VOLUME TWO
FRAUD DETECTION, PREVENTION AND CONTROL
It should be obvious from the catalogue of causes, nature and types of fraud that have been given that their identification, prevention and control should be a collaborative effort involving government and its agencies; the operators, i.e. financial institutions management and staff; and the general pubic. While the major task here is to articulate the role of government and its agencies in this respect, it should be emphasized that the classic rule of banking. “Know your customer’’ is the key to identifying, preventing and controlling frauds. It is pertinent to submit that the role of government and its agencies is more of curative whereas the financial institutions and members of the public have dual role of preventing and curing frauds.
2.1 ROLE OF GOVERNMENT
The role of government in the prevention and control of frauds in banks and other financial institutions is a Herculean task. It boarded mainly on ensuring a disciplined society, promulgation of appropriate statutes, establishing relevant institutions and ensuring enforcement of various legal provisions.
The anti-corruption act passes by the senate, if well prosecuted and faithfully implemented, would go a long way in preventing and controlling frauds in our society. The activities of the Economic and Financial Crime Commission should be without fear or favor or witch-hunting of political opponents if really we want to eradicate fraud from our society. Convicts should not be allowed to occupy top position in our banks or outright ban should be the best option. This deduction is based on the realization that indiscipline breeds all sorts of vices including fraud. In recognition of this, the government should put in place relevant status to ensure safe and sound practices in the Nigeria financial system.
They CBN Decree, Banks and other Financial Institutions (BOF1) Decree, NDIC Decree, Community Bank Decree, Micro Finance Bank Decree and Insurance Decree should be upgraded to meet the challenges of the day and to further give effect to its resolve to rid financial institutions of frauds. The government constituted the “National Committees on Malpractices in Banks and Other Financial Institutions” in 1990. This committee should be strengthened with better legislations and the much needed funds.
2.2 ROLE OF CENTRAL BANK OF NIGERIAN (CBN) AND NIGERIA DEPOSIT INSURANCE COMMISSION (NDIC)
The subject of frauds in the financial system is of special concern to the monetary and supervisor authorities, particularly the CBN and NDIC. These government agencies are concerned about the safety of individual institution and the soundness of the banking system. Most especially, the NDIC is specifically charged with the responsibility of protecting debtors. The prudential regulations of the CBN/ NDIC to banks are also aimed at preventing and controlling frauds. For example the conditions in the prudential guidelines for licensed banks that all banks should review their credit portfolio quarterly would help early detection of any acts of fraud, forgeries and financial malpractices relating to loans and advances granted under suspicious circumstances.
In effect, examination recommendations emanating from the CBN or NDIC must be treated with seriousness by banks and must receive the backing of the board of directors, shareholders and management of the effected banks.
There is also the statutory requirement for banks and other financial institutions to employ external auditors to check their books and affairs. For banks not to exercise undue influence on external auditors, their appointment and termination is subject to the approval of the CBN.
2.3 ROLE OF BRANCH MANAGEMENT
The branch’s ability to prevent or detect and control fraud depends essentially on the quality of personnel assigned to it by head office and the effectiveness of internal control in place. The usual measures which ensure timely detection and control of fraud may be categorized as:
A. Personnel control: proper recruitment procedures – (screening, referees, sworn declaration, certificates,
Photographs, permanent home address etc).
B. Administrative control: (a) segregation of duties (b) dual custody (c) security personnel (d) security devices e.g. Test key, Regiscope, cameras (e) franking machines.
C. Accounting control: e.g. (a) Data validation, (b) Prompt posting of transaction ,(c) Balancing, (d) reconciliation, (e) Variance analysis, (f) Review and statistics, (g ) Budgeting , standards and protections, (iv) Financial control :e.g. (a) cash limits (b)signing powers (c) specialized stationer (e.g. certified cheques, bankers payment coupons ).
The control of fraud at branch level must focus on means of payments (i.e. bankers payments, inter branch transfers) and accounts (i.e. bank’s ledger, impersonal accounts, customers account)
REFERENCES
Alashi, S.O (1994) “ fraud prevention and control , the Role of Government
and Agents “Nigeria institute of bankers Lagos Vol .30 no 4 pill -15
Bank Administration Institute (1989) “ fraud prevention and Detection
“(first national bank of Chicago)
Drover, C.B and Bosley R .W.B (1975) Sheldon’s practices * law of banking,
Macdonald & Evans 10th Ed.
Eke chi , A.O (1990) ,“ Frauds And Forgeries in banks : causes
types and prevention ,” seminar paper presented a the national seminar
in bank audit organized by ICAN in Lagos
Leslie, R .h. (1974) “auditing “Macdonald & Evans, forth Ed
N.D.L.C. (1992) Annual Report
Nduka.J. (1993) “internal control system: design and Implementation,”
a paper presented at FITC Course Effective Bank Inspection
Sandra, B.A (1994) “understanding of fraud in Banks, financial And Administrative
System,” Being A paper presented AT A workshop Organized by Michael
Stevens and Associates, Lagos.
