Understanding the Measures in Preventing Fraud in Banking Operations

Table of Contents

1. Introduction
2. Preventive Vigilance in Current Account
3. Preventive Vigilance in Term Deposit Account
4. Preventive Vigilance and Guidelines on a Continuous Basis
5. Preventive Vigilance in Other Operational Areas
6. Common Observations Regarding Fake Cheques
7. Tips for Cheque Fraud Prevention
8. Precautions Common to all Inter-branch Transactions

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1. Introduction

It is quiet indicative from the performance of the financial sector that the Indian economic growth graph is on an upward trajectory despite of the world-wide recessionary trend. Therefore, there has been a noticeable upsurge in number of bank accounts opened, transaction through ATMs, POS and internet/mobile banking. As a sequel different bank have invested considerably to increase their banking network and their customer reach. To provide service of high quality and cost-effective banks have resorted to various alternative delivery channels which are more customer induced in nature. Providing services on mobile, social media platforms & other digital platforms with limited knowledge of the security requirements, poses a lot of threats to customers as well as the financial institutions. This unhealthy development in the banking sector produces not only losses to the banks but also affects their reputation adversely. Despite having a strong regulator, the financial services sector has emerged as the most susceptible to fraud.

Frauds have been classified by Reserve Bank of India as under, based mainly in the provision of the Indian Penal Code.

• Misappropriation and criminal breach of trust.
• Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts and conversion of property.
• Unauthorized credit facilities extended for reward and illegal gratification.
• Negligence and cash shortage.
• Cheating and forgery.
• Irregularities in foreign exchange transactions.
• Any other type of fraud not coming under the specific head as above.

Further, it is observed by RBI that weakened supervision and blurred lines of control and command attributes to frauds. Several illustrative causes attributing to Bank fraud, are as under:

• In the process of increasing the CASA base of respective branches (or any unit), KYC requirements are compromised.
• Staff members may use unscrupulous methods to achieve their respective targets
• Lack of tools to identify potential red flags.
• The symptoms of poor internal control systems increase the chances of frauds.
• Lack of training, overburdened staff, competition, low compliance level is considered as the key factor.
• The new technologies adopted by banks are making them increasingly vulnerable to various risks.
• Banking transactions today is independent from bank branches. Most of the transactions have moved to debit/credit cards and to electronic channels like ATMs, RTGS/NEFT, ECS/NECS, Internet banking and Mobile banking. This has given a happy hunting ground to fraudsters.
• Insider fraud, whether arising from coercion, collusion, or otherwise, are increasingly considered to be one of the most serious fraud threats faced by banks in India.
• People with no or little experience or exposure to loans/advances are posted to branches which have large advances portfolio and are compelled to process loan proposals.
• Financial innovations have led to higher aggregate borrowings, which has resulted in higher defaults.
• Basic principles are not adhered that can go a long way in preventing fraud, namely the principles of knowing the customer and employees as well as partners. It is not sufficient to know only the customer alone but also pertinent to know its business, its goal and customers of the customer.
• It is time to stress on good governance in banks to increase their competitiveness and to be able to raise money from markets easily. In response to the common perception that increasingly strict regulations will make business opportunities is a cause of complacency across the industry.
• Rise in consumer bankruptcy can largely be accounted by the extensive margin and lower stigma associated with it.
• Skill and Competencies required to ensure a robust appraisal system and to monitor asset quality of bank based on Early Warning Signals.
• Underreporting/ever greening of loans on the part of the Banks as evidenced in past must be arrested.
• Involvement of third-party agencies and firms in garnering the credit leads is examined with utmost precession and transparency.

Following measures in banking Operation could arrest its occurrence: At the time of opening the account:

• “Know Your Customer” (KYC) procedure is the guiding principle, for opening an account of any person.
• At the time of opening the account, the KYC procedure must go beyond establishing the identity of the person and satisfying about his credentials which should inter alia include knowledge about the following:

1. 1. Identity of the person
   2. Location
   3. Nature of activity,
   4. Source of income, ownership of funds
   5. Purpose of transaction/opening the account
   6. Verify/check his background
   7. Allocation of risk category based on his profile

• Documents submitted by the Person seeking to open the account should be verified with the original Officially Valid Documents (OVD). Further the information submitted in the Account Opening Form (AOF) should be cross checked with the OVDs. Sometimes fraudsters obtain the documents of others and produce the copies of those documents to open accounts and sign differently from what appearing on the document on the pretext that the signature has been changed. Such cases should be handled with high caution.
• Enhanced Due Diligence (EDD) for high risk and medium risk customer accounts is required to be done.
• Indicative List of High-Risk Customers:

