Fraud Risk Management Function To Be Owned By Banks' CEOs - RBI

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Expressing concern over rising incidence of frauds in banks, especially in hosing and mortgage loans, credit card dues and internet banking, the Reserve Bank of India (RBI) has advised banks to provide singular focus on the "Fraud Prevention and Management Function' to enable accurate reporting of fraud cases to appropriate regulatory and law enforcement authorities including the central bank.

Noting that the steps taken by banks in investigating the frauds and identifying the fraudsters haven't been adequate, the central bank advised banks to immediately frame internal policy for fraud risk management and fraud investigation functions, based on the governance standard relating to the ownership of the function and accountability for malfunctioning of the fraud risk management process in their banks.

The function of the unit will have to be discharged in a centralized manner instead of leaving it to the regional offices of banks, where such specialization may not be available.

The apex bank also expressed concern that instances of frauds in the traditional areas of banking such as cash credit, export finance, guarantees, letters of credit remain unabated.

" While certain structural factors in the banks' operating environment could account for this rising trend in general, adoption of aggressive business strategies and processes by the banks for quick growth and expansion without ensuring that adequate / appropriate internal controls are in place could, in specific, incentivize operating staff to lower the standards of control while attempting to meet business targets." the RBI noted.

To tackle the increasing instances of frauds, both in terms of number of frauds and the amounts involved, the RBI has asked all banks to build up a data or information pool of large-value frauds and analyse them periodically. It also advised banks to take immediate steps to identify staff with proper aptitude and provide necessary training to them in forensic audit.

The fraud risk management and fraud investigation function must be owned by the bank's CEO, its Audit Committee of the Board and the Special Committee of the Board, at least in respect of high value frauds, the RBI said in a notification to chairmen and chief executives of all scheduled commercial banks.

They should also own responsibility for systemic failure of controls or any absence of key controls or severe weaknesses in existing controls which facilitate exceptionally large-value frauds.

" At present, the special committees give routine instructions on follow- up actions. The Committees' directions are not mandated to be implemented by any dedicated operating unit of the banks," the RBI said.

(Market News Provided by RTTNews)