AN APPRAISAL OF BANKING FRAUD AND ITS EFFECTS ON NIGERIA ECONOMY
ABSTRACT
This paper analyzes and examines the consequences of bank frauds on the growth of the Nigerian economy. In recent years, frauds in Nigeria banking sector seemed to have assumed a frightening dimension and to a large extent, the confidence the general public reposes in it, is put in jeopardy. The scope of the study is 1995 to 2014. Secondary data is being used for the study. Regression analysis and SPPS application soft ware is being used for data analysis. The study reveals that bank fraud have negative and significant consequences on the growth of Nigerian economy. The ability of banks to promote growth and development in any economy is a function of the extent to which financial transactions are carried out with trust, confidence and least risk. These no doubt requires a safe and sound banking practice which many of the banks in Nigeria today have despised to their own peril. The study recommends that the regulatory authorities of banks in Nigeria need to improve on their supervision, careful when recruiting employees, wonderful results alone is not enough, but fear of God and integrity of employees should be considered. The paper concludes that the battle for the preclusion, uncovering and retribution of fraud offenders must be fought to reduce the temptation to commit fraud and to increase the chances of detection. While a positive work environment will help to achieve the former, the latter can be achieved by sound internal control system.
- INTRODUCTION
Fraud and fraudulent activities affect every business. Fraud losses continue to pose a significant problem to many industries despite significant advances in fraud detection technologies. Wilhem (2004) estimated annual losses due to fraud for various industries in the US to include $67b (Insurance), $150b (Telecommunication), $1.2b (Bank), $40b (money laundering), $5.7b (Internet) and $1b (Credit card). These losses pose a significant threat to banks considering their role in the economy. Owolabi (2010) noted that the problem of fraud in the banking industry is not limited to any economy, nation, continent or environment. Fraud and fraudulent activities can ultimately result to bank failure. Bank failure in Nigeria can be traced to the 1930‟s bank failure and crisis. According to Nwankwo (1994) the crisis of confidence in the Nigerian banking industry occurred in the1930s when all indigenous banks, except the National Bank, collapsed. It occurred again during the banking „boom and crash‟ of the late 1940s when all, but four indigenous banks, experienced the liquidators‟ hammer. Also between 1952 and 1954, 16 out of 21 indigenous banks failed. In the late 1990s, 26 failed banks were liquidated while others went through various surgical operations ranging from restructuring, renaming, acquiring and outright sales to new investors. A prominent feature of bank failure which led to the reforms in the banking sector in Nigeria was fraud. This indicates a fundamental problem with fraud investigation and management in Nigerian banks. There is, therefore, need for a comprehensive fraud management scheme to have a holistic view of all the factors involved in fraud occurrence. The holistic scheme, as Wilhelm (2004) opines, includes fraud deterrence, fraud prevention, fraud detection, fraud mitigation, fraud analysis, fraud policy, fraud investigation and fraud prosecution. These stages must be successfully integrated and balanced to reap the benefits of advancements in fraud detection technologies and to save the economy from continuous lose of money to fraud and fraudulent activities in the banking sector in Nigeria. This paper is organized as follows; section one is the introduction while section two reviews the empirical and theoretical literature on fraud and it effect on commercial banks in Nigeria; section three discusses the models and methodology while section four provides data and empirical evidence and the final section which is section five provides the summary, conclusion and recommendations of the study.
1.2. STATEMENT OF THE PROBLEM
The banking business has become more complex with the development in the field of Information and Communication Technology (ICT) which has changed the nature of bank fraud and fraudulent practices. Berney (2008) observes that customers rely heavily on the web for their banking business which leads to an increase in the number of online transactions. Gates and Jacob (2009) and Malphrus (2009) assert that the internet provides fraudsters with more opportunities to attack customers who are not physically present on the web to authenticate transactions. Within a 6 year period, the FBI received 207,051 Suspicious Activity Reports (SARs) for criminal activities related to cheque fraud, cheque kiting, counterfeit cheques, and counterfeit negotiable instruments. These fraudulent activities accounted for 47 percent of the 436,655 SARs filed by U.S. financial institutions and equaled approximately $7 billion in expected losses (U.S. Department of Justice [DOJ], 2002). According to Greene (2009), the true economic costs are about 150 percent of the actual fraud loss. In Nigeria, in spite of the banking regulation and bank examination by the Central Bank of Nigeria (CBN), the supervisory role of the Nigeria Deposit Insurance Corporation (NDIC), and The Chartered Institute of Bankers of Nigeria (CIBN), there is still a growing concern about fraud and other unethical practices in the banking industry. Evidence from the NDIC Report (2008) reveals that the report of the examinations and special investigations showed that some banks were still bedeviled with problems of fraud, weak board and management oversight; inaccurate financial reporting; poor book-keeping practices; nonperforming insider-related credits; declining asset quality and attendant large provisioning requirements; inadequate debt recovery; non-compliance with banking laws, rules and regulations; and significant exposure to the capital market through share and margin loans. Okpara (2009) found that one of the factors that impacted the most on the performance of the banking system in Nigeria was fraudulent practices. Since the fraudulence in banks has become an ever existing problem, there is need to examines the extent to which fraud and other unethical practices have impacted on the banking industry in particular and the national economy generally. Hence, the need for this study.
1.3. OBJECTIVES OF THE STUDY
The general objective of this study is to analyze the consequences of bank fraud on the economic growth of Nigeria. Other specific objectives of the study include the following: i. To identify the categories of bank frauds and forgeries in Nigerian banking sector. ii. To identify effective control strategies for managing banks fraud and forgeries in Nigerian banking sector.
