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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT © 2013 Institute of Interdisciplinary Business Research 253

JANUARY 2013

VOL 4, NO 9

THE NATURE, EXTENT AND ECONOMIC IMPACT OF FRAUD ON BANK

DEPOSITS IN NIGERIA

Kanu , Success Ikechi (Corresponding Author)

(B.sc, PGD, MBA, M.sc, ACIPM)

Department of financial management technology, Federal university of technology,

Owerri Imo State, Nigeria

Okorafor, Ekpe Okay (PHD)

Department of financial management technology, Federal university of technology,

Owerri, Imo State, Nigeria

Abstract

This paper is set out to review the various forms of fraudulent practices, and their impact on bank deposits in Nigeria.

It sought to determine the relationship between „‟Amount of bank funds involved in fraud‟‟,‟‟ Amount of bank funds

lost to fraud‟‟ and the total deposit liabilities of insured money banks in Nigeria. It also sought to ascertain the fraud

types that inflicted the highest amount of financial losses on bank deposits and the variants that bank deposits are

more susceptible to. Data set was analyzed via two major approaches, namely the descriptive and inference statistics.

While the inference statistics was employed to analyze the formulated hypothesis, other objectives of study were met

with the use of descriptive statistics. The outcome of research reveals that the relationships are significant and that the

models can be used for meaningful analysis and decision making. Again it was ascertained that fraudulent

withdrawals are the most frequent fraud type. While bank deposits were found to be more susceptible to clearing

fraud, miscellaneous frauds turned out to have inflicted the highest amount of financial losses on bank deposits in

Nigeria. Based on the findings of this study, various aspects of banking operations that demand more attention were

highlighted. Preventive as well as curative solutions were proffered. The essence is to sanitize and minimize the

impact of fraud on bank deposits in Nigeria.

Keywords: ATM fraud, clearing Fraud, fraudulent withdrawals, Forged Cheques, Risk asset manipulation

1.0 Introduction

The incidence of fraud in the Nigerian banking industry has assumed an alarming proportion of late. With the

deregulation of the banking system in the early 1980s, the pace at which banks were established increased in an

unprecedented manner. This development brought in its wake physical expansion and growth, both in structure and

manpower. (Benson & Edwards‟s series) .The Banking consolidation exercise which commenced in 2005 further

accentuates rapid development and expansion of Nigerian Banks within and outside the country. Poaching of

experienced and seasoned workers across all cadres to fill the ever increasing job openings in the banking sector

became the order of the day (Nwaze: 2006). With this development, all manner of staff with questionable characters

were employed.

In the contrast, general poverty amongst the citizenry coupled with high degree of unemployment in the larger society

made survival a herculean task. Corruption and other forms of vices become easily identifiable with Nigerians,

irrespective of their gender, social status and professional callings. Under this dispensation, frauds have grown in

scope, nature, methodology and dimensions as the banking industry advances. The rate, frequency and volume of

financial losses have been a major source of concern to the regulatory agencies.

Government and public statements have been issued because of this cankerworm, which has eaten deep into the

fabrics of the society. Unfortunately, the bane of society is greed and the philosophy to „‟ get rich quick‟‟ is now the

order of the day. (Benson & Edwards‟s series). According to Nwaze (2006), it would almost amount to an

understatement to say that fraud has come to stay. It has been around since the beginning of time and would certainly

continue to be an issue until the end of time.

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Frauds occur in almost all facets of human endeavor i.e. social, business, commerce, government, education, and

family including religious organizations. Employee dishonesty is as old as the work place itself. Frauds have assumed

different dimensions, albeit with increased sophistication. Hence forgeries, deceit and other unwholesome practices

have continued to be a way of life and the practitioners have flourished overtime at the expense of the larger society.

Incidentally, banks are their major targets in recent times notwithstanding the increased use of technology in banking

operations. No bank appears safe from the menacing epidemic. The jitters are even felt beyond the seemingly secured

vaults of the nation‟s most vibrant sector.

Due to the pivotal roles of banks in the growth and economic development of any nation, it has become very

necessary to protect this institution from the antics of fraudsters. Thus, the purpose of this research is to discuss from

practical point of view the various forms of bank frauds, undertake an impact assessment of this dastardly act and

showcase the devastating blow it has dealt on bank deposits, collective psyche and stability of the banking industry

and to the generality of Nigerians.

