Ref.DBS. FGV(F).BC. No. 6 /23.04.001/2002-2003 Date October 18, 2002

Frauds-Classification and Reporting
Please refer to our letter DBS. FGV(F). BC. No. 10/23.04.001/2000-2001 dated March 22, 2001, forwarding the Master Circular on Frauds-Classification and Reporting. The Master Circular has been suitably updated incorporating subsequent instructions and has also been placed on the web-site of the Reserve Bank of India (www.rbi.org.in).

2. In addition, we have rationalised the reporting requirements/formats. Accordingly, Annexures 1 and 2 of the earlier Master Circular will stand replaced by FMR-1 with immediate effect. Statements in forms at Annexures 3 to 6 of the earlier Master Circular have been discontinued. Statements as per Annexures 7, 8 and 9 will continue with certain modifications as FMR-3, 2 and 4 respectively. Henceforth, banks are, therefore, required to furnish data on frauds/dacoities/robberies in the four returns, viz., FMR-1 to 4.

3. Incidentally, we are in the process of computerising the reporting system on frauds with a view to building up an appropriate MIS in this regard. The necessary computer modules for reporting by banks to the Reserve Bank will be forwarded shortly.

4. Please acknowledge receipt.

Yours faithfully,

(P.V. Subba Rao)
Chief General Manager-in-Charge

Encls: As above

FMR-1: Report on Actual or Suspected Frauds in Banks

FMR-2: Quarterly Report on Frauds Outstanding

FMR-3: Quarterly Progress Report on Large Value Frauds

FMR-4: Report on Dacoities/Robberies/Theft/Burglaries

1.

Introduction

1.

Incidence of frauds, dacoities, robberies, etc., in banks is a matter of concern. While the primary responsibility for preventing frauds lies with banks themselves, the Reserve Bank of India has been advising banks from time to time about the major fraud prone areas and the safeguards necessary for prevention of frauds. The Reserve Bank has also been circulating to banks, the details of frauds of an ingenious nature not reported earlier so that banks could introduce necessary safeguards 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 banks so that banks could exercise caution while dealing with them. To facilitate this ongoing process, it is essential that banks report to the Reserve Bank full information about frauds and the follow-up action taken thereon. Banks may, therefore, adopt the reporting system for frauds as prescribed in the following paragraphs.

2.

It has been observed that frauds are, at times, detected in banks long after their perpetration. The fraud reports are also submitted to the Reserve Bank, many a time, with considerable delay and without the required information. On certain occasions, the Reserve Bank 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 the Reserve Bank.

3.

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 the Reserve Bank failing which banks would be liable for penal action as prescribed under Section 47(A) of the Banking Regulation Act, 1949.

4.

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.

2.

CLASSIFICATION OF FRAUDS

1.

In order to have uniformity in reporting, frauds have been classified as under based mainly on the provisions of the Indian Penal Code:

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.

Unauthorised 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.

2.

Cases of 'negligence and cash shortages' referred to in item (d) above are to be reported as fraud if the intention to cheat/defraud is suspected/proved. Cases of cash shortage up to Rs. 1,000/- reported on the same day by persons handling the cash and where there is no suspicion of fraud, need not be reported as fraud. However, cases of cash shortage involving more than Rs. 1,000/- and those detected by the management/ inspecting officer, irrespective of the amount, may be reported as fraud.

3.

To ensure uniformity and to avoid duplication, frauds involving negotiable instruments may be reported only by the paying banker and not by the collecting banker.

4.

Banks (other than foreign banks) having overseas branches/offices should report all frauds perpetrated at such branches/offices also to the Reserve Bank as per the format and procedure detailed under Paragraph 3 below.

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.

3.

reporting of frauds to reserve bank of india

1.

Frauds involving Rs. 1 lakh and above

1.

Fraud reports should be submitted in all cases of fraud of Rs. 1 lakh and above where banks have been put to loss 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.

2.

Fraud reports should also be submitted in cases where central investigating agencies have initiated criminal proceedings suo motu and/or where the Reserve Bank has directed that they be reported as frauds.

3.

Wherever information is available, banks may also report frauds perpetrated in their subsidiaries and affiliates/joint ventures. Such frauds should, however, not be included in the report on outstanding frauds and the quarterly progress reports referred to in paragraph 4 below.

4.

The fraud reports should be sent to the concerned Regional Office of the Reserve Bank, Department of Banking Supervision, under whose jurisdiction the Head Office of the bank falls, in the format given in FMR-1, within three weeks from the date of detection.

2.

Frauds committed by unscrupulous borrowers

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:

i.

fraudulent discount of instruments or kite flying in clearing effects.

ii.

fraudulent removal of pledged stocks/disposing of hypothecated stocks without the bank’s knowledge/inflating the value of stocks in the stock statement and drawing excess bank finance.

iii.

diversion of funds outside the borrowing units, lack of interest or criminal neglect on the part of borrowers, their partners, etc. and also due to managerial failure leading to the unit becoming sick and due to laxity in effective supervision over the operations in borrowal accounts on the part of the bank functionaries rendering the advance difficult of recovery.

2.

In respect of frauds in borrowal accounts involving an amount of Rs. 5 lakh and above, additional information as prescribed under Part B of FMR-1 may also be furnished. In such cases, a copy of the above fraud report should also be forwarded separately to the Central Office of the Reserve Bank, Department of Banking Supervision.

3.

Frauds involving Rs. 100 lakh and above

1.

In respect of frauds involving Rs. 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 Chief General Manager in charge of the Department of Banking Supervision, Reserve Bank of India, Central Office, 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.

2.

