FRAUD IN BANKING SECTOR: TYPES CAUSES PREVENTIVE AND CONTROL MEASURES(A CASE STUDY OF SELECTED BANKS).

ABSTRACT This study is taken to analyze bank fraud and how it is committed by internal   bank   staff,   external   parties   or   mixed   parties,   operating independently or in collusion with others. It examined the effects of fraud on banks and the entire financial system. Certain research methodology, research design and strategy were adopted for collection of primary and secondary data used in this research study. Data analysis and presentation was carried out using Simple percentages, Ordinary least square Regression analysis,  and  t-test  distribution statistical analysis  and  table  to  test  the validity  of  the  formulated  hypothesis.  It  was  found  that  there  is  no significant relation between the size of fraud in bank branch; also revealed is that there is no significant relationship between the Size/Amount of fraud in a bank and the ‘age’ of the banks in the banking sector. The conventional fraud prevention, detection and control techniques were found to be inadequate. It was revealed that the banking system has been exposed to fraudulent activities due to avarice and bad management in such a way that confidence in the industry is in danger of been eroded. The analysis of the types of fraud and forgeries perpetrated showed (hat the commonest types were, falsification, forgeries, embezzlement, suppression, theft, granting of illegal credits, and illegal withdrawals among others. Following the above, constructive recommendations were advanced and suggestion for further research studies on certain areas was made.

CHAPTER ONE

1.0      INTRODUCTION

This project study is undertaken to critically evaluate frauds in Banking sector;  types,  causes Preventive and  control measures. A case study of some selected banks in Enugu Metropolis. United Bank for Africa (UBA), First Bank of Nigeria, Union Bank Plc, Mainstreet Bank, will be undertaken.

1.1. BACKGROUD OF STUDY

Since the Research study is on fraud in banking sector, types, causes, preventive and control measures it will be worthwhile to start with bank and its origin in Nigeria, before delving into the subject matter proper.

WHAT IS BANK?

Lord Paget (1966:12) defined a bank or banker as a “corporation or person (or group of persons) who accept money on current accounts, pay cheques drawn upon such accounts on demand and collect cheques for customers, that  if  such  minimum services  are  afforded  to  all  and  sundry  without restriction of any kind. The business is banking business, whether or not other business is under-taken at the same time” R.S Sayer (1979:1) in his own words defined banks as institutions whose debt usually referred to as bank deposits are commonly accepted in final settlement of other debts.

From the above, it could be  inferred that before an institution is regarded as a bank, the principal aspect of its business must consists of receiving money for the credit of a current account, which the depositor could withdraw on demand by cheque.

In modern banking where banks have become financial supermarkets providing a wide variety of services, the above definition will certainly not be enough. Fortunately, this opinion appears to have received official support in Nigeria. In the Nigerian Banking Act of 1969, the term bank was interpreted as meaning “any person who carries on banking business”. Bank Amendment Decree No 3 of 1970 stated that bank business means “the business of receiving monies from outside sources as deposits irrespective of the payment of interest and the granting of money loans and acceptance of credits or the purchase of bills and cheques or the purchase and sale of securities for accounts of others or the incurring of obligation to acquire claims  in respect of  loans  prior to  their  maturity or  the  assumption of guarantees and other transactions as the commissioner may, on the recommendation of the CBN, by order published in the Federal Gazette designate as banking business”.

ORIGIN OF BANKING INSTITUTION IN NIGERIA

Commercial banking business started in Nigeria with the establishment of the African banking corporation in 1892 (The predecessor of the present day First Bank of Nigeria Plc) Nwankwo (1991:13). The emergence of the pioneer bank in Nigeria sparked off the establishment of others. Fraud is an age-long problem, it is a global phenomenon. It is not unique to the banking industry or peculiar to Nigeria. The Nigerian society, particularly since after the civil war is bedeviled with the desire to get rich quick. Everybody wants to make it within the shortest possible time. Because the banks deals with money and since the ultimate ambition of the ‘want to get rich quickly” is to acquire money, the banks have become persistence targets for fraudsters. From the above one would ask what then is fraud.

WHAT THEN IS FRAUD?

The United Kingdom (UK) Financial service Act 1986 defined fraud as an irregularity involving the use of criminal deception to obtain for instance an unjust or illegal advantage.

In a similar vein, SAFE Associates ltd (2002) in its lecture material defined fraud as an international misrepresentation of financial statements/records by one or more individuals among management, employee or third party. It involves the use of criminal deception to obtain an unjust or illegal advantage.

The  oxford  Advance Learners  Dictionary of  current  English  defined fraud as a criminal deception. In legal terms, fraud has been defined as the act of depriving a person dishonestly of something to which he is or would or might be entitled but for the perpetration of fraud.

In its  lexical meaning, fraud  is  an act  or course of deception or trickery deliberately practiced in order to gain some advantage dishonestly.

From the  above, the  researcher sees  fraud  as  all  surprise, tricks, cunning, deception or other unfair means willfully used to cheat any person or group of persons

FUNDAMENTAL ELEMENTS OF FRAUD.

