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1. INTRODUCTION
1.1 Incidence of frauds, dacoities, robberies, etc., in banks is a matter of concern. While
the primary responsibility for preventing frauds lies with banks themselves, the Reserve
Bank of India has been advising banks from time to time about the major fraud prone
areas and the safeguards necessary for prevention of frauds. The Reserve Bank has
also been circulating to banks, the details of frauds of an ingenious nature not reported
earlier so that banks could introduce necessary safeguards by way of appropriate
procedures and internal checks. To facilitate this ongoing process, it is essential that
banks report to the Reserve Bank full information about frauds and the follow-up action
taken thereon. Banks may, therefore, adopt the reporting system for frauds as prescribed
in the following paragraphs.
1.2 It has been observed that frauds are, at times, detected in banks long after their
perpetration. The fraud reports are also submitted to the Reserve Bank, many a time,
with considerable delay and without the required information. On certain occasions, the
Reserve Bank comes to know about frauds involving large amounts only through press
reports. Banks should, therefore, ensure that the reporting system is suitably streamlined
so that frauds are reported without any delay. Banks must fix staff accountability in
respect of delays in reporting fraud cases to the Reserve Bank.
1.3 Delay in reporting of frauds and the consequent delay in alerting other banks about
the modus operandi and issue of caution advices against unscrupulous borrowers could
result in similar frauds being perpetrated elsewhere. Banks may, therefore, strictly
adhere to the timeframe fixed in this circular for reporting fraud cases to the Reserve
Bank failing which banks would be liable for penal action as prescribed under Section
47(A) of the Banking Regulation Act, 1949 (As applicable to co-operative societies).
1.4 Banks should specifically nominate a senior official who will be responsible for
submitting all the returns referred to in this circular.
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) & (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 To ensure uniformity and to avoid duplication, frauds involving forged negotiable
instruments may be reported only by the paying banker and not by the collecting banker.
However, in the case of collection of an instrument which is genuine but the amount is
collected fraudulently by a person who is not true owner, the collecting bank, which is
defrauded, will have to file fraud report with the RBI.
2.4 Cases of theft, burglary, dacoity and robbery should not be reported as fraud. Such
cases may be reported separately as detailed in paragraph
8.
3. REPORTING OF FRAUDS TO RESERVE BANK OF INDIA
3.1 Frauds involving amounts of less than Rs. 1 lakh
The cases of individual frauds involving amounts of less than Rs 1 lakh are not to be
reported individually to the Reserve Bank. Statistical data in respect of such frauds
should, however, be submitted to Reserve Bank in a
quarterly statement as detailed in para 4.1.
3.2 Frauds involving amounts of Rs 1 lakh and above but less than Rs 25
lakh The cases of individual frauds involving amounts of Rs.1 lakh and above but less than
Rs.25 lakh should bereported to the Regional Office of Urban Banks Department of
Reserve Bank of India, under whose jurisdiction the Head Office of the bank falls, in the
format given in FMR-1, within three weeks from the date of detection.
3.3 Frauds involving amounts of Rs 25 lakh and above
3.3.1 The cases of individual frauds involving amounts of Rs.25 lakh and above
should be reported to Frauds Monitoring Cell, Department of Banking
Supervision, Reserve Bank of India, Central Office, World Trade Centre, Centre-1,
Cuffe Parade, Colaba, Mumbai 400 005 in the format given in FMR-1, within three
weeks from the date of detection. A copy of FMR-1 should
also be submitted to the Regional Office of Urban Banks Department of Reserve Bank of India
under whose jurisdiction the Head Office of the bank falls.
3.3.2 In addition to the requirementgiven at paragraph 3.3.1 above, banks may
report the fraud by means of D.O. letter addressed to the Chief General Managerin-
Charge of the Department of Banking Supervision, Reserve Bank of India,
Central Office, within a week of such fraud coming to the notice of the bank's
Head Office. The letter may contain brief particulars of the
fraud such as amount 5 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
Urban Banks Department of Reserve Bank under whose jurisdiction the bank's
branch, where the fraud has been perpetrated, is
functioning.
3.4 Frauds committed by unscrupulous borrowers
3.4.1 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 or kite flying in clearing effects.