1. 1. Persons engaged in cash intensive business-like Bullion dealers (including sub-dealers) & Jewelers
   2. Politically Exposed Persons (PEPs) of foreign origin e.g., Heads of States/Governments, senior politicians, senior government/judicial/military officers, senior executives of state-owned corporations, important political party officials, etc. Before opening an account of PEP, branches will take/ obtain specific precaution, NRIs
   3. Trust accounts, Charities, NGOs and organizations receiving donations
   4. Correspondent Banking
   5. High net worth individuals (HNI)
   6. Companies having close family shareholding or beneficial ownership
   7. Firms with ‘sleeping partners’
   8. Non-face to face
   9. Those with dubious reputation as per public information available
   10. Fiduciary Accounts
   11. Pooled Accounts

• Bank has to identify existing customer ID based on PAN, Mobile Number, Passport,
  Aadhaar, Voter ID and Driving License before creation of new Customer IDs. Further Bank has to identify and merge existing duplicate customer IDs in the system respectively.
• While acquiring new customers, the CBS system gives appropriate messages in case the name of the new customer matches with the name UNSCR list (United Nations Security Council Resolution). Branches should not open accounts of known criminals or Terrorist Individuals/Entities/Organizations.
• Branches must verify PAN quoted by the customer, with the original PAN Card/PAN Allotment Letter and retain copy thereof for having ensured due diligence in this regard. Further, branches should verify the genuineness of PAN through the site and ensure its correctness. As per provisions of section 139A of the Income Tax Act 1961, quoting of PAN is compulsory in respect of certain transactions and it is further provided that any person who does not have a permanent account number and who enters into any transaction specified under the above rule shall make a declaration in Form No. 60.
• Branches are required to ensure identification and enrichment of details of “Beneficial Owner” in all new as well as existing Accounts of Non-Individual Customers (other than Sole Proprietorship and listed Companies).

2. Preventive Vigilance in Current Account

• All Current A/c be opened after ensuring KYC procedure.
• It is now mandatory to access CRILC database before opening and Current Account and NOC from Banks from Customer is enjoying credit facilities (As per AOF and CRILC) should be obtained.
• CIBIL reference to be verified.
• Further, http://www.mca.gov.in/MCA21/can be visited for due diligence on Companies and www.icai.org for verification of Auditor’s Certificate of Practice.
• All transactions debit as well credit must be closely monitored in newly opened current accounts in compliance of AML/CFT guidelines.
• To enquire the customers, the reasons for transferring funds to unrelated parties without hurting their sentiments and in case of unsatisfactory response, an alert may be entered through.

3. Preventive Vigilance in Term Deposit Account

• Term deposit receipts should be kept in Lock and key under dual control and the stock is entered in finacle.
• Proper monitoring for daily consumption of security forms should be done by
  the concerned officer. Loose inventory given to operator and received back from operators and that consumed during the day must be verified from the system.
• Term deposit receipts should be printed through the system only. No manual receipts should be issued.
• Proper receipt number should be checked from the system.
• The amount of FD receipt must be verified from system and corresponding debit and credit vouchers at the time of signing the same by branch officials.
• Term deposit receipts which are not collected by customer should be kept in lock and key.
• Accounts, where there is no face to face interaction between the branch and ultimate customer, may be opened with proper due diligence and additional safeguards such as calling for additional documents, visit of customer and effecting first payment through the account of the customer maintained with another bank that has adhered to extant KYC/AML guidelines.
• In case of misprint, other discrepancies, a fresh receipt should be printed instead of altering the printing details.

4. Preventive Vigilance and Guidelines on a Continuous Basis

• Large and complex transactions and those with unusual patterns, which have no apparent economic rationale and legitimate purpose.
• Transactions which exceed the thresholds prescribed for specific categories of accounts.
• Transactions involving large volume of cash inconsistent with the normal and expected activities of the customer.
• High account turnover inconsistent with the size of the balance maintained.
• Generation, checking and filing of Exceptional Transaction Reports.
• Branches are required to verify the identity of the customers for all international money transfer operations.
• Branches should ensure that any remittance of funds by way of demand draft, Bankers Cheque or any other mode for value of Rs. 50,000/-(Rupees fifty thousand) and above is effected by debit to the customer’s account or against cheques and not against cash payment.
• In case of existing customers, branches should obtain above information while updating their identification data at the prescribed intervals i.e. at least every two years for high risk individuals and entities. Full KYC exercise will be required to be done at least every ten years for low risk and at least every eight years for medium risk individuals and entities.
• Fresh photographs will be required to be obtained from minor customer on becoming major.
• There is a system of periodical review of risk categorization of the customers through CBS system for applying enhanced due diligence for high risk customers.
• Branches should closely monitor the transactions in accounts of marketing firms, especially accounts of Multi-Level Marketing Companies and transactions through ‘Money Mules’.
• Savings Bank accounts are operated either by Cheque Books or Withdrawal slips. In case cheque book is issued no withdrawal should be allowed on withdrawal slip. In exceptional cases it can be allowed after proper enquiry and full satisfaction and to the account holder only.
• If a request for activation of an inoperative/dormant account is received, due diligence should be exercised while doing so and the transactions in the account, especially large value transactions, should be closely monitored for few days. Activity in Potentially Dormant Accounts or those accounts not operated for a substantial period of time should be monitored.
• If a pension account remains inoperative for some time, any withdrawal should be allowed only after concrete and thorough enquiry/due diligence.
• Any cheque especially of large amount, drawn on a newly opened account presented for payment should be carefully checked for its originality, genuineness and alteration etc. before allowing payment.
• When a request for cheque book is received complete address should be updated in the system after confirming form documents before lodging in the system. The cheque book must be entered in the system.
• Transactions in newly opened accounts should be monitored scrupulously.
• List of accounts upgraded from Dormant to Active status during a particular period be monitored.

