Learnings from the PNB Saga: Control Fixes at Banks

The following article was written by industry experts at Traydstream, the Fintech company that has recently established its centre of Development and Operations in Mumbai, India. This is an attempt to demystify and debunk some of the myths that have emerged around the mechanism of the fraud that has been unearthed at PNB, and that has attracted such attention across India, and the global financial services community.

 

Reams have been written about who, whom, and how the fraud was perpetrated in the PNB story and it’s likely that the fraud will become a case study in business schools, and part of credit training at banks and Financial Institutions, regarding the Do’s and Don’t’s when lending. While the fraud itself is best left to the investigating agencies to explore, there are a number of learnings for bankers even at this early stage of investigations.

 

Here are a number of measures that could be introduced in the banking system, to help prevent the occurrence of fraud, as in this instance:

  1. Recognising and tallying all unfunded liabilities

An undertaking is an unfunded liability which could crystallise into a funded liability at any time. It needs to be recognised and recorded accordingly. All unfunded liabilities like letters of credit, guarantees, etc. should be tallied with the SWIFT / SFMS / secured stationery on which the bank has issued these instruments to be fully updated on all contingent liabilities.

 

  1. Balance confirmation at periodic intervals

On the banks’ credit systems, LoU’s should be given the same status as Financial Guarantees and accounting entries should be accordingly booked at the  time of issuance of the LOU. The lending banks against LoUs need to take care of their interests and it necessitates that the banks as well as their auditors insist on balance confirmation of the LoUs from the issuers.

 

  1. Integrate books of accounts as much as possible with the transactional flow

All transactions need to be fully integrated with the accounting records in the core banking system so that there is no transaction outside and the possibility of mismatch between the transaction movement and the accounting records is mitigated.

 

  1. Enhanced due diligence for higher levels of exposure

Automated higher levels of due diligence at a transactional and exposure level, mitigates the risk of higher amounts of transactions or higher exposure being fraudulently or inadvertently taken by officials at the operating level. The due diligence on a transaction should not be restricted only to the onset, but needs to extend to all stages of a transaction, such that if the credit quality of the client deteriorates, or market conditions change, the bank can initiate preventive steps to save its interests. It doesn’t seem in the case at hand, that  any such constant monitoring was being undertaken, allowing the perpetrator to make full use of the lack of attention or controls.

 

  1. Tighter audit and control processes

All products require comprehensive very tight policy and procedures in place, and new products / processes should requires sign-off from all the control teams in the banks. This will bring to surface any inherent risks in the product / process and enable sufficient controls being laid down in the process document / risk / audit checklist. One of the big problems in banking worldwide, is the lack of proper systems and policies to record all exposures – real and contingent. With large banks it’s possible that branches, units far flung from each other, could be operating under a different standard from the one laid out for the head office. This requires constant communication and audit to ensure the same processes are followed.

 

  1. Due diligence on the lenders against LoUs

While it is obvious that the risk of lending against a LoU is with the bank issuing the LoU, it cannot absolve the lending bank of performing due diligence on the customer to whom the amount is being disbursed. Ultimately, any lending has to be reviewed and accounted from a perspective of the worst case situation. What’s the worst that could happen? In this case it would very quickly have led to the scenario where the LoU’s were called and hence PNB would have had to pay. Not lending directly, does not mean not lending or not being exposed. Having an intermediary in the lending, makes it even more important for the credit analysis to be done thoroughly since the intermediary might not have the same standards as yourself.

 

  1. Analytics on funds’ flow

We are unaware as of now whether the amounts were directly disbursed to the borrowing entities or it was disbursed into the nostro accounts of PNB. If was indeed in the nostro account of PNB, a tighter analytics on the nostro funds flow, as is required for good AML checks would have brought to light such huge flows on behalf of a customer, without sufficient limits. This is equally applicable to the lending banks against the LoUs. What strikes one as odd is that the sums credited to PNB were, it seems, transferred by the overseas lending banks, as exposures to PNB and not to the final obligor. As bankers, that’s a sure sign of the money being lent to PNB and not the obligor. If that is indeed the case, then these funds were never lent to the obligor but were lent to PNB for the funds to be returned. However, if the accounting entry from the lending banks was to the obligor, the LoU’s were the support under which the lending was predicated and hence were a  full credit exposure for PNB. It should have then been recognised and recorded accordingly.

