Cyber Due Diligence Could Have Prevented Citibank Fraud

By

Praveen Dalal

The Gurgaon based Branch of Citibank was in controversies recently due to the fraud committed by one of its employees. Many depositors and high networth individuals (HNIs) of Citibank were defrauded upto the tune of Rs 460.91 crore in that fraud.

The modus operandi of the crime was very simple. The accused committed the fraud by mobilising funds to the tune of Rs 460.91 crore without authorisation from HNIs customers and certain corporate for the purpose of investing in stock market, assuring them high returns. The accused fabricated a circular of the Securities and Exchange Board of India (SEBI) to lure people into investing into accounts held by his accomplices.

However, Banks and Financial institutions must also be conscious of these fraudulent possibilities and they must be well prepared to prevent and tackle the same. For instance, Banks and Financial Institutions must regularly engage in “Forensics Audit” and “Incidence response”. Presently, Banks and Financial Institutions engage in these “Essential Exercises” when something fraudulent or wrong has already taken place.

Incidence Response and Forensics Audits are essential part of the overall “Due Diligence Strategy” of a Bank or Financial Institution. Recently, the Reserve Bank of India (RBI) executive director G Gopalakrishna said that all banks would have to create a position of Chief Information Officers (CIOs) as well as Steering Committees on Information Security at the Board Level at the earliest. This also means that Banks and Financial Institutions now have to engage in “Cyber Due Diligence” on a “Mandatory Basis”.

Similarly, Amendments have been proposed in the Banking Regulations Act 1949 (BRA 1949) by the Finance Ministry of India. Under the proposed Amendments, RBI would get more “Regulatory Powers” to regulate the affairs of Banks. RBI has also made it clear that it would consider issuing fresh licences for private banks only after getting more regulatory powers, including “Supersession” of bank Boards.

RBI must also constitute a “Core Working Group” consisting of Techno Legal Experts from all fields. This Group can analyse Frauds and Regulatory Aberrations committed by Banks and Financial Institutions or their employees.

The Banking Reforms in India are already in progress and these suggestions can also be a part of the same so that confidence and trust of Bank Customers and Investors is retained.