CONLUSION
In view of the craze for money in Nigeria, misplaced value judgment and the prevailing harsh economic environment, big time frauds are on the increase and banks are losing amounts running into millions of naira to fraudster everyday. The starting point is remorse and the danger for us is denial and the refusal to admit our weaknesses. Our inordinate quest for wealth and material things. Michael J. Comer lamented that many frauds succeed because some people would rather be fooled than be thought to be distrustful .It is important to stress the need for all financial institutions to comply with statutory requirements of rendering returns for effectiveness of all the policy measures which the government , monetary and supervisory authorities might design to curb the menace . The prevention, detection and control of frauds should be a collaborative effort of banks, their customers, the public and the government including relevant agencies. Frauds in the financial system should as much as possible be minimized as it kills the institutions and destroys the economy of our nation. All hands must therefore be on deck to detect prevent and control frauds in our financial system. We are called here to live a life of dedication and consecration. Our old life and nature have got to die and a new one be birthed after reading through this article.
Tuesday, January 27, 2009
Monday, January 26, 2009
FRAUD IN NIGERIAN BANKS AND ITS IMPACT ON BANKS AND THE NIGERIAN ECONOMY.VOLUME 1
INTRODUCTION
The level of fraud in the present day Nigeria has assumed an epidemic dimension. It has eaten deep into every aspect of our life to the extent that a three year old child talks about yahoo mail or 419, newly discovered sobriquet for advanced free fraud that is hunting us as a nation. Nigeria, with all of its natural and human resources, tethers on the brink of destruction because of fraud. Much of what we do is “cutting leaves” instead of dealing with the root problem. Generally, fraud take it roots from the human heart. It is an axiom that the heart is deceitful above all things and is desperately wicked.
Fraud is the number one enemy of the business world, no company is immune to it and it is in all works of life, Nwankwo (1991). The fear is now rife that the increasing wave of fraud in the financial institutions in recent years, if not arrested might pose certain threats to stability and the survival of individual financial institution and the performance of the industry as a whole and no area of the economy is immune from fraudsters and even the banking system. Fraud if not checked might cause run on in the banking sector.
The purpose of this work is to inculcate and instill the spirit of accountability, leadership, responsibility and probity in the reader(s), practicing bankers and potential bankers who will occupy managerial post tomorrow; expose the effect it has on the Nigerian economy and to discuss the effort of government and its agencies in the prevention and control of fraud . To be able to do so, this paper has been divided into volumes: the first volume examines the overall component of fraud, the second volume attempts to highlight the role of government and other agencies in fraud detection, prevention and control and finally the conclusion.
OVERVIEW OF FRAUD
Fraud is a complex universal phenomenon. It is rampant in both developed and developing countries and varies across time and places in its magnitude, its sources, the way it manifests itself and in its effects on administrative performance and development. Political, economic, social, cultural and attitudinal factors combine in contributing to its incidence.
1.1 DEFINITION OF FRAUD
Olufidipe (1994) defined fraud as “Deceit or trickery deliberately practiced in other to gain some advantage dishonesty.’’
Fraud means an act of dishonesty, deceit and imposture Alashi, (1994)
According to Kirkpatrick (1985), “a person who pretends to be something that he is not is a fraud, a snare, a deceptive, trick, cheat and a swindler.
By extension fraud will include embezzlement, theft or any attempt to steal or unlawful obtain, misuse or harm the assets of bank (Bank Administration Institute, 1989).
1.2 DIMENSIONS OF FRAUD
Going by the definitions, frauds in the Nigeria economy cannot be restricted to be banks alone. Frauds do take different dimensions which amongst others include the following:
A. Cheating by market women/men or scale measurements etc
B. Failure to pay correct import/export duties/tax evasion.
C. Over invoicing/inflating contracts.
D. Payment for services not rendered.
E. Stealing and other 419 activities.
F. Political fraud etc.
1.3 CAUSES OF FRAUD
Causes of fraud include the following amongst orders:
A. General Lust for Affluence: it is a matter of fact that the Nigerian society in the last twenty years or there-about has become one where most people want to be rich overnight by whatever means and this has been responsible for the increase in the number of bank fraud and other forms of frauds.
B. Recognition Being Accorded Wealthy People Regardless of the Source(s) of Their Wealth: the manner in which we recognize wealthy people in our various communities, churches and mosques without considering the source(s) of their wealth has even made the matter worse .Young and talented men and women engage in drug trafficking and in committing frauds because our society do not only condone these but also encourage them by singing songs of praise in their honor, making them chairmen at functions, naming halls in universities, street and highway after them even floating non governmental organizations in their names. Our national awards like CON, MFR, GCRN, and MON just to mention but a few are some times wrongly awarded to those who defrauded Nigerian banks.
B. General Belief That the Economy (banks and other financial institutions) Can Sustain Any Amount of loss: the attack on the nation’s treasury and banks by fraudsters is partly due to the belief by many Nigerians that the banking sector is the most profitable sector of the economy and that the nation’s wealth is inexhaustible and sometimes the see it as part of the national cake. Anybody with a little knowledge of Economics or Finance should know that banks are trading on equity which means they are using other peoples’ money to make money and depositors’ monies are not theirs. The can only sustain themselves by making profit after all banking business is all about risk.