 

  1. Culture of adherence to norms

This should be set as an example from the top. There should be zero tolerance to deviation from norms, including sanction of credit limits to the high and mighty, change of roles, documentation norms, etc., irrespective of the rank of the official within the bank. Any instances of wrong doing should be met with appropriate disciplinary measures, to set an example for all others.

 

  1. What seems to be “too good to be true” is likely ‘not true’

Like all industries, bankers also have revenue targets to be met. However, if someone is willing to pay you a lot of money for almost next to nothing, it should raise a big red flag. The age old truth in finance, high risk / high return has never been so true.

 

  1. Relationship Banking

One of the fundamental of banking has always been maintaining a tight relationship with your client, such that you are aware of everything that’s happening to his business. It’s called ‘know your customer’ or KYC. In this case it seems, KYC norms were not adhered to at all. In fact, in some of the more prudent banks worldwide, KYC does not only restrict itself to the client being lent to, but to the secondary industry sources and surrogate checks such as D&B etc. That seems to have been missed totally here.  Specially for such a specialised industry like Diamonds, where to the untrained eye, the difference between glass and a precious stone is very difficult to ascertain. As the adage goes ‘Easy credit, uneasy creditors’, one has to be very careful when lending to have done one’s complete homework.

 

  1. Grow slowly, Lend slower

One of the other principals lending is based on, is grow the credit limit slowly. Do not proceed to increase your exposure, exponentially within a short period of time. Experience a few cycles with the client and only with a thorough analysis of the client’s financials should one consider an increase in lending.

 

  1. Need Based Finance

Lending to a client should always be provided only for the amount and duration required, never for more than that. Why tempt the obligor into diverting funds that he probably did not deserve and desire, into extraneous uses, that can only come to hurt? This was one of the fundamental learnings from the Sub prime crisis in 2008, but seems to have been completely forgotten or overlooked in this case.

 

  1. Refresh and Call Back

Ongoing client businesses require ongoing funding. Their cash flows are constantly coming in and out and hence banks need to fund them constantly. While the predominant businesses around the world, are genuine and build safeguards and controls to monitor the ‘ins’ and ‘outs’ closely, banks have for decades followed a policy of call back. What that requires is for the client to pay back all his working capital dues for at least a week to 10 days to the bank. The net outstanding to the client comes down to zero and hence permits the bank to get itself comfortable that the client has the ability to return the funds and is not using successive borrowings to pay back the earlier ones.

 

  1. Credit Bureau

Smart fraudsters are also adept at moving funds between lenders and hence central banks need to a) ensure a regular recording of the exposures that banks have to the obligor and b) banks need to review these exposures to analyse their own lending vs the overall lent to that client. This ensures that a client has not over borrowed from the industry and his exposure is within his client limits.

 

  1. Large debtor reviews

One of the other prudent checks that’s prevalent in banking industry is the constant review of the large exposures that the bank might have. At the least it might surface the clients where revenue might be at risk, if the client moves on. But the other purpose of such a review is any of these hidden risks that the bank might have been exposed to. For if a client is making a lot of money for the bank, but does not have a corresponding capital allocated to the exposure or a requisite reason for the inordinate earning, it should serve as a red flag.

 

  1. Governance

Finally, any industry, and specially banking where billions get lent and traded daily, is dependent on governance. A tightly governed organisation has multiple avenues for such risks to be fleshed out. Whether it be a business review, a risk review, and controls check or a transactional audit, it’s critical to ensure that Governance is extremely tight for the bank to rely on. It’s usual for things to go back to normal as time passes, and the worst thing possible would be not to learn from the incident. Institute processes such that it never occurs and conduct a thorough check such that no other such hidden exposure is lurking in the books. For the others who have not been impacted, this is a great learning ground so that one can mitigate any such issues without having to go through the painful experience of living through the loss.