(ii) Fraudulent removal of pledged stocks/disposing of hypothecated stocks without the
bank’s knowledge/inflating the value of stocks in the stock statement and drawing excess
bank finance.
(iii) Diversion of funds, lack of interest or criminal neglect on the part of borrowers,
partners etc. in adhering to financial discipline and managerial failure with malafide
intent leading to the unit becoming sick and laxity in effective supervision over the
operations in borrowal accounts on the part of the bank functionaries rendering the
advance difficult of recovery and resulting in financial loss to the bank.
3.4.2 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.
3.5 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 Frauds Monitoring
Cell, Department of Banking Supervision, Reserve Bank of India, Central Office, Mumbai
indicating the modus operandi and how the attempted 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 (FMR-2)
4.1.1 Banks should submit a copy each of the Quarterly Report on Frauds Outstanding in
the format given in FMR – 2 to the Regional Office of Urban Banks Department of the
Reserve Bank under whose jurisdiction the Head Office of the bank falls within 15 days
of the end of the quarter to which it relates. Banks which may not be having any fraud
outstanding as at the end of a quarter should submit a nil report.
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
6 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 Banks 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 bank’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 (FMR-3)
4.2.1 Banks should furnish case-wise quarterly progress reports on frauds involving Rs.
1 lakh and above in the format given in FMR–3 to the Regional Office of Urban Banks
Department of Reserve Bank under whose jurisdiction the bank’s Head Office is situated,
within 15 days of the end of the quarter to which it relates.
.2.2 In case of frauds where there are no developments during a quarter, a list of such
cases with brief description including name of branch and date of reporting may be
furnished in Part – B of FMR – 3.
.2.3 If there are no fraud cases involving Rs.1 lakh and above outstanding, banks may
submit a nil report.
5. REPORTS TO THE BOARD
Reporting of Frauds
5.1.1 Banks 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 branch officials and controlling authorities, 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 A separate review for the quarter ending December is not required in view of the
Annual Review for the year-ending December prescribed below.
5.3 Annual Review of Frauds
5.3.1 Banks 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
placed before the Board by the end of March of the following year.
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 bank are adequate to detect frauds, once they have
taken place, within the shortest possible time.
(b) Whether frauds are examined from staff angle and, wherever necessary, the staff
side action is taken without undue delay.
(c) Whether deterrent punishment is meeted out, wherever warranted, to the persons
found responsible without undue delay.
(d) Whether frauds have taken place because of laxity in following the systems and
procedures or loopholes in the system and, if so, whether effective action has been
taken to ensure that the systems and procedures are scrupulously followed by the staff
concerned or the loopholes are plugged.
(e) Whether frauds are reported to the local Police for investigation.
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 bank 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, one year, more than one year of their taking place).
(h) Position with regard to frauds reported to the Police.
i) Number of frauds where final action has been taken by the bank and cases disposed
of.
(j) Preventive/punitive steps taken by the bank during the year to reduce/minimise the
incidence of frauds. Whether systems and procedures have been examined to ensure
that weaknesses are addressed.
6. GUIDELINES FOR REPORTING OF FRAUDS TO POLICE
Banks should follow the following guidelines for reporting of frauds such as unauthorised
credit facilities extended by the bank for illegal gratification, negligence and cash
shortages, cheating, forgery, etc. to the State Police authorities:
(a) In dealing with cases of fraud/embezzlement, banks should not merely be motivated
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 bank staff/officers.
(ii) Cases of fraud committed by bank employees, when it involves banks' funds
exceeding Rs. 10,000/-.
7. CLOSURE OF FRAUD CASES
Banks will report to the concerned Regional Office of Urban Banks Department of
Reserve Bank of India under whose jurisdiction the Head Office of the bank falls,
the details of the fraud cases closed along with reasons for the closure where no
further action was called for. Fraud cases closed during the quarter are required
to be reported in quarterly return FMR-2. Banks should report only such cases of frauds as closed where the actions as
stipulated below are complete:
A. The fraud cases pending with Police / Courts are finally disposed off.
B. The examination of staff accountability has been completed.
C.The amount of fraud has been recovered or written off.
D. Insurance claim, wherever applicable, has been settled.
E. The bank has reviewed the systems and procedures, identified the causative
factors and plugged the lacunae and the fact of which has been certified by the
board. Banks should also pursue vigorously with the Police/Court for final disposal of the
pending cases especially where the banks have completed staff side action.
