Fraud in Nigeria Banks – Analysis and Solutions
A lot have been said and written on this issue of the Nigeria banking system concerning fraudulent act, with special references to commercial banks in Nigeria. The collaborative literature deals much with the indigenous banks and few of foreign banking system.
However, the researcher was successful in laying hands on some useful materials which are very commendable and comprehensive in nature such as journals, newspaper, magazines and some textbooks. These materials exposed so many things on frauds. To order the Complete Project Material, Pay thr Sum of N3,000 to: BANK NAME: FIRST BANK PLC ACCOUNT NAME: CHIBUZOR TOCHI ONYEMENAM ACCOUNT NUMBER: 3066880122 Then send the Project Topic, Your Email Address and Full Name to 07033378184.
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ACCOUNT NUMBER: 3066880122
Then send the Project Topic, Your Email Address and Full Name to 07033378184.
In one of our newspapers the Guardians march 5, 1995, titled LEGA CONTROL OF FRAUD IN FINANCIAL INSTITUTION, exposes a lot of things on fraudulent act.
This was written because of the great harm fraud has done to the nation’s economy some time ago and even now. This notwithstanding, another Guardian dated march 10, 1998 titled COMPUTER CRIME AND BANKING IN NIGERIA page 34 elucidate on the impact of frauds especially computer fraud in the Nigeria banks.
The Nigerian Deposit Insurance Decree Quarterly volumes march/june 1998 numbers ½ also brings to light some indications of banking system distress. A book written by one of the chairmen of the Union Bank of Nigeria Plc. The “Bank management in chapter eleven (Frauds in banking) highlighted the issue of (fraud in banking) highlighted the issue of frauds in Nigeria banks.
This literature will bring to light the following to exert the picture of the objectives of this research.
- What is fraud in banking industry?
- What are likely to be regarded as bank fraud causes, forms types of fraud in Nigeria banking system.
- The dangers of fraud in Nigeria Banks
- The law relating to frauds and legal proceeding of prosecuting fraudulent acts in Nigeria banks.
- Methods adopted for the prevention or minimization of frauds in Nigeria banks.
- Summary and conclusion.
CAUSES OF FRAUDS
In examining critically some of the causes of frauds in banking industry on attempts has been made to review the system operations as regards to the structure, performance and functions of the management required by CAMA, BOFID & NDIC Decree (as amended) as their fiduciary duties
The following are some of the causes of frauds in the Nigeria Banking industries.
A. POOR MANAGEMENT
With the benefits of hindsight and experience as a bank supervision, one could summarize the various management practices and actions that had contributed to frauds in banking system as follows
i. APPOINTEMENT OF DIRECTORS
The problems of poor management appeared to have started with the way the manner most of the directors were appointed. Some directors appointed are just unfit and improper persons.
ii. Selection and supervision pf management team.
Selection of incompetent and ineffective management team has lead to unsafely and fraudulent practices. The problem of selecting weak management team is aptly described by G.K Olufon (1992) as follows: with the advert of the owner-manager syndrome, individual personnel considerations are scarified for operational efficiency to the extent that square pegs are slotted into round holes. Since the owner managers regard banking as an extension of their business empires, they invariably try to dominant its operations by appointing their relations or friends to key position instead of relying solely on professional managers.
B. POOR COMPENSATION SYSTEM
When the system of compensation in a bank is poor, it could force an employee into one dubious practice or the other. This is as a result of the fact that the employee imagines that no matter the quality and length of services he/she renders, he/she will not be appropriately compensated. Therefore, he/she capitalizes on any slightest opportunity available to defraud the bank.
3. KLEPTOMANIA TENDENCY
This means an obsessive wish to steal and defraud, not necessarily from poverty. Some people are born with an innate inclination to steal. No matter the amount of remuneration and compensation given to them. They are still tempted to steal. Cheat and defraud. Those with this type of tendency are potential causes of frauds
4. INADEQUATE/INEFFECTIVE INTERNAL CONTROL SYSTEM
By inadequate and ineffective internal control system, we mean a situation where by the methods and measures adopted in the banking industry to safeguard its assets, check the accuracy and reliability of its accounting data does not promote operational efficiency as stipulated and prescribed by managerial policies because of its porous lousy and weak methods and measures.
5. POLICE ATTITUDE IN HANDLING CASE OF BANK FRAUD
In our society, fraudsters know that they can always have their way with the police. The law of the country does not allow for private prosecution of fraud cases. If only you care to talk to officials of commercial banks in Nigeria, you will be aghast with the number of fraud cases which are pending with the police, some of which the police have deliberately refused to act upon.
The situation is horrible and terrifying with this apparent encouragement from the police, it is no wonder than that fraudsters have become harden in their fraudulent activities.
