RBI on SWIFT: Banks were confidentially warned thrice against misuse

Amidst the multi-agency probe into India’s biggest banking scam, RBI on Friday said it had “confidentially” cautioned banks thrice since August 2016 on the risks arising from malicious use of SWIFT system, and has decided to set up a panel to look into the rising incidence of frauds.

State-owned Punjab National Bank (PNB) was defrauded of Rs 11,400 crore allegedly by firms related to jewellery designer Nirav Modi and Mehul Choksi through fraudulent Letters of Undertaking (LoUs).

The fraud is being probed by several agencies including Enforcement Directorate, CBI, SFIO and Income Tax Department.

In a statement, the Reserve Bank of India said that as part of the ongoing efforts for strengthening of the supervisory framework in the country, it has been issuing necessary instructions to banks from time to time on a variety of issues of prudential supervisory concern, including the management of operational risks inherent in the functioning of banks.

The risks arising from the “potential malicious use” of the SWIFT infrastructure, created by banks for their genuine business needs, has always been a component of their operational risk profile.

RBI further said it “had, therefore, confidentially cautioned and alerted banks of such possible misuse, at least on three occasions since August 2016, advising them to implement the safeguards detailed in the RBI’s communications, for pre-empting such occurrences”.

Banks have, however, been at varying levels in implementation of such measures, it added.

“In the wake of SWIFT-related fraud involving significant amount, reported recently by PNB, RBI has today reiterated its confidential instructions and mandated the banks to implement, within the stipulated deadlines, the prescribed measures for strengthening the SWIFT operating environment in banks,” the statement said.

The central bank said it has decided to constitute an Expert Committee under the chairmanship of Y H Malegam, a former member of the Central Board of Directors of RBI.

The committee, RBI said, has been set up in view of large divergences observed in asset classification and provisioning in the credit portfolio of banks as well as the rising incidence of frauds in the banking system.

The panel will look into the reasons for high divergence observed in asset classification and provisioning by banks vis-a-vis the RBI’s supervisory assessment, and the steps needed to prevent it.

It will also look into factors leading to increasing incidents of frauds at banks and the measures (including IT interventions) needed to curb and prevent them.

The Malegam committee has been also asked to look into the role and effectiveness of various types of audits conducted in banks in mitigating the incidence of such divergence and frauds.

The members of the committee are, Bharat Doshi (Member, Central Board of Directors, RBI),  S Raman (former CMD,  Canara Bank and former whole-time Member, SEBI); and Nandkumar Saravade, (Chief Executive Officer, Reserve Bank Information Technology).

A K Misra, Executive Director, RBI will be the Member-Secretary of the committee.

SWIFT (Society For Worldwide Interbank Financial Telecommunication) is an infrastructure to provide secure financial messaging services across the globe.

SWIFT messages and data flows are encrypted, and both logical and physical security measures are implemented and monitored for continued effectiveness.