8. REPORTING CASES OF THEFT, BURGLARY,
DACOITY AND BANK ROBBERIES
8.1 Banks should arrange to report instances of bank robberies, dacoities, thefts and
burglaries to the following authorities immediately on their occurrence by fax / e-mail.
The report should include details of modus operandi and other information as at columns
1 to 11 of FMR – 4.
(a) The Chief General Manager – in – Charge, Reserve Bank of India, Urban Banks
Department, Central Office, Garment House, Worli, Mumbai 400 018.
(b) A copy to be endorsed to the concerned Regional Office of Reserve Bank of India,
Urban Banks Department of the state in which the dacoity has taken place.
8.2 Banks should also submit to concerned Regional Office of the Reserve Bank of
India, Urban Banks Department under whose jurisdiction the
bank's Head Office is situated a quarterly consolidated statement in the format given in FMR – 4 covering all
cases pertaining to the quarter. This may be submitted within 15 days of the end of the
quarter to which it relates.
8.3 Banks which do not have any instances of theft, burglary, dacoity and / or robbery
to report during the quarter, may submit a nil report.
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FMR
– 1
Report on Actual or Suspected Frauds in Banks
(Vide Paragraph 3)
Part A: Fraud Report
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1. |
Name
of the bank |
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2. |
Fraud
number1 |
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3. |
Details
of the branch2 |
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(a)
Name of the branch |
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(b)
Branch type |
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(c)
Place |
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(d)
District |
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(e)
State |
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4. |
Name
of the Principal party/account3 |
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5
(a) |
Area
of operation where the fraud has
occurred4 |
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5
(b) |
Whether
fraud has occurred in a borrowal
account? |
Yes/No |
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6. |
Nature
of fraud5 |
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7. |
Total
amount involved 6(Rs. in lakh) |
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8
(a) |
Date
of occurrence7 |
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(b) |
Date
of detection8 |
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(c) |
Reasons
for delay, if any, in detecting the
fraud |
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(d) |
Date
on which reported to RBI9 |
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(e) |
Reasons
for delay, if any, in reporting the
fraud to RBI |
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9
(a,b) |
Brief
history modus operandi (be precise,
clear in description) |
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10. |
Fraud
committed by |
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a. |
Staff |
Yes/No |
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b. |
Customers |
Yes/No |
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c. |
Outsiders |
Yes/No |
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11.a |
Whether
the controlling office (Regional/Zonal)
could detect the fraud by a scrutiny of
control returns submitted by the branch |
Yes/No |
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b. |
Whether
there is need to improve the information
system |
Yes/No |
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12.a |
Whether
internal inspection/ audit (including
concurrent audit) was conducted at the
branch(es) during the period between the
date of first occurrence of the fraud
and its detection. |
Yes/No |
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b. |
If
yes, why the fraud could not have been
detected during such inspection/audit. |
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c. |
What
action has been taken for non-detection
of the fraud during such
inspection/audit |
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13. |
Action
taken/proposed to be taken |
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a. |
Complaint
with Police/ Investigative agency |
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i)
Whether any complaint has been lodged
with the Police/ Investigative agency |
Yes/No |
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ii)
If yes, name of office/ branch of
Investigative agency |
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1. |
Date
of reference |
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2. |
Present
position of the case |
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3. |
Date
of completion of investigation |
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4
a |
i)
Date of submission of investigation
report by Police/Investigative agency |
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ii)
If not reported to Police/ Investigative
agency, reasons therefore |
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b. |
Recovery
suit with Co-op. Court/Court |
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i)
Date of filing |
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ii)
Present position |
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c. |
Insurance
claim |
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i)
Whether any claim has been lodged with
the insurance company |
Yes/No |
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ii)
If not, reasons therefore |
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Details
of staff-side action |
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d. |
i)
Whether any internal investigation has
been/is proposed to be conducted |
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ii)
If yes, date of completion |
Yes/No |
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iii)
Whether any departmental enquiry has
been/is proposed to be conducted |
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iv)
If yes, give details as per format given
below: |
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e. |
Steps
taken/proposed to be taken to avoid such
incidents |
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14. |
Total
amount recovered |
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i)
Amount recovered from party/parties
concerned |
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ii)
From insurance |
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iii)
From other sources |
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Extent
of loss to the bank |
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Provision
held |
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Amount
written off |
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15. |
Suggestions
for consideration of RBI |
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*
Banks
have to categorically mention the nature of
audit the branch is subjected to viz. concurrent
audit, statutory audit, internal inspection,
etc.
