Citing commercial banks’ failure to know about the people in the transactions chain as the root cause of financial frauds, the Reserve Bank of India on Friday said it is making efforts to convince banks to have a policy on tackling fraud.
“Though a whistleblower policy in banks from the vigilance perspective is already there, the RBI is trying to advise the banks that they have such a policy to prevent fraud as well,” Deputy Governor R. Gandhi said while inaugurating a conference on “Financial Frauds – Risks and Preventions”, organised here by the Associated Chambers of Commerce and Industry.
“If a bank has to prevent fraud, it must follow the three KY Principles. It must know its customer, it must know its employee and it must know its partner,” he said.
“Each bank should segment its customers based on their risk profile and transaction patterns and develop appropriate response systems for exceptional patterns noticed and fortify systemic level controls,” he added.
He said that if frauds are to be prevented effectively, banks have to know their partners, agents and vendors and take extra care about continuous vigil on their staff.
“Background checking for antecedents, checks and balances, periodic rotations, vigilance assessments, internal audits etc. techniques will have to be employed to know the employees better and as preventive measures,” Gandhi said.
He also said that the RBI has provided the banks with a list of wilful defaulters.
“We have given certain instructions to the banks, but if it is coming by law then it is well and good because that will be more forceful, more enforceable and it will be more binding on all the parties,” said the deputy governor.
“We have been continuously monitoring, we are sitting with them (banks), we are working with them, guiding them to bring in appropriate additional capital, make a provision,” he added.
The Advisory Board on Bank, Commercial and Financial Frauds (ABBCFF), reconstituted by the Central Vigilance Commission last September forms part of the organisational infrastructure of the Central Bureau of Investigation (CBI).
The Reserve Bank of India provides the needed investigative and secretarial services along with necessary funds, said the order reconstituting the board.
The ABBCFF’s jurisdiction is confined to those cases where the probe agency wants to register an enquiry against an alleged fraud disagreeing with the views of the bank/public sector undertaking/financial institution.
According to Gandhi, public sector banks in India are adequately capitalised and are meeting their requirement but going forward, they will require additional capital to meet future growth needs and possible problems.