1. 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.
1.2
It is possible that frauds are, at times, detected in NBFCs long after their perpetration.
NBFCs should, therefore, ensure that a reporting system is in place so that frauds
are reported without any delay. NBFCs should fix staff accountability in respect
of delays in reporting of fraud cases to the Reserve Bank.
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 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.
2.
CLASSIFICATION OF FRAUDS
2.1
In order to have uniformity in reporting, frauds have been classified as under
based mainly on the provisions of the Indian Penal Code:
(a)
Misappropriation and criminal breach of trust.
(b)
Fraudulent encashment through forged instruments, manipulation of books of account
or through fictitious accounts and conversion of property.
(c)
Unauthorised credit facilities extended for reward or for illegal gratification.
(d) Negligence and cash
shortages.
(e) Cheating
and forgery.
(f)
Irregularities in foreign exchange transactions.
(g)
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 item (d) and (f) above are to be reported
as fraud if the intention to cheat/defraud is suspected/ proved.Cases
of cash shortage up to Rs. 1,000/- reported on the same day by persons handling
the cash and where there is no suspicion of fraud, need not be reported as fraud.
However, cases of cash shortage involving more than Rs. 1,000/- and those detected
by the management/ inspecting officer, irrespective of the amount, may be reported
as fraud.
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.
3.
REPORTING OF FRAUDS TO RESERVE BANK OF INDIA
3.1
Frauds involving Rs. 1 lakh and above
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
Wherever information is available, 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.
3.2
Frauds committed by unscrupulous borrowers
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:
(i)
Fraudulent discount of instruments.
(ii)
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.
(iii)
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 involving an amount of Rs. 5 lakh and
above, additional information as prescribed under Part B of FMR
– 1 may also be furnished.
3.3
Frauds involving Rs. 25 lakh and above
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.
3.4
Cases of attempted fraud
Cases
of attempted fraud, where the likely loss would have been Rs. 25 lakh or more,
had the fraud taken place, should be reported to the Central Office of the Reserve
Bank, Department of Banking Supervision, Frauds Monitoring Cell and a copy endorsed
to Central Office of the Reserve Bank, Department of Non-Banking Supervision indicating
the modus operandi and how the fraud was detected. Such cases should not be included
in the other returns to be submitted to the Reserve Bank.
4.
QUARTERLY RETURNS
4.1
Report on Frauds Outstanding
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
Progress Report on Frauds
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.
REPORTS TO THE BOARD
5.1
Reporting of Frauds
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
Quarterly Review of Frauds
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
Annual Review of Frauds
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:
(a)
Whether the systems in the NBFC are adequate to detect frauds, once they have
taken place, within the shortest possible time.
(b)
Whether frauds are examined from staff angle.
(c)
Whether deterrent punishment is meted out, wherever warranted, to the persons
found responsible.
(d)
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.
(e) 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:
(a)
Total number of frauds detected during the year and the amount involved as compared
to the previous two years.
(b)
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).
(c)
Modus operandi of major frauds reported during the year along with their present
position.
(d) Detailed
analyses of frauds of Rs. 1 lakh and above.
(e)
Estimated loss to the NBFC during the year on account of frauds, amount recovered
and provisions made.
(f)
Number of cases (with amounts) where staff are involved and the action taken against
staff.
(g) Time
taken to detect frauds (number of cases detected within three months, six months
and one year of their taking place).
(h)
Position with regard to frauds reported to Police.
(i)
Number of frauds where final action has been taken by the NBFC and cases disposed
of.
(j) Preventive/punitive
steps taken by the NBFC during the year to reduce/minimise the incidence of frauds.
6.
GUIDELINES FOR REPORTING FRAUDS TO POLICE
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:
(a)
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.
(b)
Therefore, as a general rule, the following cases should invariably be referred
to the State Police:
(i)
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.
(ii) Cases
of fraud committed by NBFC employees, when it involves NBFC funds exceeding Rs.
10,000/-.