Preventive Vigilance

It is an essential prerequisite for the bank officilas to be familiar with the preventive vigilance guidelines in order to insulate the organisation as well as himself/herself from non compliances affecting the credentials of the officer as well as the bank.A brief introduction to  preventive vigilance is given here under from “bankersfeed” for general wellbeing and protection of the officials responsible for taking decisions.

Introduction

Oxford English dictionary defines ‘Vigilance’ as keeping a careful watch to avoid possible danger or difficulties. The importance of vigilance in our daily life is aptly established in the quote of John Philpot Curran, an Irish orator, politician, lawyer and judge who stated that “The condition upon which God hath given liberty to man is eternal vigilance”.

Pearl S. Buck, an American writer and novelist, had further reinforced the importance of vigilance in our daily life by stating that “When good people in any country cease their vigilance and struggle, then evil men prevail”.

Hence, Preventive Vigilance is the need of the hour for awareness and dimensions to it has become all the more critical in the modern public space. Preventive vigilance is also linked to the process of audit and inspection. The whistle Blower policy is another tool in Preventive Vigilance.

The principle of `Prevention is better than cure` is aptly applicable for auditing and preventive vigilance aspects in branches.

Knowledge

1. Preventive Vigilance

In the context of an organization, Preventive Vigilance means keeping a watchful eye on the activities of the personnel and taking prompt action to promote fair practices and ensure integrity and honesty in the official transactions & behaviours.

.

• Why Vigilance?
  • There are individuals who indulge in unethical activities of getting personal gains at the cost of the organization. Such persons not only lead to wastages, losses and economic decline but also infect others and damage the image and goodwill of the organization. Hence, to rein in such persons’ mis-endeavors and promote organizational interest, vigilance is essential. 

• It helps in: 

1. Disciplining the wrong doers;
2. Protecting honest performers; 
3. Increasing transparency and fairness; 
4. Ascertaining accountability;
5. Reducing wastages/leakages;
6. Promoting culture of honesty and integrity; and
7. Reforming systems for corruption-free delivery. 

In brief, it supports in striving for zero tolerance for corruption and thereby enhancing the image of the organization

1. While being vigilant is important in all walks of life, the observance of vigilance becomes more critical in the financial sector and particularly for institutions like banks, which deal with public money.
2. Banks, which act as an intermediary between depositors and lenders, are duty bound to observe the highest standards of safeguards to ensure that money accepted from depositors are not mis-utilized and are put to gainful use or are available with them to be paid on demand.
3. In order to ensure this, banks are not only required to do due diligence on the borrowers but are also expected to put in place appropriate safeguards to ensure that the transactions being undertaken by the staff are as per laid down guidelines.
4. The watchfulness enforced by the vigilance function is required to ensure that public money, which banks hold in fiduciary capacity is not allowed to be misused by the delinquent elements in any manner
5. In a sense, an effective vigilance is a sine qua non for good Governance

Vigilance Perception

1. Vigilance activity in Banks forms an integral part of managerial functions and such activity is not intended to reduce but to enhance the level of managerial efficiency.

2. Every loss caused to the bank does not become the subject matter of vigilance enquiry. However, motivated and reckless decisions should not be ignored.

3. Distinction has to be drawn between malafide and bonafide.

4. While bonafide could be accepted as a normal part of business and ignored, malafide has to be viewed adversely and dealt with under the extant disciplinary procedures.

What is Vigilance angle? 

Any of the following:

1. Commission of criminal offences like demand and acceptance of illegal gratification.
2. Possession of disproportionate assets.
3. Forgery.
4. Cheating 
5. Abuse of official position with a view to obtaining pecuniary benefit.
6. Irregularities reflecting adversely on the integrity of the public servant.
7. Lapses involving gross negligence.
8. Lapses involving recklessness.
9. Lapses involving failure to report to competent authorities, exercise of discretion / powers without or in excess of powers/ justification.
10. Lapses involving cause of undue loss or concomitant gain to an individual or a set of individuals / a party or parties.
11. Lapses involving flagrant violation of system and procedures.