1.4 BANK FRAUD AND ITS CAUSES
Frauds in the banks are not new they are as old as the industry itself. Bank fraud can be defined as a conscious or deliberate effort aimed at obtaining unlawful financial advantage at the detriment of another person who is the rightful owner of the fund. Orjih, (1998).
1.5 CAUSES OF BANK FRAUD
Alashi (1994) grouped the major causes of the bank fraud into two. These are institutional factors and environmental factors. Institutional factors are those traceable to the internal environment of the financial institution while the environmental factors are those which result from the influence of the environment on the banking industry.
INSTITUTIONAL CAUSES OF FRAUD
Various authors and professionals in the industry seem to be unanimous in their identification of institutional causes of fraud. These are as follows:
A. Volume of work: the amount of work done by official(s) could be so heavy that frauds could easily pass undetected by such official(s).
B. Nature of Services: fraud may be caused where documents of value and liquid assets are exposed to an undisciplined staff or unauthorized person(s) for example customer(s)
C. Banking Experience of staff: frauds in banks occur with higher frequency among staff with little experience and knowledge in financial practice. The more experience and knowledge of a staff, the less likelihood that frauds would pass such staff undetected unless with active support of that staff.
D. Number of staff: where a senior official supervises quite a large number of staff, there is a high likelihood that fraud could go undetected.
E. Poor Management: banks with poor management record high incidence of all sorts of frauds than those with effective and efficient management team with unsullied character.
F. Poor Security Arrangement: banks where security arrangement for valuable documents are weak, poor and vulnerable, it is easy for fraudsters to have their ways undetected. Nigerian banks use bullion vans for conveying huge sums of money. The heavy reliance on cash has made banking a nightmare for many Nigerians. Efforts should be made to make Nigeria a cashless society.
G. Inadequate Infrastructure: Poor communication systems, and power failure result to backlog of unbalanced postings, congested office space etc, encourage the perpetration of fraud in banks.
H. Delays in procuring Document: Delays create opportunities for hatching in bank and other financial institutions thus making prevention and detection difficult
.
ENVIRONMENTAL/SOCIETAL CAUSES OF FRAUD:
These have been identified as follows:
A. Personality Profile of Dramatize Personae; most individuals with inordinate ambitions without qualm are prone to committing frauds. These kinds of individuals bent on making money by hook or crook and to them the end justifies the means.
B. Societal Value: when the possession of wealth determines the reputation ascribed to a person, that society is bound to witness unnecessary competition for acquisition of wealth.
C. Lack of Effective Deterrent/Punishment: this is a moot point because it is argued in some quarters that lack of effective deterrent such as heavy punishment could be a factor that contributes to the high perpetration of frauds in financial institutions.
D. Fear of Negative Publicity: many financial institutions fail to report fraud cases to the authorities. They believe that doing so will give unnecessary negative publicity to their institutions. This is not only a chance for fraudsters to thrive; it is great challenge to a researcher as regards to data collection.
E. Unemployment and High level of Poverty in Nigeria: Nigeria is one of the riches economies in the Sub Saharan Africa and indeed the world both in human and natural resources (oil) but 80% of the Nigeria youths especially university graduates are unemployed. Most of the politicians squirrel away the looted funds in foreign banks without been punished. This causes capital flight, unemployment, dearth in infrastructure which is not particularly good for a developing country like Nigeria. Directly or indirectly some Nigeria youths especially those with little ICT knowledge with special reference to those that find themselves in the banking industry with criminal intent engage in one bank fraud or the other in order to eradicate poverty. Most of them have some of their family members that depend on them for what to eat, drink or even put in their pockets.
All these make fraudsters to have the feeling that they are above the law and as such can get away with ill-gotten wealth unpunished.
1.6 NATURE AND TYPES OF BANK FRAUD
Frauds in financial institutions vary widely in nature, character and method of perpetration. In general, it may be classified in two ways: (i) Perpetrators (ii) Methods used.
On the basis of perpetrators, there are three broad categories: internal, external and mixed. Internal perpetrators of frauds are related to those committed by members of staff (insiders). External perpetrators are those committed by non-staff while mixed fraud involved outsiders colluding with staff (insiders).
The most important and common types of fraud highlighted by Bank Administration institute (1989) in fraud prevention and detection series are discussed below:
A. Advance fee fraud (“419’’). This involves an gent approaching a bank, a company or an individual with an offer to access large funds at below market interest rates often for long term. The purported source of such funds is not specifically identified as the only way to have access to it is through the agent who must receive a fee or commission “in advance”.
B. Cheque Kiting: kiting is defined by the US comptroller of the currency’s policy. Guidelines for National Bank Directors as “method whereby a depositor utilizes the time required for cheque to clear to obtain an unauthorized loan without interest charge.”
C. Account-Opening Fraud: this usually starts when a person not known to the bank asks to open a transaction account with false identification but unknown to the bank. Such a person might use the account for illegal transaction and close the account within a short period.
D. Money Transfer Fraud: Fraudulent money transfer may result from a request created solely for the purpose of committing a fraud or the alteration of a genuine funds transfer request. A genuine request can be altered by changing the beneficiary’s name or Account number or changing the amount of the transfer. These day “yahoo boys” the name giving to scammers in Nigeria that send fake e-mails to would be victims asking them to apply for fake contracts or fake lottery thereby winning non-existing money from a dead billionaire’s account in different parts of the world. They connive with fraudulent bankers in the Western Union department to withdraw their ill-gotten hard currencies or without the knowledge of the bank as regards to the authenticity of the beneficiary.
