NATIONAL BANK OF ETHIOPIA

ADDIS ABABA

LICENSING AND SUPERVISION OF

The BUSINESS OF MICROFINANCE INSTITUTIONS
Fraud Monitoring Directives No. MFI/26/2014

Whereas, the form, causes and impact of fraud inflict actual and potential risk on microfinance institutions;

Whereas, detection and prevention of fraud contributes for the soundness of financial system in general and microfinance sector in particular;

Whereas, the National Bank of Ethiopia has found it necessary to require microfinance institutions to take the necessary measures to detect, prevent and take remedial actions on fraud:

Now, therefore, in accordance with Article 27(2) of Microfinance Business Proclamation No. 626/2009, the National Bank of Ethiopia hereby issues these directives.

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1. Short Title

These directives may be cited as “Fraud Monitoring Directives No. MFI/26/2014”.

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2. Definitions

For the purpose of these directives, unless the context provides otherwise:

2.1 “cases closed” means settlement of fraud cases with police or court, recovering or writing off the amount of the fraud;

2.2 “detection of fraud” means discovering that actual or attempted fraud has been taken place;

2.3 “director” means any member of the board of directors of a microfinance institution by whatever title the person may be referred to;

2.4 “employee” means a chief executive officer, a senior executive officer, or any other employee who is appointed or hired by a microfinance institution to carry out its day to day operational activities;

2.5 “fraud” means an act or omission by shareholders, directors, employees, customers committed with the intention of gaining dishonest or unlawful advantage for the party committing fraud or for other parties;

2.6 “National Bank” means the National Bank of Ethiopia;

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3. Scope of Application

The provisions of these directives shall be applicable to all microfinance institutions.

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4. Requirements

4.1 Microfinance institutions shall have a well-defined fraud monitoring and control policies, approved by the Board, and procedures for fraud detection, mitigation and reporting.

4.2 Policies and procedures stated under sub-article 4.1 of this article shall be submitted to the National Bank and be appropriately communicated to employees.

4.3 Microfinance institutions shall ensure that the organizational structures and systems are designed to facilitate communication on actual or attempted fraud to the board of directors, management members and other concerned staffs.

4.4 Microfinance institutions shall provide anti-fraud training to all employees and members of the board of directors whenever necessary.

4.5 Microfinance institutions shall maintain fraud register that shall at a minimum contain detailed records of the fraud including:

a) name and complete address of the suspected fraudster;
b) description or type of fraud (embezzlement, cheating, forgery using fake instruments or others);
c) causes of the fraud;
d) position or profession of the suspected fraudster (director, employee, customer, or other party);
e) amount of actual or estimated fraud;
f) date of occurrence of fraud;
g) date of detection of fraud and reason for the delay (if any);
h) place and area of operation where the fraud has occurred;
i) technique and/or technology used to commit the fraud;
j) action taken or proposed to be taken to avoid such incidents;
k) amount recovered, if any;
l) in case of attempted fraud, state reason for the failure of the fraud action; and
m) any other relevant information.

4.6 Microfinance institutions shall report any attempted or actual fraud to the National Bank within 15 working days from the date of detection of the fraud in the form prescribed under Annex I.

4.7 Microfinance institutions shall submit quarterly progress report on fraud outstanding to the National Bank within four weeks from the end of the reporting quarter in the form prescribed under Annex II.

4.8 Where no new fraud occurred or progress has not been made on the outstanding fraud cases during the quarter, microfinance institutions shall submit to the National Bank a report by putting a word “Same” within four weeks from the end of the quarter.

4.9 The obligation of the microfinance institution to report fraud to the National Bank under these directives shall not exclude the obligation to report the case to the pertinent authority under any other law.

4.10 Internal auditors shall assess the fraud cases at least once in every quarter and report the findings and status to the board of directors;

5 Sharing Fraud Information The National Bank, where necessary, may share the fraud information, in its general form and context, guaranteeing the anonymity and confidentiality, to other financial institutions including microfinance institutions using appropriate means of communication.

6 Effective date These directives shall enter into force as of the 1st day of December 2014

TEKLEWOLD ATNAFU GOVERNOR

Annex I Actual or Attempted Fraud Cases Name of microfinance institution: Date:

No.	Items	Description	Remark
1.	Name and complete address of the suspected fraudster
2.	Description or type of fraud (embezzlement, cheating, forgery using fake instruments or others)
3.	Causes of the fraud
4.	Status or profession of the suspected fraudster (director, employee, customer, or other party):
5.	Amount of actual or estimated fraud
6.	Date of occurrence of fraud
7.	Date of detection of fraud and reason for the delay to detect (if any)
8.	Place and area of operation where the fraud has occurred
9.	Technique and/or technology used to commit the fraud
10.	Action taken or proposed to be taken to avoid such incidents
11.	Amount recovered, if any
12.	In case of attempted fraud, state reason for the failure of the fraud action; and
13.	Any other relevant information

Prepared by: Signature: Date:

Approved by: Signature: Date:

Annex II Quarterly Summary Report on Fraud Outstanding Name of microfinance institution: Date:

No	Category / Type of Fraud (1)	Cases outstanding at the end of the previous quarter	New cases reported during the current quarter	Cases closed during the current quarter	Cases outstanding at the end of the quarter	Total amount recovered (10)	Provision** held for outstanding cases as at the end of the quarter (11)	Amount recovered during the current quarter (12)	Amount written off during the current quarter (13)
		No (2) Amount (3)	No (4) Amount (5)	No (6) Amount (7)	No (8) = (2+4-6) Amount (9) = (3+5-7)

Note: * For consistent reporting, category includes cash, deposit, ghost loan, check, others, while type of fraud includes embezzlement, cheating, forgery/using fake instruments, and others. ** The provision shall be calculated using the classification and minimum provisioning requirement specified under article 7 of Directive No. MF/1/8/06.

Prepared by: Signature: Date:

Approved by: Signature: Date: