Frauds - Classification and Reporting - RBI - Reserve Bank of India
Frauds - Classification and Reporting
RBI/2014-15/85 July 01, 2014 The Chairmen & Chief Executive Officers of all Dear Sir, Frauds – Classification and ReportingPlease refer to our letter DBS.FrMC.BC.No.1 /23.04.001/2013-14 dated July 01, 2013 forwarding the Master Circular on 'Frauds – Classification and Reporting'. It may be noted that the Master Circular consolidates and updates all the instructions issued during the year since the date of the last Master Circular dated July 01, 2013. The Master Circular has been updated as on June 30, 2014 and has been placed on the web-site of the Reserve Bank of India (www.rbi.org.in). Yours faithfully (Manoj Sharma)
1.1 Incidence of frauds, dacoities, robberies, etc., in banks is a matter of concern. While the primary responsibility of preventing frauds lies with banks themselves, Reserve Bank of India (RBI) has been advising them from time to time about the major fraud prone areas and the safeguards necessary for prevention of frauds. RBI has also been circulating to banks, the details of frauds of an ingenious nature, not reported earlier so that banks could introduce necessary safeguards / preventive measures by way of appropriate procedures and internal checks. Banks are also being advised about the details of unscrupulous borrowers and related parties who have perpetrated frauds on other banks so that they could exercise caution while dealing with them. To facilitate this ongoing process, it is essential that banks report to RBI complete information about frauds and the follow-up action taken thereon. Banks may, therefore, adopt the reporting system for frauds as prescribed in following paragraphs. 1.2 The Chairmen and Managing Directors(CMD)/Chief Executive Officers (CEOs) of banks must provide focus on the "Fraud Prevention and Management Function" to enable, among others, effective investigation of fraud cases and prompt as well as accurate reporting to appropriate regulatory and law enforcement authorities including Reserve Bank of India. 1.3 The fraud risk management, fraud monitoring and fraud investigation function must be owned by the bank's CEO, Audit Committee of the Board and the Special Committee of the Board, at least in respect of large value frauds. 1.4 Banks may, with the approval of their respective Boards, frame internal policy for fraud risk management and fraud investigation function, based on the governance standards relating to the ownership of the function and accountability for malfunctioning of the fraud risk management process in their banks. The broad governance framework driven by the above standard for ownership and accountability may rest on defined and dedicated organizational set up and operating processes. 1.5 A reference is invited to paragraph 5.2.4, as regards reporting of frauds involving ` 100 lakh and above to Special Committee of the Board. 1.6 It has been observed that frauds are, at times, detected in banks long after their perpetration. Sometimes, fraud reports are also submitted to RBI with considerable delay and without complete information. On some occasions, RBI comes to know about frauds involving large amounts only through press reports. Banks should, therefore, ensure that the reporting system is suitably streamlined so that frauds are reported without any delay. Banks must fix staff accountability in respect of delays in reporting fraud cases to RBI. 1.7 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. Banks may, therefore, strictly adhere to the timeframe fixed in this circular for reporting fraud cases to RBI failing which they would be liable for penal action prescribed under Section 47(A) of the Banking Regulation Act, 1949. 1.8 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 vide RBI Circular DBS.FGV (F) No. 8897/23.10.001/2005-06 dated December 20, 2005. Banks are required to send the FMR returns and data, as prescribed, in soft copy only (except in case of FMR-1 return pertaining to fraud cases involving amount of ` 1 lakh and above which is required to be submitted both in hard and soft copies) to RBI, Central Office as well as the concerned Regional Office of the Department of Banking Supervision/Senior Supervisory Manager (SSM) (29 banks listed in the Annex) at Central Office under whose jurisdiction the bank's Head Office/branch is situated as per the reporting requirements specified in Para 3.1.4 below. 1.9 Banks should specifically nominate an official of the rank of General Manager who will be responsible for submitting all the returns referred to in this circular. 1.10 Central Fraud Monitoring Cell, Department of Banking Supervision, Central Office located at Bengaluru will publish a directory of officers of all banks/Financial Institutions (FI) responsible for reporting of Frauds etc All banks/Financial Institutions should furnish to Department of Banking Supervision, Central Fraud Monitoring Cell, Bengaluru any changes in the names of officials that will be necessary for inclusion in the directory on priority basis as and when called for. 2.1 In order to have uniformity in reporting, frauds have been classified as under, based mainly on the provisions of the Indian Penal Code:
2.2 Cases of 'negligence and cash shortages' and ‘irregularities in foreign exchange transactions’ referred to in items (d) and (f) above are to be reported as fraud if the intention to cheat/defraud is suspected/ proved. However, the following cases where fraudulent intention is not suspected/proved at the time of detection will be treated as fraud and reported accordingly:
2.3 To ensure uniformity and to avoid duplication, frauds involving forged instruments may be reported only by the paying banker and not by the collecting banker. However, in the case of collection of an instrument which is genuine but the amount is collected fraudulently by a person who is not the true owner, the collecting bank, which is defrauded, will have to file fraud report with the RBI. In case of collection of instrument where the amount has been credited before realisation and subsequently the instrument is found to be fake/forged and returned by the paying bank, it is the collecting bank that has to file FMR-1 with the RBI as the collecting bank is at loss by parting the amount before realisation of the instrument. 2.3.1 The reporting of fraud in respect of truncated instruments will continue to be done to Central Fraud Monitoring Cell of Department of Banking Supervision at Bengaluru as well as the concerned Regional Office of the Department of Banking Supervision/SSM under whose jurisdiction the bank's Head Office/branch is situated by the paying banks as hitherto. In cases of frauds due to fake/forged instruments sent in clearing, the presenting bank will be required to immediately hand over the underlying instrument to drawee/paying bank as and when demanded to enable it to file an FIR with the police authorities and report the fraud to RBI. 2.4 Encashment of altered / fake cheques involving two or more branches of the same bank 2.4.1 In case of collection of altered/fake cheque involving two or more branches of the same bank, the branch where the altered/fake cheque has been encashed, should report the fraud to its Head Office . Thereafter, Head Office of the bank will file the fraud report with RBI. 2.4.2 In the event of an altered/fake cheque having been paid/encashed involving two or more branches of a bank under Core Banking Solution (CBS), there could be a possibility of dispute/difference of opinion as to whether the branch where the drawer of the cheque maintains the account or the branch where the encashment has taken place should report the matter to the Head Office of the bank. In such cases also the branch which has released the payment against an altered / fake cheque should report the fraud to the Head Office. Thereafter, Head Office of the bank will file the fraud report with RBI. 2.5 Cases of theft, burglary, dacoity and robbery should not be reported as fraud. Such cases may be reported separately as detailed in paragraph 7. 2.6 Banks (other than foreign banks) having overseas branches/offices should report all frauds perpetrated at such branches/offices also to RBI as per the format and procedure detailed under Paragraph 3 below. 3. REPORTING OF FRAUDS TO RESERVE BANK OF INDIA Banks need not furnish FMR-1 return in fraud cases involving amount below ` 1 lakh to RBI in either hard or soft copy. However, banks at their end should make the data entry in respect of such cases through the FRMS package individually in FMR-1 format (less than ` 1 lakh) which will get automatically captured in FMR-2 return and will form part of the consolidated database relating to frauds for the respective bank. 3.1 Frauds involving ` 1 lakh and above 3.1.1 Fraud reports should be submitted in all cases of fraud of ` 1 lakh and above perpetrated through misrepresentation, breach of trust, manipulation of books of account, fraudulent encashment of instruments like cheques, drafts and bills of exchange, unauthorised handling of securities charged to the bank, misfeasance, embezzlement, misappropriation of funds, conversion of property, cheating, shortages, irregularities, etc. 3.1.2 Fraud reports should also be submitted in cases where central investigating agencies have initiated criminal proceedings suo motto and/or where the Reserve Bank has directed that such cases be reported as frauds. 