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Banking Sector is rumoured to have INR 10 Trillion of StressedAssets.
PNB’s Case seems to have created the Perfect Storm – Is this theTIP of the ICEBERG?◦ Created by Lax Processes,◦ Inadequate Over-signt◦ SWIFT – did a swift job in wiping off the bank’s name and worth. Messages
routed and not routed through CBS allowed errant employees work out of thesystem
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380 crores
- Originally
Reported
11400 crores
- Revised 1
12600 crores
- Revised 2
20000
crores -
Rumours
“The fraud in PNB is a case of operational risk arisingon account of delinquent behaviour by one or moreemployees of the bank and failure of internalcontrols.”
According to bankers, transactions on SWIFT, an inter-bank messaging facility, must go through a built-insystem of audit and reconciliation. These includeseeking approval from officials other than those havingbanking relation with the client, red flags for suddenspurt in transactions, and breach of sectoral and groupexposure limits, among others.
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SWIFT was founded as co-operative society by 8 institutionsinitially in 1973, ABBREVIATION FOR ‘SOCIETY FORWORLDWIDE INTERBANK FINANCIALTELECOMMUNICATION”. Went live in 1977.
SWIFT’s messaging services are trusted and used by morethan 11,000 financial institutions in more than 212countries
SWIFT is the backbone of global financial communication.
Vision of creating shared worldwide financial messagingservices and a common language for international financialmessaging.
By creating and maintaining global financial messaging andreference data standards.
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Offering the most secure, cost-effective and reliableway of transmitting Financial messages relating toPayments, securities, treasury and trade.
SWIFT is a global member-owned cooperativemessaging services.
SWIFT provide finance community with a platform formessaging and standards for communicating,◦ To facilitate access and integration,◦ identification,◦ analysis and◦ regulatory compliance
SWIFT also brings the financial community together –at global, regional and local levels debate issues ofmutual interest or concern.
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Headquartered near Brussels in Belgium, has globaloffice network in all the major financial centres.
It has gained so much popularity now that dailymessages for transactions in Monetary terms are of $6trillion and yet it is not a payment felicitation orGateway but only Messaging platform.
Cross-border transactions are facilitated through theSWIFT infrastructure that works on a system of codesdivided in to 8 or 11 digits.
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Page 1
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SWIFTNet - Single window access to thefinancial world
Who is SWIFT?
A co-operative organisation serving the
financial services industry
A provider of highly secure
financial messaging services
The financial standardisation body
Slide 3
7
Common group message types
Page 4
IISACA 2007
Slide 30
Flow & acknowledgements
OutputInput
ACK/NAK UAK/UNK
Sende r Receive r
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Slide 32
IISACA 2007
Structure
What does a SWIFT message look
like ?
Screen
SWIFT
Network
Printout
Page 2
Slide 9
IISACA 2007
SWIFT Platform Overview
SA-Workstation
VPNbox
SWIFTAlliance Access / Entry
SWIFTAlliance Gateway
SW IFTNet
Financial application Service specific interface
Communication Layer Network Layer &SWIFTNet ServicesMessagingLayer
Application &
Desktop Layer
SAM
App WebServer
MT-MX
MT-MX
Browser
MT- MX
Financial Application
MT-MX-FpML
Automation
MT
SA-Webstation
Browse, FileAct, InterAct & SAG admin.
RMA
M T -M X
Fp M L
MT-MXFpML
SW IFTNet
server
E-mail client
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Slide 10
IISACA 2007
SWIFTAlliance Gateway
Ex:Highly resilient config.
SAG 2
Site 1 Site 2
FIN CLS SAB
Interface gateway
SAG 1
RA RARAMQ
DMZ
SAG
CLSgateway
FINInterface
SAB
RA RAMQ RA
DMZ
Dual-P Dual-P
Legend: Primary route(s)
Secondary route
Cold-Backup route
Page 3
IISACA 2007
Slide 27
Types of messages
• User to user messages
• System messages
• Service messages
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Categories of messages
0 System messages
1 Customer transfers & cheques
2 Financial institutions transfers
3 Foreign exchange, money markets & derivatives
4 Collections & cash letters
5 Securities markets
6 Precious metals & syndications
7 Documentary credits & guarantees
8 Travellers cheques
9 Cash management & customer status
IISACA 2007
Slide 28
12
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Slide 31
IISACA 2007
Structure
Order Form
Please pay ....to ...
from ... on .....
at ...
for ......
