee sleeping on the watch? And why were these accounts not reconciled and squared up over seven years? Now to the regulator. What about the RBI’s audits — especially since the regulator is keen on keeping close tabs on large value nostro accounts? Finally, given its past record, with the CBI taking over, should we at all expect to reach any sensible resolution? Throughout this scam, one inescapable fact stares us in the face. The public sector banking system has become rotten to the core, and such banks are ripe for easy gaming. But who cares, really?