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TaxTMI 
Master Directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions
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.....CFMC.BC.No.1/23.04.001/2016-17) dated July 01, 2016 (Updated as on July 03, 2017). Yours faithfully (Rajnish Kumar) Chief General Manager Encl.: as above Annex Master Directions (MD) on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions (AIFIs) CONTENTS INTRODUCTION CHAPTER I 1.1 Short Title and Commencement 1.2 Applicability 1.3. Purpose CHAPTER II 2. Governance Structure in banks for Fraud Risk Management CHAPTER III 3. Early Detection of Frauds - Framework for Early Warning Signals (EWS) and Red Flagging of Accounts (RFA) CHAPTER IV 4.1 Credit facility / Loan account classified as Red-flagged Account and Reporting of Fraud 4.2 Independent confirmation from the third-party service providers including professionals 4.3 Staff Accountability 4.4 Penal Measures 4.5 Treatment of accounts under Resolution CHAPTER V 5. Reporting of Frauds to Law Enforcement Agencies (LEAs) CHAPTER VI 6.1 Reporting of Incidents of Fraud to Reserve Bank of India (RBI) 6.2 Central Fraud Registry (CFR) 6.3 Modalities of Reporting Incidents of Fraud to RBI 6.4 Closure of Fraud Cases Reported to RBI CHAPTER VII 7. Che....
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....ll hereinafter collectively be referred to as 'banks' for the purpose of these Directions. 1.3 Purpose These Directions are issued with a view to providing a framework to banks for prevention, early detection and timely reporting of incidents of fraud to Law Enforcement Agencies (LEAs), Reserve Bank of India (RBI) and NABARD2 and dissemination of information by RBI and matters connected therewith or incidental thereto. CHAPTER II 2.1 Governance Structure in banks for Fraud Risk Management 2.1.1 There shall be a Board3 approved Policy4 on fraud risk management delineating roles and responsibilities of Board / Board Committees and Senior Management of the bank. The Policy shall also incorporate measures for ensuring compliance with principles of natural justice5 in a time-bound manner which at a minimum shall include: 2.1.1.1 Issuance of a detailed Show Cause Notice (SCN) to the Persons6, Entities and its Promoters / Whole-time and Executive Directors against whom allegation of fraud is being examined7. The SCN shall provide complete details of transactions / actions / events basis which declaration and reporting of a fraud is being contemplated under these Directions. 2.1.1.2....
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....eir overall risk management functions / Department. A senior official in the rank of at least a General Manager or equivalent shall be responsible for monitoring and reporting of frauds. CHAPTER III 3. Early Detection of Frauds - Framework for Early Warning Signals (EWS) and Red Flagging of Accounts (RFA) 3.1 Governance Structure 3.1.1 Banks shall have a framework for Early Warning Signals (EWS) and Red Flagging of Accounts (RFA) under the overall Fraud Risk Management Policy approved by the Board. A Red Flagged Account is one where suspicion of fraudulent activity is thrown up by the presence of one or more EWS indicators, alerting / triggering deeper investigation from potential fraud angle and initiating preventive measures by the banks. 3.1.2 The Risk Management Committee of the Board (RMCB) shall oversee the effectiveness of the framework for EWS and RFA. The Senior Management shall be responsible for implementation of a robust Framework for EWS and RFA within the bank. 3.1.3 The EWS indicators identified for monitoring credit facilities / loan accounts and other banking transactions shall be approved by the RMCB. Appropriate Turnaround Time (TAT), preferably not more th....
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....ons. Banks shall strive to continuously upgrade the EWS system for enhancing its integrity and robustness, monitor other banking / non-credit related transactions efficiently and prevent fraudulent activities through the banking channel. Further, the effectiveness of EWS system shall be tested periodically. 3.4.2 The design and specification of EWS system shall be robust and resilient to ensure that integrity of system is maintained, personal and financial data of customers are secure and transaction monitoring for prevention / detection of potential fraud is on real-time basis13. Banks shall remain vigilant in monitoring transactions / unusual activities, specifically in the non-KYC compliant and money mule accounts etc., to contain unauthorised / fraudulent transactions and to prevent misuse of banking channel. 3.4.3 The Data Analytics & MI Unit or other dedicated analytics set up in banks shall extensively monitor and analyse other banking / non-credit related transactions, more specifically the transactions through digital platforms and applications, in order to identify unusual patterns and activities which could alert the bank timely in initiating appropriate measures towar....
