ANTI-FRAUD POLICY

ANTI-FRAUD POLICY

It compelled me to scrutinize policies on anti fraud & forgeries of few local and foreign banks while I had opportunity to review some cases of frauds & forgeries for making conclusive reports there on. Based on my review I drafted Anti Fraud Policy suitable for a bank involving all the aspects. It gives me immense pleasure to put it up for general information. The nomenclatures used , for various functional units in the document might be of the bank, presently I am associated, but the process and flow of function differs to large extend, any similarity is accidental and without intention.

1)       Purpose and Scope

It is the Bank’s intent to investigate any suspected acts of internal fraud, misappropriation, or other similar irregularity. An objective and impartial investigation, as deemed necessary, shall be conducted regardless of the position, title, length of service, or relationship with the Bank of any party who might be or becomes involved in or becomes or is the subject of such investigation.

This Anti-Fraud policy has been created to support the …………. Bank’s (the “Bank”) commitment to protecting its revenue, property, reputation and other assets; to clearly emphasize the need for accurate financial reporting; and to establish guidelines for the investigation and handling of allegations of fraud, should they occur. This policy applies to all employees, officers.

It is intended to address not only instances of internal fraud at the Bank, but includes fraud detected by our dealings with our members, including issues related to their collateral or loan origination process and other vendor relationships. Any suspected act of external fraud, misappropriation, or other similar irregularity may be investigated by the Bank.

To ensure implementation of SBP’s directives on Fraud & Forgery Reporting, introduced from time to time.

2)       Definition of Fraud

The term “fraud” generally means an act of deception, bribery, forgery, extortion, theft, misappropriation, false representation, conspiracy, corruption, collusion, embezzlement, or intentional concealment or the omission of material facts. Fraud is a violation of trust that, in general, refers to an intentional act committed to secure personal or business advantage.

While fraud can cover many activities, this policy is directed primarily at financial matters that could be legally defined as fraud. There are numerous criminal and civil definitions of fraud. Listed below are additional examples of “financial fraud”, which generally fall into three broad categories and may include, but are not limited to, the intentional:

1. Misappropriation of Assets

                                 i.      Forgery, alteration or misappropriation of checks, drafts, promissory notes, or securities

                                ii.      Unauthorized non-business acquisition, use, or disposition of funds, inventory, furniture, fixtures, equipment, records, or other assets

                              iii.      Embezzlement

                              iv.      Theft

                                v.      Falsifying time sheets or payroll records including, but not limited to, reporting hours not worked or a supervisor not allowing the reporting of all hours worked by hourly employees

                              vi.      Falsifying travel and entertainment expenses and/or utilizing Bank funds to pay for personal expenses

                             vii.      Fictitious reporting of receipts from suppliers or shipments to customers

                           viii.      Misappropriation of Bank-owned computer hardware, software, data, or other records including intangibles (e.g. proprietary information, trade secrets, patents, etc.)

2. Fraudulent Financial Reporting

                                 i.            Improper earnings management

                                ii.            Improper revenue recognition

                              iii.            Overstatement of assets

                              iv.            Understatement of liabilities

                                v.            Misapplication of generally accepted accounting principles

3. Expenditures and Liabilities for Improper Purposes

                                 i.            Bribery

                                ii.            Kickbacks

4. Financial Instruments

Fraud in connection with a financial instrument may include (but is not limited to):

                                 i.            False information contained in loan documents, such as identification, employment, income or appraisal documents;

                               ii.            Theft of custodial funds;

                              iii.            Misrepresentation of collateral in loan or other documents;

3)       Fraud & Forgery Committee

An internal Committee on Fraud and Forgery is formed with following as their members with primary roles of recovery, disciplinary & legal actions.

The following members will comprise the above-mentioned committee.

• Group Head Audit & Inspection                        Secretary / Member
• Group Head HRD                                                Member
• Group Head Systems & Operations                  Member
• Head of Compliance                                            Member
• Head Of Establishment                                       Member

A minimum of three members including Group Head Audit & Inspection shall comprise the Quorum for the committee.

Role of the Committee:

1)       Ensure receipt of initial report from the Group Head Audit & Inspection.