 

In today’s day and age, with a plethora of technologies at our disposal, it’s paramount to automate systems, connect platforms, be networked and have best in class solutions that support processing, while remaining constantly alert to evolving environmental conditions.

 

About Traydstream Platform:

Traydstream is a machine learning based financial technology (Fintech / Regtech) platform designed to automate Trade Finance processing for banks and large corporates, reducing operational overheads and improving the accuracy and speed of error and fraud detection in transaction documents. The platform digitises processing and constantly connects with checks and controls around the world, online and real-time, to verify the genuineness of transactions, keeping banks and lending safe.

Fintech firm Traydstream names head of India entity

As seen here on Global Trade Review (GTR)

 

Traydstream, a UK-headquartered fintech company whose platform digitalises and automates trade finance, has hired Jayan Menon as its new country head for India.

The official appointment of Menon follows the firm’s announcement in January that it had opened its first subsidiary in Mumbai.

In his new role, Menon will be in charge of building a team of trade specialists who will help expand Traydstream’s fintech platform. He will work closely with the company’s vendors in India and Ukraine to ensure consistent global client delivery as the firm begins to onboard new clients and carry out more pilots. He will be a director of the Indian operation and be part of Traydstream’s wider management.

Menon brings more than 25 years of experience in the banking industry, particularly in trade services and treasury. He joins from Tata Consultancy Services, where, as director of operations, he headed the trade operations of a large UAE bank. He previously worked for ICICI Bank and Yes Bank, among others, in India.

Launched last year, Traydstream’s fintech solution digitalises trade documents and automates regulatory compliance screening using artificial intelligence (AI) and optical character recognition (OCR) technology.

The company is currently in varying stages of discussions, including undertaking pilots and proofs of concept, with almost 50 banks and corporates around the world. Around 15 of them are based in Asia.

“The application of the functional knowledge in trade to transform the trade services in banks with the latest technology applications is what excited me to join this fantastic team,” says Menon in a statement.

According to Achille D’Antoni, Traydstream co-founder and chief sales officer, the company has been targeting Menon “for a while”. He adds: “We are delighted to have Jayan on board. Our goal is to keep attracting first-class professionals who relish the challenges of product innovation as well as effectively managing global client delivery in a new innovative environment.”

Traydstream arm in India to service Global Banks and Corporates as Centre for Trade and Technology Expertise

As seen on Global Trade Review

Traydstream, a UK-based fintech company that aims to digitalise and automate trade finance, has opened a new office in India, its first global servicing hub for its trade, technology and client service operations.

The entity will house experts in the disciplines of trade and technology to support the ongoing development of Traydstream’s proposition, as well as servicing clients around the world.

Launched last year, the fintech firm’s solution digitalises trade documents and automates regulatory compliance screening using artificial intelligence (AI) and optical character recognition (OCR) technology.

Traydstream’s CEO, Sameer Sehgal, tells GTR the company has been talking to a number of industry seniors and is looking to announce its director of operation and the office’s executive team soon.

He says the creation of an India entity was a “natural decision” for the company.

“Over the last few decades India has firmly established itself as a leader in the tech and software industry and as a primary offshore processor for trade for organisations around the world. It’s got a deep bench strength of trade and banking professionals focussed on operations, something which we found extremely attractive,” he explains.

Based in Mumbai, the new entity will be able to serve clients 24/7, together with the office in London, Sehgal adds.

Traydstream’s solution consists of three key modules: an OCR engine, which uses AI to read, scan and instantly structure and store paper-based information digitally; a rule-checking function; and a compliance engine that utilises machine learning algorithms to verify and scrutinise for compliance with international trading rules and regulations.