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....ect to supervisory review by the Reserve Bank. 4.1.6 In case an account is identified as a fraud by any bank, the borrowal accounts of other group companies18, in which one or more promoter(s) / whole-time director(s) are common, shall also be subjected to examination by banks concerned from fraud angle under these Directions. 4.1.7 In cases where Law Enforcement Agencies (LEAs) have suo moto initiated investigation involving a borrower account, bank/s shall immediately red-flag the account and follow the usual process for classification of account as fraud and complete the same within the stipulated period as specified at Para 4.1.5 above. 4.2 Independent confirmation from the third-party service providers including professionals 4.2.1 Banks place reliance on various third-party service providers as part of pre-sanction appraisal and post-sanction monitoring. Therefore, banks may incorporate necessary terms and conditions in their agreements with third-party service providers to hold them accountable in situations where wilful negligence / malpractice by them is found to be a causative factor for fraud. 4.2.2 Banks shall, after complying with the principles of natural justice....
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....he continuance of criminal action against erstwhile promoter(s) / director(s) / person(s) who were in charge and responsible for the management of the affairs of the entity / business enterprise. 4.5.2 The penal measures as detailed in Para 4.4 shall not be applicable to entities / business enterprises after implementation of the Resolution Plan under IBC or aforesaid prudential framework. 4.5.3 The penal measures detailed in Para 4.4 shall continue to apply to the erstwhile promoter(s) / director(s) / persons who were in charge and responsible for the management of the affairs of the entity / business enterprise. CHAPTER V 5. Reporting of Frauds to Law Enforcement Agencies (LEAs)23 5.1 Banks shall immediately report the incidents of fraud to LEAs, subject to applicable laws, as indicated below24: Category of bank Amount involved in the fraud LEA to whom complaint should be lodged Remarks Private Sector / Foreign Banks Below Rs.1 crore State / Union Territory (UT) Police Rs.1 crore and above In addition to State/UT Police, Serious Fraud Investigation Office (SFIO), Ministry of Corporate Affairs, Government of India Details of fraud are to be reported to SFIO ....
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....assification30 of an incident / account as fraud. 6.3.2 Incidents of fraud at overseas branches of Indian banks shall also be reported to the concerned overseas LEAs in accordance with the relevant laws / regulations of the host countries. 6.3.3 Banks shall also report frauds perpetrated in their group entities31 to RBI separately32, if such entities are not regulated / supervised by any financial sector regulatory / supervisory authority. However, in case of overseas banking group entity of Indian banks, the parent bank shall also report incidents of fraud to RBI. The group entities will have to comply with the principles of natural justice before declaration of fraud33. 6.3.4 Banks shall adhere to the timeframe prescribed in these Master Directions for reporting of fraud cases to RBI34. Banks shall examine and fix staff accountability for delays in identification of fraud cases and in reporting to RBI. 6.3.5 While reporting frauds, banks shall ensure that persons / entities who / which are not involved / associated with the fraud are not reported in the FMR. 6.3.6 Banks may, under exceptional circumstances, withdraw FMR / remove name(s) of perpetrator(s) from FMR. Such withd....
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....s shall subject the title deeds and other related title documents in respect of all credit facilities of Rs.5 crore and above to periodic legal audit and re-verification, till the loan is fully repaid. The scope and periodicity of legal audit shall be in accordance with the Board approved policy referred to in clause 2.1.1 above. Specific to Small Finance Banks, Local Area Banks and Regional Rural Banks, the threshold amount for periodic legal audit of title deeds and other related title documents shall continue to be Rs.1 crore. 8.2 Treatment of Accounts classified as Fraud and sold to other Lenders / Asset Reconstruction Companies (ARCs)37 Banks shall complete the investigation from fraud angle before transferring the loan account / credit facility to other lenders / ARCs. In cases where banks conclude that a fraud has been perpetrated in the account, they shall report it to RBI / NABARD38 before selling the accounts to other lenders / ARCs39. 8.3 Role of Auditors 8.3.1 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. In such a situation....