1.4. RESEARCH QUESTIONS
The research questions that this study aim at finding answers are as follows: i. What are the various categories of bank frauds being perpetrated in the Nigerian banking sector? ii. Are there effective prevention and control measures for bank frauds and forgeries?. The study is significant in many ways as it will provide bank managers with a more effective ways of preventing or minimizing frauds and forgeries in the banking operations. And it will also raise the level of confidence which the public has on these banks. The research will also draw the government attention to finance and provide a consistent banking policy for sustainable development of our national economy as well as strengthening and to consolidate the Nigerian economy. The study will serve as a reference material to government, individual, students and other researchers.
1.5. RESEARCH HYPOTHESES
The hypotheses of this study are as follows: H0: Bank frauds have positive and significance consequences on the growth of the Nigerian economy. H1: Bank frauds do not have positive and significance consequences on the growth of the Nigerian economic growth.
2.0. REVIEW OF RELATED LITERATURES
2.1 CONCEPTUAL FRAME WORK
Black’s law dictionary (6th edition, 1990) has defined fraud as „‟an intentional perversion of truth for the purpose of inducing another, relying upon it to part with some valuable thing belonging to him or to surrender a legal right. A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegation or by concealment of that which deceives and is intended to deceive another so that he shall act upon it to his legal injury? Anything calculated to deceive, whether by a single act or combination or by suppression of truth or suggestion of what is false whether it be by direct falsehood or innuendo, by speech or silence, word of mouth, look or gesture .It is pragmatically essential to exegesis on the various operational definitions of major concepts of this topic. This will give a clear understanding of the concepts that are very synonymous but never the same, especially the word fraud, forgeries and errors. Fraud is described as an act of deliberate deception with the intention of gaining some benefit, in other words it is the act of dishonestly pretending to be something that one is not. (Chamber English Dictionary, 2002). Wikipedia (2008) defines bank fraud as whenever a person knowingly executes, or attempts to execute, a scheme or artifice (1) to defraud a financial institution; or (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by or under the custody or control of, a financial institution, by means of false or fraudulent
According to Adebisi (2009), there are three forms of fraud. They are the internal, external and a combination of internal and external frauds. Internal fraud: This is a fraud made against an organization by an insider- say a staff. If the staff is not capable of starting and concluding the whole process, he may carefully select a „‟TEAM‟‟ within the organization External Fraud: This is a fraud perpetrated by outsiders. This is the exact opposite of internal fraud. Combination of Internal and External Fraud: This is often referred to as „‟collusion‟‟. Fraud in a bank can be committed by a bank customer, bank staff or a combination of staff and customer or third parties. This is very common and the success rate is higher than the first two. Fraudulent transactions in organizations such as banks could equally be classified according to fraud type. This in turn is divided into three broad categories, namely by flow, victims or by Act.
2.2. METHODS THROUGH WHICH FRAUDS ARE PERPETRATED IN THE NIGERIAN BANKING INDUSTRY
There are various methods through which frauds are perpetrated in the Nigerian banking industry. The list is not exhaustive as new methods are devised with time. The most important and common methods according to Benson and Edwards (2006), Nwaze (2009) and Adebisi (2009) are: Mail Fraud: This is a process whereby the content of a duly authorized mail originated in a bank is converted to the benefit of illegitimate recipient. Tellering Frauds: This is the act of stealing from counted cash by a bank staff. This could come in the form of pilfering, teaming and lading and deposit suppression. Others include unauthorized withdrawals, vault / till cash manipulations and the manipulation of foreign currency in tellers till or vault. Clearing fraud manifests mainly in the use of cheques to fraudulently obtain cash. In Nigeria, the major types of frauds committed with cheques, are: Presentation of forged cheques, Cheque substitution, Suppression of clearing cheques, cheque cloning, cheque kiting, Issuance of „rubber‟ cheques. Forgery of signatories and re-representation of already paid cheques through insider assistance. Fund transfer frauds can be local or international, e.g. Money gram, Western union etc. Fraudulent activities through this channel could include identity fraud and fake confirmation: Fraudulent activities could come via manipulation of Fixed Deposit transactions. This includes fixing of fixed deposits above approved rates, Back value dating of fixed deposit transactions and seeking for undeserved rate for customers, to the detriment of the of the bank etc.. Manipulation/ Conversion of Assets: Some bank assets i.e. consumables, e.g., photocopying papers, staplers, biros, pencils, fuel, etc, as small as they are, can easily be converted by staff to personal property to the detriment of the bank .Others include income leakages, over invoicing/expense padding Risk Asset Manipulation: Loans are the commonest type of credits granted by banks and experience shows that their vulnerability into fraudulent manipulation begins as soon as the first requests are made. However, it has also been confirmed that at any stage, most- loan frauds are perpetuated with the active collaboration of bank employees. The Common categories of loan fraud include:
( i) Manipulation of facilities, ii) Unauthorized Facilities,
(iii) Excess above approved limits:
iv) Expired Facilities:
(v) Swapping of credit facilities.
(vi) Selling of Bank Draft/Certified Cheque on insufficient funds.
(vii) Giving of false financial accounts by some deceptive customers, as well as giving of false guarantees and presentation of false collateral etc. Computer fraud: Computer fraud is more sophisticated than the manually processed fraudulent activities. It is any fraud accomplished by tampering with computer programs; data files, operations, equipment or media, resulting in losses to the bank whose computer system is manipulated. The following are examples of computer frauds that are perpetrated in the banking systems on a regular basis
(i) Program Manipulation, (ii) Data manipulation, (iii) Transaction Entry Fraud: (iv)Stealing of passwords etc. Electronic Banking Fraud (E-fraud): While the development of e-banking has brought with it new products and ways of doing business, it has also spurned a wide