The company is currently in varying stages of discussions, including undertaking pilots and proofs of concept, with almost 50 banks and corporates around the world. Around 15 of them are based in Asia.

UK Digital Experience Awards 2017: Finalists Revealed

The UK Digital Experience Awards 2017 are to take place at London’s Wembley Stadium in what promises to be one of the most thrilling industry events this year.

Celebrating the very best in organisations that offer an exceptional digital experience for their valued customers, the awards will now be hosted earlier than planned at the famous London venue on November 22, in conjunction with the UK Business Awards

Finalists will compete in 18 categories for awards including best Omni-Channel Experience, best SEO, and best Mobile Strategy.

Entrants will be scrutinized by a judging panel featuring some of the sharpest industry minds, who will be examining the businesses’ digital experience portfolio and scoring according to strict criteria.

The gala event – which is being held by Awards International with the valued support of partners Barnardo’s, CXM, and Cranfield School of Management – is also shaping up to be one of the calendar’s key networking opportunities, ensuring that every attendee walks away with something valuable, even if it’s not one of the sought-after awards trophies.

Following the announcement of this year’s finalists, Awards International CEO Neil Skehel said: “Digital Experience is fast becoming one of the most important fields for businesses right across the globe. Today’s customers expect a lot from firms when it comes to offering a digital pathway, and if they can’t keep up they will be left behind.

“These awards are a way of showcasing the most innovative and exceptional firms, whose Digital Experience for customers is second-to-none at a time of rapid change and ruthless competition.

“It’s also fantastic to be able to bring the DX Awards to a new and bigger venue, the world-famous Wembley Stadium. It’s going to be a hugely exciting day for celebrating what makes UK businesses among the best on Earth for communication with their customers.”

 

Financial Services and Fintech Award:

Brilliant Basics

Divido Financial Services Ltd

Monese

Tempcover Ltd

Traydstream

Not for Profit and Charity Award:

GRIT Digital on behalf of The Association of Independent Museums

RHP Group

Xaxis on behalf of GlobalGiving

Yoyo Design on behalf of England Athletics

Best Online User Experience B2B:

Orange Bus

Sage in partnership with Valtech

Lloyds Banking Group (AO&O)

Thompson Reuters

Best Online User Experience B2C Award:

Absolute Design Association Ltd on behalf of 3P Direct Ltd

Eurostar

Foundit on behalf of Amara

Hallam Internet on behalf of Virtual Runner

Virgin Money

Business Transformation Award:

Business Stream in partnership with Cap Gemini

Cardiff and Vale College, Wales in partnership with PwC UK

Sage in partnership with Valtech

Vortex Commerce Ltd on behalf of AKW

Business Transformation Award:

Business Stream in partnership with Cap Gemini

Cardiff and Vale College, Wales in partnership with PwC UK

Sage in partnership with Valtech

Vortex Commerce Ltd on behalf of AKW

Business Change Award:

Eurostar

Lloyds Islands Community Bank

Royal Bournemouth and Christchurch Hospitals Trust Outpatients Department in partnership with Social Facilitators and Humap Software

Sagittarius on behalf of Contiki

Thomoson Reuters

Virgin Trains

Cloud Service Award:

SignStix Ltd

Consortiq

Nobly POS

 DX Innovation Award:

Draper and Dash

MOO

Rachel Dalton Communications on behalf of Ieso Digital Health

Sage

The BIO Agency on behalf of British Airways

Three UK

Mobile Strategy Award:

Aston Barclay Group

GlaxoSmithKline

Nobly POS

Three UK

Virgin Trains

Omni-Channel Experience Award:

Business Stream

Divido Financial Services Ltd

Jacada

Lloyds Banking Group

Severn Trent

Vizolution in partnership with O2

Use of SEO:

Banc on behalf of Gazprom Energy UK

Three UK

Virgin Money

Digital Team Award:

Absolute Design Associated Ltd on behalf of 3P Direct Ltd

B&Q plc in partnership with Digits Industries Ltd

Digital Transformation Service Northern Ireland

NS&I

Severn Trent

Beyond the Blockchain – The Role of Traydstream within End-to-End Transactions

 

A lot has been made recently of the advent of blockchain in financial services, and banks must be applauded for their commitment to change; consortiums like R3 are clearly positive initiatives that demonstrate the industry-wide desire to innovate. With global trade finance revenues reaching their lowest level in seven years, with a 5% decline year-on-year announced for the first half of 2017, as reported by GTR[1], this desire has reached a tipping point.

