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RBI/DOS/2024-25/119 DOS.CO.FMG.SEC.No.6/23.04.001/2024-25 July 15, 2024
The Chairman / Managing Director / Chief Executive Officer All Primary (Urban) Cooperative Banks (UCBs) All State Cooperative Banks (StCBs) and Central Cooperative Banks (CCBs)
Madam / Dear Sir,
Master Directions on Fraud Risk Management in Urban Cooperative Banks (UCBs) / State Cooperative Banks (StCBs) / Central Cooperative Banks (CCBs)
Please find enclosed as Annex 'Reserve Bank of India (Fraud Risk Management in UCBs / StCBs / CCBs) Directions, 2024' issued in exercise of the powers conferred under Section 21 and Section 35A read with Section 56 of the Banking Regulation Act, 1949. These Directions shall supersede the earlier directions on the subject, namely, ' Master Circular– 'Classification and Reporting' (DCBR.CO.BPD.MC.No.1/12.05.001/2015-16) dated July 1, 2015 .
Yours faithfully
(Rajnish Kumar) Chief General Manager
Encl.: as above
Annex
Master Directions (MD) on Fraud Risk Management in Urban Cooperative Banks (UCBs) / State Cooperative Banks (StCBs) / Central Cooperative Banks (CCBs)
CONTENTS
INTRODUCTION
CHAPTER I
1.1 Short Title and Commencement 1.2 Applicability 1.3. Purpose
CHAPTER II
CHAPTER III
CHAPTER IV
4.1 Credit facility / Loan account / Other banking transactions- Indication of fraudulent activities 4.2 Independent confirmation from the third-party service providers including professionals 4.3 Staff Accountability 4.4 Penal Measures 4.5 Treatment of accounts under Resolution
CHAPTER V
CHAPTER VI
6.1 Reporting of Incidents of Fraud to Reserve Bank of India (RBI) 6.2 Modalities of Reporting Incidents of Fraud to RBI 6.3 Closure of Fraud Cases Reported to RBI
CHAPTER VII
CHAPTER VIII
CHAPTER IX
CHAPTER X
INTRODUCTION
In exercise of the powers conferred under Section 21 and Section 35A read with Section 56 of the Banking Regulation Act, 1949, the Reserve Bank of India being satisfied that it is necessary and expedient in the public interest and in the interest of banking policy to do so, hereby, issues the Directions hereinafter specified.
CHAPTER I
1.1 Short Title and Commencement
These Directions shall be called the Reserve Bank of India (Fraud Risk Management in UCBs / StCBs / CCBs) Directions, 2024.
1.2 Applicability
The provisions of these Directions shall, unless otherwise provided, apply to all Primary (Urban) Cooperative Banks (UCBs) and Rural Cooperative Banks i.e. State Cooperative Banks (StCBs) and Central Cooperative Banks (CCBs) licensed or permitted to carry on banking business in India by the Reserve Bank of India. Such Cooperative Banks shall hereinafter collectively be referred to as 'Cooperative Banks' for the purpose of these Directions.
1.3 Purpose
These Directions are issued with a view to providing a framework to Cooperative Banks for prevention, early detection and timely reporting of incidents of fraud to Law Enforcement Agencies (LEAs), Reserve Bank of India (RBI) and NABARD 1 and dissemination of information by RBI and matters connected therewith or incidental thereto.
CHAPTER II
2.1 There shall be a Board 2 Approved Policy 3 on fraud risk management delineating roles and responsibilities of Board / Board Committees and Senior Management of the Cooperative Bank.The Policy shall also incorporate measures for ensuring compliance with principles of natural justice 4 in a time-bound manner which at a minimum shall include:
2.1.1 Issuance of a detailed Show Cause Notice (SCN) to the Persons 5 , Entities and its Promoters / Whole-time and Executive Directors against' whom allegation of fraud is being examined 6 . The SCN shall provide complete details of transactions / actions / events basis which declaration and reporting of a fraud is being contemplated under these Directions.
2.1.2 A reasonable time of not less than 21 days shall be provided to the Persons / Entities on whom the SCN was served to respond to the said SCN.
2.1.3 Cooperative Banks shall have a well laid out system for issuance of SCN and examination of the responses / submissions made by the Persons / Entities prior to declaring such Persons / Entities as fraudulent.
2.1.4 A reasoned Order shall be served on the Persons / Entities conveying the decision of the Cooperative Banks regarding declaration / classification of the account as fraud or otherwise. Such Order(s) must contain relevant facts / circumstances relied upon, the submission made against the SCN and the reasons for classification as fraud or otherwise.
2.2 The Fraud Risk Management Policy shall be reviewed by the Board at least once in three years, or more frequently, as may be prescribed by the Board.
2.3 Special Committee of the Board for Monitoring and Follow-up of cases of Frauds:
2.3.1 Cooperative Banks shall constitute a Committee of the Board to be known as 'Special Committee of the Board for Monitoring and Follow-up of cases of Frauds' (SCBMF) with a minimum of three members of the Board, consisting of the Chief Executive Officer and two directors 7 . The Committee shall be headed by one of the directors. UCBs categorised as Tier 1 & 2 for regulatory purposes 8 and StCBs / CCBs having deposits below ₹1000 crore 9 , shall have the option of constituting a Committee of the Executives (CoE) with a minimum of three members, at least one of whom shall be the Chief Executive Officer for the purpose of performing the roles and responsibilities of SCBMF as required under these Directions.
2.3.2 SCBMF shall oversee the effectiveness of the fraud risk management in the Cooperative Bank. SCBMF shall review and monitor the cases of frauds, including root cause analysis, and suggest mitigating measures for strengthening the internal controls, risk management framework and minimising the incidence of frauds. The coverage 10 and periodicity of such reviews shall be decided by the Board of the Cooperative Bank.
2.4 The Senior Management shall be responsible for implementation of the fraud risk management policy approved by the Board of the Cooperative Bank. A periodic review of incidents of fraud shall also be placed before Board / Audit Committee of Board (ACB), as appropriate, by the Senior Management of the Cooperative Bank.
2.5 Cooperative Banks shall put in place a transparent mechanism to ensure that Whistle Blower complaints on possible fraud cases / suspicious activities in account(s) are examined and concluded appropriately under their Whistle Blower Policy.
2.6 Cooperative Banks shall set-up an appropriate organisational structure for institutionalisation of fraud risk management 11 within their overall risk management functions / Department. A sufficiently senior official shall be responsible for monitoring and reporting of frauds.
CHAPTER III 12
3.1 Framework for Early Warning Signals for Detection of Frauds
3.1.1 UCBs categorised as Tier 3 & 4 and StCBs / CCBs having deposits above ₹1000 crore (i.e. Applicable Cooperative Banks for the purpose of this Chapter) shall have a framework for Early Warning Signals (EWS) under the overall Fraud Risk Management Policy approved by the Board.
3.1.2 A Board Level Committee 13 shall oversee the effectiveness of the framework for EWS. The Senior Management shall be responsible for implementation of a robust Framework for EWS within the Applicable Cooperative Bank.
