Issue No: Vig / 4 January - March 2014

From the Desk of CVO

“Back to Basics”
By this time, every IOBian would be aware of the financial
results of the Bank and the new thrust and focus areas of the bank for
the new financial year. It is a matter of great pride for IOBians to see
the giant strides taken by the bank over the last 75 years in business
development and branch expansion. IOB is now a Pan-India Bank
with more than 3500 branches spread across the length and breadth
of the country.

It is however a matter of great concern to observe that amidst all this

growth, we have sacrificed 'Basics' of banking to a large extent. This is evident from the
fact that during the last 5 years the Bank is reporting a fraud almost every 'third' day. A
recent study carried out by us revealed that the frauds are taking place mostly in areas
which, we, as bankers, are supposed to be very familiar. What is more painful is that
these frauds are repetitive in nature. As if to add salt to the wound, many of these
frauds are due to insider involvement.
Are we incapable of preventing this? Certainly not. The need is to
remind ourselves of the fact that whatever innovations we do in our product offerings,
we are still 'Bankers' and we need to adhere to 'basic' banking principles. Basic
precaution must be taken in:

a) Account opening b) Cash receipts and payments

c) Handling keys d) Proper accounting and tallying of cash daily.

My appeal to all IOBians is therefore to go 'Back to Basics' while marching ahead.

(N.S.NARAYAN RAO)
General Manager & Chief Vigilance Officer

Beliefs determine thoughts;

thoughts determine words;
words determine action; action determines habits ;
habits determine values and values determine destiny – Mahatma Gandhiji
 Ethics & Governance – A Perspective

(Excerpt from the Articles on Vigilance Administration and related matters – Published by CVC)
It is a well known fact that management plays a vital role in shaping the future of any organization as the
optimum utilization of all resources hinges upon the efficacy of the management. The core of successful management
lies in its Clarity of Vision, Plan of Action and more importantly Execution of the Plan of Action – the real gamut of
operations as it were and it is here that the importance of Corporate Governance and Ethics comes into being.
Whereas our policies and systems are good but the implementation needs much to be desired.

Organizations are managed by Policies, Guidelines and Systems. These are dynamic instruments, and
therefore need to be reviewed from time to time to gauge their efficacy to the said organization. This review is all the
more necessary when a lapse or untoward incident takes place. It could happen that the review undertaken reveals
that the said policy is very much sound and in place, however over a period of time wrong policies have come into
being, and which are the reasons for the problems that have occurred, therefore corrective steps need to be taken
forthwith.

A review could also reveal that the problems have occurred in spite of the policy in place and which means that
the policies would need to be modified or amended as the case may be in the best interest of the organization.

Normally, decisions are being taken within the framework of the policies and guidelines in place. Now, there
could be critical situations wherein the policy in question would need to be slightly deviated from, in order to take the
right decision, in the best interests of the organization. In such situations, a very clear and precise note should be
brought out giving the reasons which necessitated the said deviation from the policy. The said note should also contain
the implications to the organization if the decision was not taken. This would serve as a very transparent and objective
analysis, bringing out the need for deviation from the policy on this “case specific” issue, whereas the said policy in
principle would continue on an as is where is basis.

The two major reasons for corporate failures have been “Greed” and “Excess Leverage”. The moot point is
whether these two need to be completely done away with? If so, what is the incentive for aggressive growth and
competition? If not, how are these to be kept within controllable limits and yet higher growth achieved. It is here that
Business Ethics and Corporate Governance need to be focused on.

Independent Directors are expected to be “Watch Dogs”. They can at best be accused either of “Lack of
application of mind” or of consciously or otherwise overlooking the “slip” that has taken place. It has to be understood
that the Independent Directors cannot work as investigators as they are very much part of the decision making
process in the organization.

Each member of the Board need to bring their special expertise and experience on corporate issues to the
Board, and always, to keep “Broad Stake holder interest” in mind.

