13-May-19

Frauds in Banks CA Lokesh Gupta

FRAUD FRAUDS

Frauds and more so, financial frauds have been in existence for a
very long time.

Kautilya, in his famous treatise “Arthashastra” penned down around

300 BC described forty ways of embezzlement, which when
analysed will show that very little has changed over such a long
period in the basics of fraud.

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CA Lokesh Gupta CA Lokesh Gupta

DEFINITION OF FRAUD FRAUD

‘A deliberate act of omission or commission by any person,

carried out in the course of a banking transaction or in the
books of accounts maintained manually or under computer
system in banks, resulting into wrongful gain to any person
for a temporary period or otherwise, with or without any
monetary loss to the bank’.
According to the 2013 Norton Report,India ranks among
the top 5 countries in terms of number of cybercrime
incidents such as ransomware,
ransomware, identity theft and phishing
attacks.
attacks.

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CLASSIFICATION OF FRAUDS
(based on IPC)
COVERAGE OF REPORTING
d)
b)
Negligence and cash
(a) Fraudulent e)
shortages if intention  Banks (other than foreign banks) having overseas
Misappropr encashment Cheating f) to cheat/defraud is
through forged and
iation and
instruments, forgery.
Fraudulent suspected/proved. branches/offices should report all frauds perpetrated
criminal transactions in or
breach of manipulation foreign Cash shortage >
at such branches/offices also to RBI.
of books of c) exchange
trust. Rs.10000/-(including
account or Unauthoris transactions.
ed credit ATMs)
through
fictitious facilities or  Banks may also report frauds perpetrated in their
extended Cash shortage >
accounts and
for reward Rs.5,000/- if subsidiaries and affiliates/joint ventures in FMR
conversion of
property. or for detected by format in hard copy only, but where the
illegal management /
gratificatio auditor/ inspecting subsidiary/affiliate/JV are not required independently
officer and not
n.
reported on the day
to report Frauds to RBI.
g)
Any other type of fraud not coming under the specific heads as of occurrence by the
above such as where Central Investigating agencies have persons handling
initiated criminal proceedings cash.
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CA Lokesh Gupta CA Lokesh Gupta

SOFTWARE PACKAGE AND CFR

FILING OF FMR 1
 Banks shall send the Fraud Monitoring Returns 1
(FMR) through the XBRL system.

 Banks should specifically nominate an official of the Soft copy

rank of General Manager who will be responsible for within RBI electronically
submitting all the returns referred to in this circular. three using FMR
Any amount
weeks of involved application in
 Central Fraud Registry (CFR) has been created with detection XBRL system.
effect from January 20, 2016. It is a web-based and of fraud
searchable database.

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CA Lokesh Gupta
HARD COPY OF FMR
 Requirement withdrawn wef 21.Jan.2016
(RBI circular 295 dated 21.01.2016)
 Instead a monthly certificate for submission of all
frauds, should be submitted to CFMC, Bengaluru with a
copy to the respective Senior Supervisory Manager
(SSM) of the bank within 7 days from the end of the
month.
 Fraud reporting is also required where central
investigating agencies have initiated criminal
proceedings suo moto and / or where RBI directs for any
case to be reported as a fraud.
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CA Lokesh Gupta
REPORTING ON UPDATES
 Banks are also required to furnish
developments in the fraud case through the
FMR Update Application supplied to them in
XBRL system.
 FMR returns should be filled completely,
accurately and up-to-date. If any data is not
available at time of first reporting, the banks
have to collect the data and report the details
invariably through FMR Update Application.
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CA Lokesh Gupta
FRAUDS OF RS.
RS. 5 CRORE AND ABOVE
In addition to normal requirements
within a week of fraud
D.O. letter addressed to
1. Chief General Manager-In-charge/PCGM, Department
of Banking Supervision, RBI, Central Office.
2. CFMC, Bengaluru
Details of amount, nature, modus operandi, name of
parties, officials, branch details and lodging of
compliant with police/CBI.
CA Lokesh Gupta
TIMELY REPORTING OF FRAUDS
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 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. Bank must also fix staff accountability in
respect of delays in reporting fraud cases to RBI.
Further Cir no.35 dated 14.05.2015 provides that 100%
provisioning to be done over a period not exceeding 4 Qtrs
commencing from quarter in which fraud has been detected but
in case of delay in reporting of fraud, entire provision is to be
made at once.
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TIMELY REPORTING OF FRAUDS
Delay, for the purpose of this circular, would mean that the
fraud was not flashed to CFMC, RBI or reported on the
CRILC platform, RBI within a period of one week from its
(i) classification as a fraud through the RFA route which
has a maximum time line of six months or
(ii) detection/declaration as a fraud ab initio by the bank
as hitherto
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REPORTING OF FRAUDS BY AUDITORS
 To specifically report, simultaneously, to the Chief Executive
Officer of the bank and Central Office of the Department of
Banking Supervision, RBI, Mumbai, any matter susceptible
to be fraud or fraudulent activity or any foul play in any
transactions. Any deliberate failure on the part of the
auditor render himself liable for action.
 Only instances of fraud or fraudulent activity where the
amount involved is Rs.100 lakhs or above should be
reported to the Reserve Bank of India, DBS, Central
Office, Mumbai and all other instance should be reported to
Regional Office of RBI,DBS under whose jurisdiction the
Head Office of the bank falls.
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CASES OF ATTEMPTED FRAUDS
 Banks need not report cases of attempted
frauds of ₹10 million and above to Reserve
Bank of India. However, banks should continue
to place the report on individual cases of
attempted fraud involving an amount of ₹10
million and above before the Audit Committee
of its Board.
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CA Lokesh Gupta
CLOSURE OF FRAUD CASES
Banks should report to CFMC, RBI and SSM of RBI, the fraud cases of Rs.1 lakh and
above closed alongwith reasons for closure after tseeking prior approval from the
SSM and after the following process:
i. The fraud cases pending with CBI/Police/Court are finally disposed of.
ii. The examination of staff accountability has been completed
iii. The amount of fraud has been recovered or written off.
iv. Insurance claim wherever applicable has been settled.
v. The bank has reviewed the systems and procedures, identified as the
causative factors and plugged the lacunae and the fact of which has been
certified by the appropriate authority (Board / Audit Committee of the Board)
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CLOSURE FOR LIMITED STATISTICAL /

