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Blockchain Semantics Blog Hey PNB! Heard of Blockchain?

Hey PNB! Heard of Blockchain?

By Anurag Srivastava | April 6, 2018, 7:42 a.m. GMT


What is a perfect crime? A crime executed so cleverly that there is no way to link the crime to the perpetrator- no hard evidence, no circumstantial evidence, no motive, no witnesses, sometimes even no crime! 


The PNB fraud allegedly committed by Nirav Modi in connivance with PNB employees is, needless to say, far from a perfect crime. You simply cannot swindle so much money without leaving footprints all over. Still a bunch of smart people decided to do it- they thought it could be kept hidden for an indefinite period of time. After all, it was one standalone Mumbai branch register where issuances of these Letters of Undertaking was recorded. I do not blame them for pegging the odds of being caught as fairly low. 


All things equal, am I likelier to commit a murder deep in the forests in the middle of the night or on a busy city crossroad in broad daylight? The current systems in Indian banking are a lot like a dark forest where one can securely hide their misdeeds. Read on to know how blockchain could convert this Amazonian jungle into a busy city crossroad with eyes on you all the time. 


Here’s the lowdown. 


Nirav Modi and a few employees of Punjab National Bank pulled up a massive fraud of 1.8 billion USD. The fraud was incepted in 2011 and continued till 2017. The fraud was made public in the early 2018.  


What exactly was the fraud? 


A letter of undertaking is a certificate issued by a bank to its customers. The customer can show this certificate to another bank and raise money from them. This certificate acts as a guarantee to the lending bank that it is safe to lend money to this customer. In case the customer fails to repay the loan, the bank which issued the certificate becomes liable to pay the lender bank. 


Whenever a letter of undertaking is issued, the customer is supposed to pay margin money to the certificate issuing bank. There is also a credit limit attached to the certificate. This limit governs the amount that the customer can raise. Also, this means of money lending is meant for short term only. The loan cannot be raised for more than 90 days. 


Now, the fraud. Nirav Modi was allegedly able to obtain the letter of undertaking from Punjab National Bank without paying the margin money, without any credit limit, and without the clause of 90 days. This setup allowed Nirav Modi to raise money from the non-Indian branches of other Indian banks. He kept on raising money for 6 years until this was uncovered. 


Could digitization prevent it? 


If all the banks start operating on a single platform and the certificate was issued digitally and securely, this fraud could have been avoided. The banks would argue that they would not like to share data with other banks. That's fair. But, for transactions where more than one bank is involved should happen on a single digital platform. 


What's the catch? 


Transacting on a single digital platform does sound an obvious solution. Why has it not yet been implemented? Remember that the fraud took place because a few PNB employees issued the certificate on wrong terms. Users or employees with relevant access to the platform could tamper with the records and transactions. In the current software systems, there is always an admin with superpowers. 


Can it not be fixed then? 


Hey PNB, heard of Blockchain? Blockchain inherently takes away any admin access, maintains audit trail of every transaction, ensures that the records once added can never be edited or deleted even by a superuser. If only the certificate was issued on a Blockchain platform, this fraud would never have happened. The rules of issuance of letter of credit could be coded in a Smart Contract and deployed on the Blockchain platform. No letter of credit would then be issued outside of the coded rules. Only note that even the code of Smart Contract cannot be changed after it is deployed.  


Also, the unauthorised LOUs would be close to impossible to hide on the Blockchain as the entire value chain or chain of command would have had simultaneous and equal visibility into it. 


With such a tight and secure system, pulling off frauds like this would be close to impossible. 


The world needs to realize the potential of Blockchain and start building and using it. Hopefully, we will be out of “playing with it” phase soon. 

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