AN INVESTIGATION OF THE EFFECT OF FRAUD AND RELATED FINANCIAL CRIMES ON THE NIGERIAN

ABSTRACT

The objective of this study is to determine the impact of fraud and related financial crimes on the

growth and development of Nigerian economy.  Data for the study were collected from secondary

sources only. The research analyzed the data generated using regression analysis. The research findings  revealed that, fraud  and related  financial  crime has  significant effect on the Nigerian

economy  while  fraud and financial  crime  have no  significant  effect  on inflation. The  research

therefore recommends that Auditors and Accountants in organizations and financial institutions

should  be  trained  on  how  to  carry  out  forensic  investigation  since  the  fraudsters  are  now

sophisticated  in  their  act.    Also  internal  control  systems  should  be  strengthened  to  block

opportunities that attract fraud perpetrators and oversight function of the National Assembly be

strengthened to make public office holders accountable.

Key words: Fraud, Financial Crime, Nigeria, Economy.   

CHAPTER ONE INTRODUCTION 

1.1 BACKGROUND OF THE STUDY

Economic and financial crimes in whatever form and nature have potentially devastating impacts

on economy, security and social wellbeing of the people.  It is perhaps pertinent to stress that as

modern  financial  system  encourages  and  facilitates  local  and  international  commerce,

antithetically,  financial criminals  are also  enabled  by  modern  financial  global  liberalization  to

transfer  millions  of  dollars  around  the  world  instantly  through  available  information

communication infrastructures such as internet, electronic money transfer (wire transfer) and the

rest. 

Money laundering among other forms of economic and financial crime requires existing financial

system and operation.  Money is laundered in Nigeria through currency exchange houses, stock

brokerage houses, casinos, automobile dealership, and trading companies.  These institutions are

capable of masking proceeds from illegal criminal activities.  The overall effects of these activities

on the socio-political lives and economic wellbeing of the people of the developing countries and

Nigeria in particular could be well imagined (Ribadu, 2004). 

  In  the  developed  economies  of  the  West,  evidence  emerged  (which was  at  first  difficult  to

believe)  that  the  criminal  manipulation  of  Company  balance  sheets  created  a  much  more

favourable  picture  about  their  finances  than  was  the  reality.    The  Enron  Company  which

unexpectedly went bust is probably the best known example of accounting books manipulation in

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our time.   Here in Nigeria, the Lagos state government funds are  trapped  while there was also

crisis in US in the management of mortgages which were inflated.  It was a boom and investors

made  huge  profits  on  their  mortgage  investments.    This  encourages  people  and  financial

institutions  all  over the  world to  finance  mortgages  in the  USA  hoping  to  earn  profits  which

proved both unrealistic and unsustainable.  With time, there were  massive defaults in payments

leading to foreclosures which caused chaos, doom and gloom in housing market.  Since the world

is a global village, investors in the business were world-wide; the financial crisis in the US had a

contagion effect on the world economy. 

Webster’s collegiate dictionary of current English defines fraud as: “deceit, trickery, specifically:

international pervasion of truth in order to  induce another to part with something of value or to

surrender a legal right”.  This definition more specifically focuses 419ners, or con-men and other

forms of commercial dishonesty.  We can then characterize fraud by the following elements: (i)

Intent to commit a wrongful act or to achieve a purpose inconsistent with law or public policy; (ii)

Disguise of (purpose): falsifications and misrepresentations employed to accomplish the purpose;

(iii) Reliance by the offender on the ignorance or carelessness of the victim (s); (iv) Concealment

of the violation.

The most prominent of frauds in banks and agencies of government detected  in Nigeria in the

recent  times  includes:  Fraudulent  transfer  and  withdrawals;  Use  of  unauthorized  overdraft;;

Posting  of  fictitious  credits;  Presentation of  forged  cheques;  Conversion of  banks  money  into

personal use; Granting  of unauthorized  loans;  Abuse of medical scheme; Insider  abuse; Illegal

conversion of pension funds in various agencies and ministries; Ghost workers fraud resulting into

millions  of  naira  paid  into  private  pockets;  Abuse  of political office  leading  to  contract over

billings and over invoicing.

Commer (2008) noted that motivations for corporate fraud include: Personal greed; Possibility of

getting away; Low prosecution rate; societal pressures; Opportunity; Staff morale problems  and

Anti-institutional posture.