Three Aspects of Vigilance Administration

• There are three aspects to the vigilance function – Preventive, Punitive and Participative – (surveillance and detection).

• In normal course, preventive vigilance functions strengthen banks by inculcating a sense of honesty and integrity among its employees and establishing internal systems and controls, which act as a defense against malafide activity.

• Preventive vigilance function is, perhaps the most crucial and yet, the most challenging of the three aspects of vigilance

• It is crucial because it has the potential to prevent lapses from occurring by stemming the rot at the initial stages itself.

• However, it is challenging because it needs to be a continuous exercise across all levels of the organization and demands the focused attention of the management.

• “Vig-Eye”, a user-friendly platform for citizens to complain against corrupt officials by an SMS, was aimed at participative vigilance

This should be followed by strengthening participative vigilance function which encompasses (controllers’ level)

• reviewing the existing systems and control, 
• identifying lacunae and putting in place sufficient red flags so that the scope for misconduct is minimized and Transgressions are detected swiftly. 
• The systems of the institution which allow the employees to take independent decisions without subjecting them to “four eye principle”, 
• allowing use of excessive powers without scrutiny, 
• giving unrestrained financial powers to individual employees, 
• allowing employees to change the terms and conditions of any contract without involving the original sanctioning authorities etc. need to be reviewed and proper checks and balances need to be put in place to avoid misuse of powers by individual employee for their personal benefit.

Dos and Don’ts in Vigilance: 

DOs

1. Be Transparent
2. Use powers judiciously
3. Move for confirmation of action immediately: 
4. Justify action in writing
5. Follow extant guidelines / prescribed procedures
6. Be alert on the Advocate’s Opinion / Valuer’s Report
7. Be alert on the warnings given by the system:  
8. Keep secrecy of the password

DONTs

1. Delay the decision
2. Indulge in reckless finance
3. Hand over demand draft directly to the borrower / his representative
4. Depend on the middlemen
5. Make false TA/ Medical bills

It is said that intention in doing a particular thing may be true, but is should be justified

1. Audit

Audit function is to strengthen the bank’s internal controls and supervision mechanism. However, due to the human element in the execution of the banking process and sometimes due to systemic failures and inadequate process systems, irregularities might occur in the branch functioning.

The audit helps in toning up the operations, detecting and plugging income leakage and prevent plausible frauds/malpractices.

Audit for a Bank is like a health check – up for a human being. This is done to identify irregularities, if any and to rectify the same.

Bank auditing deals with the procedure of reviewing the systems and procedures adopted by banks. It is a routine procedure that all Banks must undergo in order to ensure that they are following industry standards and jurisdictional regulations.   

Banks, therefore, conduct different types of audits for ensuring that the systems and procedures are being followed and the stakeholders` interests are protected.

Let us understand the concept of audit and its types.

• Purpose of Audit

The purpose of the audit is to ensure that:

• All assets and liabilities of a bank are properly accounted for 
• No slippage of revenue 
• All expenses are properly accounted
• To inquire into the instances of frauds and malpractices in banks, if any
• The internal control system is properly implemented 
• Control returns are submitted to the controlling offices as per specified timelines

• Types of Audit

The common types of Audit are as below:

• Internal Audit (Risk Based Internal Audit)           
• Concurrent Audit or continuous audit
• Statutory Audit or Balance sheet audit
• Information System Audit (IS Audit)  
• Revenue Audit 
• Stock Audit
• RBI Audit (Annual financial Review)
• Credit Audit 

• Internal Audit (Risk based internal Audit)

• Internal Audit of the bank branch is done by the Audit team of the bank 
• Internal Audit extensively covers the procedural aspects of the entire working of the branch.
• The role of the auditor is not for ‘Fault finding’, but “Fact – Finding”. 
• Periodicity of the Audit:  

• Normally, periodicity at the branches depend upon the rating of the branch. 
• Extremely High-risk, very high and high risk rated branches shall be re-inspected after 6 months  
• Moderate risk branch or Medium risk branches – usually between 12 months to 15 months 
• Low-risk branch- 15 months to 18 months, 
• No branch will be unaudited beyond 18 months.