3.1.3 Banks may also report frauds perpetrated in their subsidiaries and affiliates/joint ventures in FMR -1 format in hard copy only. Such frauds should, however, not be included in the report on outstanding frauds and the quarterly progress reports referred to in paragraph 4 below. Such frauds will not be entered in the FRMS package at any stage. Further, in terms of circular DBS.FrMC.BC.No.6/23.04.001/2012-13 dated May 23, 2013, in case the subsidiary/ affiliates/joint ventures of the bank is an entity which is regulated by Reserve Bank of India and is independently required to report the cases of fraud to RBI in terms of guidelines applicable to that subsidiary/affiliate/joint venture, the parent bank need not furnish the hard copy of the FMR-1 statement in respect of fraud cases detected at such subsidiary/affiliate/joint venture. 3.1.4 Soft copy of the reports on frauds in FMR formats in respect of fraud cases involving amount of ` 1 lakh and above should be submitted to the Central Office of the Department of Banking Supervision (DBS) i.e. Central Fraud Monitoring Cell located at Bengaluru as well as to Regional Office (RO) of DBS/SSM under whose jurisdiction the Head office of the bank falls within three weeks of detection of fraud. Reporting of fraud cases in hard copies to RBI will be as under:- a) Fraud cases involving an amount more than ` 1 lakh and upto ` 50 lakh
Note: - In case the bank falls under the supervisory purview of Senior Supervisory Manager (SSM) (29 banks listed in the Annex.), the reporting is to be done to Reserve Bank of India, Senior Supervisory Manager (SSM), Department of Banking Supervision, Central office, 4th Floor, Centre 1, World Trade Centre, Cuffe Parade Mumbai-400005 or to the respective RBI office where the SSM is located instead of R.O under whose jurisdiction the Head Office of the bank where the fraud has taken place is located. b) Fraud cases involving an amount of ` 50 lakh and above.
3.1.5 It is observed while scrutinizing FMR 1 returns from the banks, that certain vital fields in the returns are left blank. As the complete particulars on frauds perpetrated in the banks are vital for monitoring and supervisory purposes, banks should ensure that the data furnished are complete/accurate and up-to-date. Incidentally, if no data is to be provided in respect of any of the items, or if details of any of the items are not available at the time of reporting of FMR 1 return, the bank may indicate as “no particulars to be reported” or “details not available at present” etc. In such a situation, the banks have to collect the data and report the details invariably through FMR 3 return on quarterly basis. 3.2 Frauds committed by unscrupulous borrowers 3.2.1 It is observed that a large number of frauds are committed by unscrupulous borrowers including companies, partnership firms/proprietary concerns and/or their directors/partners by various methods including the following:
3.2.2 In respect of frauds in borrowal accounts, additional information as prescribed under Part B of FMR – 1 should also be furnished. 3.2.3 Banks should exercise due diligence while appraising the credit needs of unscrupulous borrowers, borrower companies, partnership/ proprietorship concerns and their directors, partners and proprietors, etc. as also their associates who have defrauded the banks. In addition to above borrower- fraudsters, third parties such as builders, warehouse/cold storage owners, motor vehicle/tractor dealers, travel agents, etc. and professionals such as architects, valuers, chartered accountants, advocates, etc. are also to be held accountable if they have played a vital role in credit sanction/disbursement or facilitated the perpetration of frauds. Banks are advised to report to Indian Banks Association (IBA) the details of such third parties involved in frauds as advised vide circular DBS.CO.FrMC.BC.No.3/23.08.001/2008-09 dated March 16, 2009. Before reporting to IBA, banks have to satisfy themselves of the involvement of third parties concerned and also provide themwith an opportunity of being heard. In this regard the banks should follow normal procedures and the processes followed should be suitably recorded. On the basis of such information, IBA would, in turn, prepare caution lists of such third parties for circulation among the banks. 3.2.4.Frauds in borrowal accounts having multiple banking arrangements Certain unscrupulous borrowers enjoying credit facilities under "multiple banking arrangement” after defrauding one of the financing banks, continue to enjoy the facilities with other financing banks and in some cases avail even higher limits at those banks. In certain cases the borrowers use the accounts maintained at other financing banks to siphon off funds by diverting from the bank on which the fraud is being perpetrated. This is due to lack of a formal arrangement for exchange of information among various lending banks/FIs. In some of the fraud cases, the securities offered by the borrowers to different banks are the same. In view of this, all the banks which have financed a borrower under 'multiple banking' arrangement should take co-ordinated action, based on commonly agreed strategy, for legal / criminal actions, follow up for recovery, exchange of details on modus operandi, achieving consistency in data / information on frauds reported to Reserve Bank of India. Therefore, bank which detects a fraud is required to immediately share the details with all other banks in the multiple banking arrangements. 