The battle to minimize or criminate fraud in banks can never be won without willing cooperation and understanding of members of the police, the cooperation of which does not unfortunately seem forthcoming. While one appreciates the handicap and frustration of the police one naturally prays for a change of attitude towards such investigation.
The situation is bad that the banks generally hesitate to report fraud cases to the police for action except of course where insurance claims are involved. Some times, the police takes action that is directly descriptive of bank operation thus adding to exposure which influences bank fraud.
6. IMPROPER SEGREGATION OF DUTIES AMONG THE STAFF.
Division of work is one of the most important facets of a good system of control in the banking industry. If the duties of individuals are not well defined so that a single individual has complete control over a sequence of related transaction, this could result to fraud.
Improper segregation of duties increases the possibility of fraud, carelessness and unreliable record keeping were as with a proper division of duties, the work of one person or group can act as a check on work performed by another person or group for instance, the person handling bank deposit and the person keeping cash books should not receive bank statement or make bank reconciliation.
7. EMPLOYMENT SYSTEM AND IGNORANCE OF WHAT BANKING JOB/INDUSTRY IS ALL ABOUT
Before now, employment of staff into banking industry has done mostly based on merit and candidate that qualified on the related positions but now employment of staff has been converted to family oriented affairs. It is no longer based on merit but on relations, friends and kindred’s.
Most managers or whoever is in charge of recurieting staff, sees it as an extension of their business empires, they invariably try to dominate its operations by appointing their relations or friends to key sensitive positions instead of employing solely on professional merited candidates. Some of these candidates employed by their relations have nothing to offer in most cases as regards to qualities of services rendered. Consequently, the managers and others who employ these people do not consider the potentials qualities and staff of these people because their purpose of employing their relations is to create a conducive avenue and atmosphere to commit or defraud the bank easily because they know that their relations are capable of covering them in case of any loophole discovered.
8. METHODS OF DETENTION AND LACK OF DETERRENT PUNISHMENT
Some frauds committed can be detected and some are undetected according to their nature especially some computer frauds. We should also bear legislation against computer crime and this makes it very difficult to those caught in the act.
Again, long perid of investigation of fraud cases is also a factor or one of the causes of increase of frauds in Nigeria banks. The period it takes the police to investigate fraud cases has been observed to be very long. This has of recent generated a lot of public outcry. Reasons for the relatively long period of investigation include the sophisticated nature of frauds and malpractices involved in most of the cases and the difficult in getting witnesses (many of whom have left the country or gone in hiding) consequently, inadequate number of tribunals, large number of cases and the attitude of defense lawyers who have been employing delay tactics to frustrate persecution of cases
Moreso, the inadequate funding during the period of investigation makes client to be discourage towards pursuing the case.
FORMS OF FRAUDS
Frauds are of different forms, various forms of frauds can be classified according to Dr. J. Orjih “Elements of banking in respect of their nature, loopholes and place.
Forms of frauds in banking industry are three categories which includes
Frauds are said to be internal when they are committed by members of staff of a bank with or without the assistance of the customers or non employees of the bank. For example cashing fraud.
This type of fraud constitute about 80% of the number of reported fraud cases in the banks (master minded by the insiders)
External frauds are those frauds perpetrated by persons not connected with the bank without proven connection of the staff e.g signature forgeries and manipulation of credit advance.
Combined frauds are those frauds master-minded by insiders and outsiders. It is usually done with the combined efforts of the insiders and the outsiders. The target of these people is to obtained unjust reward at the expense of the public, customers and the management.
TYPES OF FRAUDS
There are several ways or methods through which frauds can be committed in the banks. According to Femi Adekanya. (1986) in his article and according to Dr Orjih “Element of banking.
These are as follows
1. MANIPULATION OF DORMANT ACCOUNTS
Accounts that are not operated for a reasonable length of time is referred to as inactive, idle or dormant account. Some fraudulent staff of banks, sometimes raise vouchers with forged signatures and withdraw money from such dormant account without the knowledge and authority of the account holders.
2. GIVING VALUE TO UNCLEARED EFFECTS
Cheque and other financial instruments in course of collection are referred as to as unclear effects. Some unscrupulous bank employees give value to such instruments before they are cleared. If the cheques are returned unlearned the bank looses such fund because the customer must have withdrawn the money from his account.
3. UNDERSTANDING AND OVERSTATING INTEREST CHARGES
This is a fraudulent practice that involves the bank staff in either over crediting the account of the customer with interest (saving account0 and after words the customer gives him a part of the credited amount.
In the case of an overdrawn carried document the staff may agree with the customer to understate interest payable by the customer at the detriment of the bank.
4 TEAMING AND LADING
This is a term which explains suppression of paying in slips by bank officials with the view of defrauding the rightful owners of the funds.