A copy each of the fraud report should also be sent directly to the Central Office of the Reserve Bank, Department of Banking Supervision, and to the Regional Office of the Reserve Bank under whose jurisdiction the bank’s branch, where the fraud has been perpetrated, is functioning.

4.

Cases of attempted fraud

Cases of attempted fraud, where the likely loss would have been Rs. 100 lakh or more, if the fraud had taken place, should be reported to the Central Office of the Reserve Bank, Department of Banking Supervision, indicating the modus operandi and how the fraud was detected. Such cases should not be included in the other returns to be submitted to the Reserve Bank.

4.

Quarterly returns

1.

Report on Frauds Outstanding

1.

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. Banks which may not be having any fraud outstanding as at the end of a quarter should submit a nil report.

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.

3.

Banks should furnish a certificate, as part of the above report, to the effect that all individual fraud cases of Rs. 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.

2.

Progress Report on Large Value Frauds

1.

Banks should furnish case-wise quarterly progress reports on frauds involving Rs. 100 lakh and above in the format given in FMR-3 directly to the Central Office of the Reserve Bank, Department of Banking Supervision, within 15 days of the end of the quarter to which it relates.

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.

3.

Banks which do not have any fraud involving Rs. 100 lakh and above outstanding may submit a nil report.

5.

reports to the board

1.

Reporting of Frauds

1.

Banks should ensure that all frauds of Rs. 1 lakh and above are reported to their Boards promptly on their detection.

2.

Such reports should, among other things, take note of the failure on the part of the concerned branch officials and controlling authorities, and consider initiation of appropriate action against the officials responsible for the fraud.

2.

Quarterly Review of Frauds

1.

Information relating to frauds for the quarters ending March, June and September may be placed before the Board of Directors/Executive Committee/Local Advisory Board 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 the Reserve Bank.

2.

These should be accompanied by supplementary material analysing statistical information and details of each fraud so that the Board/Committee/Local Advisory Board would have adequate material to contribute effectively in regard to the punitive or preventive aspects of frauds.

3.

A separate review for the quarter ending December is not required in view of the Annual Review for the year-ending December prescribed below.

3.

Annual Review of Frauds

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 December may be put up to the Board before the end of March the following year. Such review notes may be preserved for verification by the Reserve Bank’s inspecting officers.

2.

The main aspects which may be taken into account while making such a review may include the following:

a.

Whether the systems in the bank are adequate to detect frauds, once they have taken place, within the shortest possible time.

b.

Whether frauds are examined from staff angle and, wherever necessary, the cases are reported to the Vigilance Cell for further action in the case of public sector banks.

c.

Whether deterrent punishment is meted out, wherever warranted, to the persons found responsible.

d.

Whether frauds have taken place because of laxity in following the systems and procedures and, if so, whether effective action has been taken to ensure that the systems and procedures are scrupulously followed by the staff concerned.

e.

Whether frauds are reported to local Police or CBI, as the case may be, for investigation, as per the guidelines issued in this regard to public sector banks by Government of India.

3.

The annual reviews should also, among other things, include the following details:

a.

Total number of frauds detected during the year and the amount involved as compared to the previous two years.

b.

Analysis of frauds according to different categories detailed in Paragraph 2.1 and also the different business areas indicated in the Quarterly Report on Frauds Outstanding (vide FMR-2).

c.

Modus operandi of major frauds reported during the year along with their present position.

d.

Detailed analyses of frauds of Rs. 1 lakh and above.

e.

Estimated loss to the bank during the year on account of frauds, amount recovered and provisions made.

f.

Number of cases (with amounts) where staff are involved and the action taken against staff.

g.

Region-wise/Zone-wise/State-wise break-up of frauds and amount involved.

h.

Time taken to detect frauds (number of cases detected within three months, six months and one year of their taking place).

i.

Position with regard to frauds reported to CBI/Police.

j.

Number of frauds where final action has been taken by the bank and cases disposed.

k.

Preventive/punitive steps taken by the bank during the year to reduce/minimise the incidence of frauds.

6.

Guidelines for reporting frauds to Police/CBI

1.

Private sector banks 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:

i.

Cases of fraud involving an amount of Rs. 1 lakh and above, committed by outsiders on their own and/or with the connivance of bank staff/officers.

ii.

Cases of fraud committed by bank employees, when it involves bank funds exceeding Rs. 10,000/-.

2.

Public sector banks should note that, as a general rule, all the cases of fraud, whether committed by outsiders on their own or with the connivance of bank officials and cases of fraud committed by bank officials themselves, should invariably be reported to the investigating agencies or criminal cases filed with Courts where appropriate, immediately after the bank has concluded that a fraud has been perpetrated.

7.

Reporting Cases of Theft, Burglary, Dacoity and Bank Robberies

1.

Banks should arrange to report instances of bank robberies, dacoities, thefts and burglaries to the following authorities immediately on their occurrence by fax/telegram. The report should include details of modus operandi and other information as at columns 1 to 10 of FMR-4.

a.

Reserve Bank of India, Department of Banking Supervision, Central Office, Mumbai.

b.

The concerned Regional Office of the Department of Banking Supervision, Reserve Bank of India, under whose jurisdiction the affected bank branch is located.

c.

The Security Adviser, Central Security Cell, Reserve Bank of India, Central Office Building, Mumbai-400001.

d.

Ministry of Finance, Department of Economic Affairs, (Banking Division), Government of India, New Delhi.

2.

Banks should also submit to the Reserve Bank, Department of Banking Supervision, Central Office, a quarterly consolidated statement in the format given in FMR-4 covering all cases pertaining to the quarter. This may be submitted within 15 days of the end of the quarter to which it relates.

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.

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