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....-23 17-06-2022 Advisory on inclusion/adding name(s) of non-whole time Director(s) of a company in the FMR/CRILC 3. DOS.CO.FMG.No.45534/23.14.027/2021-22 11-05-2021 Conduct of Forensic Audit for investigation of accounts from fraud angle 4. DBS.CO.CFMC No.2030/23.10.002/2019-20 01-10-2019 Deployment of Closure Module for FMRs in XBRL Platform 5. DBS.CO.CFMC.No. /23.10.002/2017-18 04-06-2018 Fraud Reporting-Migration of FRMS to XBRL based system - FUA (FMR Update Application) - Revised 6. DBS.CO.CFMC.No. 6453/23.10.002/2017-18 09-01-2018 Fraud Reporting-Migration of FRMS to XBRL based system - Going Live- FUA (FMR Update Application) 7. DBS.CO.CFMC.BC.No. 3/23.10.002/2017-18 07-07-2017 Fraud Reporting-Migration of FRMS to XBRL based system - Going Live- FMR4 and VMRs 8. DBS.CO.CFMC.NO. 7516/23.10.002/2016-17 28-03-2017 Fraud Reporting - Migration of FRMS to XBRL based system - Going Live 9. DBS.CO.CFMC.No. 7876/23.04.001/2015-16 11-01-2016 Introduction of Central Fraud Registry (CFR) and migration to the XBRL based reporting of frauds 10. DBS.CO.FrMC.BC.No.7/23.04.001/2009-10 16-09-2009 Fraud Risk Management System in Banks - Role of Chairmen / Chief....
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.... Directors for domestic banks and Local Advisory Board in the case of foreign banks operating in India. 4 The policy shall inter alia contain measures towards prevention, early detection, investigation, staff accountability, monitoring, recovery and reporting of frauds. 5 Please refer to the judgement of the Hon'ble Supreme Court dated March 27, 2023 on Civil Appeal No.7300 of 2022 in the matter of State Bank of India & Ors Vs. Rajesh Agarwal & Ors. and connected matters, read with the Order dated May 12, 2023 passed by the Hon'ble Supreme Court in Misc. Application. No.810 of 2023, specifically in relation to serving a notice, giving an opportunity to submit a representation before classifying Persons / Entities as fraud and passing a reasoned order. The orders of the Hon'ble High Court of Bombay dated August 7, 2023 in Writ Petition (L) No. 20751 of 2023 and the Hon'ble High Court of Gujarat dated August 31, 2023 in Special Civil Application No. 12000 of 2021 and connected matters shall be referred to. 6 Including Third Party Service Providers and Professionals such as architects, valuers, chartered accountants, advocates, etc. 7 As non-whole-time directors (like nominee dire....
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....- Exposure Norms for Financial Institutions issued vide Circular Ref.DBR.FID.FIC.No.4/01.02.00/2015-16 dated July 01, 2015 as amended from time to time, as applicable. 19 Please refer to the Vigilance Manual issued by Central Vigilance Commission (CVC), CVC Office Order No. 02/01/22 dated January 06, 2022 and CVC Office Order No. 10/03/22 dated March 14, 2022 updated from time to time. 20 Such executive shall not participate in the meeting of the Board / ACB / SCBMF in which their accountability is to be considered. 21 (a) if it is an entity, another entity will be deemed to be associated with it, if that entity is (i) a subsidiary company as defined under clause 2 (87) of the Companies Act, 2013 or (ii) falls within the definition of a 'joint venture' or an 'associate company' under clause (6) of section 2 of the Companies Act, 2013. (b) in case of a natural person, all entities in which she / he is associated as promoter, or director, or as one in charge and responsible for the management of the affairs of the entity shall be deemed to be associated. 22 Prudential Framework for Resolution of Stressed Assets dated June 7, 2019 (as amended from time to time) issued by the RBI.....