Fraud Reporting

Fraudulent activities pose multifaceted risks to banks, including reputational damage, operational disruptions, and financial losses. Despite regulatory efforts to mitigate these risks, the banking sector continues to grapple with the increasing sophistication of fraudsters. In the FY 2022-23, Indian banks reported over 13,500 fraud cases involving INR 26,632 Cr (USD $3.3 B), although the trend is definitely declining (INR 45,598 Cr in FY 21-22 and INR 1,18,417 Cr in FY20-21)¹. The ongoing success in fraud mitigation can be credited to RBI’s regulations and timely monitoring. In this article, we highlight RBI’s emphasis towards tackling banking sector fraud, timely reporting to prevent delays in alerting other institutions and disseminating crucial information.

To ensure uniformity in reporting, frauds have been classified into various categories based on provisions similar to those found in the Indian Penal Code:

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. Unauthorized credit facilities extended for reward or for illegal gratification.
4. Cash shortages.
5. Cheating and forgery.
6. Irregularities in foreign exchange transactions.
7. Any other type of fraud not falling under the specific categories mentioned above.

To streamline reporting and oversight, the RBI has instituted the Central Fraud Registry (CFR), a searchable database for submitting Fraud Monitoring Returns (FMR). Banks are obligated to furnish FMRs electronically via the XBRL system within three weeks of identifying fraud, irrespective of the amount involved. Non-compliance with these directives can result in penalties under Section 47(A) of the Banking Regulation Act, 1949.

The importance of timeliness in fraud detection cannot be overstated. Currently, the identification of frauds often experiences significant delays, with banks typically labeling an account as fraudulent only after exhausting all avenues of potential recovery. Delays in reporting frauds and subsequent dissemination of information through Caution Advice/CFR could lead to similar fraudulent activities being perpetrated elsewhere.

In the context of loan fraud, the RBI has implemented a framework focusing on prevention, early detection, and prompt reporting to regulatory bodies. This framework includes initiating staff accountability proceedings promptly to safeguard banking operations from disruption. Early Warning Signals (EWS) in loan accounts play a crucial role in fraud detection, prompting banks to integrate EWS tracking into their credit monitoring processes, including identifying Red Flagged Accounts (RFA) to enhance vigilance and mitigate credit and fraud risks.

The RBI’s sophisticated fraud reporting system necessitates banks to match this sophistication in their monitoring and reporting systems. Banks are advised to leverage the Central Fraud Registry for timely identification, control, reporting, and mitigation of fraud risks. Establishing robust systems and procedures to incorporate information from the Central Fraud Registry into credit risk governance and fraud risk management is crucial for effective fraud prevention and detection in the banking sector. Annuity Risk Compliance Suite is equipped not only to monitor fraud reporting but also to integrate with other departments such as credit risk to enhance the overall operations of banks and ensure timely reporting.