5 UNAUTHORIZED PRINTING OF BANK STATIONARY AND FORGING OF BANKS RUBBER STAMPS
Some fraudulent bank officials in connivance with some dishonest customers forge some documents of the bank which they defraud the bank of some money. Usually, they print take cheque books, bank drafts, tellers etc.
Also some fraudsters forge banks stamps which they use in carrying out some unlawful financial transactions to the detriment of the bank.
6 COMPUTER/MACHINIST FRAUDS
There is no doubt that the information technology and acquistation of computers has increased productivity and efficiency in the banking industry. They can also be used to perpetrate fraud and cost substantial financial losses within a financial or banking industry. Computer crime is very technical in nature and huge losses do occur before discovery.
There was this computer hack in the united states who invaded the computer system of a bank, stole their money and opened an account in the same bank. He called the bank to inquire if they had any loss. The bank’s book balances sine the money taken from the existing account was used to set up another account there was no loss. The hack then told the bank of what he did, that was when the theft was discovered.
Computer crime detection and prevention are Herculean task. That is why the banks must take direct action to ensure the protection of computer equipment and software
Bank management must recognize that there are basically two types of computer crime those that are discovered and those that not discovered. The crimes not discovered outstrip those that are discovered. We should bear in mind that at the moment, there is no direct legislation against computer crime, and this makes it difficult to prosecute those caught in the act.
Most computer fraud cases like other frauds are usually reported by the banks and this may be due to the embarrassment it might cost the institution, the loss of public confidence as well as the difficulty of prosecution of such cases.
The points being made above are to draw the attention of bank management to the potentials dangers in the use of high technology equipment for banking operations. This has become very relevant today because banks in Nigeria have abuse the information technology those that have not acquired it are possibly on the way to acquire, computers. Some banks are already operating on-line, some on internet and others are offering credit cards services.
The implication of the above is that banks are now susceptible to computer crime never before experienced in our system. Experts are of the opinion that geographical constraint are no barriers to this type of crime because a computer terminal with a modem and a telephone line attached to its in any part of the globe can be used to engage in crime in an on-line computer system in another part of the globe
Bank management should not delude themselves that employees lack technical knowledge, this is because today, most children, being exposed to this technology from an early age in their homes.
The cost of acquiring computer hardware and software is decreasing making it possible for people of dubious intension to have access to computer resources. The introduction of viruses into computer system makes it easy to perpetrate fraud.
Again, frauds occur when wrong information are fed into the computer by machinist or the operators who are either acting ignorantly, innocently or with proven criminal intent. This result in computer producing wrong balances and in accurate information on account thereby giving room for fraudulent practices.
7. TELEX FRAUD
This is also called foreign exchange fraud. It involves the falsification of transfers to foreign banks by issuing banks official (by Dr. Orjih “Elements of Banking”)
This means the removal of cash collected by cashiers from their customers. This leads to declaration of false shortage
9. TRANSFER OF FUNDS INTO FICTOUS ACCOUNTS
At times fraudulent bank staff may transfer funds to fictious accounts thereby depriving true owners of the funds opportunity to make use of the money.
10 MANAGEMENT/SENIOR OFFICERS ACTION ON FRAUDS
One of the most serious frauds in banking industry is the one that involves management or senior officers in banks. For instance, some bank managers who have fraudulent tendencies in them may try to open to fictitious current account where they can grant anonymous facilities and use the fraud in merchandizing of goods and other trading activities.
They make sure that appropriate lending facilities and formalities are completed to such accounts thereby making it difficult even for bank inspectors and auditors to discover.
Another very dangerous situation that can involve senior staff is the transfer of fund from one branch of a bank to another bank through clearing items and these are signed by authorized officials and documents involved properly treated. Similarly, funds can be transferred aboard through collusion of senior officials, telex messages, telegraphic transfer which often require coding.
These operations techniques are often handled by senior staff in banks.
Fraud in the above mentioned procedures could be disastrous for banks since it can result in a closure of banks.
EFFECTS OF BANK FRAUDS
In this section the consequences of fraud on the entire banking industry with the bank depositors on special focus will be considered.
Banks that are threaten by cases of fraud fids themselves in an unfamiliar processes littered with potential hazards.
The following are some of the effects of frauds in our banking industry.
1. INCONVENIENCES IN BANKING SERVICES
A lot of inconveniences are faced by bank customers as a result of bank frauds. The services according to then, are inconvenient for a number of reasons among which are long quinces, delay and frustration. This has resulted from rigid procedures within the banks and eloborate security systems in a bid to forestalling frauds.
The bank officials argues convincing that if is in an attempt to lower the success rate of these frauds that the bank staff have been compelled to check transactions with the customers thus slowing down the total output in the processes thereby giving the impression that bank services are inconvenient. But this defense does not go down well with the public.