2)       Evaluation of the Final Investigation Report & plan further line of action based on the recommendations of the report which may inter alia include:

                                 i.            Removal of individual/suspected staff from their assignment(s) if not already done so.

                                ii.            To ensure implementation of necessary changes in policy & procedure to rectify procedural follows.

                              iii.            Recovery of Insurance Claim if any.

                              iv.            Adjustment of the loss from liabilities of the concerned employees.

                                v.            To put up the case to Disciplinary Committee and implement its decision.

                              vi.            If need be recommend police investigation and filing the case in the court of law after legal opinion.

                             vii.            Recommend CMC approval, with concurrence of COO/CEO, of payment to an aggrieved party in consequence of the incident either by way of write off or by recovery from the concerned employee.

4)       REPORTING PROCEDURE

BRANCH/UNIT LEVEL

                                 i.            On the occurrence of one of the situations covered under this document, the Branch Manager/Unit Head shall immediately, with 24 hours of coming into the knowledge of the incident shall inform the concern Area Manager/Group Head and submit a preliminary report marked as “Strictly Private & Confidential”.

                               ii.            On receipt of preliminary report from the Branch / Unit the Area / Regional Manager shall immediately, shall inform the concerned Group Head.

                              iii.            The relevant Group Head, within 24 hours of receipt of such report will arrange to forward the report to FIU (AIG) as under for initiating investigation on the incident.

–         All Areas / Units located in South Region to FIU South Karachi.

–         All Areas / Units located in Central and North Regions to Head Quality Assurance Department (AIG) Lahore.

                             iv.            This preliminary report of the Area / Unit must contain the following information / facts:

–         The detail of the incident, mentioning the date and any other pertinent details.

–         A brief note as to how the situation arose, indicating responsibility for the same;

–         Steps taken to mitigate further monetary or non-monetary loss;

–         Amount of expected loss;

–         Possible recovery sources;

–         Immediate steps taken to prevent recurrences.

                               v.            The concerned Group Head should forward the copy of the report immediately to CEO and COO for information.

                             vi.            The Area Office should submit a detail report of each attempt / incidents of Fraud/Forgeries/Dacoties of Rs.1 Million and above, within 12 days of incident as per Annexure A, to concerned FIU for onward submission to SBP.

SBP REPORTING

                                 i.            The Fraud Investigation Units should ensure receipt of Quarterly statements of Frauds/Forgeries/Dacoties along with soft copy within 7 days after the end of that quarter from all Area/Units.

                                ii.            The Area / Units should invariably submit a “NIL” report in case no such instance is to be reported.

                              iii.            It is ensured that the periodical Statement/Reports must be accurate and submitted to Fraud Investigation Unit within stipulated time frame as mentioned above.

                              iv.            Any penalty imposed by SBP on account of inaccurate information/delay in submission of information or due to any other reasons will be recovered from concerned branch/unit.

                                v.            FIU would ensure timely submission of Quarterly consolidated Fraud / Forgery / Dacoties Statement to SBP as required under BPRD Circular # 1 of 2005 dated Jan. 19, 2005.

                              vi.            SBP Reporting formats are requied to be enclosed with the policy document (http://www.sbp.org.pk/bsd/2005/C1.htm).

5)       INVESTIGATION & INTERNAL REPORTING

                                 i.            All incidents of frauds, forgeries etc shall be investigated by FIU [AIG].

                                ii.            Within 24 hours of receipt of the PRELIMINARY REPORT from the branch/unit, the designated officers of concerned FIU 7 (a) iii above shall carry out investigation of reported fraud, forgery, theft and unauthorized advances cases and submit report to the Group Head AIG.

                              iii.            The CEO/COO may nominate an officer to coordinate with AIG in the investigations.

                              iv.            The Group Head AIG may associate any member of the concerned branch/unit staff in carrying out the investigation and the Branch / Unit shall extend full cooperation where such an Officer is stationed.

                                v.            The report must incorporate full details of the fraud, forgery/dacoties etc. reasons leading to the commissioning of the fraud, names of staff responsible for or due to whose negligence the fraud was committed, procedure lapses if any, possibilities of recovery, recommendations for disciplinary action(s) and steps needed to avoid it recurrence, etc.

