These 10 transactions must be reported as fraud to RBI within 14 days

ncidents of fraud at overseas branches of Indian banks shall also be reported to the concerned overseas LEAs in accordance with the relevant laws / regulations of the host countries.

The Reserve Bank of India (RBI) has released new guidelines to help banks and other financial institutions fight fraud. The central bank issued three revised master directions on fraud risk management for Regulated Entities such as commercial banks including regional rural banks and All India Financial Institutions; urban, state and central cooperative banks; and non-banking finance firms and housing finance companies.

“The framework on Early Warning Signals and Red Flagging of Accounts has been strengthened for early detection and prevention of frauds in the REs and timely reporting to law enforcement agencies and supervisors. Further, requirement for data analytics and market intelligence unit for strengthening risk management systems have been mandated,” the RBI said.

 

The RBI withdrew 36 existing circulars on the subject following the revisions, to rationalise rules and reduce compliance burden.

Who is affected? Banks (including small regional banks), credit unions, and non-banking financial companies

What's new? The RBI reviewed existing rules and made them clearer and more focused on principles.

Boards take charge: Bank boards need to be more involved in overseeing how fraud is prevented.

Stronger internal controls: Banks need to have better systems in place to catch fraud early.

Early warnings: Banks need to be better at spotting suspicious activity that could lead to fraud. Banks should use data and technology to identify and prevent fraud.

Reporting fraud: Banks must now designate a specific person or team (nodal point) to report fraud to law enforcement agencies (LEAs) and coordinate with them to meet their needs. If fraud is found, it also needs to be reported to the RBI quickly.

How will reporting work? To ensure consistency, banks will use a specific online portal to report fraud to the RBI. 

10 specific categories of transactions that will be flagged as fraud and reported to the RBI. These include:

• Misusing funds or committing a breach of trust (e.g., embezzlement)
• Cashing fake cheques forexor using forged instruments
• Manipulating accounts (e.g., creating fake accounts or hiding information to steal money)
• Cheating through deception or impersonation
• Forgery (creating fake documents)
• Tampering with records to commit fraud
• Granting loans for illegal purposes
• Cash shortages due to fraudulent activity
• Fraudulent foreign exchange transactions
• Online banking or digital payment fraud 

Reporting incidents of fraud to RBI:

• Banks need to report all fraud cases (regardless of amount) to the RBI using an online portal (FMR) within 14 days of classifying an incident as fraud.
• Frauds committed on overseas branches of Indian banks must also be reported to the local authorities in that country.
• If a bank's subsidiaries or group entities (not regulated by financial authorities) are involved in fraud, the bank must report it to the RBI separately. These entities, however, need to follow fair procedures before declaring someone a fraudster.
• Banks are responsible for ensuring timely reporting and investigating staff accountability for delays in identifying or reporting fraud.
• The FMR report should only include individuals or entities genuinely involved in the fraud.