Tackling Financial Crime in Nigeria

As loyal readers may know, I like to include a joke about the subject I am writing about. Naively, I thought it would be difficult to find a joke about fraud. Needless to say, I not only found many jokes about the crime, but found too many relating to Nigerian fraud. I will save readers the horror I experienced in reading those jokes – in any case most of them would fail the S decency test.

Here is our joke – A cashier asks, “Is this ₦500 note real?” Customer replies “It better be. I paid ₦100 for it.”

Financial crime in Nigeria is endemic, from the cash register all the way up to the boardroom. The number of attempted frauds reported to the Nigeria Deposit Insurance Corporation (NDIC) usually peaks at over 900, typically involving sums over ₦10 billion. The country’s defunct Oceanic Bank Plc and Intercontinental Bank Plc both evoke images of shattered investor confidence, with losses through the granting of unsecured loans, amongst other financial crimes. The scale at which these crimes are perpetuated remains a nightmare for corporate governance.

How to build a resilient banking sector

In addition to assessing the scale of financial crime in the private sector, this piece offers an approach to regulating financial institutions. This will lead to greater resilience in the financial sector and thereby, confidence in it. Effective regulation has to be comprised of not just adequate, but vigilant surveillance at all levels. Inspections by financial regulators have to seek information, and make sense of it. Regulators need to use information to understand the build-up of risk within the system, the nature of the inter-linkages between participants and links between the different types of financial risk. These risks do not only exist on banks’ balance sheets, they also exist within and between currencies, commodities and foreign exchange.

Vigilant Surveillance – Mission Impossible?

Vigilant surveillance is a grand term for a simple idea: The regulation and supervision of banks, premised on a rationale that problems in one institution can damage the whole financial system. Vigilant surveillance and resilience have not been fully achieved in Nigeria when one considers the scale of financial crime. The common problems in banks are insider abuse and breach of director duties. Creating more nightmares for investors, the dubious lending which Nigerian banks have engaged in has mostly been unrecoverable. In the now non-existent Group Merchant Bank, for example, about 80% of the loans were extended to directors. These increase the systemic risks which can bring the whole sector crashing to its knees. This makes the structural question simple – Are there structures in place, adequate to the task of managing the failure of a bank? Addressing these questions, it is important to continue mandating banks to provide compliance training for staff and dedicate budgets to this endeavour. This has been actively promoted in relation to terrorist financing by the Central Bank of Nigeria (CBN).

However, the stability of one bank does not ensure the stability of the whole. The channels for bank failures, in other words - systemic crisis, are inter-linkages through the payment system and inter-bank market (bank borrowing), and through contagion effects arising from loss of investor confidence. In the case of depositors, this means they take out their deposits, potentially causing a bank run. In the case of shareholders, this means they sell their shares.

Regulatory Failure?

In addressing the failure of banks and associated problems, regulators have to tackle instances of financial crimes in the country, which largely boil down to internal collusions amongst staff. In these respects, reports by the Nigerian Deposit Insurance Corporation (NDIC) hold that there have been over 738 ATM frauds. It also reports 2,352 fraud cases, 498 of which were attributed to staff collusion, showing an increase of 141 from 357 cases in 2010.These problems are largely internal but they have dangerous systemic consequences.

Efforts at strengthening Nigerian financial markets, implemented by the CBN, SEC and NSE, should not be hampered by rogue individuals. Failure to identify them will sometimes be an example of regulatory failure. Once regulation becomes adept at managing information and interpreting it, it has to consider macroeconomic trends and patterns. This is because, ensuring the stability of a bank, thereby protecting its depositors and shareholders, cannot be guaranteed by looking at the activities of that institution alone. In other words, vigilant surveillance has to be applied on a blanket basis, as patterns and trends need to be considered where they can hamper efforts at making Nigeria investor friendly.

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