                              vi.            The Group Head AIG shall forward initial as well as comprehensive Investigation Report on the findings to the concern Group Head with copies to CEO/COO, and all members of Fraud & Forgery Committee for information and necessary action and Board Audit Committee.

                             vii.            The following is the timeline for submission of the investigation report:

–   Within 7 working days and

–   If more time is needed an interim report is submitted, giving reason for extended period, but within 15 working days.

                           viii.            The Staff member(s) suspected of any involvement or abetting in the fraud, forgery, defalcation, etc shall stand suspended till completion of inquiries and clearance from Head Office. The AIG shall initiate such suspension orders based on the initial judgment/assessment and accordingly HRD shall issue requisite suspension order(s) to the concerned Group Head / Unit Head for onward delivery to the employee(s).

6)       REMEDIAL / RECOVERY PROCEDURES

                                 i.            On receipt of the comprehensive/final report from AIG, the concerned Group Head (the Area / Unit) in coordination of Fraud & Forgery Committee, immediately initiated further action . He/she may coordinate with other Group Heads for lodgment of necessary insurance claim, in case the relevant insurance policy provides for compensation, legal advice and police investigation, if required.

                                ii.            Every effort must be made by the Branch / Unit where the fraudulent act has been commissioned to effect recovery expeditiously.

                              iii.            The Group Head HRD will take up action for removal of individual/suspected staff, as recommended by FIU [AIG] from their assignment(s) if not already done so and would  put up the case to Disciplinary Committee and implement its decision

                              iv.            The Group Head Establishment shall coordinate for lodgment of insurance claim if the policy provides for it.

                                v.            Systems & Procedures Group shall take immediate steps to rectify procedural flaws which resulted in the fraud, forgery, etc as identified in the Investigation Report. All Business Group Heads shall provide active assistance in putting in place such remedial action in the Branches.

                              vi.            In case payment has to be made immediately to an aggrieved party in consequence of fraud, forgery, etc prior authorization for such payment must be obtained from CMC through relevant Business Group coordinating with Fraud & Forgery Committee. The approval shall contain the mode of payment including the head of account through which temporary payment has to be effected shall also be mentioned.

                             vii.            All conditions laid down by Head Office must be complied with in totality by the Branch/Unit before effecting payment.

                           viii.            Any amount that is determined as unrecoverable, after the due process of law has taken its full course, the same shall be written off after obtaining approval from CMC on the recommendation of Fraud & Forgery Committee and concurrence of the CEO/President /COO or the Board of Directors, if required.

                              ix.            Any amounts written off during the year after obtaining approval of the CMC, shall be reported to the Board of Directors at end of the year through Board Audit Committee.

7)       DISCIPLINARY ACTION

                                 i.            During pendency of investigation, staff member(s) suspected of involvement shall remain suspended.

                                ii.            If need be Disciplinary Committee is constituted and proceedings thereof are carried out in fair and transparent manner as per procedure and decision is communicated to all concerned.

                              iii.            In case of any dispute the matter is referred to the court after legal opinion, however, every effort should be made to settle the case out of the court.

                              iv.            On proof of involvement in any fraud, forgery, defalcation etc. the concerned staff member shall be disassociated from the services of the Bank, ensuring recovery/ maximum recovery of the amount of loss and other liabilities as may be outstanding against him/her in the books of the Bank.

                                v.            The service terminal benefits shall be first fully utilized to extinguish the bank’s liabilities.

                              vi.            Any liability outstanding thereafter shall have to be adjusted by the concerned staff member, failure to do so shall invite such action as recommended by the Group Head and or the President may consider necessary, which may include recourse to legal action.

                             vii.            In case connivance in an act of fraud, forgery, etc. is not proved conclusively against a staff member, but there is adequate reason to deduce negligence on his/her part which enabled such an act to occur, disciplinary action as deemed commensurate with the seriousness of the negligence shall be taken with the approval of the CMC.

8)       GENERAL

                                 i.            All directives of the State Bank of Pakistan with regards to frauds, forgeries, etc. shall always prevail over the rules and regulations at any time in force.

