Fraud Prevention Detection and Control in Nigeria Banking Industry

Fraud Prevention Detection and Control in Nigeria Banking Industry. A Case Study of Habib Nigeria Bank Limited Enugu

Literature Review

  • This chapter will review literature relating to the theme and sub-themes of this study. Major ideas of this section are grouped and presented lender the following sub-headings.

2.1     THE CAUSES OF FRAUD IN THE BANKING SECTOR

According to Agunbiade, F.G. (2994) traditional schools of thought group the cause of fraud into major classes viz:

  • Environmental / societal factors
  • Institutional factors.

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(a)     ENVIORNMENTAL / SOCIETAL CAUSES

Agunbiade, F.G. (1994) noted some environmental causes of fraud especially in the banking sector to include the following:

(i)      PERVERTED SOCIETAL VALUES

In the time past, African society values honesty, hard work and wisdom as a reflection of old age as yardstick for respect and honour.  Unfortunately, materialism as measured by volume of money, number of cars etc, without regards as to how these were acquired either by defrauding other nationals, the state treasures or business associates have become yard stick for becoming political office-holders etc.

Also, paper qualifications like first degree, second degree etc have become yard stick for appointment and promotions in the work place without reference to experience, code of conduct and ethics.

(ii)     PRESSURE FROM SOCIETAL ANTICIPATE RESULT

There is an hypothesis that many fraudulent financial reporting ordinarily does not start with dishonesty but rather from societal anticipated results of companies or banks of the same generation and size.  For a bank, the pressure may come from an unwillingness to report increased loan loss reserves to the NDIC or CBN or for some the pressure may come from a senior executive who simply is not a good manager but wants to be seen as having met a pre-forecasted corporate report.

(iii)    CORRUPT LAW ENFORCEMENT AND JUDICIARY SYSTEM

Our judiciary system is very slow in the dispensation of justice, on average a fraud case could take between 7 – 10 years to be resolved in the present day Nigeria, justice delayed is justice denied.  Also the police force is very corrupt and often if the criminal can share the booty, he can go Scot-free.

(iv)    FEAR OF NEGATIVE PUBLICITY OF CORPORATE BODIES

Often corporate bodies like banks do not want their names to be mentions in the press for fear of sending wrong signals to shareholders, debenture-holders, depositors and investors and various customers for fear of negative publicity.  These fraudsters often take this as a signal that the management will not want to go the whole mog of prosecution and court case as a sign of weakness and that such management will not punish criminal behaviour.

(b)     INSTITUTIONAL FACTORS

The relate to the control of the management of a bank.  This is often manifested in various ways such as poor supervision and weak internal control.

(i)      WEAK CORPORATE GOVERNANCE

Most banks in Nigeria fail to establish an effective code of conduct and practice for their employees or create an ethical environment in the workplace to present corrupt practices, conflict of interest etc.  The experience of the failed banks investigations revealed that most fraud were perpetrated by managers themselves who make purchase for personal use, misused experience accounts or misappropriate funds.  Some of the bigger frauds were committed by chief executive officers who wielded unfettered power, and boards of directors who were unwilling to challenge that power.

(ii)     DUBIOUS ACCOUNTING PRACTICES

Most often than not organizations have no clear policy on fraud.  Things therefore, are done by individuals managers and supervisors according to their own moral standards.

(iii)    WEAK INTERNAL CONTROL SYSTEM

Where the employees are poorly supervised, those with fraudulent tendencies among them get the impression that their working environment and or circumstance is safe for the perpetuation of fraud.  Inadequate control in form of effective policies, procedures and systems is indicative of poor management.  When controls are inadequate, loopholes become glaring to the fraudulent minded operator in the system and he sees it as an opportunity he must avail himself of.

(iv)    BAD CORPORATE ATTITUDE

At close examination, you would be shocked how much many organizations encourage and tolerate fraud quite openly.  It is often argued that the allowance of “small fiddles” encourages the workforce to work harder.  The plan fact is that there is no such a thing as a small fraud. So called small frauds are big frauds, given insufficient time to grow.

(v)     UNBALANCED ASPIRATIONS AND OPPORTUNITIES

When there is imbalance between the opportunities which a company offers its staff and their aspirations, there will be a spate of discontentment.  Fraud breeds in the gap between aspirations and opportunities.

