FRAUD PREVENTION DETECTION AND CONTROL IN NIGERIA BANKING INDUSTRY (A CASE STUDY OF HABIB NIGERIA BANK LIMITED ENUGU)
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.
(a) ENVIRONMENTAL / 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 per-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 canker worm 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.
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) RECRUITMENT 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 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.
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.
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.
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.
- 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 (“419”)
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.