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FRAUD IN NIGERIAN BANKS AND ITS IMPACT ON BANKS AND THE

NIGERIAN ECONOMY.VOLUME 1
INTRODUCTION
The level of fraud in the present day Nigeria has assumed an epidemic dimension. It has eaten deep
into every aspect of our life to the extent that a three year old child talks aout yahoo mail or !"#$
ne%ly discovered sori&uet for advanced free fraud that is hunting us as a nation. Nigeria$ %ith all of
its natural and human resources$ tethers on the rink of destruction ecause of fraud. 'uch of %hat %e
do is (cutting leaves) instead of dealing %ith the root prolem. *enerally$ fraud take it roots from the
human heart. It is an axiom that the heart is deceitful aove all things and is desperately %icked.
+raud is the numer one enemy of the usiness %orld$ no company is immune to it and it is in all
%orks of life$ N%ank%o ,"##"-. The fear is no% rife that the increasing %ave of fraud in the financial
institutions in recent years$ if not arrested might pose certain threats to staility and the survival of
individual financial institution and the performance of the industry as a %hole and no area of the
economy is immune from fraudsters and even the anking system. +raud if not checked might cause
run on in the anking sector.
The purpose of this %ork is to inculcate and instill the spirit of accountaility$ leadership$
responsiility and proity in the reader,s-$ practicing ankers and potential ankers %ho %ill occupy
managerial post tomorro%. expose the effect it has on the Nigerian economy and to discuss the effort
of government and its agencies in the prevention and control of fraud . To e ale to do so$ this paper
has een divided into volumes/ the first volume examines the overall component of fraud$ the second
volume attempts to highlight the role of government and other agencies in fraud detection$ prevention
and control and finally the conclusion.
O01R0I12 O+ +R3UD
+raud is a complex universal phenomenon. It is rampant in oth developed and developing countries
and varies across time and places in its magnitude$ its sources$ the %ay it manifests itself and in its
effects on administrative performance and development. 4olitical$ economic$ social$ cultural and
attitudinal factors comine in contriuting to its incidence.
"." D1+INITION O+ +R3UD
Olufidipe ,"##!- defined fraud as (Deceit or trickery delierately practiced in other to gain some
advantage dishonesty.55
+raud means an act of dishonesty$ deceit and imposture 3lashi$ ,"##!-
3ccording to 6irkpatrick ,"#78-$ (a person %ho pretends to e something that he is not is a fraud$ a
snare$ a deceptive$ trick$ cheat and a s%indler.
9y extension fraud %ill include eme::lement$ theft or any attempt to steal or unla%ful otain$ misuse
or harm the assets of ank ,9ank 3dministration Institute$ "#7#-.
".; DI'1N<ION< O+ +R3UD
*oing y the definitions$ frauds in the Nigeria economy cannot e restricted to e anks alone. +rauds
do take different dimensions %hich amongst others include the follo%ing/
3. Cheating y market %omen=men or scale measurements etc
9. +ailure to pay correct import=export duties=tax evasion.
C. Over invoicing=inflating contracts.
D. 4ayment for services not rendered.
1. <tealing and other !"# activities.
+. 4olitical fraud etc.
".> C3U<1< O+ +R3UD
Causes of fraud include the follo%ing amongst orders/
3. *eneral ?ust for 3ffluence/ it is a matter of fact that the Nigerian society in the last t%enty years or
there@aout has ecome one %here most people %ant to e rich overnight y %hatever means and this
has een responsile for the increase in the numer of ank fraud and other forms of frauds.
9. Recognition 9eing 3ccorded 2ealthy 4eople Regardless of the <ource,s- of Their 2ealth/ the
manner in %hich %e recogni:e %ealthy people in our various communities$ churches and mos&ues
%ithout considering the source,s- of their %ealth has even made the matter %orse .Aoung and talented
men and %omen engage in drug trafficking and in committing frauds ecause our society do not only
condone these ut also encourage them y singing songs of praise in their honor$ making them
chairmen at functions$ naming halls in universities$ street and high%ay after them even floating non
governmental organi:ations in their names. Our national a%ards like CON$ '+R$ *CRN$ and 'ON
Bust to mention ut a fe% are some times %rongly a%arded to those %ho defrauded Nigerian anks.