2.2     THE EFFECTS OF FREQUENT FRAUD OCCURRENCE IN THE BANKING INDUSTRY

It is by no means an exaggeration to regard fraud as a cankerworm in our nations economic and social life.

The constant incidents of fraud in the banking industry has led to many banks been distressed and their staff thrown into the unemployment world, frustration, non-payment of pension, untimely death and assassinations of the upright.  Fraud has led to the collapse or failure of 33 banks and hundred of finance houses in the last decade and in this decade, fraud has featured in the collapse of Savannah bank Plc, African International Bank Plc, Peak Merchant bank Ltd, Society General Bank Ltd and Bank of the North.

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On the international scene, we witnessed the failures of the bank of credit and commerce international (BCCI) the collapse of ENROB, the American Energy Grant.  In April 1998, Cendant Corporation (USA) was involved in a fraud which led to a US $ 14 billion loss in market capital in just a few hours.

2.3     THE RELATIONSHIP BETWEEN BANKING PRACTICES AND FRAUD PERPETRATION

(a)     RECRUITEMENT SYSTEM

Poor recruitment system where cognate experience, relevant technical knowledge, competence, character and other sterling qualities are sacrificed on the alter of non-performance related factors such as connections and tribalism constitute important facilitations of fraud in financial institutions.

(b)     NATURE OF SERVICES

Frauds may be caused where documents of value and liquid assets are exposed to an undisciplined staff or unauthorized persons.

(c)      USE OF SOPHISTICATED ACCOUNTING MACHIENS

Where sophisticated accounting machines are in use and are manned by inadequately equipped staff, errors could arise and thus lead to the production of unreliable records.  In the hands of dishonest staff, sophisticated accounting machines could be employed to delicately omit entire, substitute improper calculation and posting, manipulate documents, substitute fictitious documents and alter genuine ones.  All these are different ways of perpetrating frauds.

(d)     POOR MANAGEMENT

Financial institutions with poor management record higher incidence of all sorts of frauds than those with effective management.  Poor management gives rise to ineffective and poor control system, indiscipline among staff and thus creates an environment for frauds to flourish.

(e)      STAFF NEGLIGENCE

In certain cases, staff negligence could give rise to the perpetration of frauds in financial institutions.  Negligence itself in a product of several factors, including poor supervisions, lack of technical knowledge, apathy, pressure etc.

2.4.    THE IMPACT OF BANKS AND GOVERNMENT’S EFFORT ON FRAUD ELIMINATION

Fraud is one of many business risks, and like most risks, it can be rarely be eliminated.  However, it can be mitigated and managed so as to limit the damage.  Effective accounting and operational controls are an essential part of fraud presentation.  It is vital to focus on the nature of the risks and to remember that it is people, and not system that commit fraud. Complete fraud prevention is seldom possible and it likely to cost too much.  It also conflict with efficient running of a business fraud prevention means creating an environment that frustrates practices and brands even petty fraudulent practices as unacceptable.  From the foregoing, it has become obvious that fraud prevention and control should be a collaborative effort involving government and its agencies

It is for this reason we have the Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC), the security exchange commission, (SEC), Independent Corrupt practices and other related offences commission (ICPC) the economic and financial crime commission (EFCC) etc.

THE CBN/NDIC

The subject of frauds in the financial system of special concern to the monetary and supervisory 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 rendering to the corporation monthly returns on frauds, forgeries or outright theft occurring during such month and notifying the corporation of any staff dismissed, terminated or advised to retire on grounds of frauds.  This not doubts is aimed at preventing and controlling frauds in banks.

ICPC

The resolve to fight and win the way against corruption in Nigeria led to the promulgation of the corrupt practices and other related offences Act 2000.  The commission has among others three main responsibilities, which include:

  • To examine, review and enforce the systems and procedures of public bodies with a view to eliminating corruption in public life and
  • Educating and enlightening the public on and against corruption and related offences with a view to enlisting and fostering public support for the fight against corruption.

