Chapter 32: Fraud and Vigilance in Banks (CAIIB – Paper 1)
1. What is the correct definition of fraud in banking?
A. Any act of negligence by a bank employee
B. A genuine error in bank accounting
C. Intentional deception for personal gain or to cause loss to the bank
D. Routine operational risk in banking
Fraud in banks refers to any intentional act of deception or manipulation done for personal gain or to cause financial loss to the bank.
2. Which of the following best defines forgery in the banking context?
A. Falsely making or altering a document with intent to deceive
B. Accidental alteration of bank records
C. Any unauthorized access to the bank’s database
D. Misplacement of customer documents
Forgery involves the intentional falsification or alteration of documents to deceive or gain an unlawful advantage in banking transactions.
3. Which of the following is considered a type of bank fraud?
A. Routine auditing of accounts
B. Following KYC guidelines strictly
C. Legal recovery of dues
D. Misappropriation of funds by an employee
Misappropriation of funds, where an employee illegally diverts bank funds for personal use, is a classic example of bank fraud.
4. Which of the following is NOT considered a form of forgery?
A. Signing a cheque on behalf of another without authority
B. Depositing a cheque correctly drawn in your own name
C. Altering the amount on a negotiable instrument
D. Counterfeiting a signature on a loan document
Forgery involves falsification or unauthorized alteration. Depositing a correctly drawn cheque in your own account is a legal banking activity and not forgery.
5. Which measure is typically implemented by banks to prevent fraud?
A. Ignoring small discrepancies in accounts
B. Avoiding customer verification procedures
C. Conducting internal audits and implementing strong internal controls
D. Allowing unlimited access to sensitive information
Banks prevent fraud by implementing strong internal controls, conducting regular audits, and ensuring proper verification of transactions and customer documents.
6. Which of the following is a common area where bank frauds are committed?
A. Advances and lending activities
B. Routine HR documentation
C. Internal audit approvals done correctly
D. Customer complaint resolution
Advances and lending activities are high-risk areas for bank frauds due to misappropriation, fake guarantees, or manipulation of accounts.
7. Which area in banks is particularly vulnerable to internal employee fraud?
A. Filing routine customer KYC forms
B. General branch cleaning activities
C. Attending training sessions
D. Cash handling and teller operations
Cash handling and teller operations are highly sensitive areas where employees may commit fraud, such as misappropriating cash or issuing unauthorized cheques.
8. Forgery and cheque frauds commonly occur in which area of banking?
A. Customer grievance redressal
B. Payment and settlement operations
C. Staff training programs
D. Branch infrastructure management
Payment and settlement operations are vulnerable to forgery, fake cheques, or fraudulent fund transfers, making them high-risk areas.
9. Which of the following areas is prone to fraud in loan documentation?
A. Employee attendance recording
B. Filing of insurance claims unrelated to loans
C. Collateral and security documentation
D. Routine office stationery management
Collateral and security documentation in loan processing can be manipulated or forged, leading to potential fraud in banks.
10. Which of the following is an area where external frauds are most likely?
A. Customer accounts and ATM transactions
B. Internal HR management
C. Staff leave approvals
D. Office cleaning services
External frauds, such as phishing, ATM skimming, or unauthorized withdrawals, often target customer accounts and banking channels.
11. Which of the following is a common type of cyber fraud in banking?
A. Misplacement of physical cash
B. Phishing attacks to steal customer credentials
C. Unauthorized leave by employees
D. Routine account reconciliation errors
Cyber fraud in banking often includes phishing attacks, where fraudsters attempt to steal customer login credentials or sensitive information online.
12. Which of the following is considered a preventive measure against cyber fraud?
A. Sharing login credentials with family members
B. Using public Wi-Fi for banking transactions
C. Enabling two-factor authentication (2FA) on accounts
D. Writing PIN on the back of the debit card
Two-factor authentication (2FA) adds an extra layer of security and is a key preventive measure against cyber frauds in banking.