--------------------Instance Type and Transmission------------------ Notification (Transmission) of Original sent to SWIFT (ACK)
Network Delivery Status :Network Ack Priority/Delivery :Normal
Message Input Reference : 1705 021115KWHKHKHHAXXX0135007653
------------------------------Message Header------------------------
Swift Input : FIN 103 Single Customer Credit Transfer
Sender : KWHKHKHHXXX
Citic Ka Wah Bank Hong Kong
: BNPAFRPPXXX BNP-PARIBAS SA
(FORMELY BANQUE NATIONALE DE PARIS S.A.)
Paris, France
Receiver
MUR : MC12
------------------------------Message Text--------------------------
20:Sender's Reference PAY/09
23B:Bank Operation Code CRED32A:Value Date, Currency and Interbank Settled Amount Date :18 November 2002Currency : EUR (EURO)
Amount : #65000,#
50K:Ordering Customer
/123001043212
MR LEE 10 QUEENSWAY HK-HONG KONG
57A:Account with Institution - BIC BNPAFRPPCAN
BNP-PARIBAS SA (FORMELY BANQUE NATIONALE DE PARIS S.A.) CANNES FR
59:Beneficiary Customer
/12345543210100001M02211 MR DUPONT 6 RUE LAFAYETTE FR-CANNES70:Remittance Information
/INV/5271A:Details of Charges SHA
------------------------------Message Trailer----------------------
{MAC:098446CF}{CHK:45946964876B}
In order to use SWIFT’s Messaging Services,customers need to connect to the SWIFTenvironment. The messages are in 8 digit or11 digit characters, first 4 for Bank code next2 for country code 2 for location code and 3for branch code (which is optional) If H.O. orprimary office is to receive, it will have only 8characters. Swift messages are also codifieddepending upon various classification in 100series is for customers 600 for preciousmetals 700 for L/C – Guarantees LOUS, 800for Travelers cheques etc.
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Messages sent by customers are authenticated usingspecialised security and identification technology.
Encryption is added as the messages leave thecustomer environment and enter the SWIFTenvironment.
Messages remain in the protected SWIFT environment,throughout the transmission process - whilst they aretransmitted to operating centres (OPCs) where theyare processed - until they are safely delivered to thereceiver.
SWIFT’s overall Enterprise Risk Managementframework provides a consolidated view ofrisk management information across SWIFT.
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SWIFT’s internal audit and external security audit is completed with information security risk management system by:
◦ Independently and objectively reviewing, assessing and reporting on SWIFT's risk and control functions on an ongoing basis
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• A typical SWIFT transaction involves checks atthree levels:• a maker,• checker and• a verifier.
• As recent as February 7, City Union Bank reportedto the stock exchanges that its SWIFT system, too,had come under a cyberattack recently.
• Three fraudulent remittances had gone throughSWIFT system to transfer nearly $2 million inthese transactions
Comprehensive SWIFT Infrastructure provides forSecurity Audit where Failure is not an option.
However after a series of security breaches in banksacross the globe, forensic experts believe malwareused in reported customer incidents was not a singleoccurrence, but part of a wider and highly adaptivecampaign targeting banks.
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(1) The case of the Central Bank of Bangladesh: $81million was stolen from the account of the CentralBank at the Federal Reserve Bank of New York.
(2) Investigators found that a separate theft had movedmoney from the Federal Reserve Bank of New York toaccounts in the Philippines.
(3) Banco del Austro S.A. in Ecuador: The bank allegedin a lawsuit filed against Wells Fargo & Co. that hackersused the SWIFT banking system to steal $12 million.
(4) Vietnam’s Tien Phong Commercial Joint Stock Banksaid it stopped an attempted theft of 1 million euroslate 2015.
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In all these instances, Investigations found: The attackers have exploited vulnerabilities
in:◦ banks funds’ transfer initiation environments, prior
to messages being sent over SWIFT.◦ The attackers have been able to bypass whatever
primary risk controls the victims have in place,thereby being able to initiate the irrevocable fundstransfer process.
They have found ways to tamper with thestatements and confirmations that bankswould sometimes use as secondary controls,thereby delaying the victims’ ability torecognize the fraud.