Apart from normal bank branches, all the specialized branches such as Service Branches, Retail hubs, CPC at Z.O and, CBS Project office, are also under audit. 

• Concurrent Audit:

The concurrent audit is an examination, which is close to the occurrence of transactions or is carried out as near thereto as possible. It attempts to shorten the interval between a transaction and its examination by an independent person.

Concurrent Audit is normally conducted by Internal auditors of the bank. However, in a few cases, this task is assigned to empanelled Chartered Accountants. Concurrent audit is normally conducted within one or two months (as per policy of bank)

Advantages of concurrent audit:

• Due to frequent Concurrent audits, the irregularities are brought to the notice of the Branch officials that help the branch to not repeat the same mistakes subsequently.
• The irregularities pointed out in the concurrent audit are rectified in a short span, thus increasing the efficiency of the branch.
• It helps in improving the quality of branch working through the adoption of policy guidelines of the RBI/Bank.
• As per RBI Concurrent audit at branches should cover at least 50% of the advances and 50% of deposits of a bank.  

• Statutory Audit: 

The audit is normally conducted by empanelled Chartered Accountants.

The purpose of Statutory Audit is to determine whether an organization is providing a fair and accurate representation of its financial position by examining financial statements like Balance Sheet, Profit & Loss Statement and other relevant reports for the correctness.

Apart from auditing the process also involves recommending suitable improvements in control aspects to reduce risks.

• Information System Audit: 

• Focus mainly on the safeguarding of information system Assets / Resources by a system of internal control.
• This audit is conducted by certified CISA/DISA professionals.
• Deals with auditing of Physical control and maintenance of computer Assets.
• Verifies whether Data integrity is maintained as per guidelines.
• Check for adherence of Banks I.T security policies on Disaster Recovery Plans (DRP) and BCP (Business Continuity Plan)
• Newly opened branches are subject to IS Audit within 6 months of opening. 

• Revenue Audit: 

• The main objective is to detect revenue leakages and to plug the loopholes. The verification of various items of Income and Expenditure like Interest Paid or charged, Commission and other Service Charges are covered, Recovery of manually debited charges etc.
• Conducted once in a year through external CA firms. The period of Audit is taken as October to September Every year and the audit is undertaken in October/November.
• The branches are required to recover the Income leakages pointed out by the Auditors during Audit only. In such cases where recovery is not possible for whatever reason, branches should recover the same at the earliest.
• On recovery of entire leakage, the Revenue audit report will be closed by Zonal Office, and a closure certificate is issued to that effect.

• Stock Audit: 

• Mainly deals with verification of stocks and debtors against which bank has lent.
• This audit is normally conducted by empaneled CA firms.
• All the borrower account enjoying fund based / non-fund based working capital limits including WCDL, TL against receivables etc. with the limit of Rs 5 crores and above (Rs 1 cr for Book Debts facility subject to Stock audit by external agencies or as per the policy of Bank. 
• Involves scrutiny as to whether the finances against stocks are safe and are valued correctly.

• Check for proper storage of stocks and if they are adequately insured. 
• Verify the realizable value of the hypothecated stock 
• Verify whether the finance is made on unpaid stocks 

• RBI Audit: 

This audit is always conducted by RBI Auditors in specific branches identified by RBI.   

Purpose of this audit is to ensure:

• Solvency of the banking system
• Quality of assets, adequate liquidity and profitability.
• Adherence to statutory and regulatory requirements.
• Implementation of socio-economic policies and developmental objectives of the Government/ Reserve Bank.