However,  Nigerian  government  like  many  other  governments  of  developing  countries  until

recently has been very slow in putting in place strict policy measures and legislative framework in

combating the effects of economic and financial crimes.  As a result economic and financial crimes

have eroded the integrity of Nigerian financial institutions since sizeable numbers of them were

actively  involved  in  money  laundering  and other  financial crimes  on  the economy  and  socio-

political development of Nigeria as a developing nation.  It is instructive to stress from on set that

this study is not intended to delve into details legal discussion on the concept  of economic and

financial crimes and the relevant provisions of Nigerian law regulating same.  This of course will

not obviate occasional reference being made to various forms of economic and financial crimes as

known to Nigerian law and relevant statutory laws regulating those forms of crimes.

This study aims at evaluating the effect of fraud and related financial crimes on the economy of

Nigeria. 

1.2 STATEMENT OF PROBLEM 

There have been concerns about the management of the country’s resources, particularly oil and its

revenues, has been on the operation of the Excess Crude account by the government because it

does  not  comply  with  relevant  provisions  of  the  1999  constitution.    Section  162  of  1999

constitution  specifically  stated  that  “internally  Generated  Revenues  (IGR)  of  the  federal

government of Nigeria must be paid into the federation Account”, but the operation of the Excess

Crude Account (ECA) by the Federal Government violates this provision.  Apart from concerns

over the mismanagement of the Excess Crude Account, there are also worries about revenues from

the sale of gases. 

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Falana (2010) noted that facts have continued to emerge daily on huge sums of money that have

either  been  looted,  misappropriated,  shared,  mismanaged  or  committed  into  white  elephant

projects.  It is worrisome to observe the highest level of profligacy and irregularities by all tiers of

government in the management of the country’s resources and wealth of the nation.  In view of the

above  development,  the  researcher  is  interested  to  investigate  the  impact  of  fraudulent  fiscal

practices and financial crimes on the growth and development of Nigeria economy. 

1.3 OBJECTIVES OF THE STUDY 

The main objective is to determine the  impact of fraud and financial crimes on the growth and

development of Nigerian economy.  The  specific objectives include the following:-

i. To examine the effect of fraud and related financial crime on Gross Domestic Product. 

ii. To examine the effect of fraud and related financial crime on inflation in the economy. 

RESEARCH QUESTIONS 

i.  To what extent do fraud and related financial crime affect Gross Domestic Product?

ii. To what extent do fraud and related financial crime affect inflation in the economy?

1.4 STATEMENT OF RESEARCH HYPOTHESES 

Ho1:  Fraud and related  financial crime have  no positive and  significant  effect  on the Gross Domestic Product. 

Ho2:  Fraud  and  related  financial  crime  have  no  positive  and  significant  effect  on  inflation  in  the economy.

1.5 OVERVIEW OF FRAUD AND RELATED FINANCIAL CRIMES 

Black  (1979) defines  fraud as  all  multifarious  means  which human  ingenuity can  devise,  and

which are resorted to by one individual to get an advantage over another by false suggestions or

suppression of the truth. It includes all surprises, tricks, cunning or  dissembling, and any unfair

way which another is cheated. Under common law, three elements are required to prove fraud; a

material false statement made with intent to deceive (scanter), a victim’s reliance on the statement

and damages. 

The criminal code section 380 sub-section one stated that everyone who, by deceit, falsehood or

other fraudulent means, whether or not it is a false pretence with the meaning of this Act, defrauds

the public or any person, whether ascertained or not, of any property, money or valuable security

or  any  service.  This means that  fraud  is criminal deception  intended  to financially benefit the

deceiver. 

Edelherz-et al (1977) defines  fraud as an illegal act or series of illegal  acts  committed by non-

physical means and by concealment or guide to obtain money or property, to avoid the payment or

loss of money or property, or to obtain business or personal advantage. Also Webster’s collegiate

dictionary of current English defines fraud as deceit, trickery, specifically; intentionally pervasion

of truth in order to induce another to part with something of value or to surrender a legal right. 

Fraud is a feature of every organized culture in the world. It is a significant and growing threat to

organizations.  Regardless of  its  size,  location  of  industry  (Golden, Skalak,  & Clayton,  2006).

Fraud is an activity that takes place in a social setting and has severe social consequences for the

economy, corporation, and individuals. 

