1 What is a Red Flagged Account?
According to RBI Directions, it is an account where suspicion of fraudulent activity is thrown up by the presence of one or more EWS indicators, alerting / triggering deeper investigation from potential fraud angle and initiating preventive measures by the banks.
2 What is Governance Structure in banks for Fraud Risk Management?
There should be a Board approved Policy on fraud risk management delineating roles and responsibilities of Board / Board Committees and Senior Management of the bank.
3 What should be the procedure in bank Policy, for declaring / classifying a loan as Fraud?
A) Issuance of a detailed Show Cause Notice (SCN) to the Persons, Entities and its Promoters / Whole-time and Executive Directors against whom allegation of fraud is being examined.
B) The SCN shall provide complete details of transactions / actions / events / basis which declaration and reporting of a fraud is being contemplated.
C) A reasonable time of not less than 21 days shall be provided to respond to SCN.
D) A reasoned Order shall be served on the Persons / Entities conveying the decision of the bank regarding declaration / classification of the account as fraud with relevant facts .
4 What is Special Committee of the Board for Monitoring and Follow-up (SCBMF) of cases of Frauds?
A) Banks to constitute SCBMF with a minimum of three members of the Board. Members (whole-time director + minimum of two independent directors / non-executive directors.
B) The Committee shall be headed by one of the independent directors / non-executive directors.
C) Task of SCBMF – Oversee the effectiveness of the fraud risk, review and monitor cases of frauds and suggest mitigating measures.
5 Who will be responsible for monitoring and reporting of frauds?
Within overall risk management department, a senior official in the rank of at least a General Manager or equivalent shall be responsible.
6 What is role of Risk Management Committee of Board?
A) EWS indicators identified for monitoring credit facilities / loan accounts and other banking transactions shall be approved by the RMCB.
B) RMCB to fix Appropriate Turnaround Time (TAT), preferably not more than 30 days, for examination of EWS alerts / triggers.
C) RMCB shall review the status of red flagged accounts, including the EWS alerts / triggers, remedial actions initiated by the bank.
7 What is Data Analytics and Market Intelligence (MI) Unit?
To enable an early detection and prevention of potentially fraudulent activities a dedicated Data Analytics and Market Intelligence (MI) Unit to be set up to facilitate collection and processing of relevant information
8 When report about Red Flagged Account to be sent to RBI?
An account meeting the CRILC reporting threshold, once red flagged, shall be reported within seven days of being red flagged.
9) What further action is required for a loan account classified as Red Flagged Account?
Banks shall use an external audit or an internal audit, for further investigation in such accounts, within the timeline approved by the Board.
10) What to do if borrower is not cooperative in investigation?
Banks shall conclude on status of the account as a fraud or otherwise based on the material available on their record and their own internal investigation / assessment.
11) What is time line to classify an account as Fraud when account is first reported as red-flagged on CRILIC platform?
The entire process of classification of the account as fraud or removal of red-flagged status shall ordinarily be completed within 180 days.
12) What special action is needed if case remains in red-flagged status beyond 180 days?
Reported to SCBMF for review. Such cases shall also be subject to supervisory review by the Reserve Bank.
13) If one account is identified as a fraud by any bank, what action on related accounts?
Accounts of other group companies, in which one or more promoter(s) / whole-time director(s) are common, shall also be subjected to examination by banks concerned from fraud angle
14) What action required where Law Enforcement Agencies (LEAs like CBI, Police) have suo moto initiated investigation involving a borrower account?
Bank shall immediately red-flag the account and follow the usual process for classification of account as fraud.
15) What action required to fixing staff accountability?
Banks shall initiate and complete the examination of staff accountability in all fraud cases in a time-bound manner as per their internal policy.
16) What extra action required for staff accountability in Public Sector Banks?
To conduct examination of staff accountability as per the guidelines issued by the Central Vigilance Commission (CVC).
In terms of CVC Order, they shall refer all fraud cases of amount involving ₹3 crore and above for examining the role of all levels of officials / whole-time directors to the Advisory Board for Banking and Financial Frauds (ABBFF) constituted by the CVC.
17) What Penal Measures are prescribed by RBI for Fraud classified account?
Persons / Entities classified and reported as fraud by banks and Entities and Persons associated with such Entities, shall be debarred from raising of funds and / or seeking additional credit facilities from financial entities regulated by RBI, for a period of five years from the date of full repayment of the defrauded amount / settlement amount agreed upon in case of a compromise settlement.
18) What will be position of extending loans after cooling period?
The lending banks shall have the sole discretion to entertain or decline such requests for credit facilities after the expiry of the mandatory cooling period.
19) What treatment to be given to accounts classified as fraud, if there is change of management under IBC or Resolution?
Bank shall examine whether the entity shall continue to remain classified as fraud or the classification as fraud could be removed after implementation of the Resolution Plan
The penal measures shall not be applicable to entities / business enterprises after implementation of the Resolution Plan under IBC or aforesaid prudential framework.
20) What are reporting requirements of Frauds (including frauds at overseas branches) to Law Enforcement Agencies (LEAs)?
A) Private Sector / Foreign Banks
1) Below ₹1 crore : State / Union Territory (UT) Police
2) ₹1 crore and above : In addition to State/UT Police, Serious Fraud Investigation Office (SFIO), Ministry of Corporate Affairs, Government of India on Fraud Monitoring Return (FMR) format.
B) Public Sector Banks / Regional Rural Banks
1) Below ₹6 crore : State / UT Police
2) ₹6 crore and above : Central Bureau of Investigation (CBI)
21) What are the provisions regarding reporting through Fraud Monitoring Returns (FMRs), of Incidents of Fraud to Reserve Bank of India (RBI)?
Banks shall choose the most appropriate category from the list of fraudulent activities, given under FMR
22) What are modalities of Reporting Incidents of Fraud to RBI
Banks shall furnish FMR for all individual fraud cases, within 14 days from the date of classification of an incident / account as fraud.
23) What procedure to adopt in closure of Fraud Cases Reported to RBI?
Banks can close fraud cases if 1) fraud cases pending with LEAs / Court are disposed off , 2) the examination of staff accountability has been completed.
Further, for limited statistical / reporting purposes, banks can close those reported fraud cases involving amount up to ₹1 crore,
a) where examination of staff accountability and disciplinary action, if any, have been taken
b) investigation is going on or charge-sheet has not been filed in the Court by LEA for more than three years from the date of registration of First Information Report (FIR)
c) charge-sheet is filed in trial court and has not commenced or is pending before the court for more than three years from the date of registration of FIR.
These FAQs are based on RBI (Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions) Directions, 2024, notified by RBI on 15.07.2024