                                ii.            The President/CEO/COO or any Group Head may direct/request AIG to arrange investigation into any matter that is brought to his/her knowledge either through sources within or outside the Bank which may have led to financial loss to the Bank or damaged Bank’s image/ reputation.

                              iii.            The AIG shall attend to the queries of SBP / Ministry of Finance and other concerned quarters with respect to the cases.

Note: Every Central Bank requires that banks under its purview should submit periodical reports on fraud related activities on prescribed frequencies and formats likewise State Bank of Pakistan [SBP] has also introduced such reporting vide BPRD Circular # 1 of 2005 of Jan. 19, 2005 (http://www.sbp.org.pk/bsd/2005/C1.htm).

CREDIT APPROVAL MODEL

CREDIT APPROVAL MODEL

Few weeks back while I was reviewing Credit Approvals [Sanction Advices] issued by various approving authorities, I had to go through the hierarchy of Credit Approving Authority of my bank and of some other banks, to comprehend and prepare a comparison and suggest improve in the current credit approving policy. The review enabled me to prepare following document CREDIT HIERARCHY where in different level of credit approvals are mentioned with their maximum right and relevant conditions & securities, if required, standing security to the credit.

The nomenclatures used in the document might be of the bank, presently I am associated, but the delegated powers discussed are not actually practiced, any similarity might be accidental and without intention.

APPROVAL AUTHORITIES

Following are the specific Committees in the apex of the bank’s credit lending decisions:

A. Executive Committee (EC)
B. Credit Risk Management Committee (CRMC).
C. Central Credit Committee (CCC)
D. Regional/Zonal Credit Committee (R/ZCC)
E. Branch Credit Committee (BCC)

CONSTITUTION OF THE COMMITTEES

A. THE EXECUTIVE COMMITTEE (EC):
Constitution:

1. This Committee is established by the Board of Directors (BOD) and may comprise of Minimum two members from Directors, nominated & approved by BOD; Chief Executive Officer as its Chairman.
2. Meetings of the EC are convened as many times as required. However, the proposals to the EC may be routed by circulation.
3. In the event of resignation of any member of the Executive Committee, the Board of Directors, in its first meeting following such resignation, nominate other Director(s) as its nominee on the Executive Committee.

Function and Responsibilities:

i. The Committee considers those Credit Proposals for approval, which are beyond the limits assigned to the CRMC & CCC, however, are within the limits granted to EC by the Board.
ii. The Committee takes decisions by majority.
iii. The EC has the authority to approve upto 10% excess over and above the Delegated Limits of the EC. However, this authority is exercised as one-time approval to accommodate one-off transactions. If a recurring pattern in the policy is observed, BOD may amend the policy as deemed appropriate.
iv. Periodically, review all policy exceptions approved by the CRMC/CCC.

B. THE CREDIT RISK MANAGEMENT COMMITTEE (CRMC):
Constitution

1. Chief Executive Officer – CEO Chairman
2. Chief Operating Officer – COO Member
3. Head of Credits Member
4. Head of Corporate Member
5. Regional Business Heads Member
6. Head of Risk Management Member
7. Head of Credit Administration Member
8. Head of Special Assets Management Member
(Head of other Units can be co-opted / appointed / invited as and when considered necessary as observer.)

Function and Responsibilities:

i. Establish and review the lending policies of the Bank and approve suggested additions / amendments.
ii. Develop and implement uniform and minimum acceptable credit standards for the Bank.
iii. Review, monitor and evaluate quality of the credit portfolio of the Bank on periodic basis, in light of the prevailing market conditions and practices, and ascertain that the overall risk of the Bank’s Credit Portfolio remains within manageable limits.
iv. To approve minor policy exception in respect of Credit Proposals.
v. Define target market for the Bank’s lending activities.
vi. Review the Bank’s Pricing Strategy and approve, any changes thereto, so that return on the Bank’s Credit portfolio commensurate with the risk taken.
vii. Set targets for loan portfolio composition, diversification and concentration by fixing ceiling;
* By industry / Line of Business / Market segments.
* By Tenor of Facilities (Shorts/Long Term).
* By Risk Rating.
viii. Consider and, if thought fit, approve the Audit Report on Credit submitted by the Internal Audit through the Credit Division and ensure compliance of the recommendations.
ix. Review the report submitted by the SAM pertaining to Classified Accounts.
x. Approve/review the Bank’s provisioning policies for loan portfolio and recommendation on provisioning submitted in compliance to the Prudential Regulations of the State Bank Of Pakistan [Central Bank] , and consequently:
* Set the Level of General Provisioning, and
* Approve Specific Provisioning.
xi. To review and update the Credit Policy and Procedure Manual whenever it is felt that amendment(s) is/are necessary based on changes in economics and business condition and feedback from the Users of the manual.