Sociologists are of the opinion that some middle-range theories of fraud in Nigeria include family

members-Nuclear,  relative, patterns  of  friendship and  social  networks  made  up of  friends  and

friends  of  members  of  social  systems  to  which  a particular  individual  belongs.    The  cultural

transmission  theory  formulated  by  Sutherland  (1949)  holds  that  deviant  behaviour,  like  non-

deviant behaviour, and the norms of conduct and cultural belief are products of society, that are

learnt by people as members of a society or social groups in the society.  With specific reference to

the violations of criminal law, the theory holds that a person becomes criminal if he is exposed Kuwait Chapter of Arabian Journal of Business and Management Review    Vol. 2, No.7; March. 2013

1.6 THE IMPACT OF FRAUD AND FINANCIAL CRIMES ON ECONOMIC GROWTH AND DEVELOPMENT 

In legal terms, there are five elements to a fraud: (i) “Scienter”, or knowledge of facts, events, or

circumstances by one party; (ii) Misrepresentations (including non-disclosure) of that knowledge

of the  party in dealings with another;  (iii) Reliance on those misrepresentations by the second

party; (iv) An agreement, contract, or transaction between the parties which a reasonable person

would not have entered into if privy to the first party’s knowledge; and (v) Harm or damage to the

second party as a result. 

The casual factors that should be removed to deter fraud are best described as fraud triangle.  The

fraud triangle explains  three  factors that  are present  in  every  situation  of  fraud.  (i)  Motive (or

pressure) – the need for committing fraud (need for money etc). (ii) Rationalization – the mindset

of the fraudsters that justifies them to commit fraud; and (iii) Opportunity-the situation that enables

fraud to occur (often when internal controls are weak or nonexistent). 

Breaking the fraud triangle is the key to fraud deterrence.  Breaking the fraud triangle implies that

an organization  must  remove  one of the  elements  in  the fraud triangle  in order  to  reduce the

likelihood of fraudulent activities. “Of the three elements, removal of opportunity is most directly

affected by the system of internal controls and generally provides the most achievable route to

deterrence of fraud”.  (htt://en.wikipedia.org/wiki/fraud deterrence). 

Common  personality  traits  of  fraudsters  include  the  following:    Wheeler  and  dealer,

Domineering/controlling,  Don’t like people reviewing their work, Strong desire for personal gain, 

Have a “beat the system attitude”, Live beyond their means,  Close relationship with customers or

vendors,  Unable to relax,  Often have a  “two good to be true” work performance, Don’t take

vacation  or  sick  time  or  only  take  leave  in  small  amount,  Often  work  excessive  overtime, 

Outwardly, appear to be very trustworthy, Often display some sort of drastic change in personality

or behaviour. 

Corporate accounting scandals are political and business scandals which arise with the disclosure

of misdeeds by trusted executives of large public corporations.  Such misdeeds typically involve

complex methods for misusing or misdirecting funds, overstating revenues, understating expenses,

overstating the value of corporate assets or underreporting the existence of liabilities, sometimes

with the cooperation of officials in other corporations or affiliates.  

In public companies, this type of “creative accounting” can amount to fraud and investigations are

typically launched by the  government  oversight agencies, such as the Securities  and Exchange

Commission  (SEC)  in  the  United  States.    The  Enron  scandal  resulted  in  the  indictment  and

criminal conviction of  the big  five  auditor  Arthur Andersen  on June 15,  2002.   Although  the

conviction was overturned on May 31, 2005 by the supreme court of the United States, the firm

ceased performing audits and is currently unwinding its business operations. 

In  July,  2002,  WorldCom  filed  for  bankruptcy  protection  in  what  was  considered  the  largest

corporate insolvency ever at the time.  These scandals reignited the debate over the relative merits

of Untied States GAAP, which takes a “rules-based” approach to accounting, versus International

Accounting standards and United Kingdom GAAP, which  takes  a  “principles-based”  approach. 

The financial accounting standard Board announced that it intends to introduce more principles-

based standards.  More radical means of accounting reform have been proposed, but so far have

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very little support. The debate itself, however, overlooks the difficulties of classifying any system

of knowledge, including accounting, as rules-based or principles-based. 

In  2005,  after  a  scandal  of  insurance  and  mutual  funds  the  year  before,  AIG  was  under

investigation for accounting fraud.  The company already lost over 45billion US dollars worth of

market capitalization because of the scandal.  This was the fastest decrease since the WorldCom

and Enron scandals.  Investigations also discovered over a billion US dollars worth of errors in

accounting transactions (http:llen.wikipedia.org/wik:/accounting scandals).

Since 2008,  the  financial  institutions  of the  leading world economies-USA,  Germany,  Britain,

France, China and Japan, Italy and Brazil have experienced great difficulties resulting in a huge

cash crunch.  Whereas Lehman Brothers was liquidated, American International Group (AIG) was

too  interconnected with  World  economics outside  the  united  state  to  be  left  to  die,  but  were

rescued with American treasury funds.  In the wake of this serious financial crisis, many mortgages

could not be serviced, credit dried up for many consumer in the leading world economics.  There

were cases of bankruptcies, jobs were lost, and suicides were recorded. 