9. *eneral 9elief That the 1conomy ,anks and other financial institutions- Can <ustain 3ny 3mount
of loss/ the attack on the nation5s treasury and anks y fraudsters is partly due to the elief y many
Nigerians that the anking sector is the most profitale sector of the economy and that the nation5s
%ealth is inexhaustile and sometimes the see it as part of the national cake. 3nyody %ith a little
kno%ledge of 1conomics or +inance should kno% that anks are trading on e&uity %hich means they
are using other peoples5 money to make money and depositors5 monies are not theirs. The can only
sustain themselves y making profit after all anking usiness is all aout risk.
".! 93N6 +R3UD 3ND IT< C3U<1<
+rauds in the anks are not ne% they are as old as the industry itself. 9ank fraud can e defined as a
conscious or delierate effort aimed at otaining unla%ful financial advantage at the detriment of
another person %ho is the rightful o%ner of the fund. OrBih$ ,"##7-.
".8 C3U<1< O+ 93N6 +R3UD
3lashi ,"##!- grouped the maBor causes of the ank fraud into t%o. These are institutional factors and
environmental factors. Institutional factors are those traceale to the internal environment of the
financial institution %hile the environmental factors are those %hich result from the influence of the
environment on the anking industry.
IN<TITUTION3? C3U<1< O+ +R3UD
0arious authors and professionals in the industry seem to e unanimous in their identification of
institutional causes of fraud. These are as follo%s/
3. 0olume of %ork/ the amount of %ork done y official,s- could e so heavy that frauds could easily
pass undetected y such official,s-.
9. Nature of <ervices/ fraud may e caused %here documents of value and li&uid assets are exposed to
an undisciplined staff or unauthori:ed person,s- for example customer,s-
C. 9anking 1xperience of staff/ frauds in anks occur %ith higher fre&uency among staff %ith little
experience and kno%ledge in financial practice. The more experience and kno%ledge of a staff$ the
less likelihood that frauds %ould pass such staff undetected unless %ith active support of that staff.
D. Numer of staff/ %here a senior official supervises &uite a large numer of staff$ there is a high
likelihood that fraud could go undetected.
1. 4oor 'anagement/ anks %ith poor management record high incidence of all sorts of frauds than
those %ith effective and efficient management team %ith unsullied character.
+. 4oor <ecurity 3rrangement/ anks %here security arrangement for valuale documents are %eak$
poor and vulnerale$ it is easy for fraudsters to have their %ays undetected. Nigerian anks use ullion
vans for conveying huge sums of money. The heavy reliance on cash has made anking a nightmare
for many Nigerians. 1fforts should e made to make Nigeria a cashless society.
*. Inade&uate Infrastructure/ 4oor communication systems$ and po%er failure result to acklog of
unalanced postings$ congested office space etc$ encourage the perpetration of fraud in anks.
C. Delays in procuring Document/ Delays create opportunities for hatching in ank and other financial
institutions thus making prevention and detection difficult
.
1N0IRON'1NT3?=<OCI1T3? C3U<1< O+ +R3UD/
These have een identified as follo%s/
3. 4ersonality 4rofile of Dramati:e 4ersonae. most individuals %ith inordinate amitions %ithout
&ualm are prone to committing frauds. These kinds of individuals ent on making money y hook or
crook and to them the end Bustifies the means.
9. <ocietal 0alue/ %hen the possession of %ealth determines the reputation ascried to a person$ that
society is ound to %itness unnecessary competition for ac&uisition of %ealth.
C. ?ack of 1ffective Deterrent=4unishment/ this is a moot point ecause it is argued in some &uarters
that lack of effective deterrent such as heavy punishment could e a factor that contriutes to the high
perpetration of frauds in financial institutions.
D. +ear of Negative 4ulicity/ many financial institutions fail to report fraud cases to the authorities.
They elieve that doing so %ill give unnecessary negative pulicity to their institutions. This is not
only a chance for fraudsters to thrive. it is great challenge to a researcher as regards to data collection.