General
The meetings of CRMC are convened at least once every month/ quarter or more frequently if needed. The meeting of CRMC is convened by the Credit Division through a notice of at least seven days. The Notice is accompanied by working papers on the subject to be discussed. Presence of minimum of four members constitute quorum for the purpose of a meeting while Convener of the meeting has to be present in all meetings.

C. THE CENTRAL CREDIT COMMITTEE (CCC):
Constitution:

1. Chief Executive Officer Chairman
2. Chief Operation Officer Member
3. Head of Credit Member
4. Head of Corporate Member
5. Head of Retail Banking Member
6. Head of Islamic Banking Member

Function and Responsibilities:

i. The Committee considers approval of Credit Proposals within Delegated Credit Limit empowered by Executive Committee.
ii. Delegate and review Lending Authorities of Regional Heads/Area Managers and Branch Credit Committee.
iii. The Committee takes decisions by majority.
iv. The meetings of CCC are convened more frequently to respond to business requirements. The frequency generally is weekly, however, depending on emergency, credit proposal is raised by circulation.
v. The CCC may approve up to 10% excess over and above the Delegated Credit Limits of the EC. However, this authority is exercised as one-time approval to accommodate one-off transactions. If a recurring pattern in the policy is observed, BOD may amend the policy as deemed appropriate.
vi. Approve all policy exceptions/deferrals of Credit Proposals.

Committee Secretary

The general administration functions of above committees are carried out by Committee Secretary, at Head /Principal Office a full time working employee who is sufficiently senior with relevant credit knowledge to manage secretarial and maintain the record and confidentiality of the affairs of the committees. Following are the main functions of Committee Secretary:

i. Receive proposals requiring CCC’s approval from functional units.
ii. Circulating proposals to all members for their review.
iii. Make necessary arrangements of meetings.
iv. To co-ordinate with the members for timely approvals.
v. Communicating decisions to all concerned.
vi. Maintain records of all CP approved by the CCC.
vii. Generally, co-ordinate specific tasks.

D. REGIONAL/ZONAL CREDIT COMMITTEE (R/ZCC)

For the smooth functioning and business expansion, the Central Credit Committee delegate credit approving authority to Regional / Zonal / Branch Managers depending on the business requirements of the region coupled with seniority of the Business Head of Regional/Zonal / Branch Manager.
Constitution:

1. Regional / Zonal Manager Chairman
2. Regional Credit Coordinator Member
3. Manager of Main Branch Member

E. BRANCH CREDIT COMMITTEE (BCC)
Constitution:

1. Branch Manager Chairman
2. Credit Manager Member
3. Credit Officer Member

MISCELLANEOUS:

GENERAL GUIDELINES:

I. If any member has a negative opinion against a proposal, such negative vote is duly noted, with particular mention of the comments/reasons behind the negative vote. In this case, the proposal is referred to the CEO for decision. In the event of two negative votes, the proposal may be considered rejected.
II. Members are expected to, at all times, exercise their votes, affirmative or negative, in a judicious and objective manner. If according to one individual member, there are valid and sufficient negative features in a credit proposal, he/she should highlight these precisely for discussion and only the unresolved issues should be recorded together with notation of his/her negative vote, if the other members opt to approve the proposal.
III. Member should not abstain from voting.

