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RBI/2013-14/39
DNBS.PD.CC. No.337/03.10.042/2013-14
DNBS.PD.CC. No.337/03.10.042/2013-14
July 1, 2013
All Deposit taking NBFCs (including RNBCs) and NBFC-ND-SI
Dear Sirs,
Master Circular - Frauds – Future approach towards monitoring of frauds in NBFCs
As you are aware, in order to have all current instructions on
the subject at one place, the Reserve Bank of India had issued a
Master Circular No 283 on the captioned subject, which is now updated
up to 30th June 2013. The Mater Circular has also been placed on the
RBI web-site (http://www.rbi.org.in). A copy of the revised Master Circular is enclosed.
Yours faithfully,
(N. S. Vishwanathan)
Principal Chief General Manager
Principal Chief General Manager
INTRODUCTION
1.1 Incidence of frauds in NBFCs is a matter of
concern. While the primary responsibility for preventing frauds lies
with NBFCs themselves, a reporting system for frauds is prescribed in
the following paragraphs, which may be adopted by NBFCs, both NBFCs-D
and NBFCs-ND-SI(NBFCs with asset size of Rs. 100 crore and above).
1.3 Delay in reporting of frauds and the consequent delay in
alerting other NBFCs about the modus operandi and issue of caution
advices against unscrupulous borrowers could result in similar frauds
being perpetrated elsewhere. NBFCs may, therefore, strictly adhere to
the timeframe fixed in this circular for reporting fraud cases to the
Reserve Bank failing which NBFCs would be liable for penal action as
prescribed under the provisions of Chapter V of the RBI Act, 1934.
1.4 NBFCs should specifically nominate an official of the rank
of General Manager or equivalent who will be responsible for
submitting all the returns referred to in this circular.
1.5 It may be noted that NBFCs are not required to submit
‘Nil’ reports to Frauds Monitoring Cell/Regional Offices of Department
of Non-Banking Supervision. At the same time enough precautions may be
taken by deposit-taking NBFCs and NBFCs-ND-SI to ensure that the cases
reported by them are duly received by Frauds Monitoring Cell/Regional
Offices of Department of Non-Banking Supervision as the case may be.
1.6 It
is advised that all non-deposit taking NBFCs with asset size of Rs.100
crore and above and deposit taking NBFCs shall disclose the amount
related to fraud, reported in the company for the year in their balance
sheets. NBFCs failing to report fraud cases to the Reserve Bank would
be liable for penal action prescribed under the provisions of Chapter V
of the RBI Act, 1934.
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Misappropriation and criminal breach of trust.
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Fraudulent encashment through forged instruments,
manipulation of books of account or through fictitious accounts and
conversion of property.
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Unauthorised credit facilities extended for reward or for illegal gratification.
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Negligence and cash shortages.
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Cheating and forgery.
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Irregularities in foreign exchange transactions.
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Any other type of fraud not coming under the specific heads as above.
2.2 Cases of ‘negligence and cash shortages’ and
‘irregularities in foreign exchange transactions’ referred to in items
(d) and (f) above are to be reported as fraud if the intention to cheat /
defraud is suspected / proved. However, the following cases where
fraudulent intention is not suspected / proved, at the time of
detection, will be treated as fraud and reported accordingly:
(a) cases of cash shortages more than Rs.10,000/- and
(b) cases of cash shortages more than Rs. 5000/- if detected
by management /auditor / inspecting officer and not reported on the
occurrence by the persons handling cash.
2.3 NBFCs having overseas branches/offices should report all
frauds perpetrated at such branches/offices also to the Reserve Bank as
per the format and procedure detailed under Paragraph 3 below.