Any employer would look for three qualities from the employees – Integrity, Intelligence and vigor.
If they don't have the first, the other two will kill the institution – Anonymous
 They would be required to diligently and keenly watch the changes in Assets& Liabilities in Balance Sheet to
ensure quick corrective action if needed.

It is vital that the Independent Directors understand the impact and consequences of the proposals they are

clearing in the Board Meetings. They should also remember that they have a right under the Company Law to put up a

note of dissent (of course for valid reasons) as per their own judgment.

Board Members must embrace corporate ethics by creating a climate of integrity and responsibility within the
organization, expressed in both the written code and by living example i.e. all need to come together to build a strong
ethical culture for the organization which would ensure correct behavior/right behaviour when policies are either
unwritten, unclear or are unenforced.

Ethics and Corporate Governance are not just moral or compliance issues. In the long term, they are essential
behavioural traits for the organization that strengthen the organization's “brand equity” and help ensure stable
sustainable growth.

Release of Booklet - Do’s & Don’ts

LEARNING POINTS
14th March 2014

Release of Booklet - CMD,EDs,Directors & CVO

CMD honouring the co-author of Booklet

A good Manager is a man who isn't worried about his own career but rather
the careers of those who work for him – H.S.M.Burnes 3
 Workshop For Regional Vigilance Officers
2014 March 20,21 & 22

CMD Inaugurating the Workshop CMD's address

CVO's address GM PAD at Workshop

Ms.Thenmozhi, IPS, Supdt. of Police, DGM's address

CBI, Chennai - addressing the RVOs

A section of participants Another section of participants

Even a little dishonesty spoils a man; as a drop of poison spoils a pot of milk - Anonymous 4
 Case No.1 Fraud committed by I line Manager – Obey the official superior but verify the voucher

What happened and how:

In a medium sized branch, a customer was having his NRE SB and NRO accounts. He made a complaint that there were
unauthorized debits in his account to the extent of nearly Rs.100 lac and unauthorized transfer of funds from his account. As
the account holder got suspicion he visited the branch and enquired about his deposits. When the details of deposits were
searched in the system, there were no such deposits. It later transpired that lot of deposits of the account holder have been
misappropriated by the then I Line Manager of the branch and funds transferred to the branch to which he was transferred
without the knowledge of the account holder. Other officials have posted/passed the fraudulent transactions for which no
vouchers were prepared and held with voucher bundle. While the then First Line Manager has been placed under
suspension, lapses have been identified against the other officials.
Learning points:
Any transaction to be posted and passed in the system, only with the supporting voucher. In the instant case,
the other officials would have obeyed their official superior viz., the First Line Manager and posted/passed the
fraudulent transactions without supporting voucher. Branch officials should always follow the practice of
posting/passing any transaction, only with the supporting voucher and not to pass their pass word even to their official
superior.

Case No.2 What happened and how?

Manager I line of a rural branch sanctioned as many as 116 dairy loans of Rs.1 lac each where the animals have not
been purchased and all loans became unsecured. The Manager I line had committed other serious procedural irregularities
including allowing middlemen before and after sanctioning of loans for personal benefit. The matter came to light when the
present Manager sent registered notices to the defaulters and also through a customer complaint. The Manager who had
sanctioned the loan has been placed under suspension. Thus it is a clear case of Fence eating the crops. The I line Manager
who is supposed to safeguard the interests of the bank has chosen to violate the rules causing substantial likely loss to the
bank.
Learning Points:

Before posting any official as Manager I line of a branch, the following procedures have to be followed:
I) Examining the integrity and honesty of the person to be posted. ii) Obtaining vigilance clearance
iii) Surveillance to be maintained in the form of examining the CAF returns submitted by the I line Manager
iv) Periodical visits by Regional Office officials to the branch under preventive vigilance angle.

Case No.3 What happened and how?