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Security must be an essential element of theSWIFT Infrastructure, this area includes
password management
physical security
user profile setup
encryption
SSL setup
Firewall rules
certificate management.
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“At the end, technology is only anenabler and the concept of maker andchecker will only work when processesare followed.
If people involved undertookunauthorised trades than and only thenthere will be failure to track it”.
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AUDIT AND DILIGENCE AREAS
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Regular Cyber, Admin and Financial audit to confirmthe immunity of their swift infrastructure is must toprevent such attacks.
It is also necessary to INTEGRATE WITHCBS/PAYMENT/CONTROL ACCOUNT SYSTEM AS WELLAS NOSTRO RECONCILIATION & BIOMETRICauthentication system rather than 3 or 5 passwordsystem.
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IISSAACCAA 22000077
Slide 54
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Summary elements of a SWIFT audit
Check SWIFT system configuration for links, back-up,
contingency Reports on contingency and BCP tests
Physical access procedures to SWIFT room
Release management
Match HR lists to operators in SWIFT interface
Check operator permission lists with SWIFT Security
Officers Check procedures for delivery monitoring
Archiving procedures
MIS statistics of average number of messages IN/OUT, average
value
25
STANDARD & SECURITY PROTOCALS IN SWIFT – SOME COMMENTS
Assess validation controls, data integrity programs, Anti-Virus and the installed operating systems’ security patches.
Verify the integrity of the Swift Alliance database to ensurethere is no evidence of data tampering, errors, oromissions.
Monitor application/system performance, to make sureperformance logs are analysed in real time, to detect andrectify any availability issues, active attacks,application/system and network slowdowns or crashes.
Evaluate employee training and readiness, relative toemergency, disaster, and contingency plans.
AUDITORS ALSO MUST VERIFY CUSTOMERSINFORMATION FILE AS WELL AS USER APPLICATION ANDLIABILITIES STATEMENT.
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Introduction:RBI, the regulator of banks in India, defines fraud as “Adeliberate act of omission or commission by any person,carried out in the course of a banking transaction or in thebooks of accounts maintained manually or under computersystem in banks, resulting into wrongful gain to any person fora temporary period or otherwise, with or without anymonetary loss to the bank”.
PNB in the fiscal ending March 31 had made a provision ofRs.18,366.83 crore towards bad loans that led to a net loss ofRs.3,974.39 crore for the fiscal. The Bank had shown turnaroundin the current year but now entire picture will go for Toss due tohuge scam unearthed in Nirav Modi/Gitanjali scam.
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Until the PNB declared its fraudulent transactions onMonday, the Winsome Diamond Group scam wascountry's second largest banking fraud after KingfisherAirlines.
Winsome Group promoter Jatin Mehta is alsoconsidered one of the biggest corporate defaulters.
Amount of Fraud:
The Winsome Diamond Group had taken a loan ofRs.6,800 crore from a consortium of banks led by theStandard Chartered Bank.
Of the total loan amount, PNB has the highestexposure of Rs.1800 crore.
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Even though the case is with the CBI, the banks in Indiahave not been able to do much to force the WinsomeDiamond Group to pay up.
That's because Winsome Group won the case in UAE inwhich the Group claimed it had suffered a $ 1 billion(Rs 6,500 crore) loss due to non-payment from 13 UAE-based firms.
Following the Winsome Diamond's legal victory, UAEauthorities have reportedly refused to provide Indiangovernment agencies with information on the UAE-based firms to take their investigation forward.
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Like the Nirav Modi case, PNB hadreported the transactions to theCentral Bureau of Investigation (CBI)which is still investigating the case.
Since then, Mehta's - the family whichfounded Winsome - never visitedIndia, with some of them settling inSingapore and Dubai after takingcitizenship of Saint Kitts.
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Amount of Fraud:
Indian banks consortium extended facility to the tune of Rs.2,650 crore. From 2010, foreign banks started invoking the bank guarantees of Indian banks.
Background of Fraud:
All foreign entities were controlled by Choudhary and most of the projects and contracts, claimed to have been bagged offshore by Zoom, were fake. The Promoters are now arrested at Indore after gap of almost 6 years.