1. Audit Preparedness

Audit preparedness calls for meticulous planning, staffing, delegating and supervising the operational processes that happen in the branch. If proper steps are followed by the branch, it will help for smooth conduct of Audit. Some of the Indicative steps for Audit preparation are given below:

2. Conduct Staff meeting involving all staff members to sensitise on adherence to their respective departments. 
3. Review the previous year`s Audit report/rectification report to ensure that irregularities/deviations observed are duly rectified. 
4. Ensure easy and safe access of all Documents relating to borrowal accounts, property valuation reports, nominal heads, etc., which are normally verified during the course of the audit.
5. Ensure that insurance policies are in force and are available for verification.
6. Ensure Post sanction visit reports are readily available for audit.
7. Ensure that there is no leakage of revenue.  

2. Serious irregularities observed in Internal Audit:

The branch has to take care that there are no serious and major irregularities in the working of the Branch.

The indicative list of major irregularities is given below:

KYC compliance in respect of newly opened accounts are not being ensured.
Vouchers /cheque not authenticated with full signature of authorized signatory
Ultra Violet lamp machines and counterfeit note detectors are not put to use
Monthly Monitoring Reports are not sent in time to controlling office and even if sent, qualitative updating of information is not being done.
Review of account based on financial statements is overdue.
Improper calculation of Drawing Power by not deducting unpaid stock
Copy of Sanction letter not on record
Mortgaged and hypothecated property inadequately insured, defective mortgage and hypothecation agreements.
Pre-sanction visit not done/ visit report not held on record. Inspection of charged securities not carried out as per guidelines.
End-use not verified /security verification report, not on record
Not ensuring/checking movement of goods in case of L/C business and falling prey to accommodative nature of the L/C.
Expenses made exceeding delegated powers
Processing fees/Supervision Charges/Documentation Charges not collected.
Commission for Renewal/Extension for BG/LC not collected.
TOD /EOD sanctioned not reported to higher authorities
Exceptional transaction reports daily generated but not checked/ authenticated as per instructions
Password secrecy not maintained
Documents are Incomplete and/or defective.
Irregularities pointed by law officer /panel Advocate in documents not yet rectified
Documents are under-stamped or unstamped
Documents for TOD /EOD not obtained
Bank’s hypothecation charge is not registered with RTO in case of vehicle loan
Acknowledgement of Debt (AOD) is not on record for loans and advances.
Last Audit report overdue for closure.

3. SUBISSION AND CLOSURE OF AUDIT REPORT: 

1. On receipt of the Audit report, branches should make an ABC Analysis for prioritizing the Audit irregularities and submitting the rectification report. (A being serious, B being less serious and C being minor irregularities.) 
2. Discuss the irregularities with the respective departmental staff and delegate the work for rectification.
3. Branches should concentrate on the most serious irregularities and major irregularities on priority and appraise the progress to controlling office. 
4. Income leakages pointed out in the audit report should be recovered, preferably during internal Audit/concurrent audit. If not possible for some reasons, efforts to be made to recover the income leakage and report compliance. 
5. Branches should submit the audit rectification reports periodically with the first report to be submitted within 15 days of the closure of Audit and receipt of the audit report.
6. The internal audit report (Risk based internal Audit) is expected to be rectified and closed within a month from the date of receipt of the Audit report and final closure at HO level within 4 months. 
7. With each submission of the audit rectification report, Branches should submit the progress report informing the number of irregularities rectified and yet to be rectified.
8. There is a scope to rectify a few observations during the course of the audit. This can be attended on priority and the auditor needs to note the compliance.

4. FRAUD PRONE AREAS 

Frauds have been classified as under, based mainly on the provisions of the Indian Penal Code: which falls under the vigilance angle.

