IMPORTANT GUIDELINES ON FRAUD –CLASSIFICATION AND
REPORTING *
01. GUIDELINES
RBI Guidelines on frauds insists, among others, that banks are required
to
introduce necessary safeguards / preventive measures by way of
appropriate
procedures and internal checks so as to prevent/minimize occurrence of
frauds
and resultant financial loss to the banks.
The CEOs of the banks are supposed to provide singular focus on the
"Fraud
Prevention and Management Function" to enable, among others, effective
investigation in fraud cases and prompt as well as accurate reporting of
fraud
cases to appropriate regulatory and law enforcement authorities including
RBI.
Banks are required to frame their internal policy for fraud risk
management and
fraud investigation function with the approval of their respective Boards.
02. CLASSIFICATION OF FRAUDS
Frauds are classified, mainly on the basis of the provisions of Indian Penal
Code
(IPC), as under:-
a) Misappropriation and criminal breach of trust.
b) Fraudulent encashment through forged instruments, manipulation of
books of
account or through fictitious accounts and conversion of property.
c) Unauthorized credit facilities extended for reward or for illegal
gratification.
d) Negligence and cash shortages.
e) Cheating and forgery.
f) Irregularities in foreign exchange transactions.
g) Any other type of fraud not coming under the specific heads as above.
Cases of 'negligence and cash shortages' and ‘irregularities in foreign
exchange
transactions’ (d & f) are to be reported as fraud if the intention to
cheat/defraud
is suspected/ proved.
Cases such as:-
a) Cases of cash shortage more than Rs. 10,000/-, and
b) Cases of cash shortage more than Rs.5,000/- if detected by
management /
auditor/ inspecting officer and not reported on the day of occurrence by
the
persons handling cash.
where fraudulent intention is not suspected/proved at the time of
detection will be
treated as fraud.
Frauds involving forged instruments have be reported only by the
paying
banker whereas collection of a genuine instrument 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.
Collection of an instrument where the amount has been credited before
realization and subsequently the instrument is found to be fake/forged
and
returned by the paying bank, the collecting bank is required to report the
transaction as fraud with the RBI as they are at loss by parting the
amount.
Collection of an altered/fake cheque involving two or more branches of
the same
bank, the branch where the altered/fake cheque has been encashed is
required to report the fraud to its H.O. for further reporting to RBI by the
H.O.
An altered/fake cheque having been paid/encashed involving two or
more
branches of a bank under Core Banking Solution (CBS), the branch which
released the payment is required to report the fraud to its H.O. for further
reporting to RBI.
Cases of theft, burglary, dacoity and robbery are not treated as fraud.
Banks (other than foreign banks) having overseas branches/offices are
required to
report
all frauds perpetrated at such branches/offices to RBI.
03. REPORTING OF FRAUDS TO RBI (FMR-1)
3.1Frauds involving Rs. 1 lakh and above
Fraud including subsidiaries and affiliates/joint ventures 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.
Cases under criminal proceedings initiated by central investigating
agencies suo
motto and/or where RBI has directed to treat as frauds.
For frauds involving Rs. 5 Lakh and above, banks are required to send
Soft copy of
the reports (FMR-1/B) to the Central Office of the Department of Banking
Supervision (DBS) within three weeks of detection of fraud, etc.
a) Frauds committed by unscrupulous borrowers
Such frauds include:-
Fraudulent discount of instruments or kite flying in clearing effects.
Fraudulent removal of pledged stocks/disposing of hypothecated stocks
without
the bank’s knowledge/inflating the value of stocks in the stock statements
and
drawing excess bank finance.
Diversion of funds outside the borrowing units, lack of interest or
criminal neglect
on the part of borrowers, their partners, etc. leading to the unit becoming
sick
as also due to laxity in effective supervision over the operations in
borrowal
accounts on the part of the bank functionaries rendering the advance
difficult
to recover.
Banks are supposed to 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.
Besides the borrower fraudsters, other third parties such as builders,
vehicle/tractor
dealers, warehouse/cold storage owners, etc. and professionals are also to
be held
accountable if they have played a vital role in credit
sanction/disbursement or
facilitated the perpetration frauds. Banks are required to report to Indian
Banks
Association (IBA) the details of such third parties involved in