The poor customers suffer when security measures are tightened within the bank as a safeguard against fraud. Attack by the bank’s security dogs is also inconvenient to the customers.
2. TENSION IN BANKING SYSTEM
Whenever fraud occurs, there is confusion and tension being generated. The adverse effect of police and management enquiring produce an atmosphere of distrusts and disruption of normal work flow. Staff are frightened of taking on usual work for fear of being implicated in fraudulent transactions. Often it is necessary to restrict or curtail services during enquiries or withdraw suspected staff or he is whisked away if the police calls. This now brings about discruption of normal work flow because the customers then have to went for longer period.
3. DETERIORATING OF BANKING HABIT
In a country where one has to pay indirectly by long queues to withdraw his money, pay directly to take loans, advance or overdraft, one is bound to treat and regard the bankers with contempt. The respect that is usually accorded to the banks have been withdrawn by the public.
A few years back, several deficiencies have risen to erode the growth of the banking habit among the public. The sped of the banking habit arises from the use of a chequing system for payment. But in Nigeria today, the inconveniences associated with banking services have eroded the use of chequing system in our society. It is worthy to note that our society has now become a cash society as a reflection of people’s lack of confidence on the use of cheque.
4. MAKING NON-SENSE OF BANKING FACILITIES
Generally, our commercial banks and the entire Nigeria banking industry are already making it towards improved technology. Any thing that has advantage must have a disadvantage. This is so because the improved technology has brought about increase mechanization and advancement in computerization. This is one of the advantages, slso, one of the disadvantages is that fraudsters have introduced a new and more expensive device of this introduction of computer, known as computer fraud.
This had made nonsense of the use of computer for the facilitation of banking services. Also other ones affected are the use of telex and telegraphic transfers as well as mail transfers these media instruments have been taking over by fraudsters that their function in the banking industry is more or less like a necessary evil.
5. BANK DISTRESS/LOSS OF FUND
One of the major effects of frauds in Nigeria banks is bank distress. A bank can be de-cleared distress when it is not able to meet balance sheet test of having enough assets at market value to cover its liabilities. Some of the balance sheet ratio commonly used to measure solvency are
- Total capital to total profit assets
- Total capital to total loan and advances
- Dividend to profit after tax
- Equity capital to total capital
- Total capital to total assets
- Total capital to total risk adjusted assets
A bank can also be classified as being distressed when it is unable to meet the bank examination rating system (CAMEL)
Under this criterion a bank performance is assessed based on its ability to meet the following conditions viz:
– Capital adequacy
– Assets quality
– Management competency
– Liquidity strength
The central bank of Nigeria (CBN) credit guide lines No. 26 of 192 as amended August, 1992 prescribed that for a bank to be adjusted healthy, it has to meet the following requirements.
– Meeting specified liquidity ratio
– Adherence to prudential guidelines
– Meeting up statutory paid up capital requirement
– Having capital adequacy ratio
– Having sound management.
CHARACTERISTICS OF DISTRESSED BANKS
Generally, the following features are signals of banks distressed.
– Persistent liquidity
– Disproportional operational cost
– Acierated deterioration of portfolio.
– Very slow loan recover rates
– Desperate management
– Raising of lending arte etc.
From the above, it would be observed that all these signals are not unconnected with the negative consequences of frauds in banking industry. Therefore, bank distress could direct or indirectly as a result of the activities of the fraudsters in the banking industry.
6. OTHER STAFF APATHY
When a fraud is discovered, the recrimination involved tends to lower the interest of the staff and generally an apathy towards rendering services could result and their dynamism is impaired, the result is further lowered output.
7. MANAGEMENT TIME CONSUMING AND MANAGEMENT MISTRUST
As mentioned earlier on customers don’t like the idea of time wastage in bank. An attempt of fraud requires a through investigation of the management. This investigation involves a lot of time. Which results in less time spent in other matters like attending to customer, the time is shortened. The management is responsible in protecting the customers fund entrusted in their care against any form and type of fund. But it is devastating and a total erosion of confidence and trust whenever the management or senior staff of a bank are involved in fraud. From this perspective it could result in a closure of a bank as the amount involved are usually huge and the bank running into bankrupt and total distress.
There are many effects of bank fraud but this research has out of the whole lot taken just seven. In the final analysis, uncontrollable fraudulent practices are capable of not only destroying a whole bank but can also destroy the economy of a nation.
Frauds/fraudsters therefore, constitute enormous danger to our banks as well as to the nation’s economy and hence can hinder economic growth.
THE LEGAL FRAME WORK AND FRAUDULENT PRACTICES
—This article is not complete———–This article is not complete————
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