E. Telex Fraud: Transfer of funds from one location to another can be affected through the telex. The message though often coded can be altered to enable diversion of the funds to an account not originally intended.
F. Money laundering Fraud: this is a means to conceal the existence, source or use of illegally-obtained money by converting the cash into untraceable transaction in a bank. The cash is disguised to make the income appear legitimate.
G. Computer Fraud: computer frauds can take the form of corrupting the program(s) and even breaking into the system via a remote sensor by a computer programmer or specialist .Diskettes can also be tampered with to gain access to unauthorized areas or even give credit to an account for which funds where not originally intended.
H. Loans Frauds: Loan fraud occurs when credit is extended to non-borrowing customers or to borrowing customer who had exceeded his credit ceiling. The fraudulent aspect of this class is that there is intent to conceal it from the head office (inspectorate) staff on routine check to deceive them with plausible but falsified statements, documents etc. That is to say a credit facility for a customer “A” yet to be drawn is diverted for the use of customer “B”. Other types of bank frauds include counterfeited securities, clearing fraud, letters of credit fraud, forging of banks Rubber stamps, substitution of names in credit vouchers, over stating interest charges, manipulation of dormant accounts and unauthorized printing of bank stationeries and cheque fraud etc.
1.7 EXTENT OF FRAUD IN BANKS
Bank fraud in Nigeria has increased and will continue to increase because it is a part of everyday life. “The magnitude of fraud is, of course, not known because much of it is undiscovered or undetected and not all that is detected is published” Nwankwo (1991). In Nigeria, where the statistics are non- existent, it is put at about -N-200 Million per annum of which about 15%- 20% would be successful. It is appropriate to have a feel of the extent of loss through bank frauds in Nigeria in order to appreciate the havoc the cankerworm has been wrecking on the economy.
The sum of =N= 2.2 billion Was involved in banks fraud in 3 year, 1991 – 1993 , out of which commercial banks accounted for about 94.1 per cent ( see table) the actual/expected loss to the
banking system within the same period totaled about #0 .3 Billion with commercial banks accounting for about 95.7 per cent thereof .
In 1998, the nation’s banking industry lost #3.196 Billion while in 1999; it lost a whopping sum of #7.404 Billion to fraud. Similarly, the actual/expected loss stood at a higher level of # 2.713 Billion relative to #623 50 Million in 1998 (NDIC Annual report and statement of account 1999).
Nigeria's banks have seen almost $10m disappear through employee fraud in 2002, a rise of more than 40% on the year before, a survey by the country's banking regulator has found. The total amount stolen was 1.29bn naira, up from 906.3m in 2001, the Nigerian Deposit Insurance Corporation reported. Ten times that amount #12.91bn was recorded in attempted fraud, up from 11.24bn for a rise of 15%. Most of the thefts, NDIC said, were the result of either forgeries or illegal withdrawals from customers' accounts.
The figures may well be an understatement, though; as NDIC said it believes financial institutions routinely underreport fraud losses for fear of negative publicity. In May 2003 Nigerian bank fraud moved up to 40%. The banking regulator says theft by bank employees soared last year, but suspects that much more fraud may go unreported.
It is not only Nigerian banks and citizens that are exposed to bank frauds. Such frauds are also focused on foreign banks and their citizens. Just how much has been stolen by such fraud is not clear. But BBC news-business says that US citizens lose in 2004 move than $100m (£63.4m) a year to Nigerian fraudsters. However, Nigerians do indeed involve themselves in genuinely legal businesses apart from the infamous banking scams.
TABLE 1
Fraud in Nigeria Commercial and Merchant Banks
Amount involved Actual / Expected loss
Year commercial Banks merchant banks commercial banks merchant
1991 360.194 28.318 25.498 1.180
1992 351.913 59.82 64.8 8.31
1993 1376.3 41.92 241.01 5.37
Total 2088.424 30.058 331.308 14.86
Source NDIC. Annual Reports (various issues)
TABLE 2
Number of Bank Staff Involved in Frauds
Ranks Number
1991 1992 1993
1. Supervisor and manager 66 132 127
2. Officers , Accountant & Executive Assistant 60 66 58
3. Clerks and Cashiers 236 156 192
4. Typist, Technicians & Stenographers 47 9 34
5. Messenger , Drivers, Cleaners and Stewards 51 54 61
6. Temporary staff 24 - 5
7. Unregistered staff 30 19 40
Total 514 436 517
>Staff whose status were not disclose
Source: NDIC Annual Report (Various issues)
1.8 IMPLICATION S OF FRAUD
A. DOWN TURN IN THE ECONOMY
For the past 18 years or so our economic development has witnessed a serious set-back with graduates roaming the streets in search of employment which are not available. Various government polices to revamp the economy though appear laudable were all frustrated at the implementation stage because some of the people responsible for implementing them are fraudulent. Both the political and economic situation declined from bad to worse with naira witnessing an unprecedented devaluation of 1,300% within five years. As at December 2008 and January 2009 the naira exchange rate with the stood between #149 to #150 per $1.Devil then found job as idle hands were meant to engage in one kind of fraud or the other while “419, cocaine pushing, billion naira bank frauds”, becoming regular features of our newspaper, Television and Radio headlines.
