IBA Caution List of Third Party Entities

Banks and other financial institutions are approaching Frauds seriously. This post is about the role of third party entities in Frauds and importance to maintain a record of it.

Banking is the business of taking money and lending money. Different types of customers approach regularly at the Banks for taking loans. The Banks make use of certain Third Party Entities for the purpose of their daily banking business. It mainly happens when some person approaches a Bank for a loan. For example, in case of a loan one party wants to mortgage his landed property. The Bank manager may not know the correct status of the title of the borrower. In such cases the services of a lawyer will be required to find out whether there are any legal impediments in accepting the said property as security for the advance to be granted. It must be known that the title to the property is clear. So an advocate can be said to be a third party entity. Like wise, a valuer who values the property for the purpose of determining the sanction limit of loan and for knowing the amount of security comes into the hands of Bank at the time of recovery of the loan by sale. There are other third party entities.Third Party Entities can be defined as individuals or group of individuals, 

whether incorporated or not, used by bank or its customers/agents, for their product/service/expertise, based on which these entities sell products/provide services/give opinions/certify the accuracy of statements/valuation of assets/ownership of assets, etc. The Bank takes a decision based on the documents /opinion/certification given by these entities and enters into a financial transaction with the customer. The transaction could be related to any service the bank provides to its customers. When any problem occurs it will adversely affect the Bank's business. 

Reserve Bank of India conducted an analysis about the frauds committed by such third party entities for their own selfish purposes thereby putting the Bank's stand in stake. The analysis revealed that there is an increasing trend of fraud being committed in this area especially those pertaining to retail loans such as housing 

loans, commodity financing against warehouse receipts, loans for purchase of agricultural implements from dealers, vehicle loans and credit card cases. The main role of third parties such as builders, warehouse/cold storage owners, tractor/car dealers, travel agents etc is found out. Similarly, advice given by professionals like 

Chartered Accountants, Valuers, Architects, Advocates etc seem to have impact on the fraud cases. They tend to collude with the fraudsters by giving fake/questionable certificates.

Reserve Bank of India has now asked banks to build up an internal database on such third parties in a systematic manner and resort to mutual exchange of data on an ongoing basis. But the Banks should first know whether there is any role of such third party entities in the fraud committed. Then the Banks should prepare a Caution List of these entities involved in fraud cases. A centralised database of all such entities is 

maintained with full details like name of agency, names of partner/proprietor/directors, registration number if applicable, address and Permanent Account Number.

If any third party entity is found engaged in any case of fraud of a particular Bank, that Bank can upload that information which will be a caution for other Banks for not using their services.