The
Reserve Bank of India's Fraud Monitoring Cell attached to Department
of Banking Supervision (DBS), Central Office has shifted from the
present location at 2nd Floor, World Trade Centre-1, Cuffe Parade,
Mumbai - 400005 to Bengaluru Regional Office of the Reserve Bank. The
Central Fraud monitoring Cell will continue to be part of Department of
Banking Supervision, Central Office Mumbai and will start functioning
from the new location at Bengaluru from July 01, 2013. All the NBFCs
are requested to take note of the address of the Central Fraud
Monitoring Cell at the new location :
Central Fraud Monitoring Cell
Department of Banking Supervision,
Reserve Bank of India, 10/3/8, Nruputhunga Road,
P.B. No. 5467
Bengaluru - 560001.
Phone No : - +91 80 22244120
Fax No. : +91 80 22127754
Department of Banking Supervision,
Reserve Bank of India, 10/3/8, Nruputhunga Road,
P.B. No. 5467
Bengaluru - 560001.
Phone No : - +91 80 22244120
Fax No. : +91 80 22127754
All NBFCs may file fraud reports etc / furnish response to the
existing letters from Fraud Monitoring Cell of DBS, Central Office and
fresh letters at your end to the new address at Bengaluru from June
14, 2013 onwards.
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
FDRs unauthorised handling of securities charged to the NBFC,
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
moto and/or where the Reserve Bank has directed that they be reported
as frauds.
3.1.3 NBFCs
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 the prescribed format should be
sent to the Central Office (CO) of the Reserve Bank of India,
Department of Banking Supervision, Frauds Monitoring Cell where the
amount involved in fraud is Rs 25 lakhs and above and to Regional Office
of the Reserve Bank of India, Department of Non-Banking Supervision
under whose jurisdiction the Registered Office of the NBFC falls where
the fraud amount involved in fraud is less than Rs 25 lakh, in the
format given in FMR – 1, within three weeks from the date of detection.
A copy of FMR-1 where the amount involved in the Fraud is Rs
25 lakhs and above should also be submitted to the Regional Office of
the Department of Non-Banking Supervision of Reserve Bank of India
under whose jurisdiction the Registered Office of the NBFC falls.
it
was observed that in some cases the eligible NBFCs were not
furnishing the FMR-1 in respect of cases involving an amount of Rs
25.00 lakh and above in individual cases of fraud to Fraud Monitoring
Cell (FrMC),DBS,CO at all and the incidence of fraud is detected on
scrutiny of FMR -II and FMR-III statements pertaining to a quarter
received at the end of the relevant quarter. It was reiterated that all
NBFCs have to necessarily furnish FMR-1 in respect of cases involving
an amount of Rs 25.00 lakh and above in individual cases of fraud to
Fraud Monitoring Cell (FrMC),DBS,CO within 21 days of detection of the
fraud.
Further it was observed that NBFCs were also advised to
furnish case-wise quarterly progress reports on frauds involving Rs. 1
lakh and above in the format given in FMR – 3 only to Regional Office
of the Reserve Bank of India, Department of Non-Banking Supervision
under whose jurisdiction the Registered Office of the NBFC falls within
15 days of the end of the quarter to which it relates. NBFCs were
advised to file FMR-3 with DBS,CO FrMC in respect of only those fraud
cases where the amount involved in particular account is Rs 25.00 lakh
or above.
It was also advised that NBFCs are permitted to close the
fraud cases only where the actions are complete and prior approval is
obtained from the respective Regional Offices of DNBS. The action would
be considered complete when
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The fraud cases pending with CBI / Police / Court are finally disposed of.
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The examination of staff accountability has been completed
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The amount of fraud has been recovered or written off.
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Insurance claim wherever applicable has been settled.
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The NBFC has reviewed the systems and procedures,
identified as the causative factors and plugged the lacunae and the
fact of which has been certified by the appropriate authority (Board /
Audit Committee of the Board)
-
NBFCs should also pursue vigorously with CBI for final
disposal of pending fraud cases especially where they have completed
staff side action. Similarly, NBFCs may vigorously follow up with the
police authorities and / or court for final disposal of fraud cases.
