THE ECONOMIC EFFECT OF ADVANCED FREE FRAUD IN BANKING SYSTEM IN NIGERIA

ABSTRACT

The study is an empirical analysis of the impact of regulation and supervision on the activities of Nigerian Banks with emphasis on the role of the Central bank of Nigeria and the Nigerian Deposit Insurance Corporation.  It evaluates the roles and contributions of CBN and NDIC to the Nigerian banking sector.  Extensive field survey and library research was carried out and data collected were subjected to thorough analysis.

The analysis is shows that the supervisory and regulatory framework of the Central bank of Nigeria and the Nigerian deposit Insurance Corporation are not sufficient into guarantee effective banking practices in Nigeria.  Other findings from the study include the need to increase the maximum insurance coverage due to the effect of inflation and the persistent fall in the value of the Naira, the need to disclose transactions continuously to ensure financial prudence through regular supervision and monitoring of the financial health of local banks with the aid of the “CAMEL ratings and other supervisory framework.

There is need to also increase the awareness of banking activities within the general populace through a deliberate integration process aimed at demystifying certain inherent perceptions of the public with respect to distress and the role of the Nigerian deposit Insurance Corporation (NDIC).  Moreover, the public, investors and depositors were not fully aware of the activities of NDIC and CBN in liquidating and revocation of banks’ licenses due to the ineffectiveness of the enlightenment programmes used in carrying out the awareness.

The study focuses also on the consolidation agenda of the Central Bank of Nigeria and the processes, prospect and the challenges of consolidation.  A questionnaire and telephone based research was adopted for the study and the data collated was tested using the chi-square analysis and supported by fundamental evidence from the database of the regulatory authorities.

Finally, the study offered suggestion as to how the problems so identified could be ameliorated.

 

 

 

 

 

TABLE OF CONTENTS

CHAPTER ONE

1.1     Introduction                  

1.2     Statement of problem    

1.3     Objectives of the study

1.4     Statement of research question                 

1.5     Research hypothesis     

1.6     Research methodology                     

1.7     Scope of the study                            

1.8     Justification of the study                           

1.9     Organization of the study                 

 

CHAPTER TWO: 

LITERATURE REVIEW

2.0     Introduction                                     

2.1     Definitions of bank                           

2.2     Meaning and definitions of fraud               

2.3     Criminal motivation in fraud and white collar crime     

2.3.1  Psychological causes              

2.3.2  Cultural causes                                

2.3.3  Socially acquired traits  

2.4     Causes of fraud             

2.4.1  Motivational elements   

2.4.2  Situational elements               

2.5     Factors influencing fraud       

2.5.1  Institutional factors                

2.5.2  Organizational factor              

2.6     People involved in bank fraud 

2.6.1  Fraudsters within the bank    

2.6.2  Frauds committed by outsiders        

2.6.3  Fraud perpetrated through the combined efforts  of member(s) of bank staff and outsider(s)

2.7     Types of fraud     

2.7.1  Cashiering fraud  

2.7.2  Cheque frauds               

2.7.3  Clearing fraud     

2.7.4  Banker’s committee report on cheque frauds

2.7.5  Frauds involving manipulation of bank documents                

 

CHAPTER THREE:       

RESEARCH METHODOLOGY

3.0     Introduction

3.1     Research design  

3.1.1  Roles of the Central Bank of Nigeria

3.1.2  The role of the Nigerian Deposit Insurance Corporation (NDIC)                 

3.2     Sources of data and instrument of data collection

3.2.1  Primary data

3.2.2  Secondary data                       

3.3     Determination of sample size

3.4     Method of data analysis

 

CHAPTER FOUR:

DATA PRESENTATION AND ANALYSIS

4.1     Data presentation

4.2     Data analysis                

4.2.1  Respondents assessment of the impact of regulation and supervision on Nigerian banks

4.3     Hypothesis testing        

 

CHAPTER FIVE:           

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1     Summary            

5.2     Conclusion                    

5.3     Recommendations         

          Bibliography

 

 

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND TO THE STUDY

An advance-free fraud is a confidence trick in which the target is persuaded to advance sums of money in the hope of realizing a significantly larger gain. Among the variations on this type of scam, are the Nigerian Letter (also called the 419 fraud, Nigerian scam, Nigerian bank scam, or Nigerian money offer, the Spanish Prisoner, the Black money scam as well as Russian/Ukrainian scam (also extremely widespread, though far less popular than the former).  Both the so-called Russian and Nigerian scams stand for wholly dissimilar organized crime traditions, they therefore tend to use altogether different breeds of approaches.

The 419 scam originated in the early 1980s as the oil-based Nigerian economy declined.  Several unemployed university students first used this scam as a means of manipulating business visitors interested in shady deals in the Nigerian oil sector before targeting businessmen in the west, and later the wider population.  Scammers in the early-to-mid 1990s targeted companies, sending scam messages via letter, fax, or telex.  The spread of email and easy access to email-harvesting software significantly lowered the cost of sending scam letters by utilizing the internet.  In the 2000s, the 419 scam has spurred imitations from other locations in Africa, Asia and Eastern Europe, and more recently, from North America, Western Europe (mainly UK) and Australia.