13. Which of the following types of fraud can occur due to malware in banking systems?
A. Unauthorized fund transfers or data theft
B. Accidental cheque bouncing
C. Employee salary delay
D. Customer complaints about branch timings
Malware can compromise banking systems to steal data or perform unauthorized fund transfers, which is a common cyber fraud risk.
14. Which of the following is a social engineering method used in banking frauds?
A. ATM machine malfunction due to hardware issues
B. Delay in cheque clearance
C. Routine internal audit
D. Impersonating bank officials to obtain sensitive information
Social engineering frauds occur when fraudsters impersonate bank officials to trick customers into revealing sensitive information such as PINs or OTPs.
15. Which regulatory guideline is primarily aimed at preventing cyber frauds in banks?
A. Banking Regulation Act 1949
B. RBI Cyber Security Framework for Banks
C. Negotiable Instruments Act 1881
D. Companies Act 2013
The RBI Cyber Security Framework for Banks provides guidelines for securing banking systems and preventing cyber frauds.
16. What is the primary purpose of a fraud reporting and monitoring system in banks?
A. To increase branch profitability
B. To reduce employee workload
C. To detect, report, and monitor fraudulent activities effectively
D. To automate customer onboarding
A fraud reporting and monitoring system helps banks detect suspicious transactions, report them timely, and monitor ongoing fraud incidents to prevent losses.
17. Which system is commonly used by Indian banks to report frauds to the RBI?
A. Central Fraud Monitoring System (CFMS)
B. SWIFT Messaging System
C. Core Banking MIS Reports
D. RTGS/NEFT Payment System
The Central Fraud Monitoring System (CFMS) is used by banks to report significant frauds to the RBI, ensuring regulatory compliance and monitoring.
18. What is the time limit for banks to report a fraud of Rs. 1 crore and above to the RBI?
A. Within 90 days of detection
B. Within 30 days of detection
C. Within 6 months of detection
D. No specific timeline
As per RBI guidelines, banks must report frauds of Rs. 1 crore and above within 30 days from the date of detection to ensure timely monitoring and action.
19. Which of the following is a key feature of an effective fraud monitoring system?
A. Ignoring small-value transactions
B. Manual reporting only without automation
C. Delayed investigation of alerts
D. Real-time alerts, centralized reporting, and tracking of fraud incidents
Effective fraud monitoring systems provide real-time alerts, centralized reporting, and continuous tracking of fraud incidents to mitigate risk quickly.
20. Who is primarily responsible for reporting frauds internally within a bank?
A. Branch receptionist
B. Security guards
C. Branch manager and designated officers
D. Customers themselves
Branch managers and designated officers are primarily responsible for detecting and reporting frauds internally to ensure proper escalation and compliance with regulatory requirements.
21. What is the main objective of the vigilance function in banks?
A. To increase customer footfall
B. To improve branch interior design
C. To detect, prevent, and investigate irregularities and frauds
D. To manage routine branch paperwork
The vigilance function in banks aims to detect, investigate, and prevent irregularities, frauds, and misconduct to safeguard bank assets and reputation.
22. Who is primarily responsible for vigilance administration in a bank?
A. Branch cashier
B. Customer service executive
C. Security guard
D. Chief Vigilance Officer (CVO) or designated vigilance officers
The Chief Vigilance Officer (CVO) or designated vigilance officers are responsible for implementing vigilance policies, monitoring frauds, and ensuring regulatory compliance.
23. Which of the following activities is part of the vigilance function in banks?
A. Approving daily branch cash transactions
B. Conducting surprise inspections and audits
C. Updating customer passbooks
D. Routine cheque clearance
Vigilance officers conduct surprise inspections, audits, and monitoring to identify irregularities, prevent frauds, and maintain operational integrity.
24. Which of the following is NOT a function of vigilance in banks?
A. Preparing marketing campaigns for bank products
B. Investigating complaints of misconduct
C. Monitoring adherence to internal controls
D. Ensuring compliance with regulatory guidelines
Vigilance does not handle marketing or sales campaigns. Its primary role is investigation, monitoring, and ensuring compliance with rules and regulations.