B. TERMINATION / RETIREMENT OF STAFF
As a result of this very serious economic crime, some staff in the industry have either been dismissed, or have their appointment terminated or prematurely retired. This means that some experienced hands in the sectors are lost due to their involvement in frauds and forgeries. During and after the consolidation exercise that took place in the Nigerian banking industry it was revealed by the central bank that some bank directors and senior managers of those banks that couldn’t meet up the #25 billion minimum capital base gave themselves unserviceable loans in hundreds of millions. The Nigerian Deposit Insurance Corporation is still in court with those involved in this unethical behavior. Our problem is that most of those involved these economic crimes are highly placed or senior politicians. We can’t know their names simply because of their positions in the country.
C. GLOBAL PERCEPTION. Nigeria has become synonymous with fraud as some of its citizens use the boom in internet fraud and corruption has become an unfortunate staple in Nigeria's international reputation. The country regularly features at the top of international surveys measuring the part played by graft in different economies. Successive dictatorships have extracted billions from the exchequer, denuding the public purse of revenues from Nigeria's rich oil reserves. Outside the country Nigeria has become synonymous with fraud as some of its citizens use internet and the boom in of cafes to send "spam" e-mails, promising millions in exchange for the gullible recipient's bank details. This makes it difficult for genuine business men from Nigeria to go into international business with foreigners or secure credit overseas.
REFERENCES
Anyanwu, J.C, (1993), Monetary Economics: Theory, Policy And
Institutions. Onitsha, Nigeria. Hybrid publishers ltd.
Bank Administration Institute (1989), “Fraud prevention and Detection
Series” First Chicago (the First National Bank of Chicago).
Kirkpatrick, E.M, (Ed) (1985) “Chambers Universal Learners’ Dictionary”,
Ibadan Nigeria spectrum book Ltd.
Michael, J C, (1995)”, (Corporate fraud” UK, Mc- Graw Hill Books co.
NDIC, (1992) Annual Report.
, (1998) Annual Report.
Nwankwo, G.O, (19991) Bank management” principles and practice Lagos
Malthouse press Ltd, Lagos Nigeria.
Nzotta, S.M, (1999) Money, banking & Finance: Theory and practice
Owerri Nigeria Intercontinental Educational Books & Publishers 1St Ed.
Olufidipe, E.O, (1994), “Fraud in Nigeria and its Implication for Bank &Financial Institutions”
Nigeria Institute of bankers Lagos July- Decembers Vol. 30 NO. 4pp7-10.
Orjih. J, (1998) Elements of Banking, Enugu Nigeria Communications Publishers.
Shongotla, I.O, (1994) “Fraud Detection and control” Nigeria institute of
Bankers Lagos July- December VOi.30, NO.4 PP16-19.
www.bbcnews.com ⁄business
The level of fraud in the present day Nigeria has assumed an epidemic dimension. It has eaten deep into every aspect of our life to the extent that a three year old child talks about yahoo mail or 419, newly discovered sobriquet for advanced free fraud that is hunting us as a nation. Nigeria, with all of its natural and human resources, tethers on the brink of destruction because of fraud. Much of what we do is “cutting leaves” instead of dealing with the root problem. Generally, fraud take it roots from the human heart. It is an axiom that the heart is deceitful above all things and is desperately wicked.
Fraud is the number one enemy of the business world, no company is immune to it and it is in all works of life, Nwankwo (1991). The fear is now rife that the increasing wave of fraud in the financial institutions in recent years, if not arrested might pose certain threats to stability and the survival of individual financial institution and the performance of the industry as a whole and no area of the economy is immune from fraudsters and even the banking system. Fraud if not checked might cause run on in the banking sector.
The purpose of this work is to inculcate and instill the spirit of accountability, leadership, responsibility and probity in the reader(s), practicing bankers and potential bankers who will occupy managerial post tomorrow; expose the effect it has on the Nigerian economy and to discuss the effort of government and its agencies in the prevention and control of fraud . To be able to do so, this paper has been divided into volumes: the first volume examines the overall component of fraud, the second volume attempts to highlight the role of government and other agencies in fraud detection, prevention and control and finally the conclusion.
OVERVIEW OF FRAUD
Fraud is a complex universal phenomenon. It is rampant in both developed and developing countries and varies across time and places in its magnitude, its sources, the way it manifests itself and in its effects on administrative performance and development. Political, economic, social, cultural and attitudinal factors combine in contributing to its incidence.
1.1 DEFINITION OF FRAUD
Olufidipe (1994) defined fraud as “Deceit or trickery deliberately practiced in other to gain some advantage dishonesty.’’
Fraud means an act of dishonesty, deceit and imposture Alashi, (1994)
According to Kirkpatrick (1985), “a person who pretends to be something that he is not is a fraud, a snare, a deceptive, trick, cheat and a swindler.
