DBS. No. FGV(F).BC. 1 /23.04.001/2001-2002

August 13, 2001
Shravana 22, 1923 [S]

The Chief Executives of all
commercial banks (excluding RRBs)

Dear Sir,

As you are aware, Reserve Bank of India has, from time to time, issued a number of guidelines/instructions/directives to banks in regard to matters relating to classification and reporting of frauds, dacoities, robberies etc. To enable the banks to have current instructions at one place, a Master Circular incorporating all the existing guidelines/instructions/directives on the subject has been prepared and furnished to you under cover of our letter DBS.No.FGV(F).BC.10 / 23.04.001 /2000-2001 dated March 22, 2001. This Master Circular consolidates and supersedes all the previous instructions issued by Reserve Bank of India on the subject. There are no amendments to the instructions issued therein.

Yours faithfully,

Frauds - Classification and Reporting - Master Circular

1. Introduction

2. Timely Detection and Reporting

3. Classification of Frauds

4. Reporting of Frauds

5. Statistics on Frauds

6. Annual Review of Frauds

7. Entrustment of Cases for CBI/Police Investigations/Departmental Enquiries

8. Reporting Cases of Theft, Burglary, Dacoity and Bank Robberies

Annexures

Appendix

1.1 Increasing incidence of frauds, corruption and dacoities/robberies in banks is a matter of concern. Frauds perpetrated in banks show an increasing trend mainly on account of non-adherence/improper implementation of various guidelines.

1.2 The primary responsibility for preventing frauds is that of bank managements. Reserve Bank of India, on its part, has been advising banks from time to time about the major fraud prone areas and the safeguards necessary for their prevention. Various guidelines/ instructions issued from time to time were also compiled in a Compendium of Instructions up to December 1995 and supplied to banks along with circular No.DOS.317/23.11.001/96 dated 9 September 1996.

1.3 Reserve Bank of India has also been circulating to banks details of frauds of ingenious nature which come to its notice so that individual banks could introduce necessary safeguards by means of appropriate procedures and internal checks having regard to the modus operandi of the frauds.

1.4 For the purpose, it is very important that Reserve Bank of India receives full information about the incidence of frauds and the action taken by the banks to prevent them.

1.5 In order to enable both the Government of India and Reserve Bank of India to have required information on frauds, suitable reporting system has been introduced which is detailed hereunder.

2.1 It has been observed that very often frauds are detected in banks only long after their perpetration, thus allowing the fraud to continue for a long time. The Estimates Committee of Parliament also has observed that in spite of the existence of various control systems and arrangements to supervise the working of branches of banks through internal and external inspections/audits, vigilance machinery, etc., a number of frauds perpetrated are not detected during the course of inspection/audit.

2.2 It is also observed that in some cases, the fraud reports are submitted to Reserve Bank of India with considerable delay and many a time without adequate information. The reasons for delay in detection and in reporting are also not clearly stated in the fraud reports. On certain occasions, Reserve Bank of India comes to know about frauds involving large amounts only through press reports. This happens due to non-reporting of frauds by banks immediately on their detection.

2.3 Banks must examine the reasons for delay in reporting of frauds to Reserve Bank of India and ensure that the reporting system is suitably streamlined so that frauds are reported without any delay.

3.1 In order to have uniformity in reporting cases of frauds, the question of classification of bank frauds on the basis of the provisions of the Indian Penal Code has been considered and frauds have been classified as under:

1. Misappropriation and criminal breach of trust.
2. Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts and conversion of property.
3. Unauthorised credit facilities extended for reward or for illegal gratification.
4. Negligence and cash shortages.
5. Cheating and forgery.
6. Irregularities in foreign exchange transactions.
7. Any other type of fraud not coming under the specific heads as above.

4.1 Reporting of actual or suspected frauds

1. The cases of individual frauds involving amounts up to Rs. 1 lakh each are not to be reported individually as and when such frauds come to banks' notice.
2. Banks should report such frauds in a consolidated form category-wise on a quarterly basis as detailed in paragraph 5.3.

1. Banks should ensure that all major frauds involving Rs. 1 lakh and above are reported to their Board of Directors promptly on their detection.
2. While examining such cases, it is absolutely essential to take note of the failure on the part of the concerned branch officials, as well as controlling authorities, and initiate appropriate action against the officials responsible for causing the fraud or loss.
3. A copy of the note put up to the Board may also be sent promptly to the Chief General Manager, Department of Banking Supervision, Reserve Bank of India, Central Office, World Trade Centre, Mumbai – 400 005.

1. The report should include instances where banks have been put to loss 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.
2. Cases of attempted frauds need not be reported to Reserve Bank of India in the above format but may be done by way of a letter (para 4.1.6).
3. Banks should ensure that in the fraud reports, 'brief history/ modus operandi' is presented concisely avoiding vague and generalised terms.
4. Frauds perpetrated on subsidiaries and affiliates/joint ventures functioning both in India and abroad may be treated by banks incorporated in India on par with those of their branches and may be reported in the above prescribed format as and when detected.
5. Public sector banks having overseas branches/offices should report all frauds perpetrated at their overseas branches to the Regional Office of Reserve Bank of India under whose jurisdiction the Head Office of the bank falls.