1. Unemployment and Cigh level of 4overty in Nigeria/ Nigeria is one of the riches economies in the
<u <aharan 3frica and indeed the %orld oth in human and natural resources ,oil- ut 7DE of the
Nigeria youths especially university graduates are unemployed. 'ost of the politicians s&uirrel a%ay
the looted funds in foreign anks %ithout een punished. This causes capital flight$ unemployment$
dearth in infrastructure %hich is not particularly good for a developing country like Nigeria. Directly
or indirectly some Nigeria youths especially those %ith little ICT kno%ledge %ith special reference to
those that find themselves in the anking industry %ith criminal intent engage in one ank fraud or the
other in order to eradicate poverty. 'ost of them have some of their family memers that depend on
them for %hat to eat$ drink or even put in their pockets.
3ll these make fraudsters to have the feeling that they are aove the la% and as such can get a%ay %ith
ill@gotten %ealth unpunished.
".F N3TUR1 3ND TA41< O+ 93N6 +R3UD
+rauds in financial institutions vary %idely in nature$ character and method of perpetration. In general$
it may e classified in t%o %ays/ ,i- 4erpetrators ,ii- 'ethods used.
On the asis of perpetrators$ there are three road categories/ internal$ external and mixed. Internal
perpetrators of frauds are related to those committed y memers of staff ,insiders-. 1xternal
perpetrators are those committed y non@staff %hile mixed fraud involved outsiders colluding %ith
staff ,insiders-.
The most important and common types of fraud highlighted y 9ank 3dministration institute ,"#7#- in
fraud prevention and detection series are discussed elo%/
3. 3dvance fee fraud ,(!"#55-. This involves an gent approaching a ank$ a company or an individual
%ith an offer to access large funds at elo% market interest rates often for long term. The purported
source of such funds is not specifically identified as the only %ay to have access to it is through the
agent %ho must receive a fee or commission (in advance).
9. Che&ue 6iting/ kiting is defined y the U< comptroller of the currency5s policy. *uidelines for
National 9ank Directors as (method %herey a depositor utili:es the time re&uired for che&ue to clear
to otain an unauthori:ed loan %ithout interest charge.)
C. 3ccount@Opening +raud/ this usually starts %hen a person not kno%n to the ank asks to open a
transaction account %ith false identification ut unkno%n to the ank. <uch a person might use the
account for illegal transaction and close the account %ithin a short period.
D. 'oney Transfer +raud/ +raudulent money transfer may result from a re&uest created solely for the
purpose of committing a fraud or the alteration of a genuine funds transfer re&uest. 3 genuine re&uest
can e altered y changing the eneficiary5s name or 3ccount numer or changing the amount of the
transfer. These day (yahoo oys) the name giving to scammers in Nigeria that send fake e@mails to
%ould e victims asking them to apply for fake contracts or fake lottery therey %inning non@existing
money from a dead illionaire5s account in different parts of the %orld. They connive %ith fraudulent
ankers in the 2estern Union department to %ithdra% their ill@gotten hard currencies or %ithout the
kno%ledge of the ank as regards to the authenticity of the eneficiary.
1. Telex +raud/ Transfer of funds from one location to another can e affected through the telex. The
message though often coded can e altered to enale diversion of the funds to an account not originally
intended.
+. 'oney laundering +raud/ this is a means to conceal the existence$ source or use of illegally@otained
money y converting the cash into untraceale transaction in a ank. The cash is disguised to make the
income appear legitimate.
*. Computer +raud/ computer frauds can take the form of corrupting the program,s- and even
reaking into the system via a remote sensor y a computer programmer or specialist .Diskettes can
also e tampered %ith to gain access to unauthori:ed areas or even give credit to an account for %hich
funds %here not originally intended.
C. ?oans +rauds/ ?oan fraud occurs %hen credit is extended to non@orro%ing customers or to
orro%ing customer %ho had exceeded his credit ceiling. The fraudulent aspect of this class is that
there is intent to conceal it from the head office ,inspectorate- staff on routine check to deceive them
%ith plausile ut falsified statements$ documents etc. That is to say a credit facility for a customer
(3) yet to e dra%n is diverted for the use of customer (9). Other types of ank frauds include
counterfeited securities$ clearing fraud$ letters of credit fraud$ forging of anks Ruer stamps$
sustitution of names in credit vouchers$ over stating interest charges$ manipulation of dormant
accounts and unauthori:ed printing of ank stationeries and che&ue fraud etc.