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Amount of Fraud:
In 2012, the firm started availing the facility of letter ofcredit (LC) from no. of banks like Central / Vijaya Bank /Axis / Federal etc. In January 2013, the firm's maindirector, Amitabh Parekh, who used to take care ofthese affairs, died and the company stopped loanrepayment.
Total fraud now hovers around Rs.1800 crores.
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Amount of Fraud:
Bank officials issued the LoUs and informed thesebranches via the international cash transfer servicecalled SWIFT (Society for Worldwide InterbankFinancial Telecommunication) which connects allinternational banks worldwide.
However, exploiting the information gap-and the factthat unlike other Indian banks PNB had not integratedits SWIFT network with the bank's core bankingnetwork- they chose not to record these transactionsin the bank's own system.
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Over 150 such LoUs were issued since the first one wasfraudulently issued in 2011.
Interestingly, while an LoU expires in 90-180 days,these bank officials are believed to have rolled themover after each expiry, as a result the fraud layundetected for over 7 years.
Initial fraud amount of Rs.380 crores overnightmultiplied to Rs.11200 crores and now provisionalfinalised at 12600 crores.
It is very difficult even to digest the recovery figures. IfRs.5500 crores, which we believe is taken at MRP ofstocks seized.
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DELHI-ADVANCE REMITTANCE FRAUD - ASHOK VIHAR BRANCH, BOB, NEW DELHI
“Feb 15,2016 - Illegal remittance of around Rs.6172 crore on 12 August 2015.”
Background of Fraud: The modus operandi in this transaction was that a number
of current accounts were opened in the Ashok Viharbranch.
As per the banking system, a remittance of up to $100,000does not raise an alarm and is automatically clearedwithout supporting documents of imports.
The money launderers exploited this loophole to passunder the radar. They also smartly selected commoditieswhich are prone to cancellations on account of quality orsharp price fluctuations like fruits, pulses and rice.
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6. ROTOMAC PENS
Amount of Fraud: The Kanpur-based company's owner had taken a loan of more
than Rs. 800 crore from over five state-owned banks. Allahabad Bank, Bank of India, Bank of Baroda, Indian Overseas
Bank and Union Bank of India compromised their rules tosanction loans to Rotomac.
Background of Fraud: Last year, Bank of Baroda (BOB), a consortium partner declared
pen manufacturer Rotomac Global Pvt Limited as a "willfulldefaulter".
The company moved to the division bench of Allahabad HighCourt seeking removal of its name from the list of willfuldefaulters, who directed bank to remove the name from thewillful defaulters list and now CO. MD Vikram Kothari is arrestedunder charge of fraud
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What the investigation foundThe Enforcement Directorate’sinvestigation found that the fundsraised by Birla Power Solutions werenot used for a power project butwere transferred to other groupcompanies.
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Amount of Fraud:
CRB Corporation Ltd raised Rs 84 core through threepublic issues between May 1993 and December 1995.
CRB Share Custodial Services raised a further Rs.100crore in January 1995 to set up operations.
Bhansali was borrowing funds from banks throughquestionable means.
All was well till December 1996. Then the Reserve Bankof India (RBI) refused banking status to CRB andcontemplated action for various irregularities.
Promoter C.R Bhansali spent only 3 months in jail.
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14.06.2017 - UBI,Kolkata
They allegedly cheated to the tune ofRs.184.43 crore through the loanamount of Ramsarup Utpadak (Unit-II)of M/s Ramsarup Industries Ltd bydiverting a sum of Rs.130.95 crore to agroup company M/s RAV Dravya PvtLtd."
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Amount of fraud: It was alleged that a fraud of Rs.212.30 crores (approx)
was perpetrated and there was fraudulent availment ofCredit limit and Letter of Credit/BG facility from CentralBank of India during the period 2011-2013.
Background of Fraud: During 2011-13, the Central Bank of India allegedly
gave fraudulent credit limit and Letter of Credit/BGfacility to Jain Infraprojects Ltd.
The CBI said that it recovered documents whichincluded copies of LCs and BGs, besides certain seals offour shell companies through which some loanproceeds have been allegedly invested on diversion.
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Amount of fraud
These cases are of forgery and cheating by a syndicateof Fraudsters operating in the Banking sector whonegotiated a total of 46 forged outstation Letter ofCredits (LCs) and swindled Bank of India to the tune ofRs.80 crores approx. (Both cases inclusive).