EFCC

The economic and financial commission has some its duties as entrenched in the money laundering (prohibition) Act 2004 the following functions

  • A financial institution must verify its customer’s identity and address, before opening an account for, issuing a passbook to or entering into any business relationship with the customers.
  • A financial institution shall require a corporate body to provide proof of its identity by presenting its certificate of incorporation and other valid official document.

2.5     DEFINITIONS OF FRAUD

According to the chambers dictionary fraud is defined as “Dishonestly, a person who present to be something that is not”.  There are however, various schools of thought who have defined fraud.  Agunbiade, (2004) noted that fraud is “any behaviour by which one person intends to gain a dishonest advantage over another.

Elaborating further, he noted that this is  an ordinary definition and it includes petty theft, pilfering, extortion, embezzlement, forgery, unfair competition, commercial espionage, computer crime advance fee fraud, money laundering forex round to tripping and other financial crimes.

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NATURE AND TYPES OF FRAUD

Fraud in financial institution vary widely in nature, character and method of perpetration.  In general, it may be classified in two ways:

  • Perpetrators and
  • Method use

On the basis of perpetrators, there are three broad categories.

  • Internal
  • External and
  • Internal perpetrators of frauds relate to those committed by members of staff (insiders) while
  • External perpetrators are persons not connected with the institutions.
  • Mixed frauds involved outsiders colluding with staff. It is useful for government and its agencies and management to try and identify the category under which various frauds in financial institutions fall.

Ekechi, A.O. (1990).  Although the use of types of fraud method is usually in exhaustive as new method and devised with time; fraudsters are forever devising new method.  The most important and common types of frauds are discussed here.

(a)     ADVANCE FEE FRAUD (“410”)

This may involve an agent approaching a bank, a company of an individual with an offer to access large funds at below market interest rate often for long term.  The purported source of such funds, is not specifically identified as the only way to have access to its through the agent who must receive a fee or commission “in advance”.  As soon as the agent collects the fee, he disappears into this air and the facility never comes through.  Any bank desperate for funds especially the distressed banks and banks needing huge funds to bid for foreign exchange can easily fall victim to this type of fraud.

(b)     CHEQUE KITING

Kiting is defined as “a method whereby a depositor utilizes the time required for cheque to clear to obtain an unauthorized loan without any interest charge.  The goal of the cheque kiter may be to use these uncollected funds, interest free, for a short time to overcome a temporary cash shortage or to withdrawn the funds permantly for personal use.  Competition among banks in the era or deregulations encourages banks to make funds available before actual collection of customer’s cheques in order to attract customers especially business accounts.

(c)      ACCOUNT OPENING FRAUD

This involves the deposit and subsequent cashing of fraudulent cheques.  It usually starts when a person not known to the bank asks as current and savings account with false identification but unknown to the bank.

(d)     LETTERS OF CREDIT FRAUD

Letters of credit generally arises out of international trade and commerce.  They stimulate trade across national boners by providing a vehicle for ensuring prompt payment by financially sound institutions.

(e)      MONEY TRANSFER FRAUD

Money transfer services are means of moving funds to or from a bank to a beneficiary account at any banking point worldwide in accordance with the instructions from bank’s customers.  Some common means of money transfer are mail, telephone, and telex.  Fraudulent money transfer may result from a request created solely for the purpose of coming a fraud or the alteration of a genuine funds transfer request.

(f)      CHEQUE FRAUD

The use of cheques as means of paying for financial obligations is an essential feature of modern economy.  Cheques fraud is now common involving billions of naira annually.  Common types of cheques are personal, business, government, traveler’s certificate, draft and counter cheques with each having its own characters sites and vulnerabilities or fraudulent use.  The most common of cheque frauds involve cheques that are stolen, forged, counterfeited or alternated.

(g)     ONLY LAUNDERING FRAUD

This is a means to conceal the existence, source or use of illegally obtained money by converting the cash into untraceable transactions in banks.  The cash is disguised to make the income appear legitimate.

THE LEGAL FRMA WORK AND FRAUDULENT PRACTICE

The pre-occupation of this section is to explore what previous writers say about the role of the law courts in checking fraud in Nigeria banking industry.

The legal system of the economy is powerful enough to deter frauds, committed in the banking sector, but it seems that inadequacy in its administrative system creates major problems and obstacles.  Courts these days are always congested and as such, it takes months for cases including those of fraud to be dispersed.  It may b due to lack of funds

Omotogho (1988) says that the procedure for investigating fraud by police is still at snail speed.