5. Preventive Vigilance in Other Operational Areas

• No credit is to be given to the depositor of counterfeit note.
• Branches are required to send acknowledgement to them immediately upon receipt of consignment of Security forms. The consignment is to be opened immediately upon receipt in the presence of Branch Manager/Second in-charge and the number of books and the leaves in each book should be counted. All security forms must be entered in system.
• Surprise Cash Verification should be used carried out to prevent frauds related to cash shortages.

6. Common Observations Regarding Fake Cheques

• Some of the cheques are simply coloured photocopy of the original cheque.
• The quality of the paper of the cheque leaf is inferior. In some cases, it was parchment paper which is non-MICR paper.
• The cheque leaf did not have water mark, Bank’s logo and/or Bank’s name.
• The cheques are not printed with super sensitized ink. Sensitized ink is used for printing of all our cheque leaves. This ink tends to fade and dissolves/breaks up on coming in contact with any liquid or chemical.
• MICR code line is not in black magnetic ink.
• The cheque design and size is different from the standard design and size of the original cheques.
• In many instances color of logo on the fake cheque does not match with colour of our Bank’s logo.
• Many of such cheques are presented in inter branch transactions.

7. Tips for Cheque Fraud Prevention

The following are the tips to protect our self from cheque related fraud:

• Settle our accounts regularly and on time.
• Never sign blank cheques.
• Only sign them once all the details are complete.
• Avoid leaving gaps in the payee’s name, and write the amount in words & figures.
• Keep our cheque book in a secure place to avoid theft.
• Tear up or shred any cheques we have made a mistake.
• Use electronic payments (if possible) for high-value amounts.
• Secure our postal mailbox.
• Limit the number of signatories on our account.
• Make sure invoices are valid before paying them.
• Ensure the signature’s not on any documents that the general public can access.
• Contact immediately if our cheque’s been lost or stolen and ask to stop payment.

8. Precautions Common to all Inter-branch Transactions

•  All Cheques received for transfer/clearing transactions should be screened under ultraviolet ray machine for safe guarding against non-apparent chemical alteration in the tenor of the cheque.
• Cheque passed and not issued messages are not to be ignored. While passing the cheques in the system sometimes it throws the message “cheque already paid”. Despite this message by the system in certain instances officers have ignored the exceptional message and modified the cheque number and authorize. Such transactions were later found to be fraudulent transactions.
• In case of High Value transfer transactions base branch is contacted for ascertaining the genuineness and confirmation be sought before passing.
• It is advised to check Inter-branch transfer transactions on daily basis to monitor these transactions allowed during the day by the branch.
• In case of high value cheques presented in clearing, and in case of doubt (for small value cheques) Back Offices/Main branches (handling clearing) should contact the base branch and ascertain the genuineness of the cheque.

Communication received from customers through email for Fund Transfer: It has been observed that customers are using different modes for communication with branches such as Fax, email, scanned letter etc. for different purposes including fund transfer through NEFT/RTGS/Swift. Fraud has been reported where branch has received request for fund transfer in Foreign Currency or RTGS through customer’s email.

In view of above, we advise precautions as under are required to be taken.

• Fax, email and scanned letters are not a valid mode of communication for banking transactions.
• Branches should not entertain request of fund transfer to third party received through fax, email or scanned letters.
• Branches to ensure the transactions are taken place on the basis of proper mandate.

Cheques issued by customers in favour of “Yourself” For certain transactions such as issuance of Demand Draft, RTGS/NEFT or Tax payment, the following precautions are required to be taken.

• Customer should be educated that whenever cheques are issued favouring “Yourself” or in favour of “Bank”, the purpose must be written on the back side of cheque so that fraudulent transactions if any may be avoided.
• When such cheques are received transfer stamp should be affixed on it immediately and it should be kept at proper place.
• The cheques should not be kept on table or counter where anybody can pick it up.
• Whenever high value cheques favouring “Yourself” or “Bank”, Account (Account No. or Name of payee) are received through 3rd party or through employees of Account holder’s organization, the credentials of payee must be ascertained from the drawer to avert any fraud.

References:

1. RBI Circular on Master Directions on Frauds – Classification and Reporting by commercial banks and select FIs-RBI/DBS/2016-17/28 DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated July 01, 2016 (Updated as on July 03, 2017)
2. RBI/DBR/2015-16/18 Master Direction DBR.AML.BC. No. 81/14.01.001/2015-16: aster Direction — Know Your Customer (KYC) Direction, 2016 (Updated upto 04.05.2023)