Background of fraud
It was alleged that Rajesh Choradia (A-1), Proprietor ofM/s. A.R. Finance, a third party bill negotiator,presented different bills (LCs) purportedly issued byBank of Baroda.
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The banks before negotiation have a system ofconfirming the LCs from issuing branch and alsosend the original documents for acceptance.
Once the acceptance letter is received, the LCswere negotiated for payment.
In this case, the fraudsters forged the LCs withdifferent telephone numbers and fax numbers andused the services of a lineman of Airtel service whodiverted the telephone calls to a private numberpossessed by one of the accused
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Hence, when the official from the bank called to checkthe veracity of the LCs, the call was diverted to theprivate numbers of another accused Mohd. Ziyauddin
He used to confirm the issuance of the LCs.
The accused Mohd. Ziyauddin also managed to get asample signature of the officials of the issuing branchand rubber seal of the issuing branch through a privateperson in Bhopal.
The signatures were super imposed and he made theforged signature on the LCs by overwriting on thesuper imposed signature to take care of confirmationof the LCs signatures with an online system.
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Amount of Fraud: Owner allegedly availed of credit facilities of approx. Rs.60
crores from the bank by providing fake collateral securities.
Background of Fraud: A letter addressed to the PNB was faxed from the SBI head
office seeking confirmation of the guarantee. However, it was sent to a fax number other than the one
available with the bank as part of regular transactions. Accordingly, 30 kilograms of gold was delivered to an
authorised representative of borrower. Original guarantee of Rs.7 crs which was increased up to
Rs.60cr for Purchase of Gold. Bank as usual was PNB.
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Amount of Fraud: The forged LC for Rs.4.91 crores(approx), purported to
be issued by Union Bank of India, Narasanda Branch,Gujarat, was submitted to the Kochi Branch of StateBank of India Global Factors Ltd (SBIGFL), a sisterconcern of the SBI along with fake & false supportingdocuments by the accused persons and got the LCdiscounted at Kochi.
The amount discounted at SBI GFL, Kochi, was creditedinto the Bank account of the Kochi(Kerala) basedprivate firm represented by its two partners in theBank of Baroda, Ernakulam Branch.
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Amount of Fraud: The chairman and secretary of a Cownpore
Swadeshi Urban Cooperative Bank have beenarrested in Uttar Pradesh for issuing a fake bankguarantee of Rs.4.76 crore in favour of a privatecompany, based on which they availedmobilisation advance.
The integrity pact, signed in 2013, said that if asuccessful bidder violated the agreement, itwould entail forfeiture of the bank guarantee.
Central government standing counsel AnuragAhluwalia, appearing for the Centre, had told thecourt that on 17 October, 2014, the bankguarantee was invoked and full payment of theamount was demanded as the company hadallegedly violated the integrity pact.
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NORMAL
FINANCIAL ARRANGEMENTS FOR TRADE AND INDUSTRY
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INNOVATIVE
FINANCIAL ARRANGEMENTS FOR TRADE AND INDUSTRY
NON-FUND BASED FINANCE IS MISNOMER
LIKE EVERY LIVE THING- DEATH IS INEVITABLE
FOR EVERY NON-FUND BASED FINANCE FUNDINGEVENTUALLY HAPPENS.
BROADCATEGORY OF NFF:
A) LETTER OF CREDIT/COMFORT/LOU
B) GUARANTEES
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1. Uniform Customs and Practices for DocumentaryCredits (UCPDC),
2. Exchange Control Regulations (ECR),
3. Export and Import Policy and Public notices issuedby Director General of Foreign Trade from time to time.
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An instrument by which a bank undertakes to make payment
◦ To a seller / Specified Person
◦ on production of documents stipulated in the credit.
It specifies certain instructions.
◦ To the paying bank or at some future date.
◦ Assurance from Bank to seller for payment on due date.
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LC is also termed as contingent liability and it is off-balance sheet item.
It is a commercial instrument of assured payment subjectto compliance to terms & conditions.
This limit is normally carved out of the fund based limit.
All parties to the credit deal only with the documentsand not the goods.
Available for settlement by acceptance /payment / deferred payment / negotiation.
The negotiation under a confirmed credit iswithout recourse to drawer.