1.1 Statement of research problem:

Though it appears the banking industry is one of the most profitable within the economy, higher performance could

have been attained in terms of their performing a leading role in the reactivation of our economy, creation of wealth

to her shareholders and rendition of social obligations to the larger society. The sub optimal performance of the

Nigerian banking industry is due to an array of problems, of which fraud is a factor to contend with. Fraud has

become one of the most intractable and monumental problems in recent times. As a matter of fact, banks have

become the main target of conmen for survival. It is not an understatement that only well managed banks especially

with respect to fraud prevention would survive in the coming years.

It is on record that the spate of distress that ravaged the banking industry prior to the banking consolidation of 2006

was not entirely hinged on management‟s ineptitude alone. The activities of fraudsters and the inability of banks to

foil the frauds were their „‟Achilles heel‟‟. The high turnover of frauds, theft, defalcations and forgeries in the

banking system is capable of undermining the growth, development and stability of banks which at the moment

seems to be doggedly affecting the financial sector of the economy.(FITC:1982)

Ovuakporie (2004) observed that depositors have had to contend with the insecurity, this hydra-headed monster in the

banking system poses to their funds and the ugly consequence of course is having a majority of the banking public

losing confidence in the banking industry and therefore keeping a large amount of bankable funds away from the

banking system.

Another ugly aspect of this phenomenon is the frequencies, complexities and magnitude of fraud cases. They seem to

be progressively moving up a trend line. (FITC: 1982). With a whopping sum of (=N=17.54 billion) lost to fraudsters

in 2008, that amount is by no means, a small sum of money. This figures, balanced against the argument that perhaps

only a fraction of such incidents are reported, has indicated the heavy toll frauds have on deposit liabilities in

particular and on the vibrancy of the banking system in general.(NDIC:2010).

Chart1

Source: Graph plotted from data collated from NDIC Annual reports.

As the Nigerian economy struggles to find its foothold, a new twist has emerged that is helping to exacerbate the

menace of fraud in the banking institution:

Banks are now cutting costs and laying off staff to remain afloat

Bank employees are under intense pressure to retain their jobs

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While the morale of bank employees are down, their fears are up

A combination of these conditions has created an enabling environment for insider related frauds to thrive.

Irked by the volume of frauds in liquidated banks, the federal government of Nigeria promulgated the „‟Failed Banks

(Recovery of Debts) and financial malpractices in Banks‟‟ decree No 18, 1994. The decree was meant to recover

loans that were fraudulently granted by bank officials or directors to their cronies. (Nwude: 2006). Ironically, while

the government and regulatory authorities are busy exploring and fashioning out strategies to curtail the strange-hold

of frauds on the banking system, the fraudsters are busy „‟engineering new methods and tricks „‟ to wreck more

havoc on the system through fraud (Ogunleye: 2010).

The impact of fraud on bank deposits is better appreciated from the standpoint of cash depletion. The phenomenon is

capable of creating a liquidity trap in the entire banking system and could possibly cause a bank failure depending on

the size and frequency of occurrence. (NDIC: 2010).

Centrally, the study is intended to investigate the impact of fraud on bank deposits. It will seek to determine the

relationship between the amount of „‟ Bank funds involved in fraud‟‟ and amount of „‟ Bank funds lost to fraud‟‟ .It

will also seek to ascertain the fraud types that inflicted the highest amount of losses on bank deposits and the variants

that bank deposits are more susceptible to. This is with a view to creating the right sense of awareness and urgency

required to stem the tide of fraud in the Nigerian banking industry

2.0 Literature Review

What is fraud?

Black‟s law dictionary (6th

edition, 1990) has defined fraud as „‟an intentional perversion of truth for the purpose of

inducing another, relying upon it to part with some valuable thing belonging to him or to surrender a legal right. A

false representation of a matter of fact, whether by words or by conduct, by false or misleading allegation or by

concealment of that which deceives and is intended to deceive another so that he shall act upon it to his legal injury.

Anything calculated to deceive, whether by a single act or combination or by suppression of truth or suggestion of

what is false whether it be by direct falsehood or innuendo, by speech or silence, word of mouth, look or gesture.

2.1 Theoretical framework on fraud

The relevant theories on fraud are briefly reviewed below:

Differential Association theory as postulated by Edwin Sutherland (1883-1950), states that Crime is learned as we

learn any other subject or trade and that learning of criminal behavior occur with other persons in a process of

communication.

