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

The Reserve Bank of India (RBI) has introduced new guidelines to help banks and financial institutions tackle fraud more effectively. The central bank released three revised master directions on fraud risk management for Regulated Entities (REs), which include commercial banks, regional rural banks, All India Financial Institutions, urban, state and central cooperative banks, non-banking finance firms, and housing finance companies.

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

The RBI emphasized the importance of early detection and prevention of frauds through a strengthened framework on Early Warning Signals and Red Flagging of Accounts. This framework aims to ensure timely reporting to law enforcement agencies and supervisors. Additionally, the guidelines mandate the use of data analytics and market intelligence units to enhance risk management systems.

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.

Banks are required to report all fraud cases, irrespective of the amount, to the RBI using an online portal called the Fraud Monitoring Report (FMR). This must be done within 14 days of classifying an incident as fraud. The guidelines also cover frauds committed in overseas branches of Indian banks, which must be reported to local authorities in the respective countries.

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

If a bank’s subsidiaries or group entities not regulated by financial authorities are involved in fraud, the bank must report these incidents separately to the RBI. However, these entities are required to follow fair procedures before declaring someone a fraudster.

Banks are responsible for ensuring the timely reporting of frauds and investigating staff accountability for any delays in identifying or reporting such incidents. The FMR report should only include individuals or entities genuinely involved in the fraud to maintain accuracy and fairness.

The RBI’s new guidelines are a significant step towards enhancing the detection, prevention, and reporting of fraud in the financial sector. By adhering to these directives, banks and financial institutions can improve their risk management practices and safeguard against fraudulent activities.