The number ‘419’ refers to the article of the Nigerian criminal code (part of chapter 38: “obtaining property by false pretences; cheating”) dealing with fraud.  The American Dialect Society has traced the term “419 fraud” back to 1992.

The advance-free fraud is similar to a much older scam known as the Spanish Prisoner scam in which the trickster would tell the scam victim that a (fictitious) rich prisoner had promised to share (non-existent) treasure with the victim if the latter would send money to bribe the prison guards.

Insa Nolte, a lecturer of University of Birmingham’s African Studies department, stated that “the availability of e-mail helped to transform a local form of fraud into one of Nigeria’s most important export industries”.

Embassies and other organizations warn visitors to various countries about 419.  Countries in West Africa with warnings cited include Nigeria, Ghana, Benin, Cote d’Ivoire (Ivory Coast), Togo, Senegal and Burkina Faso.  Countries outside of West Africa with 419 warnings cited include South Africa, Spain and the Netherlands.

This scam usually begins with a letter or e-mail purportedly sent to a selected recipient but actually sent to many making an offer that will ultimately result in a large payoff for the intended victim.  The e-mail’s subject line often says something like “from the desk of Mr. (Name)” “Your assistance is needed”, and so on.  The details vary, but the usual story is that a person, often a government or bank employee, knows of a large amount of unclaimed money or gold which he cannot access directly, usually because he has no right to it.  such people, who may be real but impersonated people or fictitious characters played by the scammer, could include the wife or son of a deposed African or Indonesian leader or dictator who has amassed a stolen fortune, or a bank employee who knows of a terminally ill wealthy person with no relatives or a wealthy foreigner who had deposited money in the bank just before dying in a plane crash (leaving no will or known next of kin), a U.S solider who has stumbled upon a hidden cache ofgold in Iraq, a business being audited by the government, a disgruntled worker orcorrupt government official who as embezzled funds, a refugee, and similar characters.  The money could be in the form of gold bullion, gold dust, money in a bank account, so-called “blood diamonds”, a series of cheques or bank drafts, and so forth.  The sums involved are usually in the millions of dollars, and the investor is promised a large share, typically ten to forty percent, if they will assist the scam character in retrieving the money.  Whilst the vast majority of recipients do not respond to these emails, a very small percentage do, enough to make the fraud worthwhile as many millions of messages can be sent.  Invariably sums of money whichare substantial, but very much smaller than the potential profits, are said to be required in advance for bribes, fees, etc – this is the money being stolen from the victim, who things he is investing to make a huge profit.

Many operations are professionally organized in Nigeria, with offices, working fax numbers, and often contacts at government offices.  The victim who attempts to research the background of the offer will often find that all pieces fit perfectly together.  Such scammers can often lure wealthy investors, investment groups, orother business entities into scams resulting in multi-million dollar lose.  However, many scammers are part of less organized gangs or are operating independently; such scammers have reduced access to the above connections and thus have little success with wealthier investors or business entities attempting to research them, but are still convincing to middle-class individuals and small businesses, and can bilk hundreds of thousands of dollars from such victims.

If the victims agree to the deal, the other side will often send one or more false documents bearing official government stamps, and seals.  419 scammers often mention false addresses and use photographs taken from the internet or from magazines to falsely represent themselves.  Often a photograph used by a scammer is not of any person involved in the scheme.  Multiple ”people” involved in schemes are fictitious; the author of the “WEST AFRICAN ADVCNE FEE SCAMS” article posted on the website of the Embassy of the United States in Abidjan, Cote d’Ivoire believes that in many cases one person controls many fictitious persons used in scams.

1.2   STATEMENT OF PROBLEM

Commercial and merchant banks have lived and relied extensively and entirely on the process of gathering profit, expansion and gathering appreciable returns for the shareholders.

The realization of these objectives seems to depend on a host of factors like the introduction of modern technology, dedicated and efficient management highly skilled and experienced manpower, adequate knowledge and understanding of the economic system as well as the ability to effectively compete with other competitors in the banking business.

However, these objectives have not been completely achieved.  The achievement has been more of delusion than reality.  The constraints impending the realization of these objectives are myriad in nature, varying from the Central Bank of Nigeria’s tight fiscal and monetary policies to incompetence of bank’s management and staff and staff force.  In between these two extremes is a social problem called “FRAUD” a social parasite which is now fast cutting deep into the threshold of existence and survival of most Nigerian banks.

The problem of fraud in Nigerian bank is adversely affecting the stability of the country’s financial system and this has continued to constitute a source of concern to most economic analysts and astute financial gums in the business world.  The major motivation for fraud as we all know is financial gain, the “get-rich-quick” syndromes has hinder the entire facet of Nigerian economic.