3.2.5 Forensic scrutinies at certain identified banks were conducted by RBI due to occurrence of large value frauds and sharp increase in number of frauds at such banks to primarily identify the policy gaps, if any, and adequacy of controls. During the scrutinies, systemic factors were also sought to be identified. Based on the findings of the scrutinies, the operating framework for tracking frauds and dealing with them were advised to be structured along the tracks of detection and reporting of frauds, corrective action and preventive and punitive action vide our circular dated May 31, 2011. 3.2.6 Banks may ensure to place the copy of the circular on modus-operandi of fraud issued by them for alerting their branches/controlling offices etc., on specific frauds before the Audit Committee of Board (ACB) in its periodical meetings. 3.3 Frauds involving ` 100 lakh and above In respect of frauds involving ` 100 lakh and above, in addition to the requirements given at paragraphs 3.1 and 3.2 above, banks may report the fraud by means of a D.O. letter addressed to the Principal Chief General Manager, Department of Banking Supervision, RBI, Central Office, Mumbai within a week of such frauds coming to the notice of the bank’s Head Office. The letter may contain brief particulars of the fraud such as amount involved, nature of fraud, modus operandi in brief, name of the branch/office, names of parties involved (if they are proprietorship/ partnership concerns or private limited companies, the names of proprietors, partners and directors), names of officials involved, and whether the complaint has been lodged with the Police/CBI. A copy of the D.O. letter should also be endorsed to the Regional Office of RBI/SSM under whose jurisdiction the bank's branch, where the fraud has been perpetrated, is functioning. Banks need not report cases of attempted frauds of ` 1 crore and above to Reserve Bank of India, in terms of circular DBS.FrMC.BC.No.04/ 23.04.001/2012-13 dated November 15, 2012. However, the banks should continue to place the report on individual cases of attempted fraud involving an amount of ` 1 crore and above before the Audit Committee of its Board. The report should cover the following viz.
Further, beginning from the year ended March 31, 2013, a consolidated review of such cases detected during the year containing information such area of operations where such attempts were made, effectiveness of new processes and procedures put in place during the year, trend of such cases during the last three years, need for further change in processes and procedures, if any, etc as on March 31 every year may be put up to the ACB within three months of the end of the relative year. 4.1 Report on Frauds Outstanding 4.1.1 Banks should submit a soft copy of the Quarterly Report on Frauds Outstanding in the format given in FMR – 2 to the Central Fraud Monitoring Cell, Department of Banking Supervision at Bengaluru and the Regional Office of the Department of Banking Supervision/SSM under whose jurisdiction the Head Office of the bank falls within 15 days of the end of the quarter to which it relates. The data should be submitted in soft copy only. Banks which may not be having any fraud outstanding as at the end of a quarter should submit a nil report. 4.1.2 Part - A of the report covers details of frauds outstanding as at the end of the quarter. Parts B and C of the report give category-wise and perpetrator-wise details of frauds reported during the quarter respectively. The total number and amount of fraud cases reported during the quarter as shown in Parts B and C should tally with the totals of columns 4 and 5 in Part – A of the report 4.1.3 Banks should furnish a certificate, as part of the above report, to the effect that all individual fraud cases of ` 1 lakh and above reported to the Reserve Bank in FMR – 1 during the quarter have also been put up to the bank’s Board and have been incorporated in Part – A (columns 4 and 5) and Parts B and C of FMR – 2. 4.1.4 Closure of fraud cases Banks will report to the Central Fraud Monitoring Cell, RBI, Department of Banking Supervision (DBS), Bengaluru and the respective Regional offices of the DBS/SSM, the details of fraud cases of ` 1 lakh and above closed along with reasons for the closure after completing the process as given below. 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 report only such cases as closed where the actions as stated below are complete and prior approval is obtained from the respective Regional Offices of DBS/SSM.