The fundamental observation of Donald Cressey (1919-1987), in the theory of fraud triangle was that fraud is likely

to occur given a combination of three factors i.e. Pressure, (Motivation), Opportunity and rationalization

Albretch et al emphasized in the theory of fraud scale that, when situational pressure and perceived opportunity are

high and personal integrity is low, then fraud is much more likely to occur

According to Wolfe and Hermerson(2004), in the theory of fraud diamond, an individual's capability, personality

traits and abilities can play a major role in determining whether fraud may occur. While opportunities can open the

doorways to fraud, incentive and rationalization will attract people to it, but such an individual must have the

capability to recognize the open doorway as an opportunity and should be able to take an undue advantage of the

identified loopholes.

Social learning theory on fraud postulates that if deviant behaviors are reinforced and alternative behaviors are not

reinforced as strongly, then an individual is likely to engage in fraudulent / deviant behaviors.

The theory of work place deviance reiterates that employees steal primarily as a result of workplace conditions, and

that a lowered rate of employee theft is a by-product of a management team that is responsive to employee‟s plights.

The theory of hyper motivation opines that ’’ Given a sufficiently powerful motivation to commit an act of fraud,

people are generally more than capable of rationalizing why it does not in fact conflict with their own ethical

precepts. And once they have taken the first step towards unethical behavior, subsequent steps into abyss of

immorality gets progressively easier. The basic condition was that of a visceral state, that can lead an individual into

an action that one would normally have deemed unacceptable.

According to the Anomie theory on fraud, in every competitive capitalist society, the other members of the society

who are excluded from access to legitimate means to success and stardom will experience a sense of relative

deprivation which they try to relieve by way of social vices like(1) aggressive criminal behaviors, like bank frauds,

and armed robbery attacks,( 2) Aggressive revolutionary behaviors like Coup de tat in the military and (3) A retreat

into psychosomatic illnesses like drug addiction, alcoholism ,etc

The American dream theory posits that in a given corporate environment, to pull an impressive level of

accomplishment, a strong pressure to succeed is mounted on executives to pass through a narrowly defined way. To

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overcome the inevitable challenges, desperate managers pass through the fraudulent path to achieve a measure of

success when others could not.

The Potato Chips theory explains that fraud can be additive. If the perpetrator is not caught in the act, he gets bolder

to commit more fraud and eventually makes a mistake that will expose him. Fraud has therefore been likened to a

person that eats a potato chip, but may never be satisfied

The Rotten Apple theory opines that good and bad conducts within corporate organizations are infectious. Fraudulent

actions by supervisors and top management can easily be emulated by their subordinates. Similarly, good conducts

exemplified by top management will be emulated. This poses a challenge to management that whenever a „‟ rotten

and fraudulent apple‟‟ is identified in the organization, it must be quickly plucked off to ensure it does not

contaminate the other good fruits on the tree.

A tip of the iceberg theory posits that whenever fraud is discovered, it must be fully investigated and probed to its

foundation. On many occasions, a massive fraud may be disguised as a minor one and even as an innocent error.

The theory of low hanging fruits refers to frauds of minor value but with high frequency. The temptation is to

overlook items of low amount in the cause of investigations, but this can be dangerous because frauds of low amounts

and high frequency can equally be devastating to the bottom line.

The addition by subtraction theory explains that whenever any person is found guilty of fraud, he or she must be

fired, irrespective of the amount involved and his or her position within the organization

Travis Harchis(1969), in the social control theory proposes that exploiting the process of socialization and social

learning helps to build in self control in individuals and thus, reduce the inclination to indulge in behavior recognized

as anti -social

The cognitive theory asserts that fraudsters are naturally intelligent and are imbued with high intelligent quotient. The

implication is that organizations should watch out for those staff that are tagged „‟smart‟‟ and rated „‟indispensable‟‟.

The Differential opportunity theorists see fraudsters as victims of unequal opportunities, structures and the obstacles

to legal opportunities that lower class citizens need to overcome in order to achieve success.

The Social ecology theory states that crimes are high in areas characterized by urban decay and large scale

unemployment, in such a manner that control agents cannot function properly

Lastly, the labeling theory posits that some individuals tend to internalize and accept ‟‟ a label‟‟, a criminal or

fraudulent concept or tendencies to which an audience (say the law enforcement agencies) are looking out for and

have associated them with.