1. Fraudulent discount of instruments or kite-flying in clearing effects.
2. Fraudulent removal of pledged stocks/ disposing hypothecated stocks without the knowledge of the bank resulting in the accounts becoming unsecured/inflating the value of stocks in the stock statements and drawing excess bank finance.
3. Diversion of funds outside the borrowing unit, lack of interest or criminal neglect on the part of the 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 the borrowal accounts on the part of the bank functionaries rendering the advances difficult of recovery.

1. In order to have uniformity in the matter of accounting of frauds relating to negotiable instruments, such cases should be reported by paying banker to the concerned Regional Office of the Reserve Bank of India as soon as the fraud comes to its notice.
2. Such fraud reports submitted by the paying banker will be taken by Reserve Bank of India purely for statistical purposes. This procedure will have no bearing on the dispute between the paying banker and the collecting banker.
3. The collecting banker should also report such fraud cases in the prescribed format to the concerned Regional Office of Reserve Bank of India to enable them to follow up the cases with regard to the lapses/ staff accountability aspects. However, they should not include the figures of such cases in statistical statements detailed in paragraph 5.2.

1. Cases of attempted frauds may be advised to Reserve Bank of India, Department of Banking Supervision, Central Office, by way of a letter indicating the modus operandi and how the fraud was detected.
2. These cases of attempted frauds should not be included in the

1. report on actual or suspected fraud submitted vide paragraph 4.1.2 (i) above, and
2. quarterly/half-yearly reports on frauds detailed in paragraph 5 below.

6.1 The trend observed in a number of frauds in various banks, calls for effective action for their prevention. The initial step needed therefor is to make a detailed study of the frauds that have already taken place with a view to finding out the gaps in the systems and procedures or the defects in following them and initiating prompt necessary action to plug the loopholes.

6.2 A periodical review of all the frauds that have been perpetrated in the banks, say once a year, will also be helpful for initiating adequate measures for prevention of frauds.

6.3 The main aspects which may be taken into account while making such a review may include the following:

1. Whether the system in the bank is adequate to detect frauds, once they have taken place, within the shortest possible time.
2. Whether frauds are examined from staff angle and wherever necessary, the cases are reported to Vigilance Cell for further action in the case of public sector banks.
3. Whether deterrent punishment is meted out wherever warranted to the persons found responsible.
4. Whether frauds have taken place because of the laxity in following the systems and procedures and, if so, whether effective action has been taken to ensure that the systems and procedures are scrupulously followed by the staff concerned.
5. Whether frauds are reported to local Police or CBI, as the case may be, for investigation, as per the guidelines issued to public sector banks by Government of India in this regard.

1. The total number of frauds and total amount detected/reported during the year and the amount outstanding.
2. Analysis of frauds over Rs. 1 lakh/10 lakh/50 lakh/100 lakh.
3. Estimated loss to the bank and the amount recovered during the year and provisions made, if any (for last 3 years).
4. Number of cases (with amounts) where staff are involved during the year and action taken against staff.
5. Category-wise classification and analysis of frauds.
6. Region-wise/Zone-wise break-up of figures of number of frauds (with amounts).
7. Time taken to detect frauds (No. of cases detected within three months, six months, one year of their commission).
8. Analysis of frauds reported to CBI/Police and present position in the matter.
9. No. of frauds where final action has been taken by the bank and cases disposed off.
10. The preventive/punitive steps taken by the bank during the year to reduce/minimise the incidence of frauds.
11. A comparative analysis of the current year figures with those of the previous two years.
12. A separate Annexure may also be enclosed with this review note detailing the modus operandi of major frauds reported during the year along with their present position.

7.1 Guidelines for reporting frauds to Police/CBI

1. The cases of frauds on banks involving an amount of Rs. 1 lakh and above, committed by outsiders on their own and/or with the connivance of bank staff/officers.
2. The cases of frauds committed by bank employees themselves, when it involves bank funds exceeding Rs. 10,000/-.

8.1 Banks should arrange to report within 24 hours of their occurrence, bank robberies, dacoities, thefts or burglaries to the following authorities in the proforma given in Annexure 9.

1. Reserve Bank of India, Department of Banking Supervision, Central Office, Mumbai.
2. A copy to be endorsed to the concerned Regional Office of Reserve Bank of India of the State in which the dacoity takes place for use by the State Level Security Council.
3. The Security Adviser, Central Security Cell, Reserve Bank of India, Department of Administration and Personnel Management, Central Office, Central Office Building, Mumbai – 400001.
4. Ministry of Finance, Department of Economic Affairs, (Banking Division), Government of India, New Delhi.