A large corporate group was enjoying various credit facilities and was operating satisfactorily for over 5 years. When
they planned for expansion, they approached our Bank for enhancement and exposure to their associates under
consortium/Multiple Banking Arrangement. The same was considered favourably by all Banks. All banks released their
portion of Term Loans, which were credited to the Escrow Account with our Bank, being the leader bank. While remitting the
cost of acquiring the machineries, the branch failed to ensure genuineness of the supplier, which facilitated fraudulent
diversion of funds. In the absence of due diligence exercise, several Officers of the Bank are in trouble, both under
departmental action and by the CBI.

Learning Points:
Credit reports on the suppliers and critical scrutiny of the proforma invoices should never be overlooked.
There is everything which will satisfy a man's need 5
There is nothing which will satisfy a man's greed – Anonymous
 Preventive Vigilance in Foreign Exchange business
Foreign exchange business is a major fraud prone area involving crore of rupees. Hence there is an imperative
need to adopt preventive vigilance measures to protect against frauds. Some of the preventive vigilance measures in
Foreign Exchange portfolio are discussed hereunder.

Acceptance of usance bills.

Banks release the document of title to goods relating to import bills (IUBF and LC on usance terms) based on

acceptance of the bill by the drawee (our importer customer). As a preventive vigilance measure, it should firstly be

ensured that the person who accepts the bill is the authorized signatory of the firm or company.

Institutions covered under FCRA (Foreign Contribution Regulation Act)

Branches may be having accounts of many institutions engaged in educational and cultural activities. These

institutions receive inward remittances from abroad. As a preventive vigilance measure, it should be ensured that

these institutions are registered with Ministry of Home Affairs, Govt. Of India and a certificate to this effect in terms of

the instructions in force, is insisted from the customers and kept on record before permitting credit of inward

remittances. Care is to be taken to ensure that there are no other credits in the account and in case of any abnormal

debits or credits in the account, the matter is to be brought to the notice of the Competent Authority (AML requirement)

without any loss of time.

Obtaining credit opinion:

Before opening LCs on behalf of importer-customers for imports of large value, credit opinion on the supplier of
raw material / machinery, must be obtained and scrutinized for any adverse opinion. Similarly while extending Packing
Credit or discounting export bills for exporter customer, it should be ensured that credit opinion on the importer abroad
is obtained and scrutinized for any adverse opinion. If the credit report contains adverse opinion or if the party is not in
the data base of the credit rating agency, additional care is to be taken before proceeding further.

Handing over documents directly to the party

There are instances where documents such as acceptance of bills, due date advice etc. are directly handed-
over to the parties instead of sending directly to the concerned banks

As there are chances of making alterations or capturing the signatures of authorized officials of the bank by

unscrupulous persons, no bank documents should be directly handed over to the party. Similarly in case of export

customers, the party may directly bring LCs opened for their benefits which are supposed to be received from LC

advising bank. The practice needs to be discouraged. However in such cases, the LCs can be acted upon after due

cross-verification and validation.

A wise man is he who does not grieve for the things which he has not
but rejoices for those which he has – Epictetus
Onerous clause in LC:
An onerous clause or any restriction in LC which is intended to disrupt the functional-path of LC mechanism.

In one of the recently reported frauds, the LC opening bank at Dubai failed to honour the LC commitment on due date
(our customer is an exporter and our bank has discounted the bill). This defeats the very purpose of LC mechanism.
Ideally where an importer fails to pay on the due date, the importer's bank or LC opening bank has to honour its
commitment. When the bank persistently followed –up the matter, the Importer's bank pleaded that LC contain a
clause viz.,

“Upon buyer making payment, the bank shall reimburse the amount to the exporter” and relying on this clause, the L/C
opening bank states that if the buyer pays the amount, the bank will reimburse the amount. “

As a preventive vigilance measure, it should be ensured that the LC does not contain any such onerous clauses.

Over-financing:

An exporter customer may have various limits viz., CC, PC, LC and Bills discounting limits. The operations and
end-use of funds under each category should be monitored under each category to guard against diversion of funds.
In one account where large value fraud has been reported, the following preventive measures were not
followed by the branch:

a. The CC limit was in excess and stock statements were not submitted by the borrower
b. An export bill for huge amount was discounted though credit opinion on the supplier was negative. Further,
the bill was for export of machinery but our borrower was dealing in Compact Discs and DVDs.
The over financing (excess allowed in CC and Bills discounted for huge amount) obtained by the borrower
through fraudulent means resulted in diversion of funds and the bank's money was locked.