The economies in the developing countries like Nigeria were particularly vulnerable because of the

dependence of many of them on western economic and financial systems.  In Nigeria for example,

the drop in the price of crude oil and its reduced production due to the conflict in the Niger Delta,

had a telling effect on the country’s revenues and budget.  The demand for goods and services was

generally depressed leading to factory closures and lay-offs.  The financial crisis in Nigeria is more

complex to decipher.  It is however, well established now that the Nigeria banking system is both

corrupt and inefficient (Jibo, 2008).  The highly commendable work of the Central Bank of Nigeria

(CBN) governor Sanusi Lamido Sanusi has exposed the stench in the country’s banking industry. 

Huge unsecured loans were given by the banks; their CEOs allegedly manipulated bank books and

helped  themselves  to  customer  funds.    Above  all,  bank  shares  were  manipulated  to  deceive. 

Things were presented from a public relation (PR) perspective and many were led to  purchase

bank shares which were almost worthless.  While this alleged scam was on, the banks presented a

polished image by maintaining an elaborate scheme of deceit.  Many Nigerians were ruined by a

number of banks who loaned them money to purchase their worthless shares.   Bank CEOs  in a

number of instances criminally used their customers’ accounts to borrow money from banks under

their charge (Enwegbara, 2009).

  FINANCIAL FRAUD IN GOVERNMENT AND ORGANIZATION 

Financial  fraud  in  an  entity  can  be  divided  into  three  categories:  Those  perpetrated  by  chief

executives; by political office holders and; by public servants and employees of entities 

Fraud perpetrated  by chief  executive is  management  fraud while  those  perpetrated by political

office  holders  and  public  servant/employees are  regarded  as condonable  fraud and  staff fraud

respectively.   Condonable  or  staff  fraud  can  be  perpetrated  by circumventing  internal  control

arrangement  or  by breaching internal control regulations.   Condonable  fraud  occurs where the

employee diverts the  employer’s property which  was given to  enhance the performance of  the

employee  (Mainoma,  2009).    The  use  of  employer’s  photocopying  machines  and  computer

facilities for persona gains or benefits is an example of condonable fraud.  This class of fraud is

tagged condonable because any effort to eradicate it is expensive and counterproductive.  In this

case, the employer will condone the class of fraud and thus allow the fraud and the organization to

co-exist.  However, condonable frauds are difficult to eradicate but they can be minimized. 

Staff frauds are perpetrated by employees involved in the theft, misappropriation or embezzlement

of the employer’s funds, stock of goods or other assets.  The type of fraud is characterized by:

Inclusion of ghost names in payroll, Over booking of hours worked and overpaying of allowances,

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Keeping  inadequate  records  and  therefore  incurring  loss,  Misappropriating  unclaimed  wages,

Pilferages of currency notes from the bundles, Misappropriation of revenues collected. 

The third category, leadership fraud is analogous to management fraud in the private sector and

undermines the entire fabric of public accountability.  Since it is mitigated from above and may be

executive from outside the organization, it operates outside the internal control system (Oshisami,

1994). When it is executed within the organization, example, defalcation and misappropriations, it

may be caught within the web of internal control, i.e. when this is not deliberately shifted by the

leadership.   Whatever  the reason,  it  often creates  problems  for  the  internal  audit  and  may  be

arrested  by external audit.   Some  common example  of management/leadership  fraud includes:

Fictitious transaction;  Wrong project  evaluation; Wrong project  award; Erroneous  reporting of

level of project executed; Loans to relatives leading to bad debts.

Audit to deter frauds differ in objectives, coverage and execution from normal audit (internal and

external) and therefore require additional skills, time, thoroughness and sometimes extra audit and

accounting capabilities (Oshisami, 1994 and Daniel, 1999).  Part of the difficulty appears to  be

inadequate training and development of audit personnel in the field.  For instance, internal audit

personnel being trained for the detection of fraud requires to be exposed to new ways of examining

books  of  accounts  and  documentation,  various  techniques  of  asset  and  cash  survey  and

ascertainment, various abuses of documentation for imprest  purchases, applied stores, schemes of

preparing and paying ghost workers and the means of their detection. 

1. RESEARCH METHODOLOGY

The study adopts the historical research method in an attempt to determine the effect of fraud and

related crimes on the Nigerian economy.  The purpose of historical research is to obtain a better

understanding of the present through the evaluation of the past and intelligent prediction of the

future  (Adefila,  2008).  The  study  purely  used  secondary  data  for  the  analysis.  The  use  of

secondary data only is because; information relating to the study is readily available from various

publications. The analytical tool adopted by the researcher in analyzing the data collected for the

study was the Regression Analysis.