"The thief is on the ship" theory holds good in PNB fraud too.
Gokulnath Shetty, Deputy Manager and some of his colleagues went on and on issuing LOUs- Letter of undertaking in favor of suppliers rough of diamonds and pearls abroad without any collateral, according to the investigation. As of now, it is Rs.12600 crores, may be further investigation may reveal the extent of money exchanged hands, after a detailed inquiry.The game plan is simple as per the CBI investigation.
Gokulnath Shetty would issue an LOU to an overseas branch of Indian Bank, that would credit PNB's Nostro account with foreign currency, money would be paid to the overseas supplier for supplying diamonds, inevitably a front company floated by the jewelers. Next, issue another LOU(valid for 6 months) when the payment becomes due, clear the outstanding, from the same ( earlier) guarantee. Interestingly the collateral guarantee is returned.
This went on to such an extent, the fraudulent deal became too big as Rs.12,600 crores. It is this loophole in the system which was exploited by the borrowers and the corrupt- mind officials hand-in-glove lead to a unwholly-dealings, eventually biggest fraud in the second largest bank PNB surfaced.
Modus operandi-LOUs sent through society for worldwide interbank financial telecommunication or SWIFT. PNB internal auditors had no practice totally entries made on SWIFT on a daily basis and those on CBS, is the exit-point, thus exploited. CBI has taken Gokulnath Shetty into police custody for interrogation.