BANK FRAUDS

A sound banking system should possess three basic characteristics to protect depositor's interest and public faith namely a fraud free culture, a time tested Best Practice Code, and an in house immediate grievance remedial system.[1]The financial sector, including Banking, Insurance and Stock Market is more prone to frauds.[2] RBI has laid down policy norms on “Fraud- Classification and Reporting”. RBI issues the master circular on frauds after making revisions on old circular. Delay in reporting of frauds and the consequent delay in alerting other banks about the modus operandi and issue of caution advices against unscrupulous borrowers could result in similar frauds being perpetrated elsewhere.

 

On the basis of advice of Central Vigilance Commission and Central Bureau of Investigation, banks were advised in January 2004 to constitute a Special Committee of the Board for monitoring and follow up of large value frauds involving amounts of Rs 1.00 crores and above.

Timely reporting of frauds to RBI and updating quarterly and annually RBI and the Board of the Bank about the Fraud Outstanding is must for all prescribed financial institutions. The Banks must report in the standardized format within the time frame.

 

On August 16, 2002, Know Your Customer (KYC) guidelines relating to identification of depositors were issued.

 

A software package on 'Frauds Reporting and Monitoring System' was supplied to banks in June 2003 and subsequent revisions carried out in the above package were advised to banks.

 

The latest circulars dated 25 July 2006 and dated 27 July 2006 have been issued for all Commercial Banks (excluding RRBs), and Financial Institutions; and for Primary (Urban) Co-operative Banks respectively. [3]

 

The Banks must share information about account-holders who have committed frauds and try to trace them with help of each other.

 

On 16^th September, 2009, the banks have been directed toimmediately put in place an adequately enabled and efficient ‘internal oversight framework’ that can prevent the wrongdoings and take the punitive measures against the wrongdoers.

From the operational point of view, banks may take certain measures as: The operating unit should own specialized fraud monitoring, investigation and follow up function for large value frauds or frauds which occur across the bank. The function will have to be, therefore, discharged in a centralized manner instead of leaving it to the Regional Office where such specialization may not be available. Fraud investigation requires competence in ‘forensic audit’ and also technical / transactional expertise. In this regard, banks may take immediate steps to identify staff with proper aptitude and provide necessary training to them in forensic audit so that only such skilled staff is deployed for investigation of large value frauds. The banks may build up a data / information pool of large value frauds and analyze them periodically which may act as knowledge repository for policy responses. Detection of serious irregularities with systemic and system-wide implications, as also post facto “Fraud Investigation”, gathering of information / data / evidences and creation of credible records that are useful for internal management action or legal prosecution against the wrong doers require typical skills.

 

Banks should submit a copy each of the Quarterly Report on Frauds Outstanding in the format given in FMR - 2 to the Central Office and the Regional Office of the Reserve Bank under whose jurisdiction the Head Office of the bank falls within 15 days of the end of the quarter to which it relates. Fraud cases closed during the quarter are required to be reported in quarterly return FMR 3 and cross checked with relevant column in FMR-2 return before sending to RBI.

Banks should furnish case-wise quarterly progress reports on frauds involving Rs. 1.00 lakh and above in the format given in FMR - 3 to the Central Office of RBI, Department of Banking Supervision as well as the concerned Regional Office of the Department of Banking Supervision under whose jurisdiction the bank’s Head Office is situated, within 15 days of the end of the quarter to which they relate.

Banks should ensure that all frauds of Rs. 1.00 lakh and above are reported to their Boards promptly on their detection.

Information relating to frauds for the quarters ending March, June and September may be placed before the Audit Committeeof theBoard of Directors during the month following the quarter to which it pertains, irrespective of whether or not these are required to be placed before the Board/Management Committee in terms of the Calendar of Reviews prescribed by RBI.

Banks should conduct an annual review of the frauds and place a note before the Board of Directors/Local Advisory Board for information. The reviews for the year-ended December may be put up to the Board before the end of March the following year. Such reviews need not be sent to RBI. These may be preserved for verification by the Reserve Bank’s inspecting officers.

To control occurrence of bank frauds, it is necessary on the part of Banks to follow guidelines of RBI in employing employees, dealing with customers and timely reporting the appropriate authorities.

 

 

 

 

 

 

 

 

 

 

 

 

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