There is a general consensus amongst criminologists that fraud is caused by three basic elements called “WOE”- will, Opportunity and Exit i.e.  the  will to  commit the  fraud  by  the  individual, the  opportunity to execute from sanctions against successful or attempted fraud or deviant behavior.

Detective Egwu A.K. (2008:23) in his unpublished work- “MIS as a tool for fraud detection and control in Banks” listed the below as a prove and elements of fraud

(i.) There must be decent, though the motive is immaterial

(ii.) There must be damage to the person deceived, even where there is willful false representation before a course of action could arise.

(iii.) There must be a substance in which the fraud is based i.e. the object of the fraud e.g. cash, benefits, properties etc.

ORIGIN OF FRAUD

Karwai S.A(2002), maintained that it is very difficult to trace the origin of fraud. However, in the case of fraud perpetration, he cited Adewole (1990) who opined that “any minor mistake by an individual which is not detected in time or at all makes such an individual to think that the success of such mistakes  may  be  taken  advantage  of  and  may  proceed  to  enact  more mistakes, this time deliberately so as to test the systems check and balance. He stressed that where a deliberate mistake is made and is successful, the individual takes benefit of it for selfish end. He refers to this behaviour as fraud since it is now a deliberate action aimed at dishonestly enriching the individual who is definitely going to continue with such errors until he eventually graduate to a hardened fraudster.

It can be therefore, deduced that the genesis of fraud is traceable to the committal of minor undetected mistakes, which are consequently capitalized upon by individuals intending to defraud

Bright (1982), lamented that the cancer of fraud crept into the Nigerian banking industry right from its primordial days in 1892 and has remained there without any hope of elimination. Due to the above fact, certain statement of problems arises thus.

1.2     STATEMENT OF PROBLEMS

The sub-optimal performance of the Nigerian banking industry is due to an array of problems. Of these problems, the issue of frauds in our banks is one of the most intractable and monumental. The magnitude of fraud, its types, causes, preventive and control and its implications for the banking industry has inspired this research study.

Fraud is perpetrated in our banks in various forms. It cut across all sectors of the economy but more prevalent in banking sector and the size of an enterprise and the nature of business usually determine the size and degree of fraud perpetrated in it. The incidence of banks fraud has assumed an alarming degree in recent times, with little or no hope of stemming it completely. It can lead to huge financial losses to both banks and their customers, and of course grounding of a business set up in some cases. Awareness should be created of which such problems as social, institutional and  environmental  factors  as  well  as  penalties  for  offenders  play  in perpetration of fraud in Nigerian banks. All manners/types of fraud, be it

internal, external or mixed frauds as classified by (Wole Adewunmi (1986:2) could be prevented, controlled or reduced to the barest  minimum by the use of several measures among which are adoption of strategies that will   block   loopholes   that   encourage   fraud,   maintenance   of   good management control systems, very sound internal control measures among others.

1.3     OBJECTIVE OF THE STUDY

The broad and primary objective of this study is to find practical means of minimizing or eliminating the incidence of bank frauds in the banking sector. To achieve thus, the Following secondary objectives have been specified thus,

i.        To  review  existing  literatures,  collect  and  collate  information on fraud in banks

ii.       To identify the causes of fraud in banks

iii.      To identify the various types of fraud perpetrated in banks

iv.      To highlight the various means employed in defrauding banks

v.       To  identify  various  factors  internal  or  external-  that  induce  the perpetrators of fraud in banks

vi.     To determine the magnitude and frequency of fraud in banks vii.     To examine the impact or effects of fraud on banks.

viii.   To   analyze   the   strategies   and   control   measures   available   to management and the Government for fraud detection, prevention and control.

ix.     To make necessary recommendations based on my findings and

x.      To identify the means through which the recommended measures can effectively be implemented.

1.4 SIGNIFICANCIEOF THE STUDY

This is research study is considered significant or beneficial in the following ways.

(i)     The findings of this research study will be beneficial to the bank management since they will now be more equipped to detect, prevent and control fraud in their banks.

(ii)      Management team of other business enterprises and parastaltals will in similar vein benefit from this research result as the bank management

(iii)    The  study  will  be  of  immense  benefit  to  students,  scholars  and potential researchers who will find this work interesting and challenging as a base for further academic investigations and research

(iv)  Government and related regulatory bodies would find this work valuable in having an in-depth knowledge of the impacts of frauds in banks  and  the  economy  as  a  whole.  It  will  also  be  a  guide  in instituting appropriate penalties to punish offenders and to deter potential offenders.

(v)     Finally, this research work will be of assistance to legal authorities and investigators of fraud as the causes and the modus operandi of fraud and fraudsters have been high-lighted.