Effecting remittances based on email requests of customers

Branches receive e-mail requests from customers requesting outward remittances to the debit of their specific
accounts. Branches act upon such messages after ensuring that the e-Mail id of the inward message is the one
registered with the Bank. However problem arises when the customers deny having sent such e-Mail requests.

In the present day scenario where hacking of e-mail ids are possible, whenever branch receive e-Mail requests
from customers for transfer of funds, as a preventive vigilance measure, cross-verification with such customers be
made before acting upon such messages.

Opening LCs based on email authorisation by NAD branches

A case of fraud has been reported where an AD branch opened various LCs based on email requests from an
NAD branch. When the first LC opened was due for payment and when, the AD branch requested the NAD branch to
provide funds, it came to light that the NAD branch never gave authorization for opening the said LCs. Further
verification revealed that many such LCs were opened by AD branch involving crore of rupees. Though the e-mail Id
was that of the NAD branch, still NAD branch contended that it never gave any authorization. LCs were opened in
routine manner without application of mind. Failure on the part of AD branch to cross verify with NAD branch has
facilitated the fraudster.

A businessman's judgement is no better than his information – R.P.Lamont 7

 Submission of fake document of title to goods.

As far as new business connections are made, care should be taken to ensure that the Customers are
subjected to KYC requirements and the profiles as reflected in KYC documents are satisfactory. In one case, the
customer after banking with the branch for many years, has chosen to submit fake document of title to goods and got
the export bills discounted and siphoned off the money involving crore of rupees. This indicates that given an
opportunity even an existing long-standing customer can commit a fraud. Conscious adherence to the prescribed
Systems and procedures is a sine qua non before extending banking services including credit facility to a customer.

Preventive vigilance includes situations where deviations are to be made taking into account the practical
aspects involved, track record of the customer and other circumstances. However it should be ensured that such
deviations are reported to the higher authorities immediately for sanction / ratification with reasons for such deviations.
Branches should guard against indulging in deviations habitually.

Contributed by Shri K.Satyanarayanan, Senior Manager,Vigilance Dept.,Central Office

LEGAL CORNER
Disposal of fresh representation will not give
new cause of action in a stale issue
Gist of the case

Shri J was terminated by the G branch of Department of Industries and Commerce, Government of Tamilnadu
on charges deserting the service in 1982. After lapse of eighteen years Shri J claimed pension benefits.

Court ruling

The Hon'ble Supreme Court in the matter of between Shri J and Director of Geology and Mining and another
reported in 2009 (1) L.L.N.1 observed that every representation to the Government for relief, may not be replied on
merits. Representations relating to matters which have become stale or barred by limitation, can be rejected on that
ground alone, without examining the merits of the claim.

In regard to representations unrelated to the department, the reply may be only to inform that the matter did not
concern the department or to inform the appropriate department. Representations with incomplete particulars may be
replied by seeking relevant particulars. The replies to such representations, cannot furnish a fresh cause of action or
revive a stale or dead issue. The Court also observed that when a direction is issued by a court /tribunal to consider or
deal with the representation, usually the directee (person directed) examines the matter on merits, being under the
impression that failure to do may amount to disobedience. When an order is passed considering and rejecting the
claim or representation, in compliance with direction of the court or Tribunal, such an order does not revive the stale
claim, nor amount to some kind of “acknowledgment of a jural relationship” to give rise to a fresh cause of action.
The Supreme Court dismissed the Special leave petition filed by the terminated employee for pension benefits who
was terminated from service in the year 1982 and filed representation during 2000 before the management after
eighteen years of his termination.

A lot of people have great ideas, but nothing in the world is cheaper 8
than a good idea with no action – Anonymous.