2.2 Conceptual Framework on fraud

Having reviewed the theoretical framework on fraud, we now shift our research focus to basic conceptual framework

surrounding this study. According to Adebisi (2009), there are three forms of fraud. They are the internal, external

and a combination of internal and external frauds.

Internal fraud: This is a fraud made against an organization by an insider- say a staff. If the staff is not capable of

starting and concluding the whole process, he may carefully select a „‟TEAM‟‟ within the organization

External Fraud: This is a fraud perpetrated by outsiders. This is the exact opposite of internal fraud.

Combination of Internal and External Fraud: This is often referred to as „‟collusion‟‟. Fraud in a bank can be

committed by a bank customer, bank staff or a combination of staff and customer or third parties. This is very

common and the success rate is higher than the first two. Fraudulent transactions in organizations such as banks could

equally be classified according to fraud type. This in turn is divided into three broad categories, namely by flow,

victims or by Act.

2.2.1 Methods through which Frauds are perpetrated in the Nigerian banking industry. There are various methods through which frauds are perpetrated in the Nigerian banking industry. The list is not

exhaustive as new methods are devised with time. The most important and common methods according to Benson

and Edwards (2006), Nwaze (2009) and Adebisi (2009) are:

Mail Fraud: This is a process whereby the content of a duly authorized mail originated in a bank is converted to the

benefit of illegitimate recipient.

Tellering Frauds: This is the act of stealing from counted cash by a bank staff. This could come in the form of

pilfering, teaming and lading and deposit suppression. Others include unauthorized withdrawals, vault / till cash

manipulations and the manipulation of foreign currency in tellers till or vault.

Clearing fraud manifests mainly in the use of cheques to fraudulently obtain cash. In Nigeria, the major types of

frauds committed with cheques, are: Presentation of forged cheques, Cheque substitution, Suppression of clearing

cheques, cheque cloning, cheque kiting, Issuance of „rubber‟ cheques. Forgery of signatories and re-representation of

already paid cheques through insider assistance.

Fund transfer frauds can be local or international, e.g. Money gram, Western union etc. Fraudulent activities through

this channel could include identity fraud and fake confirmation:

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Fraudulent activities could come via manipulation of Fixed Deposit transactions. This includes fixing of fixed

deposits above approved rates, Back value dating of fixed deposit transactions and seeking for undeserved rate for

customers, to the detriment of the of the bank etc..

Manipulation/ Conversion of Assets: Some bank assets i.e. consumables, e.g., photocopying papers, staplers, biros,

pencils, fuel, etc, as small as they are, can easily be converted by staff to personal property to the detriment of the

bank .Others include income leakages, over invoicing/expense padding

Risk Asset Manipulation: Loans are the commonest type of credits granted by banks and experience shows that their

vulnerability into fraudulent manipulation begins as soon as the first requests are made. However, it has also been

confirmed that at any stage, most- loan frauds are perpetuated with the active collaboration of bank employees. The

Common categories of loan fraud includes:( i) Manipulation of facilities, ii) Unauthorized Facilities,(iii) Excess

above approved limits: iv) Expired Facilities: (v) Swapping of credit facilities.(vi) Selling of Bank Draft/Certified Cheque on

insufficient funds.(vii) Giving of false financial accounts by some deceptive customers, as well as giving of false guarantees and

presentation of false collateral etc .

Computer fraud: Computer fraud is more sophisticated than the manually processed fraudulent activities. It is any

fraud accomplished by tampering with computer programs; data files, operations, equipment or media, resulting

in losses to the bank whose computer system is manipulated. The following are examples of computer frauds that

are perpetrated in the banking systems on a regular basis (i) Program Manipulation,(ii) Data manipulation,

(iii)Transaction Entry Fraud:(iv)Stealing of passwords etc.

Electronic Banking Fraud (E-fraud): While the development of e-banking has brought with it new products and

ways of doing business, it has also spurned a wide variety of frauds and ways of perpetrating them. The nature of

perpetration is often the internet or electronic card products-hence the term e-banking frauds or cyber-frauds.