1. Misappropriation and criminal breach of trust.
2. Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts and conversion of property.
3. False claim in respect of TA and hospitalisation bills from bank etc.,
4. Unauthorised credit facilities extended for reward or for illegal gratification.
5. Cash shortages.
6. Cheating and forgery.
7. Fraudulent transactions involving foreign exchange
8. Any other type of fraud not coming under the specific heads as above.
9. Cash shortages resulting from negligence and fraudulent forex transactions involving irregularities/violation of regulations.

The officers should be alert and vigilant to prevent frauds by adhering to the laid down systems and procedures and keep their eyes and ears open to avert such fraudulent transactions. 

1. Whistle Blower Policy

Whistle-blower is an effective tool for preventive vigilance which acts as deterrent for the employees to keep themselves away from such activities.

The Whistleblower policy in banks aims to enable any employee, customer, general public or an organization, who notices any wrongdoing, to report it to the bank. 

Whistle blower policy covers areas such as corruption, misuse of office, criminal offences, suspected / actual fraud, failure to comply with existing rules and regulations and acts resulting in financial loss / operational risk, loss of reputation, etc. detrimental to depositors’ interest / public interest

The management always support the whistleblowers in the organizations so that this channel of information gathering from the inside sources can be nourished and built into an effective arm of the vigilance function.

 A whistleblower is a person who comes forward to share his/her knowledge of any wrongdoing happening in the whole organisation or in a specific department. He exposes any activity that is deemed illegal or unethical within an organization. The Whistleblower policy in banks aims to enable any employee, customer, general public or an organisation, who notices any wrongdoing, to report it to the bank. 

Broadly, the Whistleblower policy will have the following procedural guidelines for lodging of complaints and dealing with them.

• The complaints cover areas such as corruption, misuse of office, criminal offences, suspected / actual fraud, failure to comply with existing rules and regulations and acts resulting in financial loss / operational risk, loss of reputation, etc. detrimental to depositors’ interest / public interest
• The complaint should be sent in a closed / secured envelope
• The complainant should give his / her name and address in the beginning or end of the complaint or in an attached letter. In case of an employee making a complaint, details such as name, designation, branch/office and place of posting etc. should be furnished.
• Complaints can be made through e-mail also giving full details as specified above. For this purpose, a specific e-mail address is created
• Anonymous complaints should not be entertained
• The complainant should ensure that the issue raised by him involves dishonest intention/moral angle. He should study all the relevant facts and understand their significance. He should also make an effort, to resolve the issue through internal channels.
•  The details of the complaint should be specific and verifiable
• The identity of the complainant should be kept confidential 
• If allegations are substantiated, appropriate action should be against the official concerned

Your Action

1. Understand the concept of preventive vigilance and follow the procedures to safeguard the interest of branch/Bank. 
2. Be a vigilant employee and observe the activities going on around you with your eyes and ears open and report any untoward incidents to the Management by becoming a whistle blower. 
3. Check all Electronic Voucher Verification Report (EVVR) vouchers generated by the system and provide the report to the auditors / inspectors.
4. Keep all the records ready for smooth conduct of Audit 
5. Attend to Audit and try to rectify the items which can be attended on the spot and inform the Auditor on compliance  
6. Recover income leakage as far as possible during the course of audit/Audit and report compliance to the auditor 
7. Never ignore long outstanding GL entries.
8. Exercise preventive vigilance so as to avoid serious irregularities and frauds.

How Do You Apply

Situation 1:

You observe during regular working at the branch that one of the officers is allowing regular overdrawing’s to a customer against cheques received across counter and clearing though balance in CA is insufficient. As an employee of the branch how will you view from the angle of branch vigilance. 

Solution: 

The above observation to be got verified first as the officer is allowing the overdrawing only after consulting the branch Manager and hence it cannot be treated as an irregularity straightaway.  

In case the overdrawing’s are allowed to a customer who is maintaining a nominal account having a normal profile and there is no benefit to bank/ branch then the intention of the employees needs to be verified. 

Ensure whether these transactions are reported to higher authorities regularly and got the approval to be verified. 