NBFCs were advised that they are allowed, for limited
statistical / reporting purposes, to close those fraud cases involving
amounts upto Rs.25.00 lakh, where :
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The investigation is on or challan / charge sheet not
filed in the Court for more than three years from the date of filing of
First Information Report (FIR) by the CBI / Police., or
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The trial in the courts, after filing of charge sheet / challan by CBI / Police, has not started, or is in progress.
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:
-
Fraudulent discount of instruments.
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Fraudulent removal of pledged stocks/disposing of
hypothecated stocks without the NBFC’s knowledge/inflating the value of
stocks in the stock statement and drawing excess finance.
-
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 NBFC functionaries rendering
the advance difficult of recovery.
3.2.2 In
respect of frauds in borrowal accounts, additional information as
prescribed under Part B of FMR-1 should also be furnished.
In respect of frauds involving Rs. 25 lakh and above, in
addition to the requirements given at paragraphs 3.1 and 3.2 and above,
NBFCs 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, Reserve Bank of India, Frauds Monitoring Cell, Central
Office and a copy endorsed to the Chief General Manager-in-charge of
the Department of Non-Banking Supervision, Reserve Bank of India,
Central Office within a week of such frauds coming to the notice of the
NBFC. 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. A copy of the
D.O. letter should also be endorsed to the Regional Office of Reserve
Bank, Department of Non-Banking Supervision under whose jurisdiction
the Registered Office of the NBFC is functioning.
On
a review and as a part of rationalisation of process and procedures,
it has been decided to amend para 3.4 of Master Circular DNBS.PD.CC.
No.283/03.10.042/2012-13 dated July 02, 2012 on Frauds – Future approach
towards monitoring of frauds in NBFCs and that the practice of
reporting attempted fraud cases of Rs 25 lakh or more to Reserve Bank
of India, Fraud Monitoring Cell, Department of Banking Supervision,
Central office were to be discontinued from the date of the circular.
However, the NBFCs were advised to continue to place the
individual cases involving Rs 25 lakh or more before the Audit
Committee of its Board as hitherto as per the instructions contained in
above mentioned Master Circular. The report containing attempted frauds
which is to be placed before the Audit committee of the Board should
cover inter alia the following viz
-
The modus operandi of the attempted fraud.
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How the attempt did not materialize in the fraud or how the attempt failed / was foiled.
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The measures taken by the NBFC to strengthen the existing systems and controls
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New systems and controls put in place in the area where fraud was attempted.
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In addition yearly consolidated review of such cases
detected during the year containing information such area of operations
where such attempts were made, effectiveness of new process and
procedures put in place during the year, trend of such cases during the
last three years, need for further change in process and procedures, if
any, etc as on March 31 every year starting from the year ending March
31, 2013 within three months of the end of the relative year
4.1.1 NBFCs should submit a copy of the Quarterly Report on
Frauds Outstanding in the format given in FMR – 2 to the Regional
Office of the Reserve Bank of India, Department of Non-Banking
Supervision under whose jurisdiction the Registered Office of the NBFC
falls irrespective of amount within 15 days of the end of the quarter
to which it relates.
4.1.2 Part – A of the report covers details of frauds
outstanding as at the end of the quarter. Parts B and C of the report
give category-wise and perpetrator-wise details of frauds reported
during the quarter respectively. The total number and amount of fraud
cases reported during the quarter as shown in Parts B and C should
tally with the totals of columns 4 and 5 in Part – A of the report.
4.1.3 NBFCs should furnish a certificate, as part of the above
report, to the effect that all individual fraud cases of Rs. 1 lakh
and above reported to the Reserve Bank in FMR – 1 during the quarter
have also been put up to the NBFC’s Board and have been incorporated in
Part – A (columns 4 and 5) and Parts B and C of FMR – 2.
4.2.1 NBFCs should furnish case-wise quarterly progress
reports on frauds involving Rs. 1 lakh and above in the format given in
FMR – 3 to the Central Office (CO) of the Reserve Bank of India,
Department of Banking Supervision, Frauds Monitoring Cell where the
amount involved in fraud is Rs 25 lakhs and above and to Regional
Office of the Reserve Bank of India, Department of Non-Banking
Supervision under whose jurisdiction the Registered Office of the NBFC
falls where the fraud amount involved in fraud is less than Rs 25 lakh
within 15 days of the end of the quarter to which it relates.