Electronic banking frauds are perpetrated via (a) ATM/ Card– related Frauds, (b) Spam Mails / denial of services

(c) Hacking / Unauthorized Access (d) SWIFT frauds (e) Money Transfer Frauds (Western Union Money

Transfer & Money Gram)

Advance Fee Fraud (419): The dynamics of Advance Fee Fraud is to trick prospective victims into parting with funds

by persuading them that they will receive a substantial benefit, in return for providing some modest payment in

advance

Counterfeit securities: Daily huge sums of money are lost by banks through fraudulent use of counterfeit financial

documents. Apart from money itself, other financial instruments and documents are susceptible to forgery, a trend

made easy with the advent of modern photographic and printing equipment.

Account Opening Fraud: In the last few years many banks have lost money through corporate and personal -

account - opening frauds. Some of these frauds would have been prevented had the banks applied their standard

account-opening controls.

Money Laundry fraud: Money laundering is a means to conceal the existence source, or use of illegally – obtained

money – by converting the cash into untraceable transactions in banks. The cash is disguised to make the income

appear legal.

Insider Dealing Fraud The impact of Insider dealing fraud is better appreciated from the standpoint of supplying

insider related information that are used in defrauding a bank..

Executive or management fraud is characterized by lack of transparency on the part of Board, management, and

officers of some banking institutions in financial reporting and transactions with clients and unsuspecting members of

public. The more common types of executive fraud include, but are not limited to the following (i) Foreign Exchange

Scam, (ii) Unethical Balance Sheet Management iii) Illegal bank charges, transactions, and unfair dealings by banks

against their customers iv) Cross dealings to conceal violation of single obligor limits (v) Loan Application through

fronts,( vi) Foreign Exchange Transfer Profiteering vii) Business Development/ Public Relations Payment viii) Loan

Recovery Fraud (ix) Cost of fund: Interest Padding (x) Property Rental Fraud xi) Over–invoicing on Purchases and

other Contracts: xii) Utilization of Bank‟s Time and other Resources, xiii) competition with Employer and Financial

Statement fraud.

Lastly, in spite of the seeming tamper proof measures, fraudsters still perpetrate fraud on banks via letters of credit.

2.3 Causes of Fraud

According to Benson and Edwards (2006), Nwaze (2009) and Adebisi (2009), there are many causes of fraud,

depending on the enabling environment. We will focus our attention on the common ones under the following

classifications: Social, technological and legal. Others are personal and management. These are briefly discussed

below.

Social: The following social issues are capable of causing or encouraging fraud:

Placing of high value on accumulation of wealth by the society without regard for the source.

Non reward of honesty within a system; in which case, honest staff are regarded as slow and stupid

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The promotion of nepotism in office where by only those with people in „‟high places‟‟ or high deposit

mobilizes who have relations or people holding sensitive political positions are favored,

Placing less emphasis on professionalism, as has been the case in recent times where by having a better or

related qualification becomes meaningless. This way some very intelligent staff gets aggrieved and often

constitutes a threat to the organization when dissatisfied.

Technological

Continuous advancement in technology constitutes a major factor in enhancing fraud. The easier things

become the more it is for fraudsters too.

The cost of perpetrating fraud using available technology is very low.

Technology facilitates near perfection of documents‟ replication.

It has turned the world to a global village. It has removed physical boundaries, hence fraud can be

perpetrated along far distances

Proceeds from fraudulent activities can be obtained with ease, e.g. via electronic money transfers.

Most of the technological fraudsters are youths with highly developed minds and are often influenced by

successful peers.

Technological frauds are not easy to detect or prevent. There are so many user points worldwide where such

frauds can be perpetrated.

Technological development is a continuous process. While a particular fraudulent act is being detected and

prevented, other methods are being develop

Legal: The legal system causes or encourages fraud in the following ways:

Most fraudulent cases are “bailable offences‟‟, hence perpetrators in most cases get off the hook even when

caught.

Fraud prosecution requires “due process of the law”. This involves a careful but very long investigation

process before the culprits are brought to book.

Sometimes when “suspects‟‟ or known fraudsters are arrested, they are discharged by the court for want of

evidence. Documents that look like clear evidence to a layman are inadequate before the law.

The rot in the law enforcement arm of the legal system i.e. police, judiciary etc, also assist fraudsters. In

most cases, fraudsters settle their way out

Personal: The following are personal issues that have been found to cause, influence or encourage fraud:

There are professional criminals whose specialty is to defraud corporate bodies and banks. They go around

recruiting interested people with impaired character.