In case the transactions are bonafide for any reasons it does not attract vigilance angle but if the transactions are with a malafide interest with a pecuniary interest then the matter needs to be looked from preventive vigilance angle. 

Sometimes overdrawing’s are allowed in a normal account based on the assurance of the customer to get a big chunk of business to the bank or customer may be influential in the area of operation and has helped in getting good leads though maintaining nominal account.

Whether there is transparency, honesty, and justification have to be ensured to treat a transaction bonafide or malafide.

How Do You Apply

Situation 2

Your branch was last audited internally about 13 months back. The internal audit is due and is expected any time within 15 days to 20 days. Your Branch Manager has advised you to keep things in readiness for the internal audit. 

Please explain as to how you would plan for the coming internal audit.

Solution:

1. Initially go through the Last Years Audit Report and Rectification Report and list down the major irregularities observed and rectified.
2. Check all those areas of irregularities for the current year and verify whether any such irregularities are recurring  and will ensure that necessary rectifications are  corrected well before the commencement of audit.
3. Conduct a self-audit especially in the area of credit and deposit to ensure that all documents are complete in all respects. Obtain approval of higher authority wherever necessary before the audit commences. 
4. Keep all the relevant records/documents ready which are normally verified by the auditors.  This will help smooth conduct of the audit and a positive indication to the auditor on our importance to audit.
5. Sensitize all the team members about the audit preparedness for respective desks.  

Learning Confirmation

1. Three Aspects of Vigilance Administration are: 

1. Preventive, Punitive and Participative
2. Preventive, Regular and Internal 
3. Punitive and transparent 
4. Preventive, punitive and rectifiable.

(Justification: The 3 aspects of vigilance are preventive, punitive and participative. Preventive is the most sought after to avoid damage to the organisation)

2.  Preventive vigilance is a must in an organization to ensure —-?

1. To improve the gradation of the branch/ bank 
2. To avoid observation by Statutory Auditors.
3. To improve the profitability of bank.
4. Increasing transparency and fairness and ascertaining accountability

(Justification: Preventive vigilance is a mechanism to ensure proper process and system by being more transparent and fairness and ascertain accountability for wrong doers by way of punitive action which is a caution for others) 

3. Smooth conduct of the Branch audit and Audit is the responsibility of ————-

1. the assistant manager of the Branch
2. The Branch Manager of the Branch
3. All the staff members collectively
4. staff members of respective departments

(Answer c: Justification: The branch audit and Audit is teamwork, and everybody has to work in tandem without thinking about which department he belongs to. The delegation and coordination have to be very planned.) 

4. RBIA report is expected to be rectified and closed 

1. within one month from the date of receipt of Audit report.
2. within 3 months from the date of commencement of RBIA
3. within 3 months from the date of receipt of Audit report by branch
4. within 4 months from the date of receipt of Audit report by branch

 (Justification: Normal TAT allowed by banks is one month or stipulated by Audit department of the branch) 

5. If the rectification is not done within the time frame, it amounts to non-compliance

1. True
2. False

(Justification: rectification to be done within the time frame as per Bank`s guidelines)

Summary

1. While being vigilant is important in all walks of life, the observance of vigilance becomes more critical in the financial sector and particularly for institutions like banks, which deal with public money.
2. Vigilance activity in Banks forms an integral part of managerial functions and such activity is not intended to reduce but to enhance the level of managerial efficiency
3. Preventive vigilance function is, perhaps the most crucial and yet, the most challenging of the three aspects of vigilance. It is crucial because it has the potential to prevent lapses from occurring by stemming the rot at the initial stages itself
4. The concept of whistleblower is another effective tool for preventive vigilance which acts as deterrent for the employees to keep themselves away from such activities.
5. Audit is conducted to help the Branch in rectifying the irregularities that exist in the branch to avoid the possible legal risk, financial risk and operational risk. The audit is an eye-opener in some cases as the branches could be committing the irregularities without the proper knowledge.