Trade Finance is one area, in particular, where the introduction of blockchain technology would appear to have a profound impact.

Trade remains an industry that relies on the iterative updating and transfer of paper-based documentation but with blockchain these iterations could be centralised – or rather decentralised – removing the costs and delays involved with the duplication and transfer of documentary credit between buyers’ and sellers’ banks and insurers. This approach enables the simultaneous digital recording of data across multiple parties, leading to secure transactions and instantaneous updating.

This is however only one part of the process as far as trade finance processing is concerned. The ‘heavy lifting’ involved in the scrutiny of transaction documentation for regulatory compliance remains largely un-automated, and this is where Traydstream has focussed its efforts.

Currently banks employ extensive teams of ‘document-checkers’ to scrutinise the transaction documentation. This involves different aspects of scrutiny including highlighting discrepancies between entries or missing fields; ensuring compliance with international trading standards and embargoes as set by the UCP Rules and ICC’s ISBP regulations; and spotting contravention of country and port specific sanctions, as well as internal banking policies.

Since the financial crisis these regulatory requirements have accelerated drastically with the number of individual regulatory changes that banks must track on a global scale more than tripling since 2011, to an average of 200 revisions per day, according to BCG research.[2]

This has led to spiralling compliance costs for banks with the cost of inaction being equally severe – ‘strict regulatory enforcement has brought cumulative financial penalties of roughly $321 billion (through to the end of 2016).[3] It is in this environment that the need for smarter methods of reviewing and scrutinising transactions has become mission-critical.

Traydstream’s solution is aimed at solving these challenges, reducing the regulatory burden without sacrificing transaction scrutiny or security. We have spent the last three years developing a platform that extracts data using a propietary OCR engine, breaks down the conditions of the document and scrutinises it for regulatory compliance using with what we believe to be a unique rule engine.

The platform mirrors exactly the job of a document checker today, using cognitive behavioural technology to learn from each transaction, memorise document behaviour, and perceive potential issues.

With this tailored use of Artificial Intelligence and Machine Learning, the platform can automate the end-to-end processes of trade finance using manual paper based records, OR their digital equivalents through blockchain technology.

Smart contracts (which are one of the most highly anticipated applications of the blockchain) are, in effect, computer programs that verify, or enforce the negotiation or execution of an agreement.  Clearly this has highly positive implications in facilitating documentation BUT they still need to be checked, scrutinised validated, and this is the purpose behind Traydstream.

At Traydstream, we view the processes behind regulatory compliance as one of the big challenges that lie in Trade Finance and have hit this ‘head-on’ to change the landscape on how trade is processed.   We are committed to delivering an intelligent end-to-end solution that will process in minutes what currently takes banks hours and in many cases days.

We see Traydstream as a real game-changer, whose solution is only improved by blockchain adoption.  Having concentrated our efforts on solving the processing piece of the trade puzzle, we are excited to be launching our solution into the market.

 

Uzair Bawany

Felix Bradshaw

 

[1] Global Trade Review, ‘Global trade finance revenues hit seven-year low’, <https://www.gtreview.com/news/global/trade-finance-revenues-hit-seven-year-low/>

[2] Boston Consulting Group (BCG), ‘Global Risk 2017: Staying the Course in Banking’, <https://www.bcg.com/publications/2017/financial-institutions-growth-global-risk-2017-staying-course-banking.aspx>

[3] BCG, ‘Global Risk 2017: Staying the Course in Banking’.