From KYC to now KYE: CVC suggests ‘know your employee’ to prevent bank frauds

With several frauds turning out to be insider jobs, banks have to be extra cautious with their staff.

The seventh edition of the Vigilance Manual by the Central Vigilance Commission, was released this year and it offers an interesting suggestion for banks. While the banking institutions find ways to cut down on the unhealthy practices that may lead to scams, CVC suggests that it’s time banks look beyond just KYC (know your customer), and focus on KYE (know your employee) and KYP (know your partner).

The manual explains that “Several frauds are insider jobs or perpetrated with the abetment of insiders. Banks have to take extra care to have continuous vigil on their staff.”

The manual advises that the techniques of background check for antecedents, periodic rotations, vigilance assessments, internal audits, and so on, have to be effectively employed to know the employees better.

It also mentions that modern-day banking necessitates working hand in hand with partners, agents, vendors, and so on, in addition to outsourcing peripheral and several operational activities, which involve deploying and trusting external agencies’ employees. Moreover, varied activities as diverse as cash logistics to IT and data management are being entrusted to third parties. Banking correspondents and banking facilitators are emerging as yet another set of persons closely associated with a bank.

In line with that, the manual states that, “If frauds are to be prevented, banks should have appropriate mechanisms to screen their partners.”

Under the norms and suggestions for ‘know your partners’, the manual further states that due diligence on other professionals, such as chartered accountants, valuers and advocates involved in the loan assessment and sanctioning processes is also an essential safeguard.

The Vigilance Manual 2017, released by the Minister of State for Personnel Jitendra Singh, elaborates that there have been instances, where some of these professionals have facilitated perpetration of frauds by colluding with the borrowers to fabricate/fudge financial statements, inflate security valuation reports and prepare defective search reports for title deeds of mortgaged property; and banks have been led to overestimate the funding requirements and security cover.

The manual emphasises that a strong system of guiding the anti-fraud initiatives should be present in the bank. “This requires a look at the corporate governance in banks and board-level ownership of the anti-fraud initiatives,” it cites. The bank should deal firmly and consistently with any fraud, and should enable employees to escalate their concerns and insights on potential frauds to the top management.

It is for the first time that a special chapter on public-sector enterprises, banking and insurance companies has been included in the seventh edition of the Vigilance Manual.