GENERAL CRITERIA:

The CRMC and CCC may further delegate, Lending Authority it has from EC to authorized body [various committees] formed under the Credit Policy, giving complete description of each facility and security support, containing in a Schedule of Delegated Approval Power.
 However, these delegated authorities are to be exercised by the relevant committee, provided basic lending criteria and policies related to all types of lending as mentioned in the Bank’s Credit Policy and Procedures Manual and the conditions mentioned in the schedule are strictly adhered to and the Credit Approval Process has been complied with.
 Major Exception to criteria and/or set policies is referred to the BOD for approval.
 Securities and/or collateral detailed in the Schedule of Delegated approval Powers are to serve as the SECONDARY source of repayment. The underlying risks should be commercially viable and the PRIMARY source of repayment for facilities is to be clearly identified from the borrower’s assets conversion / operating cash flow of the business. The only exceptions to this rule will apply in case of:
o Back-to-Back letters of Credit,
o Facilities fully secured by Deposits under lien, pledge of Govt. Securities and Prime or Acceptable bank Guarantees.
 The Regional/Zonal Business Heads will have the authority to approve up to lesser of 5% or Rs. 10 million excess over the Main Sanctioned Limit. However, these will be one time approval, to accommodate one-off transactions and will require post-facto ratification of the relevant approval authority.
 A maximum of 5% excess over the sanctioned Sub Limit is permitted provided the bank has perfected global security available to it. However, the Total Outstanding (Funded / Un-Funded) should not exceed the total sanctioned Main Limit.
 To determine the relevant approval authority of a Credit Proposal (CP), the Main Limit will be considered vis-a-vis the collateral being offered against such limit and not the Sub Limits.
 In case of multiple authority levels emerging, against Main Limits / Sub Limits under the same CP, the highest level of authority emerging as a result of the analysis will be considered as the relevant approving authority for the entire CP.
 A single client will be issued a single Main Limit and a set of Sub Limits at one point in time.
 A Main Limit / Sub Limit assigned to a single client will be for a specific duration, mentioned in the CP. In case the client requires additional facilities during the term of its existing approved limits, a fresh CP will be prepared which will incorporate all its existing limits, their outstanding position and the new proposed limits.
 Sub Limits assigned under a main Limit of customer can be reassigned as long as;
o The main sanctioned limit is not exceeded; and
o The reassigned Sub Limit is of a lower risk category than the initial approved Sub Limit. For example, a Sub Limit of Letter of Credits (Usance) can be reassigned as a letters of Credits (Sight) but not vice versa.
o A Main Limit and Sub Limit are to be assigned to ONE customer only and not a group of customers. (unless the collateral is cash / bank guarantee or near cash such as, Defence Saving Certificate (DSC) and other Government Securities with appropriate security documentation).
 All Running Finance/Overdraft/Working capital facilities will be subject to an annual clean-up period of 3-10 days. i.e. during the clean up period, the account will not show any negative balance. Such clean up period will generally coincide with date of renewal of such facilities.
 The practice of TEMPORARY BLOCKING of facility of one customer of a group and reallocation to another within that group is not permissible. (Unless the collateral is cash / bank guarantee or near cash such as, DSCs and other Government Securities with appropriate security documentation).
 Negotiation pricing of facilities will remain the purview of the Branch Manager / Regional Business Heads which should be in line with the pricing strategy as provided in the Credit Manual and Circulars issued from time to time on pricing. However, the relevant highest approving authority may approve facilities on a different pricing.
 The exchange rates of various currencies applied for translation into Pak Rupees to be used will be:
o “The mid-rate between buying & selling of a currency against Pak Rupees, as reported by Treasury Division, prevailing at the date of Credit Proposal.”
 In the context of Delegated Approval Powers, SAM will have the following authorities within the parameters described in Credit Manual along with relevant Credit approving authority:
o Authority to negotiate the restructuring or rescheduling and reach settlement for all Substandard, Doubtful and loss rated accounts;
o Write-off or waiver of Principle / Mark-up of debt settlement subject to provisos of Prudential Regulations issued by State Bank Of Pakistan.
o Head of SAMG jointly with relevant Branch Manager and/or Regional Business / Credit Group Head will recommend debt restructuring of rescheduling and debt settlement proposals to the RAC for approval.
o Only BOD can amend, modify, and enhance, etc. the delegated authorities with the recommendation of the above Committee.