CHAPTER FIVE

DISCUSSIONS

5.1     DISCUSSIONS FO RESULTS

In order to prevent, detect and control fraud in the banking industry, it is very important to understand the various sources and form of fraud.  It is also important to underscore the effects of certain banking practices.  From the research work, it is obvious that there are three forms of frauds in the banking industry namely:

  • Internal fraud
  • External fraud
  • Combined fraud

INTERNAL FRAUD

This is the kind of fraud perpetrated by members of staff without collaborating with anybody outside the bank.

EXTERNAL FRAUD

This involves people who are not members of staff but can defraud the bank though signature forgery and manipulation of credit advance.

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COMBINED FRAUD

This is the kind of fraud where a bank staff collaborates with outsider to defraud the bank.  This can be done through falsification of accounts.

Furthermore, the research reveals that certain banking practices and lapses on the part of management could lead to fraud.

5.2     CONCLUSIONS

The following conclusions have been drawn from the relevant major findings of the study.

  1. Fraud has become a major menace threatening banking transactions and as well dwindling confidence in the financial system.
  2. From the research, it was observed that there are two major factors that are responsible for the perpetration of fraud. These are the environment factor and the institutional factor.
  3. The research also reveals that most frauds are carried out with the collaboration of banks’ staff. When they are not involved, some of their banking practices tend to and fraud perpetration.
  4. Finally, government towards fraud elimination is yielding fruits through it various agencies saddled with that Herculean task.

5.3     IMPLICATION OF THE RESULTS

From the research conducted, it became pertinent here to call for a new approach in fighting fraud.  Various educational institutions should include in their curriculum the teaching of fraud prevention, detection and control especially to students studying finance related courses.  Also the results also revealed that greed and get rich syndrome are the major causes of fraud.  Therefore the society should de-emphasized materialism and learns to appreciate those values like honestly, truth and hard work

5.4     RECOMMENDATIONS

The following recommendation have been made in light of the findings and major conclusion which been highlighted.  An organisation must develop, implement and provide a means to monitor and update comprehensive policy and procedure governing the activities of all departments, especially those involving cash handling facilities, functions and personnel.  Furthermore, an organisation must have a comprehensive written internal control technique.  Both internal and external crimes rely upon the lack or ineffective use of internal control techniques.  Also an organisation must maintain a policy requiring that all employees provide handwriting and fingerprint samples, and their photographs.  If handwriting samples and fingerprints have never been collected, identification, investigation and subsequent prosecution may be seriously impaired.

I also recommend that an organisation must develop a programme for the rotation of employee’s schedules and work assignments at unpredictable intervals.  It is also pertinent to recommend here that a corporate entity should be able to monitor the performance of a new executive officer, particularly a chief executive officer, who immediately begins making significant changes within the organisation’s structure.

Banks should also develop a policy prohibiting disbursement because of the presentation of an “authorization on letter” rather than the presentation of a cheque, drafts or an official bank document.

Finally, an organisation must develop a human resources motivation and incentives mechanism to reward honestly and hard work.  Also an organisation must be a reasonable and fair remuneration system to ensure employee does not have temptation to steal in order to live a reasonable standard of living commensurate with their qualification and experience and competitive with prevailing industrial average.

5.5     SUGGESTIONS FOR FURTHER RESEARCH

Following the results of the study, this research work suggests that further research be done in some other banks and financial institutions in order to have a wider perspective of the subject matter.  This work will also suggest that future researcher should convinced respondents to research questions to be as unbiased as possible since the work is purely an academic exercise.

Finally, further research on this topic should look at the role of the police and the judiciary in combating fraud.

5.6     LIMITATION OF THE STUDY

This study met certain difficulties during the course of the research.  Such difficulties include:

TIME:  This research work commenced in June 2004 and is expected to be presented in August 2004.  Meanwhile, the research is being earned out concurrently with lecture and other activities.

COST:  It was expensive to involve all the banks hence the research was limited to one bank.

Fraud Prevention Detection and Control in Nigeria Banking Industry. A Case Study of Habib Nigeria Bank Limited Enugu

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