".G 1HT1NT O+ +R3UD IN 93N6<
9ank fraud in Nigeria has increased and %ill continue to increase ecause it is a part of everyday life.
(The magnitude of fraud is$ of course$ not kno%n ecause much of it is undiscovered or undetected
and not all that is detected is pulished) N%ank%o ,"##"-. In Nigeria$ %here the statistics are non@
existent$ it is put at aout @N@;DD 'illion per annum of %hich aout "8E@ ;DE %ould e successful. It
is appropriate to have a feel of the extent of loss through ank frauds in Nigeria in order to appreciate
the havoc the canker%orm has een %recking on the economy.
The sum of INI ;.; illion 2as involved in anks fraud in > year$ "##" J "##> $ out of %hich
commercial anks accounted for aout #!." per cent , see tale- the actual=expected loss to the
anking system %ithin the same period totaled aout KD .> 9illion %ith commercial anks accounting
for aout #8.G per cent thereof .
In "##7$ the nation5s anking industry lost K>."#F 9illion %hile in "###. it lost a %hopping sum of
KG.!D! 9illion to fraud. <imilarly$ the actual=expected loss stood at a higher level of K ;.G"> 9illion
relative to KF;> 8D 'illion in "##7 ,NDIC 3nnual report and statement of account "###-.
NigeriaLs anks have seen almost M"Dm disappear through employee fraud in ;DD;$ a rise of more than
!DE on the year efore$ a survey y the countryLs anking regulator has found. The total amount stolen
%as ".;#n naira$ up from #DF.>m in ;DD"$ the Nigerian Deposit Insurance Corporation reported. Ten
times that amount K";.#"n %as recorded in attempted fraud$ up from "".;!n for a rise of "8E. 'ost
of the thefts$ NDIC said$ %ere the result of either forgeries or illegal %ithdra%als from customersL
accounts.
The figures may %ell e an understatement$ though. as NDIC said it elieves financial institutions
routinely underreport fraud losses for fear of negative pulicity. In 'ay ;DD> Nigerian ank fraud
moved up to !DE. The anking regulator says theft y ank employees soared last year$ ut suspects
that much more fraud may go unreported.
It is not only Nigerian anks and citi:ens that are exposed to ank frauds. <uch frauds are also focused
on foreign anks and their citi:ens. Nust ho% much has een stolen y such fraud is not clear. 9ut 99C
ne%s@usiness says that U< citi:ens lose in ;DD! move than M"DDm ,OF>.!m- a year to Nigerian
fraudsters. Co%ever$ Nigerians do indeed involve themselves in genuinely legal usinesses apart from
the infamous anking scams.
T39?1 "
+raud in Nigeria Commercial and 'erchant 9anks
3mount involved 3ctual = 1xpected loss
Aear commercial 9anks merchant anks commercial anks merchant
"##" >FD."#! ;7.>"7 ;8.!#7 "."7D
"##; >8".#"> 8#.7; F!.7 7.>"
"##> ">GF.> !".#; ;!".D" 8.>G
Total ;D77.!;! >D.D87 >>".>D7 "!.7F
<ource NDIC. 3nnual Reports ,various issues-
T39?1 ;
Numer of 9ank <taff Involved in +rauds
Ranks Numer
"##" "##; "##>
". <upervisor and manager FF ">; ";G
;. Officers $ 3ccountant P 1xecutive 3ssistant FD FF 87
>. Clerks and Cashiers ;>F "8F "#;
!. Typist$ Technicians P <tenographers !G # >!
