“Where there is Money, there will be Fraud” is a truth which all traditional Bankers know. Hence the essence of Good Banking is building security into the culture of the organization and into its systems. The legacy paper based systems in Banks have been robust enough to ensure that Frauds are detected quickly if and when it happens and no fraud will succeed without collusion of multiple persons and negligence of multiple persons.
Future of Banking
With the change over from paper based banking to electronic banking, the risk has increased many fold since the procedures of Banking have now been subordinated to the “Systems” designed by “IT Professionals” who are not “Bankers”.
I am reminded of one of the early warnings given out (some time around 2005) by Mr A. T. Panneer Selvam, the former Chairman of Union Bank of India (and an Ex DGM of IOB in which the undersigned worked a few decades back) who said “Future of Banking belongs to IT Professionals”. I have quoted this a number of times in my lectures promoting the advent of digital Banking before shifting to the current slogan that “Future of Banking belongs to Information Security Professionals”.
Need for Information Security Culture
The PNB fraud has highlighted this need to develop an “Information Security Culture” in Banks on a priority basis.
People in the Information Security try to design many sophisticated tools to secure the “Confidentiality”, Integrity” and “Availability” of information which they define as the contours of information security. But if an authorized system owner shares his password to another, then the entire system of security built around the system of password crumbles.
In the PNB case, it appears that the Password of an AGM was shared with a Deputy Manager. So far the name of the AGM who shared his Level 5 Password with Mr Gokulnath Shetty has not come to open. He is an abetter for the crime and should also cool his heels in the jail for some time. It may be more than one official of the banks who shared his password with his juniors and all of them should now be held responsible along with Mr Gokulnath Shetty who shared the password with an outsider client in what can only be said as “Incredible”.
In June 2016, we saw TCS employees sharing passwords issued for an employee of a different company amongst themselves and hacked into a US Company resulting in a legal suit of US $940 million on the Company. Fortunately the Directors and CEO escaped criminal charges and contained the damage to a civil suit.
This menace of “Password Sharing” that has now reached a new dimension with password being shared with an outsider clearly indicates that our Information Security designers are at fault to first of all rely on the system of Passwords and then not have adequate measures to control the risks.
If we have dual keys to our strong room where cash is kept and electronic locks that can be opened only at a certain time by certain biometric authentication etc., why is that the SWIFT systems cannot use digital signatures backed by biometric based cryptographic keys and RFID based identity cards etc to build layers of security which ensures that the system cannot be operated except from within a specific system in the Bank? Why every transaction is not immediately deposited in a different system and audited independently of the maker and checker who might have colluded?
The security design in banks is faulty and I have already said that the makers of FINACLE software for which our Banks have paid a fortune should accept that their security design has left the Indian Banking system vulnerable.
Inaction by RBI
When I spotted and pointed out extreme recklessness of ICICI Bank ,PNB and Axis bank during the adjudication proceedings of some Phishing Frauds, I had personally represented to RBI that they should suspend the Internet Banking licences of some of the branches involved in the commission of Phishing frauds.
Had RBI atleast sent one harsh letter to the Banks at that time, perhaps this PNB fraud would not have happenned. Mr K.R.Kamat was the Chairman then and he continued to raise to greater heights after the frauds were pointed out.
The fraud in which more than Rs 1.6 crores were lost by an exporter in PNB was a clear indication of complicity by the Noida branch of PNB but Mr Kamat took no action. This case is still languishing in the Delhi National Consumer Forum and the judges who have been adjourning the case year after year obviously at the instance of the bank will have to introspect if they could have contributed indirectly to the current Rs 11400 crore PNB Fraud.
The Governors, Deputy Governors and other Executives of RBI whom I repeatedly appealed to for action but who did not respond should introspect if they are also responsible for not initiating specific action in time which has caused the present mess.
Appointment of Directors
Without diverting back into the software issue and irritating my friends in IT industry more, and also not again speaking of the RBI as a toothless paper pusher who is good in drafting guidelines without any power to implement them, I would today like to say that the root cause for the malaise lies with the Finance Ministry in their system of appointment of Independent Directors of Banks, Chair persons and other Directors.
The clean up therefore should start here at the Board level appointments in each of the Banks. For Indian political system to think of progress we needed a Narendra Modi to succeed Mr Manmohan Singh. Similarly, for any Bank whether it is PNB or SBI, ICICI Bank or HDFC Bank, Allahabad Bank or Union Bank, it is necessary that the head of the institution should be not only efficient from the domain perspective but also scrupulously honest. We cannot expect every Chairman to be an Information Security expert but it is for this reason that he has a Board to assist him. Every member of the Board should therefore be equally honest besides being an expert in some part of the domain.
The constitution of the Board of Directors is the biggest internal and external control for the Banks. Without correcting this, if we try to tinker with our Firewalls, Software and Hardware, we will not be able to achieve the security that we are trying to achieve.
The politicians and media who are questioning Mr Narendra Modi that Mr Hari Prasad’s letter was not acted upon by the PMO must ask why all the public postings at Naavi.org in which Banks like ICICI Bank, PNB, AXIS Bank and SBI in particular were pointed out for lack if information security practices leading to frauds were not acted upon by the respective Banks and RBI.
I had called upon the Independent Directors of the Banks with a request ” If You are a Bank Director.. Your Independence Day Resolution Should be…” after the Bangladesh Bank SWIFT fraud to ensure that the RBI guidelines on the “Cyber Security Framework” should be diligently implemented by the Banks. I am not however sure if any of the independent directors raised the issue in any of the Board meetings.
These Independent Directors have failed to discharge their responsibilities like what Mr Dubey of Allahabad Bank tried to do and therefore should bear the vicarious liability for the PNB fraud.
The Ball is in the Court of Mr Arun Jaitely
If these Directors were incapable of protecting the Banks and the Chair persons were both inefficient but also complicit in the frauds, the responsibility goes upto the Finance Ministry under Mr Aurn Jaitely and the Secretaries in the Finance Ministry who have appointed these Chairmen and Directors for their own considerations. While commenting on the Bitcoin issue, I have repeatedly stated that I have doubts on the culture of the Finance Ministry built under the regime of Mr P Chidambaram and urged Mr Arun Jaitely to take suitable corrective action.
Now we need to repeat this request once again for Mr Arun Jaitely to prove his commitment to clean up the Banks by kicking out non functional Directors and replacing them with vigilant, honest individuals of repute who can ask questions of the Chairmen and Board. Many of the Chairmen themselves need to be eased out though in a manner that does not destabilize the system. All independent Directors in PNB and other Banks which have given loans to Nirav Modi, Mehul Chokshi companies must be removed tomorrow and replaced with appropriate persons.
Will Mr Arun Jaitely have the necessary commitment?
Naavi.org has been carrying on a crusade against Bank frauds in the Digital era and discussed many issues in the past. If the authorities had taken some action on these warnings, we would have perhaps not be in the situation we are now in. Some of these warnings were to individual Banks, some to RBI and some to the Government itself. I hope at least now some body will find time to examine how security in Indian Digital Banking industry can be improved with appropriate regulatory action. The ball is the court of Mr Arun Jaitely, the Finance Minister.
For immediate reference some of the past articles are indicated here:
..The list is endless. May be a search page like this will help