1.5     RESEARCU QUESTIONS

The emerging research questions seek answers to the problems being investigated

i.        What is bank fraud?

ii.       Is there an incidence of fraud in Nigeria banks?

iii.      Why do we have fraud in banks?

iv.      What are some of the causes of fraud in banks?

v.       What are the common types of fraud in banks?

vi.      What is the relationship between the size of fraud and bank age of existence?

vii.     What category of people commits fraud in banks?

viii.    What strategy do fraudsters employ in defrauding banks in Nigeria?

ix.      What factors induce frauds in banks?

x.       To what extent and frequency does fraud occur in Nigerian banks?

xi.      What is/are the impact of fraud in banking sector and the economy as a whole?

xii.     Can bank fraud be minimized, controlled or prevented?

xiii.    What are the control and preventive measures of fraud in banks?

xiv.    How can the detection, control and preventive measures of fraud be effectively implemented in Nigeria banks?

1.6 HYPOTHESIS OF THE STUDY

For the realization of the objectives and confirmation of the results of this research study, the follow hypotheses were tested.

HYPOTHESIS ONE

(I) NULL HYPOTHESIS (H0)

There is no relationship between the ‘size’ of fraud in a bank and the

‘size’ of the bank branches in the banking sector. The size of fraud is defined in two ways; the number of fraud cases and the amount involved.

Thus Null hypothesis I is statistically expressed as follows. H0; Y1 ≠   F  (X)

Y2 ≠ F (X)

Where,

H0 = Null hypothesis

Y2 =Number of fraud cases per bank branch

Y2 = Amount of money involved in fraud per bank branch

X = Staff strength per bank branch f = Bank branch

(ii) ALTERNATIVE HYPOTHESIS (HA)

There is relationship between the ‘size’ of fraud in a bank and the size of the branches. The size of fraud is defined in two ways as in above (Null hypothesis)

The Alternative hypothesis is statistically expressed as follows. HA, Y1 = f (x)

Y2 = F (X)

Where all variables are as defined previously above, and

HA = Alternative hypothesis.

HYPOTHESIS TWO

(1) NULL HYPOTHESIS (H0)

That there is no relationship between the ‘size’ of fraud in a bank branch and the ‘age’ of the bank branch i.e. age = no of years the branch has existed statistically.

H0 Y1 ≠ F (P) Y2    ≠ F(P) Where

P = Age of a bank branch in existence

(ii) ALTERNATIVE hypothesis (HA)

That there is relationship between the ‘size’ of fraud in a bank branch and the ‘age’ of the bank branch. –

Statistically HA; YI = F (P) Y2 = F (P)

HYPOTHESIS THREE

(i)      NULL HYPOTHESIS (H0)

That relatively inexperienced staff of a bank are not more likely to commit fraud.

Statistically

H0; R F (q) Where

The variables are defined above

1.7 SCOPE OF THE STUDY

The study will be limited to some selected banks in Nigeria which have experienced incidence of fraud and also give returns on fraud to the CBN and the Nigerian Deposal insurance corporation (NDIC).

The information used for the analysis covered the fifteen year period between 1996 and 2011. Information was obtained on the number of fraud cases,  different  types  of  fraud  and  the  frequency of  each,  the  amount involved  is  the  amount  of  loss  to  banks  and  to  customers, the  person involved, period of concealment, the incidence of collusion, the causes of fraud and the level of effectiveness of fraud preventive measures. The study also focused on areas relating to staff strength, sizes of deposits, loans and advances, age or years of banking experience of fraudsters and punishment on fraudsters.

1.8 LIMITATIONS OF THE STUDY

The limitations of this study can be grouped under the  following constraints; the environment, time, dearth of literature, finance or cost.

THE ENVIRONMENT: Getting probing information from the banks was very difficult. Many of the respondents in banking environment refused to divulge valuable information for fear of committing espionage against other banks.

T1ME: There is scarcely enough time to carry out a detailed and extensive collection of adequate data for a 100% research study.

DEARTH OF LITERATURE: Lack of adequate and reliable literature impacted negatively on the review of related literature of this topic. FINANCE/COST: Non availability of adequate finance and the cost of distributing the questionnaires as well as that of data collection hindered my envisaged wider coverage of the researcher terrain nationwide.

1.9     DEFINITION OF TERMS

The following terms and concepts are defined within the context of this project.

BANK:  This is an institution that has license to be so called and performs the following basic function; accepting deposits from the general public, permitting  money  to  be  withdrawn  or  transfered  from  one  account  to another and lending the surplus of deposited money to customers who wish to borrow.

BANKING: Business activity of banks such as activities in central bank, Deposit cadet, and Micro finance houses which involves money terms. FRAUD: The action or an instance of deceiving somebody in order to make money or obtain goods illegally.

HYPOTHESIS: This is an unproven statement of a research question in a testable format.

MASTERMIND: A person who is  unusually intelligent, especially one who plans the work of others.

PERPETRATOR: A person who commits a crime or does something that is wrong or evil.

PUBLIC:   People   in   general   such   as   the   employees,   shareholders, customers,  government,  educational  bodies,  religious  bodies,  military, police, students etc.

SAMPLE: A person of a population selected for the study.

SAHREHOLDER: An owner of shares in a business company.

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