8. 'essenger $ Drivers$ Cleaners and <te%ards 8" 8! F"
F. Temporary staff ;! @ 8
G. Unregistered staff >D "# !D
Total 8"! !>F 8"G
Q<taff %hose status %ere not disclose
<ource/ NDIC 3nnual Report ,0arious issues-
".7 I'4?IC3TION < O+ +R3UD
3. DO2N TURN IN TC1 1CONO'A
+or the past "7 years or so our economic development has %itnessed a serious set@ack %ith graduates
roaming the streets in search of employment %hich are not availale. 0arious government polices to
revamp the economy though appear laudale %ere all frustrated at the implementation stage ecause
some of the people responsile for implementing them are fraudulent. 9oth the political and economic
situation declined from ad to %orse %ith naira %itnessing an unprecedented devaluation of "$>DDE
%ithin five years. 3s at Decemer ;DD7 and Nanuary ;DD# the naira exchange rate %ith the stood
et%een K"!# to K"8D per M".Devil then found Bo as idle hands %ere meant to engage in one kind of
fraud or the other %hile (!"#$ cocaine pushing$ illion naira ank frauds)$ ecoming regular features
of our ne%spaper$ Television and Radio headlines.
9. T1R'IN3TION = R1TIR1'1NT O+ <T3++
3s a result of this very serious economic crime$ some staff in the industry have either een dismissed$
or have their appointment terminated or prematurely retired. This means that some experienced hands
in the sectors are lost due to their involvement in frauds and forgeries. During and after the
consolidation exercise that took place in the Nigerian anking industry it %as revealed y the central
ank that some ank directors and senior managers of those anks that couldn5t meet up the K;8
illion minimum capital ase gave themselves unserviceale loans in hundreds of millions. The
Nigerian Deposit Insurance Corporation is still in court %ith those involved in this unethical ehavior.
Our prolem is that most of those involved these economic crimes are highly placed or senior
politicians. 2e can5t kno% their names simply ecause of their positions in the country.
C. *?O93? 41RC14TION. Nigeria has ecome synonymous %ith fraud as some of its citi:ens use
the oom in internet fraud and corruption has ecome an unfortunate staple in NigeriaLs international
reputation. The country regularly features at the top of international surveys measuring the part played
y graft in different economies. <uccessive dictatorships have extracted illions from the exche&uer$
denuding the pulic purse of revenues from NigeriaLs rich oil reserves. Outside the country Nigeria has
ecome synonymous %ith fraud as some of its citi:ens use internet and the oom in of cafes to send
RspamR e@mails$ promising millions in exchange for the gullile recipientLs ank details. This makes it
difficult for genuine usiness men from Nigeria to go into international usiness %ith foreigners or
secure credit overseas.
R1+1R1NC1<
3nyan%u$ N.C$ ,"##>-$ 'onetary 1conomics/ Theory$ 4olicy 3nd
Institutions. Onitsha$ Nigeria. Cyrid pulishers ltd.
9ank 3dministration Institute ,"#7#-$ (+raud prevention and Detection
<eries) +irst Chicago ,the +irst National 9ank of Chicago-.
6irkpatrick$ 1.'$ ,1d- ,"#78- (Chamers Universal ?earners5 Dictionary)$
Iadan Nigeria spectrum ook ?td.
'ichael$ N C$ ,"##8-)$ ,Corporate fraud) U6$ 'c@ *ra% Cill 9ooks co.
NDIC$ ,"##;- 3nnual Report.
$ ,"##7- 3nnual Report.
N%ank%o$ *.O$ ,"###"- 9ank management) principles and practice ?agos
'althouse press ?td$ ?agos Nigeria.
N:otta$ <.'$ ,"###- 'oney$ anking P +inance/ Theory and practice
O%erri Nigeria Intercontinental 1ducational 9ooks P 4ulishers "<t 1d.
Olufidipe$ 1.O$ ,"##!-$ (+raud in Nigeria and its Implication for 9ank P+inancial Institutions)
Nigeria Institute of ankers ?agos Nuly@ Decemers 0ol. >D NO. !ppG@"D.
OrBih. N$ ,"##7- 1lements of 9anking$ 1nugu Nigeria Communications 4ulishers.
<hongotla$ I.O$ ,"##!- (+raud Detection and control) Nigeria institute of
9ankers ?agos Nuly@ Decemer 0Oi.>D$ NO.! 44"F@"#.