Instructions for compiling the Fraud Report (FMR
1):
1 Fraud number: This has been introduced with a
view to facilitate computerizations and
cross-reference. The number will be an
alphanumeric field consisting of the following:
four alphabets (to indicate name of bank), two
digits for the year (02, 03, etc.), two digits
for the quarter (01 for January – March
quarter, etc.) and the final four digits being a
distinctive running number for the fraud
reported during the quarter.4
2 Name of the branch: In case the fraud relates
to more than one branch, indicate the name of
only one branch where the amount involved has
been the highest and/or which is mainly involved
in following up the fraud. The names of the
other branches may be given in the brief
history/modus operandi against item number
9.
3 Name of party: A distinctive name may be given
to identify the fraud. In the case of frauds in
borrower accounts, name of the borrowers may be
given. In the case of frauds committed by
employees, the name's) of the employee's) could
be used to identify the fraud. Where fraud has
taken place, say, in clearing
account/inter-branch account, and if it is not
immediately possible to identify the involvement
of any particular employee in the fraud, the
same may be identified merely as “Fraud in
clearing/inter-branch account”.
4 Area of operation where the fraud has
occurred: Indicate the relevant area out of
those given in column 1 of statement FMR 2 (Part
A) (Cash; Deposits (Savings/Current/Term);
Non-resident accounts; Advances (Cash
credit/Term Loans/Bills/Others); Foreign
exchange transactions; Inter-branch accounts;
Cheques/demand drafts, etc.; Clearing, etc.
accounts; Off-balance sheet (Letters of
credit/Guarantee/Co acceptance/ Others);
Others)
5 Nature of fraud: Select the number of the
relevant category from the following which would
best describe the nature of fraud:
(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) Others.
6 Total amount involved: Amounts should, at all
places, be indicated in Rs. lakh up to two
decimal places.
7 Date of occurrence: In case it is difficult to
indicate the exact date of occurrence of fraud
(for instance, if pilferages have taken place
over a period of time, or if the precise date of
a borrower’s specific action, subsequently
deemed to be fraudulent, is not ascertainable),
a notional date may be indicated which is the
earliest likely date on which the person is
likely to have committed the fraud (say, January
1, 2002, for a fraud which may have been
committed anytime during the year 2002). The
specific details, such as the period over which
the fraud has occurred, may be given in the
history/modus operandi.
8 Date of detection: If a precise date is not
available (as in the case of a fraud detected
during the course of an inspection/audit or in
the case of a fraud being reported such on the
directions of the Reserve Bank), a notional date
on which the same may be said to have been
recognised as fraud may be indicated.
9 Date of reporting to RBI: The date of
reporting shall uniformly be the date of sending
the detailed fraud report in form FMR 1 to the
RBI and not any date of fax or DO letter that
may have preceded it.
* Banks have to categorically mention the nature
of audit the branch is subjected to viz.
concurrent audit, statutory audit, internal
inspection, etc.
FMR – 2 Quarterly Report on Frauds
Outstanding (Vide Paragraph 4.1)
Name of the bank
______________________________________
Report for the quarter ended
_____________________________
Domestic Overseas
Part – A: Frauds Outstanding
|
Category |
Cases
outstanding as at
the end of the previous quarter |
New
cases reported
during the current quarter |
Cases
closed during
the current quarter |
Cases
outstanding
as at the end of the quarter |
Total
amount recovered |
Provision
held for cases outstanding
as at the end of
the Qtr. |
Amount
Recovere d during the
current Qtr. |
Written
off during the current
quarter |
|
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
13 |
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Cash |
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Deposits
Savings Current Term |
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Non-resident
accounts |
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Advances
Cash credit T rm Loans Bills
Others |
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Foreign
exchange transactions |
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Inter-branch
accounts |
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Cheques/Demand
drafts, etc. |
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Clearing,
etc., accounts |
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