What is a LoU? Based on PNB Fraud (Download PDF)

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Second largest state-owned lender Punjab National Bank was the victim of the India’s largest bank fraud amounting to over Rs. 11, 000 crore done by Jeweller Nirav Modi and related entities.

Image of Nirav modi And Fraud Case

Image of Nirav Modi And Fraud Case

Image of Nirav modi And Fraud Case

How Did the Fraud Take Place?

  • Companies colluded with PNB officials to get Letters of Undertaking to help fund buyer’s credit from other overseas banks or branches of other Indian banks. The funds were said to be raised for the purchase and sale of diamonds.
  • These fraudulent LoUs were transmitted across the SWIFT messaging system, based on which credit was offered to fraudulent companies.
  • The scammers also delinked SWIFT from CBS so that funds were provided to the companies without being recorded in the bank’s CBS.
  • Overseas banks were lending money to the firms being assured that PNB has them covered in case of a default. That’s wasn’t the case though.

Who Should Pay the Loan?

  • Ideally, the client should repay PNB, which in turn would pay the banks that loaned out the funds.

  • If companies do not pay, the final liability lies with PNB as the money loaned had been routed to PNB’s nostro account and not directly to the client.

What is an LoU?

  • An LoU is a commitment offered by a domestic bank on behalf of its client to conduct an international transaction. It’s a commonly used trade finance instrument.

  • A borrower with verified credentials approaches a local bank for a LoU issued in favour of a foreign bank or the overseas branch of an Indian bank.

  • The foreign bank then approves buyer’s credit for the borrower, which is received in the nostro account of the local bank.

  • A nostro account is a foreign currency bank account usually held in another bank for cross-border transactions.

  • The borrower then receives the money and proceeds with his operations for which the funds were sought.

  • Once the final product is complete, the borrower exports it and uses the funds to repay the international bank.

  • In case the borrower is unable to repay the foreign bank, the local bank that issued the LoU is liable to pay.

What is SWIFT?

  1. Banks across the world use SWIFT, or Society for Worldwide Interbank Financial Telecommunications.

  2. It is a messaging network for securely transmitting information and instructions for all financial transactions through a standardized system of codes.

  3. The maker keys in the message in the system, the checker checks it and, at the third stage, the verifier transmits it after he is convinced of its genuineness.

  4. After the SWIFT message is sent to an overseas bank for a financial transaction, the bank which receives it, transfers the money (to the overseas Nostro bank account of the exporter or the importer).

  5. The bank sends a SWIFT message back confirming the creation of the loan.

  6. The person who receives this message is a different person; not any of the three—maker, checker or verifier.

  7. The message comes to a secured room and gets printed on a separate printer; everybody does not have access to this secured room.

What is Extradition and Indian’s Extradition Laws and Treaties (Important)?

Extradition is the act by one jurisdiction of delivering a person who has been accused of committing a crime in another jurisdiction or has been convicted of a crime in that other jurisdiction into the custody of a law enforcement agency of that other jurisdiction.

In light of recent flood of fugitives leaving India, the topic of Extradition becomes very important for your exam.

  • The Extradition Act, 1962, regulates the surrender of a person to another country, or request for arrest of a person in foreign land.

  • A request for extradition can be made whenever a person’s conduct in India or in a foreign stare corresponds to any in the list of extraditable offences and is punishable.

Globally Accepted Conditions for Extradition?

  • The crime conducted by the person should be punishable in both the countries.

  • Political criminals are not extradited.

  • Some countries refuse to extradite if the expected punishment is not in their territories

  • Some countries refuse to extradite their citizens.

With Which Countries Does India Have Extradition Treaties?

  • India has extradition treaties with 47 countries like Brazil, Canada, Belgium, France, Germany, Malaysia, Mauritius, Spain, Turkey, UK, US.

  • India has extradition arrangements (understanding on case-to case basis) with 9 countries like Fiji, Croatia, Italy, Sweden.

How Many Persons Have Been Extradited to India

  • Between 2002 and 2016, 62 fugitives 25 for violent crimes, 17 for economic offences, 13 for terrorism, 3 for sex offence, 2 for organized crime, 1 for drug offence, 1 for passport fraud) have been extradited to India.

- Published/Last Modified on: April 9, 2018

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