REPORTING OF FRAUDS TO RESERVE BANK OF INDIA

3.1 Frauds involving Rs. 1 lakh and above

3.1.1 Fraud reports should be submitted in all cases of fraud of Rs. 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 they be
reported as frauds.
3.1.3 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.
3.1.4 The fraud reports in soft copy format involving all categories of
frauds and hard copy format involving frauds of Rs. 5 lakh and
above should be sent to the Central Office (CO) as also the
concerned Regional Office of RBI, 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. However, fraud reports in hard copy format
involving frauds of Rs. 1.00 lakh and above and less than Rs.
5.00 lakh should be sent to the concerned Regional Office of RBI,
Department of Banking Supervision only.

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:
(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 statements 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 to recover.

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 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 frauds. Banks are advised report to Indian
Banks Association (IBA) the details of such third parties involved in
frauds.
Before reporting to IBA, banks have to satisfy themselves of the
involvement of third parties concerned and also provide them with an
opportunity of being heard. In this regard the banks should follow formal
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.

3.3 Frauds involving Rs. 100.00 lakh and above

In respect of frauds involving Rs. 100 lakh and above, in addition to the
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 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, RBI,
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. A copy of
the D.O. letter should also be endorsed to the Regional Office of RBI
under whose jurisdiction the bank's branch, where the fraud has been
perpetrated, is functioning.

3.4 Cases of attempted fraud

Cases of attempted fraud, where the likely loss would have
been Rs. 1.00 crore or more had the fraud taken place,
should be reported by the bank to the Fraud Monitoring Cell,
Department of Banking Supervision, Reserve Bank of India,
Central Office, Mumbai within two weeks of the bank coming
to know that the attempt to defraud the bank failed or was
foiled. The report should cover the following:
• The modus operandi of the attempted fraud.
• New systems and controls put in place in the area where fraud was
attempted.
Reports on such attempted frauds should be placed before the Audit
Committee of the Board.
Such cases should not be included in the other returns to be submitted
to RBI.