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The Applicant/ Buyer
The beneficiary / seller
The issuing Bank
Advising Bank
Confirming Bank
Negotiating Bank
Reimbursing Bank
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LC is also classified in to various categories depending upon the nature and the functions of the credit. Some of them are:
Inland LC
Import LC
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DP/DA : The letter of credit based on the mode ofpayment may be DA or DP
DP/LC DA/LC Revocable LC Irrevocable LC With or without recourse LCs Instalment LC Confirmed LC Transferable LC: Can be made available in whole or in
part SUBJECT TO UCPDC, 600 Revolving LC: It is reinstated once retired Back to Back LC: Countervailing LC
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Revolving credit is one where, under theterms and conditions of the credit, theamount is revived or reinstated withoutrequiring specific amendment to the credit.
The amount under the credit can revolve inrelation to time or value.
The basic principle of a revolving credit isthat ―after a drawing is made, the creditreverts to its original amount for re-use bybeneficiary
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Back to Back LC: It is an LC which is issued onthe strength of original LC. Beneficiary oforiginal LC is applicant of Back to Back credit.Normally an exporter uses his export LC as acover for LC in favour of local suppliers.
Back- to-Back L/C is also called asCountervailing L/C
When a second L/C is issued on the basis of aparent L/C, the second L/C will be termed asa ‗back- to- back L/C
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Two types of anticipatory L/C are there: red clause credit& green clause L/C In case of anticipatory L/C., paymentis made to beneficiary at pre- shipment stage inanticipation of his actual shipment and submission ofbills at a future date.
The payment which is provided through an anticipatoryL/C is generally a part or full amount of the loan to beadjusted at the time of submission of final documents.
The L/C. contains a special clause authorizing the bank tomake advances to the beneficiary which are recoveredfrom the beneficiary out of the proceeds of bills to bepresented under the credit.
Restricted LC: A letter of credit in which negotiation isrestricted to a particular bank.
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It is backup available to the beneficiary (fromissuing bank) in case the applicant fails to pay orperform.
No transport document is required.
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Liability of an opening bank in a letter of creditarises, when the beneficiary delivers thedocuments strictly drawn as per terms of theletter of credit. These documents include thefollowing
Bill of Exchange
Invoice
Transport Documents
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The words 'to', 'until', 'from' and 'between' whenused to determine a period of shipment includethe date mentioned and the words 'before' and'after' exclude the date mentioned.
The words 'from' and 'after' when used todetermine a maturity date exclude the datementioned.
The terms 'first half' and 'second half' of a monthshall be construed respectively as the 1st to the15th and the 16th to the last day of the month,all dates inclusive
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The terms 'beginning', 'middle' and 'end' of a monthshall be construed respectively as the 1st to 10th, the11th to the 20th and the 21st to the last day of themonth, all dates inclusive.
Branches in different countries are considered to beseparate banks.
The date of issuance of the transport documents willbe deemed to be date of dispatch, taking in charge orshipped on board and the date of shipment
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Transshipment means unloading from one means ofconveyance and reloading to another means ofconveyance.
A clean transpon documents is one bearing no clause ornotation expressly declaring a defective condition of thegoods or their packaging.
If there is no indication in the credit about insurancecoverage, amount of insurance coverage must be at least110% of CIF or CIP value of the goods.
Bill of Lading should be "On Board Bill of Lading". Since Billof Lading is issued in more than one set, all negotiablecopies of bill of lading should be obtained.
Bank should accept Clean Bill of Lading and notconditional one.
Bill of Lading should be presented for negotiation within21 days of shipment.
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If words about is written in LC with quantity or amount,then variation of plus or minus 10% is permitted. If word'about' is not written in LC with quantity or amount, thenvariation of plus or minus 5% is permitted in quantity butnot in amount.
Insurance policy should be in the same currency as those ofLC.
If insurance policy is dated later than the date of issue ofBill of Lading, then it should cover the risk from date of Billof Lading.
If expiry date of LC fails on a holiday declared for banks,then LC can be negotiated on the next workingdayNegotiating, confirming and Issuing Bank are given 5banking days each to scrutinize that documents are as perLC.
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During the course of business, banks are oftenrequired to furnish guarantee on behalf of their owncustomers in lieu of their obligations, performance orengagement.
Used for participation in tenders, in lieu of securitydeposits◦ for capacity to perform contracts,◦ avail concessions in duty on imports.
