RBI frames rules to prevent fraud; wants vigilance officers in banks

RBI frames rules to prevent fraud; wants vigilance officers in banks

Mumbai: The Reserve Bank of India (RBI) has drawn up new rules for banks aimed at preventing fraud and irregularities.

The regulator has asked banks to immediately frame staff rotation and mandatory leave policies for employees in sensitive areas such as treasury and for relationship managers handling high-value clients.

Staff rotations and leave are international practices that help banks keep track of decisions and businesses handled by a particular employee.

In a notification on Thursday, RBI said it introduced the rules following forensic studies at certain banks due to the “occurrence of large value frauds or sharp increase in number of frauds at such banks".

In another notification, RBI directed private and foreign banks to appoint chief of internal vigilance (CIV) officers, with responsibilities similar to those of chief vigilance officers in public sector banks.

“It was observed that the practices vary widely among banks," RBI said. “It has, therefore, been decided to lay down detailed guidelines for private sector and foreign banks on similar lines so that all issues arising out of lapses in the functioning of the private sector and foreign banks, especially relating to corruption, malpractices, frauds, etc., can be addressed uniformly by the banks for timely and appropriate action."

Banks need to implement an internal vigilance system by 31 August and submit a compliance report.

RBI’s directive on staff rotation and mandatory leave comes a few months after a multi-crore fraud involving a relationship manager at the Gurgaon branch of Citibank India came to light.

The relationship manager, Shivraj Puri, is accused of defrauding clients of at least 400 crore after promising them astronomical returns. He is in police custody.

To prevent frauds, banks should have prescribed procedures and criteria to analyse and assess irregularities, RBI said. Banks should be able to understand the nature of an irregularity or fraud. For instance, whether it has taken place because of negligence in duty as a result of a “collusion" by employees, it said.

“Any action taken in collusion to derive undue/unjust benefit or advantage should be termed as fraud," RBI said.

It has asked banks to examine the “intent to defraud, irrespective of whether or not actual loss takes place".

If an irregularity is detected, banks should immediately assess if it was a result of human or system failure, RBI said.

The regulator also said that in the event of a fraud, banks should immediately move to recover the money.

“This exercise is the first critical step towards corrective action in the sense that it would lead to expeditious filing of police complaints, blocking/freezing of accounts and salvaging funds from the blocked/frozen accounts in due course," RBI said.

It asked banks to frame a “fit and proper" criteria for posting employees in critical positions such as in dealing rooms and treasury, or as relationship managers for high-value customers and heads of specialized branches.

RBI has allowed banks a free hand in appointing CIVs, but has fixed the initial tenure at a maximum of six years.