Banks should also pursue vigorously with CBI for final disposal of pending fraud cases especially where the banks have completed staff side action. Similarly, banks may vigorously follow up with the police authorities and/or court for final disposal of fraud cases. Banks are allowed, for limited statistical / reporting purposes, to close those fraud cases involving amounts upto ` 25 lakh, where:
The banks are required to follow the guidelines relating to seeking prior approval for closure of such cases from RO of DBS under whose jurisdiction the Head Office of the bank is located/ SSM and follow up of such cases after closure for limited statistical purpose as enumerated in RBI circular DBS.CO.FrMC BC.NO. 7/ 23.04.001/ 2008-09 dated June 05, 2009. 4.2 Progress Report on Frauds (FMR-3) 4.2.1 Banks should furnish case-wise quarterly progress reports on frauds involving ` 1 lakh and above in the soft copy format given in FMR – 3 to the Central Fraud Monitoring Cell RBI, Department of Banking Supervision as well as the concerned Regional Office of the Department of Banking Supervision/SSM under whose jurisdiction the bank’s Head Office is situated, within 15 days of the end of the quarter to which they relate. 4.2.2 In the case of frauds where there are no developments during a quarter, a list of such cases with a brief description including name of branch and date of reporting may be furnished in Part – B of FMR – 3. 4.2.3 Banks which do not have any fraud involving ` 1 lakh and above outstanding may submit a nil report. 5.1.1 Banks should ensure that all frauds of ` 1 lakh and above are reported to their Boards promptly on their detection. 5.1.2 Such reports should, among other things, take note of the failure on the part of the concerned branch officials and controlling authorities, and initiate appropriate action against the officials responsible for the fraud. 5.2 Quarterly Review of Frauds 5.2.1 As advised vide circular DBS.FrMC.BC.No.5/ 23.04.001/2012-13 dated January 04, 2013 information relating to frauds for the quarters ending June, September and December may be placed before the Audit Committee of the Board 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. 5.2.2 These should be accompanied by supplementary material analysing statistical information and details of each fraud so that the Audit Committee of the Board would have adequate material to contribute effectively in regard to the punitive or preventive aspects of frauds. 5.2.3 A separate review for the quarter ending March is not required in view of the Annual Review for the year-ending March prescribed at para 5.3 below. 5.2.4 Banks are required to constitute a Special Committee for monitoring and follow up of cases of frauds involving amounts of ` 100 lakh and above exclusively, while Audit Committee of the Board (ACB) may continue to monitor all the cases of frauds in general. The Special Committee should consist of CMD in case of public sector banks and MD in case of SBI/its Associates. In case of private sector banks, two members from ACB, two members from Board excluding RBI nominee. 5.2.5 The major functions of the Special Committee would be to monitor and review all the frauds of ` 100 lakh and above so as to:
All the frauds involving an amount of ` 100 lakh and above should be monitored and reviewed by the Special Committee of the Board in case of all Indian commercial banks. The periodicity of the meetings of the Special Committee may be decided according to the number of cases involved. In addition, the Committee should meet and review as and when a fraud involving an amount of ` 100 lakh and above comes to light. 5.2.6 The banks may delineate in a policy document the processes for implementation of the Committee's directions and the document may enable a dedicated outfit of the bank to implement the directions in this regard. 5.3.1 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 March may be put up to the Board before the end of the next quarter i.e. quarter ended June 30th. Such reviews need not be sent to RBI but may be preserved for verification by the Reserve Bank’s inspecting officers. 5.3.2 The main aspects which may be taken into account while making such a review may include the following:
5.3.3 The annual reviews should also, among other things, include the following details:
5.3.4 To align the vigilance function in Private sector and Foreign Banks to that of the Public Sector Banks the existing vigilance functions of a few private sector and foreign banks were mapped with the existing guidelines in the matter and it was observed that the practices vary widely among the banks. The detailed guidelines for private sector and foreign banks were issued on May 26, 2011 to address all issues arising out of lapses in the functioning of the private sector and foreign banks especially relating to corruption, malpractices, frauds etc. for timely and appropriate action. The detailed guidelines are aimed at bringing uniformity and rationalization in the function of internal vigilance. Private sector banks (including foreign banks operating in India) were advised to put in place a system of internal vigilance machinery as per the guidelines. 6. GUIDELINES FOR REPORTING FRAUDS TO POLICE/CBI 6.1 Private sector banks (including foreign banks operating in India) should follow the following guidelines for reporting of frauds such as unauthorised credit facilities extended by the bank for illegal gratification, negligence and cash shortages, cheating, forgery, etc. to the State Police authorities: (a) In dealing with cases of fraud / embezzlement, banks should not merely be actuated by the necessity of recovering expeditiously the amount involved, but should also be motivated by public interest and the need for ensuring that the guilty persons do not go unpunished. (b) Therefore, as a general rule, the following cases should invariably be referred to the State Police:
(c) Fraud cases involving amounts of ` 100 lakh and above should also be reported to the Director, Serious Fraud Investigation Office (SFIO), Ministry of Company Affairs, Government of India. Second Floor, Paryavaran Bhavan, CGO Complex, Lodhi Road, New Delhi 110 003. Details of the fraud are to be reported to SFIO in FMR-1 Format. 6.2 Public sector banks should report fraud cases involving amount of ` 300 lakh and above to CBI and those below ` 300 lakh to local police, as detailed below: Cases to be referred to CBI (a) Cases involving ` 300. lakh and above and upto ` 2500 lakh
(b) All cases involving more than ` 2500 lakh – Banking Security and Fraud Cell of the respective centres, which is specialised cell of the Economic Offences Wing of the CBI for major bank fraud cases. Cases to be referred to Local Police Cases below ` 300 lakh – Local Police.
6.3 Filing of Police complaint in case of fraudulent encashment of DDs/TTs/Pay Orders/Cheques/ Dividend Warrants, etc. 6.3.1 In case of frauds involving forged instruments including those cleared under CTS, the paying banker has to file the police complaint and not the collecting banker. 6.3.2 However, in case of collection of instrument which is genuine but the amount collected fraudulently by a person who is not the owner, the collecting bank which is defrauded has to file a police complaint. 6.3.3 In case of collection of instruments where the amount has been credited before realisation and subsequently the instrument is found to be fake/forged and returned by the paying bank, it is the collecting bank that has to file a police complaint as they are at loss by paying the amount before realisation of the instrument. 6.3.4 In cases of collection of altered/fake cheque involving two or more branches of the same bank, the branch where the altered/fake instrument has been encashed, should file a Police complaint. 6.3.5 In the event of an altered/fake cheque having been paid/encashed involving two or more branches of a bank under CBS, the branch which has released the payment against a fraudulent withdrawal, should file a Police complaint. 7. REPORTING CASES OF THEFT, BURGLARY, DACOITY AND BANK ROBBERIES 7.1 Banks should arrange to report by fax / e-mail instances of bank robberies, dacoities, thefts and burglaries to the following authorities immediately on their occurrence.
The report should include details of modus operandi and other information as at columns 1 to 11 of FMR – 4. 7.2 Banks should also submit to the Reserve Bank, Department of Banking Supervision, Central Fraud Monitoring Cell at Bengaluru as well as the concerned Regional Office of the Reserve Bank/SSM under whose jurisdiction the bank’s Head Office is situated a quarterly consolidated statement in the format given in FMR – 4 (soft copy) covering all cases pertaining to the quarter. This may be submitted within 15 days of the end of the quarter to which it relates. 7.3 Banks which do not have any instances of theft, burglary, dacoity and / or robbery to report during the quarter, may submit a nil report. List of banks under the supervisory purview of Senior Supervisory Managers (SSM):
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