The guarantee with a maturity of more than 10 yearsonly after prior permission of Higher Authority.
As per RBI guidelines, Banks are required to set up―E-confirmation Cell at Central Office, for electronicconfirmation of genuineness of bank guaranteesissued.
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A guarantee based on location can be either of thefollowing:
Inland Guarantee
Foreign Guarantee
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For discharge of a pecuniary liability of theprincipal debtor on his default.
Broadly they are the guarantees for repayment ofa debt.
Guarantees issued in favour of Income Tax/GSTorin respect of disputed assessment etc.
Guarantee for obtaining mobilisation advance
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When the beneficiary agrees to allow certain advanceto complete the contractual obligations.
Bid bond guarantee:
As and when tenders are called for, the beneficiary askfor a bid bond, being the part of the total contractvalue say 5%.
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The beneficiary as part of the contract, may retainsome portion of the contract amount.
This retained money is released only after beingsatisfied about the project.
Bank issue a retention money guarantee to replacedeposit.
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A guarantee which lays stress on the performance ofcertain acts.
Issued for the due performance of a contract within agiven time frame.
The instances of such guarantees are◦ Bid Bonds◦ Guarantee on behalf of a manufacturing co. in respect of
supply◦ Guarantee on behalf of a contractor for due completion of
work◦ Guarantee in favour of Railways for due performance/licence
fee etc.◦ Export Performance Guarantee
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◦ The all-in-cost per annum , payable for the credit doesnot exceed LIBOR + certain basis points for credit up toone year and LIBOR + certain basis points for credit forperiods beyond one year but less than 3 years, for thecurrency of credit.
◦ ADs shall not issue guarantee letter ofundertakings/credit except with prior approval of thereserve bank.
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In case of purchase of capital goods like machinery,the necessity to issue deferred payment guaranteearises.
Unlike all other L.G.’s, the payment will have to bemade by the banks on the accepted due dates
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It is a usance credit where payment will be made bydesignated bank, on respective due dates, determinedin accordance with stipulations of the credit
1) Only senior level assistants should verify L/C and BG relatedtransactions and reverification by partner and proprietor is must
2) Please read bank’s internal guidelines along with instructionmanual which normally comes along with appointment letter
3) In case of any Doubts don’t hesitate to consult other friendlyBank officers other than Branch/ Bank under Audit withoutdiscussing details and if there is any Fraud immediately are tobe reported to RBI and Police/ CBI and for non-reporting, RBIcan impose penalty u/s 47-A of Banking Regulation Act.Definition of fraud is same as in Criminal Procedure Code.
4) if the audit assignment is for the first time, please study howother banks are opening L/C or BG from inhouse clients. SomeL/C, BG’s are appended herewith of kind perusal of allparticipants.
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Having regards to the recent developments following controls have beenintroduced with immediate effect and the branch heads to ensure strictcompliance on ongoing basis:
a) Liability voucher is to be passed in CBS before opening of Letter ofUndertaking (LOU) or other transactions pertaining to Non-financialmessages.
b) Direct message creation has been disabled through SAM for allbranches. Wherever the message is required to be created in SWIFTdirectly, the branches have to approach DC with the details of liabilityvoucher passed in CBS such as reference number, currency, amount anddate. Where liability voucher is not required to be passed the brancheshave to give cogent reasons for the same.
c) Six eye principle is to be followed without exception.
d) Branch head to check every day the details of all SWIFT messagestransmitted / originated from SWIFT directly.
e) Such details are to be preserved permanently.
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Frauds of Rs.1 lac and above should be reported toRegional office of RBI on form FMR 1 within 3 weeks ofthe frauds.
Frauds of Rs.1 crore and above should be reported toCentral Office of RBI on form FMR 1 within 3 weeks ofthe fraud.
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1. Frauds less than Rs.3 crore should be reported to Local Police.2. Frauds of Rs.3 crores and above should be reported to CBI.3. Frauds of Rs.3 crores and above BUT UPTO Rs.25 crores; if staff involvement-report to Anti Corruption Cell to CBI; if no staff involvement then report to Economic Offence Wing of CBI Rs.25 crore to Rs. 50 crores Banking Security ND Fraud
Cell of the CBI of the CBI whether there is staff involvement or not.
More than Rs.50 crores-Joint Director(Policy)CBI, HQ New Delhi.
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