TaxTMI 
TaxTMI 
Master Directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions
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....cial banks and select FIs) Directions 2016 (Ref.DBS.CO.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 Moda....
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....t Bank of India Act, 1989, respectively (hereinafter referred to as 'All India Financial Institutions or 'AIFIs'. 1.2.3 The Commercial Banks and AIFIs shall 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 NABARD^2 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 Board^3 approved Policy^4 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 justice^5 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 Persons^6, Entities and its Promoters / Whole-time and Executive Directors against whom allegation of fraud is being examined^7. Th....
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....amined and concluded appropriately under their Whistle Blower Policy. 2.2 Banks shall set-up an appropriate organisational structure for institutionalisation of fraud risk management^9 within their 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....
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..../ non-credit related transactions^12 3.4.1 Banks shall develop / strengthen their EWS system by identifying suitable indicators and parameterising them in their EWS system for monitoring other banking / non-credit related transactions. 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 basis^13. 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 / ....
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.... from the date of first reporting of the account as red-flagged on the CRILC platform. Cases remaining in red-flagged status beyond 180 days shall be reported to the SCBMF for review with adequate reasoning / justification thereof. Such cases shall also be subject 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 companies^18, 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 ....
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.... / business enterprise, the bank shall examine whether the entity shall continue to remain classified as fraud or the classification as fraud could be removed after implementation of the Resolution Plan under IBC or aforesaid prudential framework. This would, however, be without prejudice to the 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 below^24: Category of bank Amount involved in the fraud LEA to whom complaint sho....
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....r attempted fraudulent transactions to Central Payments Fraud Information Registry (CPFIR)^28, maintained by RBI. However, such transactions, if subsequently concluded as fraud committed on bank(s), shall invariably be reported through FMR so as to be reflected in CFR. 6.3 Modalities of Reporting Incidents of Fraud to RBI 6.3.1 Banks shall furnish FMR^29 in individual fraud cases, irrespective of the amount involved, immediately, but not later than 14 days from the date of classification^30 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 entities^31 to RBI separately^32, 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 fraud^33. 6.3.4 Banks shall ad....
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....uine but payment has been made to a person who is not the true owner; or where the amount has been credited before realisation and subsequently the instrument is found to be fake / forged and returned by the paying bank, the presenting bank which is defrauded or is put to loss by paying the amount before realisation of the instrument shall file the fraud report with the RBI and inform the LEAs for investigation and further action under law. CHAPTER VIII 8. Other Instructions 8.1 Legal Audit of Title Documents in respect of Large Value Loan Accounts Banks 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 Reconstruc....
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.... 10. Repeal With the issue of these Directions, instructions / guidelines contained in the Circulars issued by the Reserve Bank of India listed in Appendix stand repealed, as the contents of the same have been incorporated in the Master Directions. All the instructions / guidelines contained in these Circulars shall be deemed as given under these Directions. Appendix List of Circulars Repealed S. No. Circular No. Circular Date Subject 1. DOS.CO.FMG.NO. S332/23.04.001/2022-23 13-01-2023 Reporting of digital payment related frauds to RBI through FMR 2. DOS.CO.FMG.NO. S101/23.04.001/2022-23 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.....
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....FGV.BC.25/23.04.001/96 30-12-1996 Reporting of Frauds by Banks 27. DOS.No.317/23.11.001/96 09-09-1996 Frauds in banks - Compendium of Instructions 28. DOS.No.FGV.BC.17/23.04.001/96-97 09-09-1996 Reporting of Frauds 29. DOS.No.FGV.BC.13/23.01.001/96 12-06-1996 Annual Review of Frauds 30. DOS.No.BC.FGV.10/23.04.001/96 06-05-1996 Reporting on Frauds in Banks * Export-Import Bank of India ('Exim Bank'), National Bank for Agriculture and Rural Development ('NABARD'), National Bank for Financing Infrastructure and Development ('NaBFID'), National Housing Bank ('NHB') and Small Industries Development Bank of India ('SIDBI'). ^1 Nationalised Banks under Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970 /80. ^2 RRBs shall report the incidents of fraud to NABARD as hitherto. ^3 Board of 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 Su....
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.... 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 (Please refer to Para 2.1.1 ibid). ^18 Please refer to the Large Exposure Framework issued vide Circular Ref.DBR.No.BP.BC.43/ 21.01.003/2018-19 dated Jun 03, 2019 as amended from time to time and Master Circular - 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. 02/0....