25. Which type of inspection is typically carried out by vigilance officers?
A. Annual HR appraisal
B. Customer feedback surveys
C. Surprise inspection of branches and departments
D. IT system software updates
Surprise inspections by vigilance officers help detect irregularities, prevent frauds, and ensure compliance with internal policies.
26. Which of the following is a key RBI guideline for private sector and foreign banks regarding fraud management?
A. Ignore small-value frauds to reduce reporting workload
B. Establish a robust internal control and fraud risk management framework
C. Delegate all fraud detection to outsourced vendors only
D. Report only internal employee frauds to RBI
RBI requires private sector and foreign banks to implement strong internal controls, risk assessment, and monitoring mechanisms to prevent and detect frauds effectively.
27. What is RBI’s requirement regarding the appointment of a Chief Vigilance Officer (CVO) in private sector banks?
A. Only public sector banks need a CVO
B. CVO can be part-time in private banks
C. All private sector banks must appoint a full-time CVO or designated vigilance officer
D. No CVO is required if frauds are below Rs. 50 lakh
RBI mandates that all private sector banks appoint a full-time Chief Vigilance Officer (CVO) or designated vigilance officer to oversee fraud management and compliance.
28. According to RBI, how frequently should private and foreign banks report frauds above Rs. 1 crore?
A. Within 30 days of detection
B. Every quarter regardless of detection
C. Only at the end of the financial year
D. No reporting required if internal investigation is ongoing
RBI guidelines require that frauds above Rs. 1 crore be reported within 30 days from detection to ensure timely regulatory action.
29. Which of the following measures is recommended by RBI for cyber fraud prevention in private and foreign banks?
A. Relying solely on customer vigilance
B. Using outdated software to avoid complexity
C. Disabling alerts for small transactions
D. Implementing multi-layered IT security and continuous monitoring
RBI emphasizes that private and foreign banks implement strong IT security measures, multi-factor authentication, and continuous monitoring to prevent cyber frauds.
30. RBI expects private and foreign banks to maintain which of the following for fraud reporting?
A. Only verbal reports to branch heads
B. Informal internal memos without documentation
C. Properly documented fraud reporting and monitoring system with escalation matrix
D. Reporting only to external auditors annually
RBI guidelines require private and foreign banks to maintain a documented fraud reporting and monitoring system with a clear escalation matrix to ensure timely detection and reporting.
31. Which of the following is a common cause of fraud in banks?
A. Strict adherence to internal controls
B. Weak internal controls and inadequate supervision
C. Continuous employee training
D. Timely audits and inspections
Weak internal controls, lack of supervision, and loopholes in processes are common causes of fraud in banks.
32. Which factor contributes to cyber fraud in banking?
A. Strong password policies
B. Multi-factor authentication
C. Regular IT security audits
D. Lack of IT security awareness among staff and customers
Cyber fraud often occurs due to lack of IT security awareness, phishing, malware, and poor password management among staff and customers.
33. What is a key function of the vigilance mechanism in banks?
A. Designing new financial products
B. Increasing branch deposits
C. Monitoring operations, detecting irregularities, and investigating frauds
D. Conducting routine customer surveys
The vigilance mechanism ensures monitoring of operations, timely detection of irregularities, and investigation of frauds to maintain bank integrity.
34. Which of the following is a component of corporate governance in banks?
A. Increasing teller efficiency
B. Transparency, accountability, and adherence to regulatory guidelines
C. Promoting only profitable branches
D. Reducing staff training programs
Corporate governance in banks focuses on transparency, accountability, risk management, and compliance with RBI and statutory guidelines.
35. Which measure helps banks strengthen corporate governance to prevent fraud?
A. Ignoring internal audit findings
B. Reducing vigilance reporting
C. Avoiding regulatory compliance to save cost
D. Establishing strong internal controls, audit committees, and reporting mechanisms
Strong internal controls, audit committees, effective reporting systems, and regulatory compliance are key measures to strengthen corporate governance and prevent fraud.