Most banks executives detest the news of fraud in their respective banks.  In fact such news often sends disintegrating sock waves through their body system.  It also reveals a lapse in the bans, security and decision or operation process.  It may not be easy to quantify loss by banks to fraudsters.  In view of this realization a large sum of money are set out in the budgets of banks every year for the purpose of combating fraud to the detriment of further development of bank staff.

1.3   OBJECTIVES OF THE STUDY

The primary objective of this research is to find practical means of minimizing incidence of fraud in Nigerian banks.  Hence to achieve this objective, the following secondary objectives are to be pursued:

  1. To determine the magnitude and frequency of fraud in banks
  2. To identify the causes of fraud in banks
  3. To identify the various types of fraud and means employed in defrauding bank
  4. To recommend measures for reducing the incidence of bank fraud.

The study will also try to examine the party that bears the loss in case of an occurrence of fraud.  What provision does the legal system make as a deterrent to fraudsters?  From the study, the research will also try to identify the roles which banks and the society at large should play in brining fraud to its lowest ebb.

 

1.4       STATEMENT OF RESEARCH QUESTION

-              Advanced free fraud hinders a bank from attaining its goal within the stipulated period

-              Fraud cases appeared to be considerably lower in merchant banks than in commercial banks why?

-              Frauds committed by senior and management staff are usually few in number but they are big time fraud which always reflect high level sophisticated techniques in carrying them out.

-              Impact of technology has also been identified as another organizational factors with the introduction of advanced technology in telex and electronic funds transfer.

1.5       RESEARCH HYPOTHESIS

The researcher adopted the Chi-Square goodness-of-fit test to test the hypothesis. The Chi-Square statistics formula is given as
X2=    Summation of (Oi- Ei)2

 Ei

Where Oi = Observed frequency

Ei = expected frequency

The degree of freedom n = 5, V = 5-1=4

Level of significance = 5% or 0.05

Note: Ei = total frequency 450 divided by 5 = 90

HYPOTHESIS 1

Ho:    The supervisory and regulatory functions of the Central Bank (CBN) and the NDIC have been effective in curtailing distress in the Nigerian banking system

H1: The supervisory and regulatory functions of the CBN and the NDIC have not been effective in curtailing distress in the Nigerian banking system

1.6       RESEARCH METHODOLOGY

This involves the use of some statistical tools such as percentages, mean score and Chi-square test in order to make comparison, test the hypotheses and draw conclusions.  Percentages is a statistical tool that uses 100 as its base. It is simple and makes comparison easier – percentages are used in describing relationship.  Chi-square test provides a means of comparing a set of observed frequencies with a set of expected frequencies.  The test statistic for testing hypothesis is based on this quantity.

          Chi-Square         =        X2      =        S(O – E)2

                                                                         E

1.7       SCOPE OF THE STUDY

The research work covers only Nigeria banks within the period of 2000 and 2007.  Fraud occurs in almost every sector of the Nigeria economy but for the purpose of this study, discussion will be restricted basically to the banking industry.  Therefore, in order to attain the objectives of this research aspects of fraud in banking operation, information obtained is entrenched within the scope of data on number of fraud cases perpetrated in each bank, the different types of fraud, the amount of loss to banks and to customers, the category of person involved in fraud, the period of concealment and the incidence of collusion.

Furthermore, since the only latest source of compiled, accurate, attested and authentic data on fraud in Nigerian banks is that published annually by the Nigeria Deposit Insurance Corporation (NDIC).  The secondary data will be good assistance for the study and the results shall be heavily relied on for the purpose for the analysis of the research findings.

1.8       JUSTIFICATION OF THE STUDY

The banks are vital to the development of any nation.  They are in fact pivot of a nation’s economic growth.  The great resources at the command of the Nigerian banking sectors make it a vital factor in the process of restructuring and diversifying the productive base of the economy to reduce dependence on oil sector.

Nevertheless, the performance of the banking industry has been at a sub-optimal level.  This is due to an array of problems of which the issue of fraud is evil of the most intractable and monumental.  The magnitude of these problems and implication for the industry has inspired this research on fraud in banks.

Fraudsters can be found in and outside any organization and frauds are perpetrated independently of either of these two categories.  However, appreciable proportion of frauds in Nigerian banks today is committed through the joint efforts of both outsiders and banks staff.  This dual effort has made the problems of fraud appear more of a puzzle.  Some top executive members of banks who have assessed to information also indulge in this ungodly act.

This study is therefore necessary for the purpose of exposing the strategies and tactics of fraudsters.

1.9   ORGANIZATION OF THE STUDY

The research work is carefully structured into five chapters.  Chapter one will focus on introduction to the study, statement of research problem, objectives of the study, statement ofresearch questions, scope of the study, and justification of the study.

Chapter two will center on the literature review on the effect of advanced free fraud in banking system in Nigeria.

The third chapter considers the research methodology. 

Chapter four will the data presentation and the analysis of the findings.

Finally, the fifth chapter is the summary, recommendation and conclusion

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