Reasoned fraud classification requires independent consideration of defences; reproducing audit observations and show-cause allegations is insufficient.

Reasoned fraud-classification orders under the 2024 Fraud Master Circular must set out the relevant facts, address the noticee's response to the show-cause notice, and explain why defences are rejected. The notes state that an order reproducing forensic audit observations and the show-cause notice, without independent reasoning, is unsustainable. They further state that reinitiating fraud-classification proceedings may be impermissible where the forensic audit identifies no fraudulent transaction during the director's tenure, the individual left before the account became an NPA, and no personal guarantee is established. The stated principle requires an independently reasoned decision rather than reliance on audit material alone.

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Issues: Whether the order classifying the petitioner as fraud complied with the requirement of a reasoned order, and whether the bank could be permitted to recommence fraud-classification proceedings for the relevant review period.

Issue (i): Whether the order classifying the petitioner as fraud complied with the requirement of a reasoned order.

Analysis: Clause 2.1.1.4 of the Fraud Master Circular of 2024 requires the bank to serve a reasoned order setting out the relevant facts and circumstances relied upon, the response to the show-cause notice, and the reasons for classification. The impugned order merely reproduced the forensic auditor's observations and recorded the opportunities afforded to the petitioner, without addressing the petitioner's defences or explaining their rejection. Its contents substantially replicated the show-cause notice before declaring the petitioner as fraud.

Conclusion: The fraud-classification order was wholly unreasoned and unsustainable, in favour of the petitioner.

Issue (ii): Whether the bank could be permitted to recommence fraud-classification proceedings for the review period from 1 April 2014 to 4 December 2018.

Analysis: The forensic audit report attributed no fraudulent transaction to the petitioner during his tenure as director. The petitioner had ceased to be a director before the account became an NPA, and the record did not establish that he had executed a personal guarantee. In these peculiar circumstances, fraud proceedings against him for the review period could not be sustained.

Conclusion: The bank was denied liberty to reinitiate fraud-classification proceedings against the petitioner for the specified review period, in favour of the petitioner.

Final Conclusion: The fraud classification lacks a legally sustainable basis and cannot be revived on the forensic audit material relating to the specified review period.

Ratio Decidendi: A fraud-classification order must independently address the noticee's response and state reasons for rejecting it; a reproduction of the show-cause notice and audit observations does not satisfy the requirement of a reasoned decision.

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