By extension fraud will include embezzlement, theft or any attempt to steal or unlawful obtain, misuse or harm the assets of bank (Bank Administration Institute, 1989).
1.2 DIMENSIONS OF FRAUD
Going by the definitions, frauds in the Nigeria economy cannot be restricted to be banks alone. Frauds do take different dimensions which amongst others include the following:
A. Cheating by market women/men or scale measurements etc
B. Failure to pay correct import/export duties/tax evasion.
C. Over invoicing/inflating contracts.
D. Payment for services not rendered.
E. Stealing and other 419 activities.
F. Political fraud etc.
1.3 CAUSES OF FRAUD
Causes of fraud include the following amongst orders:
A. General Lust for Affluence: it is a matter of fact that the Nigerian society in the last twenty years or there-about has become one where most people want to be rich overnight by whatever means and this has been responsible for the increase in the number of bank fraud and other forms of frauds.
B. Recognition Being Accorded Wealthy People Regardless of the Source(s) of Their Wealth: the manner in which we recognize wealthy people in our various communities, churches and mosques without considering the source(s) of their wealth has even made the matter worse .Young and talented men and women engage in drug trafficking and in committing frauds because our society do not only condone these but also encourage them by singing songs of praise in their honor, making them chairmen at functions, naming halls in universities, street and highway after them even floating non governmental organizations in their names. Our national awards like CON, MFR, GCRN, and MON just to mention but a few are some times wrongly awarded to those who defrauded Nigerian banks.
B. General Belief That the Economy (banks and other financial institutions) Can Sustain Any Amount of loss: the attack on the nation’s treasury and banks by fraudsters is partly due to the belief by many Nigerians that the banking sector is the most profitable sector of the economy and that the nation’s wealth is inexhaustible and sometimes the see it as part of the national cake. Anybody with a little knowledge of Economics or Finance should know that banks are trading on equity which means they are using other peoples’ money to make money and depositors’ monies are not theirs. The can only sustain themselves by making profit after all banking business is all about risk.
1.4 BANK FRAUD AND ITS CAUSES
Frauds in the banks are not new they are as old as the industry itself. Bank fraud can be defined as a conscious or deliberate effort aimed at obtaining unlawful financial advantage at the detriment of another person who is the rightful owner of the fund. Orjih, (1998).
1.5 CAUSES OF BANK FRAUD
Alashi (1994) grouped the major causes of the bank fraud into two. These are institutional factors and environmental factors. Institutional factors are those traceable to the internal environment of the financial institution while the environmental factors are those which result from the influence of the environment on the banking industry.
INSTITUTIONAL CAUSES OF FRAUD
Various authors and professionals in the industry seem to be unanimous in their identification of institutional causes of fraud. These are as follows:
A. Volume of work: the amount of work done by official(s) could be so heavy that frauds could easily pass undetected by such official(s).
B. Nature of Services: fraud may be caused where documents of value and liquid assets are exposed to an undisciplined staff or unauthorized person(s) for example customer(s)
C. Banking Experience of staff: frauds in banks occur with higher frequency among staff with little experience and knowledge in financial practice. The more experience and knowledge of a staff, the less likelihood that frauds would pass such staff undetected unless with active support of that staff.
D. Number of staff: where a senior official supervises quite a large number of staff, there is a high likelihood that fraud could go undetected.
E. Poor Management: banks with poor management record high incidence of all sorts of frauds than those with effective and efficient management team with unsullied character.
F. Poor Security Arrangement: banks where security arrangement for valuable documents are weak, poor and vulnerable, it is easy for fraudsters to have their ways undetected. Nigerian banks use bullion vans for conveying huge sums of money. The heavy reliance on cash has made banking a nightmare for many Nigerians. Efforts should be made to make Nigeria a cashless society.
G. Inadequate Infrastructure: Poor communication systems, and power failure result to backlog of unbalanced postings, congested office space etc, encourage the perpetration of fraud in banks.
H. Delays in procuring Document: Delays create opportunities for hatching in bank and other financial institutions thus making prevention and detection difficult
.
ENVIRONMENTAL/SOCIETAL CAUSES OF FRAUD:
These have been identified as follows:
A. Personality Profile of Dramatize Personae; most individuals with inordinate ambitions without qualm are prone to committing frauds. These kinds of individuals bent on making money by hook or crook and to them the end justifies the means.
B. Societal Value: when the possession of wealth determines the reputation ascribed to a person, that society is bound to witness unnecessary competition for acquisition of wealth.
C. Lack of Effective Deterrent/Punishment: this is a moot point because it is argued in some quarters that lack of effective deterrent such as heavy punishment could be a factor that contributes to the high perpetration of frauds in financial institutions.
D. Fear of Negative Publicity: many financial institutions fail to report fraud cases to the authorities. They believe that doing so will give unnecessary negative publicity to their institutions. This is not only a chance for fraudsters to thrive; it is great challenge to a researcher as regards to data collection.