REPORTING PURPOSES
Banks are allowed, for limited statistical/
reporting purposes, to close those fraud cases
involving amounts upto Rs.25.00 lakh, where:
REPORTING FRAUDS TO POLICE/CBI
 Private sector banks (including foreign banks operating
in India) should report 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) b)  In dealing with cases of fraud/embezzlement, banks

The investigation is on or
challan/ charge sheet not
filed in the Court for more
than three years from the date
of filing of First Information
Report (FIR) by the CBI/Police.
The trial in the courts, after
filing of charge sheet /
challan by CBI / Police, has
not started, or is in
progress.
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

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REPORTING FRAUDS TO STATE POLICE – REPORTING FRAUDS TO CBI-

CBI-PSB
PRIVATE/FOREIGN BANKS
Public Sector Banks to report fraud cases
of Rs. 3 Crore and above to CBI (c) More than Rs.50
crore-Joint Director
Cases of Rs 1 (Policy) CBI, HQ, New
Cases of fraud Delhi
crore and above
involving an should also be
amount of Rs. (a)
Cases of fraud reported to the
1.00 lakh and Cases involving Rs. 3 crore
committed by Serious Fraud (b) All cases involving more than
above, committed and above upto Rs. 25
bank employees, Investigation Rs.25 crore to 50 crore – Banking
by outsiders on crore
when fraud is for Office Security and Fraud Cell(BSFC) of CBI.
their own and/or Rs.10,000/- and (SFIO), Ministry of
with the
above. Corporate
connivance of
Affairs, GOI, New Where staff
bank Where staff involvement
Delhi 110 003 in involvement is prima
staff/officers. is prima facie not
FMR-1 Format. facie evident – CBI
evident – CBI (Economic
(Anti Corruption
Offences Wing)
Branch)

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REPORT FRAUD CASES TO POLICE-PSB THEFT, BURGLARY, DACOITY AND BANK ROBBERIES

Public Sector Banks to report fraud cases of below Rs. 3 crore to local police  Banks to report by fax / e-mail instances of bank robberies,
dacoities, thefts and burglaries, immediately on their
occurrence. Report should include details of modus operandi
and other information, as required.
Fraud amount < a) CFMC, Bengaluru
Cases of frauds of
Rs.10,000/-
Rs.1.00 lakh and Rs.10,000 and involving bank officials, to b) SSM under whose jurisdiction the Head Office of the bank falls.
above, should be above> Fraud be referred to Regional
reported by the amount < Rs.1 Head of the bank, who
Regional Head of the Lakh would scrutinize each c) RO of DBS under whose jurisdiction the affected bank branch is located.
bank concerned to Report to local case and direct the bank
State CID/Economic police station by branch concerned on
Offences Wing of the the bank branch d) The Security Adviser, Central Security Cell, RBI, Central Office Building, Mumbai
whether it should be
State concerned. concerned. reported.
e) Ministry of Finance, Department of Financial Services Government of India,
Jeevan Deep, Parliament Street, New Delhi.-110001

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CA Lokesh Gupta CA Lokesh Gupta

QUARTERLY REPORT OF THEFT,

THEFT, BURGLARY,
CHEQUE RELATED FRAUDS
DACOITY AND BANK ROBBERIES
I. Use of 100% CTS - 2010 compliant cheques.

 Banks should also submit to the RBI, through
application supplied in XBRL system a quarterly
consolidated statement covering all cases pertaining
to the quarter.
II. Strengthening the infrastructure at the cheque handling Service Branches and
bestowing special attention on the quality of equipment and personnel posted
for CTS based clearing, so that it is not merely a mechanical process.
III. Ensuring that the beneficiary is KYC compliant so that the bank has recourse to
him/her as long as he/she remains a customer of the bank.

IV. Examination under UV lamp for all cheques beyond a threshold of say, ₹0.2
million.
within 15 days of the end of the quarter to which it
V. Checking at multiple levels, of cheques above a threshold of say, ₹0.5 million.
relates.
VI. Close monitoring of credits and debits in newly opened transaction accounts
based on risk categorization.

VII. Sending an SMS alert to payer/drawer when cheques are received in clearing.

I. Customer calling and confirmation from the payer/drawer and contacting base
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EXCEPTIONS WHERE COLLECTING BANK HAVE

FRAUDS INVOLVING FORGED INSTRUMENTS TO FILE FRAUD REPORT/POLICE COMPLAINT
 to be reported and police complaint only by the
Paying Banker and not by the Collecting banker.
EXCEPTIONS In case of collection of
If instrument is instrument where the
(Exceptions are covered in next slide) genuine but the amount has been
amount is collected credited before
 Altered / fake cheques involving two or more branches of fraudulently by a realisation and
the same bank person who is not the subsequently the
true owner, the instrument is found to
Reporting/Filing police complaint by the branch where the
collecting bank, which be fake/forged and
altered/fake cheque has been encashed/released the
is defrauded returned by the paying
payment to its Head Office.
bank

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CA Lokesh Gupta CA Lokesh Gupta

HANDING OVER OF EVIDENCE FRAMEWORK FOR LOAN FRAUDS

 Frauds due to fake/forged instruments sent in
clearing,
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
(RBI/2014-15/590 DATED MAY 7, 2015)
Applicable if exposure of Rs.50 Crore or more at level
of a bank.
 Red Flagged Account (RFA)
A RFA is one where a suspicion of fraudulent activity
is thrown up by the presence of one or more Early
Warning Signals (EWS). These signals in a loan
account should immediately put the bank on alert
regarding a weakness or wrong doing which may
ultimately turn out to be fraudulent.

Any account classified as RFA or ‘Frauds’ must also

be reported on the CRILC data platform.
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FRAMEWORK FOR LOAN FRAUDS
(RBI/2014-15/590 DATED MAY 7, 2015)
Fraud Monitoring Group (FMG) should report the
details of loan accounts of Rs.50 crore and above in
which EWS are observed, together with the decision
to classify them as RFAs or otherwise to the
CMD/CEO every month.
Role of Auditors:
Auditors: During the course of the audit,
auditors may come across instances where the
transactions in the account or the documents point
to the possibility of fraudulent transactions in the
account.
account. In such a situation, the auditor may
immediately bring it to the notice of the top
management and if necessary to the Audit
Committee of the Board (ACB) for appropriate action.
action.
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CA Lokesh Gupta
LEGAL AUDIT OF TITLE DOCUMENTS
Banks should subject the title deeds and other
documents in respect of all credit exposures
of Rs.5 crore and above to periodic legal
audit and re-verification of title deeds with
relevant authorities as part of regular audit
exercise till the loan stands fully repaid.
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PENAL MEASURES FOR FRAUDULENT
BORROWERS
In particular, borrowers who have defaulted and have
committed a fraud, would be debarred from availing
finance from Scheduled Banks, Development Financial
Institutions, Government owned NBFCs, Investment
Institutions, etc., for a period of 5 years from the date of
full payment of the defrauded amount.
No restructuring or grant of additional facilities may be
made in the case of RFA or fraud accounts.
However, in cases of fraud/malfeasance where the
existing promoters are replaced by new promoters and
the borrower company is totally delinked from such
erstwhile promoters/management, banks and JLF may
take a view on restructuring of such accounts based on
their viability, without prejudice to the continuance of
criminal action against the erstwhile
promoters/management.
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