4.2.2 In the case of frauds where there are no developments
during a quarter, a list of such cases with a brief description
including name of branch and date of reporting may be furnished as per
FMR – 3.
5.1.1 NBFCs should ensure that all frauds of Rs. 1 lakh and above are reported to their Boards promptly on their detection.
5.1.2 Such reports should, among other things, take note of
the failure on the part of the concerned officials, and consider
initiation of appropriate action against the officials responsible for
the fraud.
5.2.1 Information relating to frauds for the quarters ending
March, June and September may be placed before the Board of Directors
during the month following the quarter to which it pertains.
5.2.2 These should be accompanied by supplementary material
analysing statistical information and details of each fraud so that the
Board would have adequate material to contribute effectively in regard
to the punitive or preventive aspects of frauds.
5.2.3 All the frauds involving an amount of Rs 25 lakh and
above should be monitored and reviewed by the Audit Committee of the
Board (ACB) or if ACB is not there, other Committee of the Board of
NBFCs. The periodicity of the meetings of the Committee may be decided
according to the number of cases involved. However, the Committee
should meet and review as and when a fraud involving an amount of Rs 25
lakh and above comes to light.
5.3.1 NBFCs should conduct an annual review of the frauds and
place a note before the Board of Directors for information. The reviews
for the year-ended December may be put up to the Board before the end
of March the following year. Such reviews need not be sent to RBI. These
may be preserved for verification by the Reserve Bank’s inspecting
officers.
5.3.2 The main aspects which may be taken into account while making such a review may include the following:
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Whether the systems in the NBFC are adequate to detect frauds, once they have taken place, within the shortest possible time.
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Whether frauds are examined from staff angle.
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Whether deterrent punishment is meted out, wherever warranted, to the persons found responsible.
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Whether frauds have taken place because of 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.
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Whether frauds are reported to local Police, as the case may be, for investigation.
5.3.3 The annual reviews should also, among other things, include the following details:
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Total number of frauds detected during the year and the amount involved as compared to the previous two years.
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Analysis of frauds according to different categories
detailed in Paragraph 2.1 and also the different business areas
indicated in the Quarterly Report on Frauds Outstanding (vide FMR – 2).
-
Modus operandi of major frauds reported during the year along with their present position.
-
Detailed analyses of frauds of Rs. 1 lakh and above.
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Estimated loss to the NBFC during the year on account of frauds, amount recovered and provisions made.
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Number of cases (with amounts) where staff are involved and the action taken against staff.
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Time taken to detect frauds (number of cases detected within three months, six months and one year of their taking place).
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Position with regard to frauds reported to Police.
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Number of frauds where final action has been taken by the NBFC and cases disposed of.
- Preventive/punitive steps taken by the NBFC during the year to reduce/minimise the incidence of frauds.
NBFCs should follow the following guidelines for reporting of
frauds such as unauthorised credit facilities extended by the NBFC for
illegal gratification, negligence and cash shortages, cheating, forgery,
etc. to the State Police authorities:
-
In dealing with cases of fraud/embezzlement, NBFCs should
not merely be actuated by the necessity of recovering expeditiously the
amount involved, but should also be motivated by public interest and
the need for ensuring that the guilty persons do not go unpunished.
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Therefore, as a general rule, the following cases should invariably be referred to the State Police:
Cases of fraud involving an amount of Rs. 1 lakh
and above, committed by outsiders on their own and/or with the
connivance of NBFC staff/officers.
Cases of fraud committed by NBFC employees, when it involves NBFC funds exceeding Rs. 10,000/-.
Ozg NBFC Consultant
Ozg Center | Delhi | Mumbai | Chennai | Bangalore | Kolkata
Back Office Phone # 09811415831-37-61-72-84-92-94