E. Unemployment and High level of Poverty in Nigeria: Nigeria is one of the riches economies in the Sub Saharan Africa and indeed the world both in human and natural resources (oil) but 80% of the Nigeria youths especially university graduates are unemployed. Most of the politicians squirrel away the looted funds in foreign banks without been punished. This causes capital flight, unemployment, dearth in infrastructure which is not particularly good for a developing country like Nigeria. Directly or indirectly some Nigeria youths especially those with little ICT knowledge with special reference to those that find themselves in the banking industry with criminal intent engage in one bank fraud or the other in order to eradicate poverty. Most of them have some of their family members that depend on them for what to eat, drink or even put in their pockets.
All these make fraudsters to have the feeling that they are above the law and as such can get away with ill-gotten wealth unpunished.
1.6 NATURE AND TYPES OF BANK FRAUD
Frauds in financial institutions vary widely in nature, character and method of perpetration. In general, it may be classified in two ways: (i) Perpetrators (ii) Methods used.
On the basis of perpetrators, there are three broad categories: internal, external and mixed. Internal perpetrators of frauds are related to those committed by members of staff (insiders). External perpetrators are those committed by non-staff while mixed fraud involved outsiders colluding with staff (insiders).
The most important and common types of fraud highlighted by Bank Administration institute (1989) in fraud prevention and detection series are discussed below:
A. Advance fee fraud (“419’’). This involves an gent approaching a bank, a company or an individual with an offer to access large funds at below market interest rates often for long term. The purported source of such funds is not specifically identified as the only way to have access to it is through the agent who must receive a fee or commission “in advance”.
B. Cheque Kiting: kiting is defined by the US comptroller of the currency’s policy. Guidelines for National Bank Directors as “method whereby a depositor utilizes the time required for cheque to clear to obtain an unauthorized loan without interest charge.”
C. Account-Opening Fraud: this usually starts when a person not known to the bank asks to open a transaction account with false identification but unknown to the bank. Such a person might use the account for illegal transaction and close the account within a short period.
D. Money Transfer Fraud: Fraudulent money transfer may result from a request created solely for the purpose of committing a fraud or the alteration of a genuine funds transfer request. A genuine request can be altered by changing the beneficiary’s name or Account number or changing the amount of the transfer. These day “yahoo boys” the name giving to scammers in Nigeria that send fake e-mails to would be victims asking them to apply for fake contracts or fake lottery thereby winning non-existing money from a dead billionaire’s account in different parts of the world. They connive with fraudulent bankers in the Western Union department to withdraw their ill-gotten hard currencies or without the knowledge of the bank as regards to the authenticity of the beneficiary.
E. Telex Fraud: Transfer of funds from one location to another can be affected through the telex. The message though often coded can be altered to enable diversion of the funds to an account not originally intended.
F. Money laundering Fraud: this is a means to conceal the existence, source or use of illegally-obtained money by converting the cash into untraceable transaction in a bank. The cash is disguised to make the income appear legitimate.
G. Computer Fraud: computer frauds can take the form of corrupting the program(s) and even breaking into the system via a remote sensor by a computer programmer or specialist .Diskettes can also be tampered with to gain access to unauthorized areas or even give credit to an account for which funds where not originally intended.
H. Loans Frauds: Loan fraud occurs when credit is extended to non-borrowing customers or to borrowing customer who had exceeded his credit ceiling. The fraudulent aspect of this class is that there is intent to conceal it from the head office (inspectorate) staff on routine check to deceive them with plausible but falsified statements, documents etc. That is to say a credit facility for a customer “A” yet to be drawn is diverted for the use of customer “B”. Other types of bank frauds include counterfeited securities, clearing fraud, letters of credit fraud, forging of banks Rubber stamps, substitution of names in credit vouchers, over stating interest charges, manipulation of dormant accounts and unauthorized printing of bank stationeries and cheque fraud etc.
1.7 EXTENT OF FRAUD IN BANKS
Bank fraud in Nigeria has increased and will continue to increase because it is a part of everyday life. “The magnitude of fraud is, of course, not known because much of it is undiscovered or undetected and not all that is detected is published” Nwankwo (1991). In Nigeria, where the statistics are non- existent, it is put at about -N-200 Million per annum of which about 15%- 20% would be successful. It is appropriate to have a feel of the extent of loss through bank frauds in Nigeria in order to appreciate the havoc the cankerworm has been wrecking on the economy.
The sum of =N= 2.2 billion Was involved in banks fraud in 3 year, 1991 – 1993 , out of which commercial banks accounted for about 94.1 per cent ( see table) the actual/expected loss to the
banking system within the same period totaled about #0 .3 Billion with commercial banks accounting for about 95.7 per cent thereof .
In 1998, the nation’s banking industry lost #3.196 Billion while in 1999; it lost a whopping sum of #7.404 Billion to fraud. Similarly, the actual/expected loss stood at a higher level of # 2.713 Billion relative to #623 50 Million in 1998 (NDIC Annual report and statement of account 1999).
Nigeria's banks have seen almost $10m disappear through employee fraud in 2002, a rise of more than 40% on the year before, a survey by the country's banking regulator has found. The total amount stolen was 1.29bn naira, up from 906.3m in 2001, the Nigerian Deposit Insurance Corporation reported. Ten times that amount #12.91bn was recorded in attempted fraud, up from 11.24bn for a rise of 15%. Most of the thefts, NDIC said, were the result of either forgeries or illegal withdrawals from customers' accounts.
The figures may well be an understatement, though; as NDIC said it believes financial institutions routinely underreport fraud losses for fear of negative publicity. In May 2003 Nigerian bank fraud moved up to 40%. The banking regulator says theft by bank employees soared last year, but suspects that much more fraud may go unreported.
It is not only Nigerian banks and citizens that are exposed to bank frauds. Such frauds are also focused on foreign banks and their citizens. Just how much has been stolen by such fraud is not clear. But BBC news-business says that US citizens lose in 2004 move than $100m (£63.4m) a year to Nigerian fraudsters. However, Nigerians do indeed involve themselves in genuinely legal businesses apart from the infamous banking scams.
TABLE 1
Fraud in Nigeria Commercial and Merchant Banks
Amount involved Actual / Expected loss
Year commercial Banks merchant banks commercial banks merchant
1991 360.194 28.318 25.498 1.180
1992 351.913 59.82 64.8 8.31
1993 1376.3 41.92 241.01 5.37
Total 2088.424 30.058 331.308 14.86
Source NDIC. Annual Reports (various issues)
TABLE 2
Number of Bank Staff Involved in Frauds
Ranks Number
1991 1992 1993
1. Supervisor and manager 66 132 127
2. Officers , Accountant & Executive Assistant 60 66 58
3. Clerks and Cashiers 236 156 192
4. Typist, Technicians & Stenographers 47 9 34
5. Messenger , Drivers, Cleaners and Stewards 51 54 61
6. Temporary staff 24 - 5
7. Unregistered staff 30 19 40
Total 514 436 517
>Staff whose status were not disclose
Source: NDIC Annual Report (Various issues)
1.8 IMPLICATION S OF FRAUD
A. DOWN TURN IN THE ECONOMY
For the past 18 years or so our economic development has witnessed a serious set-back with graduates roaming the streets in search of employment which are not available. Various government polices to revamp the economy though appear laudable were all frustrated at the implementation stage because some of the people responsible for implementing them are fraudulent. Both the political and economic situation declined from bad to worse with naira witnessing an unprecedented devaluation of 1,300% within five years. As at December 2008 and January 2009 the naira exchange rate with the stood between #149 to #150 per $1.Devil then found job as idle hands were meant to engage in one kind of fraud or the other while “419, cocaine pushing, billion naira bank frauds”, becoming regular features of our newspaper, Television and Radio headlines.
B. TERMINATION / RETIREMENT OF STAFF
As a result of this very serious economic crime, some staff in the industry have either been dismissed, or have their appointment terminated or prematurely retired. This means that some experienced hands in the sectors are lost due to their involvement in frauds and forgeries. During and after the consolidation exercise that took place in the Nigerian banking industry it was revealed by the central bank that some bank directors and senior managers of those banks that couldn’t meet up the #25 billion minimum capital base gave themselves unserviceable loans in hundreds of millions. The Nigerian Deposit Insurance Corporation is still in court with those involved in this unethical behavior. Our problem is that most of those involved these economic crimes are highly placed or senior politicians. We can’t know their names simply because of their positions in the country.
C. GLOBAL PERCEPTION. Nigeria has become synonymous with fraud as some of its citizens use the boom in internet fraud and corruption has become an unfortunate staple in Nigeria's international reputation. The country regularly features at the top of international surveys measuring the part played by graft in different economies. Successive dictatorships have extracted billions from the exchequer, denuding the public purse of revenues from Nigeria's rich oil reserves. Outside the country Nigeria has become synonymous with fraud as some of its citizens use internet and the boom in of cafes to send "spam" e-mails, promising millions in exchange for the gullible recipient's bank details. This makes it difficult for genuine business men from Nigeria to go into international business with foreigners or secure credit overseas.
REFERENCES
Anyanwu, J.C, (1993), Monetary Economics: Theory, Policy And
Institutions. Onitsha, Nigeria. Hybrid publishers ltd.
Bank Administration Institute (1989), “Fraud prevention and Detection
Series” First Chicago (the First National Bank of Chicago).
Kirkpatrick, E.M, (Ed) (1985) “Chambers Universal Learners’ Dictionary”,
Ibadan Nigeria spectrum book Ltd.
Michael, J C, (1995)”, (Corporate fraud” UK, Mc- Graw Hill Books co.
NDIC, (1992) Annual Report.
, (1998) Annual Report.
Nwankwo, G.O, (19991) Bank management” principles and practice Lagos
Malthouse press Ltd, Lagos Nigeria.
Nzotta, S.M, (1999) Money, banking & Finance: Theory and practice
Owerri Nigeria Intercontinental Educational Books & Publishers 1St Ed.
Olufidipe, E.O, (1994), “Fraud in Nigeria and its Implication for Bank &Financial Institutions”
Nigeria Institute of bankers Lagos July- Decembers Vol. 30 NO. 4pp7-10.
Orjih. J, (1998) Elements of Banking, Enugu Nigeria Communications Publishers.
Shongotla, I.O, (1994) “Fraud Detection and control” Nigeria institute of
Bankers Lagos July- December VOi.30, NO.4 PP16-19.
www.bbcnews.com ⁄business
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