Research has shown that some people have insatiable appetite for adventure- criminal or otherwise. Such

people will steal if they have opportunities, not withstanding their status or material

possessions(Kleptomaniacs)

Moral upbringing among people varies. While some parents pay attention to this important issue at home,

others leave it to teachers, pastors or Islamic scholars.

Wrong choice of friends or mentors can link one to fraudulent people. Such persons may be enticed with

generous cash or material gifts before the „‟subject‟‟ is introduced to them.

Some people are from good homes, attend good schools and have very good or refined religious

backgrounds but they have week minds and can easily be convinced.

Some fraudsters believe in the use of their „‟crime fathers‟‟, friends or parental influence to slow down

investigation. These „‟backers‟‟ are usually influential and may call on their big friends in high places to

rescue their children or „‟boys‟‟ from justice. In the process, the entire syndicate members could be let off

the hook.

Management actions or inactions could cause or create a fertile ground for fraud in banks such as:

Recruitment of staff without rigorous character checks from reliable source like schools attended, previous

employers etc.

Placement of high premium on paper qualification to the detriment of performance, causing certificate

manipulation and other fraudulent acts.

Low remuneration package when the organization is perceived through its publications and utterance of key

officials that they can afford to pay their staff better than they are doing.

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Weak internal controls, checks and un-reconciled accounts/ books on a timely basis

Delay or total neglect of regular internal and external audits;

Use of inexperienced staff in strategic positions to save or reduce costs.

Total neglect of staff training.

Lack of serious penalty such as prompt dismissal when fraud takes place and the culprits are found.

Substandard or lack of security equipment like fireproof safe, to keep security items and telephone, fax and

e-mail or internet facilities to contact third parties when confirmation is required.

Loose or generous approval / authorization limit in an organization.

Unrestricted access to the computer database

Placing higher responsibilities and confidence on one staff, simply because he is perceived to be efficient or

competent.

Vesting of so much authority on one single individual.

It is on record that frauds that could be attributed to personal causes are the most difficult to correct because habits

„‟die hard‟‟. The social system can be modified, technological solutions may be devised, the law can be adjusted and

corporate management can include ethical standards in their operating manual, but human personal traits are difficult

to control!

2.4 Identified fraud types prevalent in the Nigerian banking Industry

The regulatory authorities (Central Bank of Nigeria (CBN) and the Nigerian deposit insurance corporation (NDIC),

have identified the under listed 18 fraud types as the prevalent modes through which deposits are frittered away in

Nigerian banks. This includes:(1) Tellering fraud, 2) Falsification of accounts,3) Forged cheques with forged

signatures 4) Printing of bank documents illegally, 5) Clearing fraud,6) Computer Fraud,7) Telex or SWIFT Fraud,8)

Foreign exchange fraud,9) Cross firing of cheques and Kite flying, 10) Theft of cash,11) Suppression of Cash /

Cheque entries, 12) Opening and Operating of fraudulent loan accounts,13) Over Invoicing of service to the banks,

14) Armed Robbery attacks, 15) Fictitious Bank branches,16) Miscellaneous and other types of fraud, 17) Fraudulent

Withdrawals and 18) ATM Withdrawals

2.5 Effects of Fraud on Nigerian Banks:

According to Adebisi (2009), whenever there is a successful fraud incident, certain things happen in quick succession

that will leave considerable social and psychological effects as well as painful memory or lasting scars on the

organization, staff, government and the society at large.

2.6 A critique of related works and consequent research gaps

A plethora of studies have been carried out in the area of fraud. Notable works include that of financial institutions

training centre, Lagos (FITC: 1985) .The centre sought to investigate the relationship between sizes of bank frauds

and the ages of such banks. The study concluded that experienced staff swindles the bank of larger sums of money

compared to their relatively inexperienced counterparts. Again, they opined that falsification of accounts and

suppression of entries was the commonest methods employed to defraud banks.

In a related development, NDIC annual reports on fraud and forgeries have consistently warned banks about the

rising trend of fraud risks and the need to update their internal control mechanisms. The studies posits that between

1989 anD1999, there were a total of 2,667 reported cases of attempted frauds and forgeries involving over

=N=23.52billion. The obvious short comings of NDIC reports lie in the fact that, they appeared in silos. There was no

comparative analysis done to establish trends.

Iyiegbuniwe (1999), carried out a study of frauds on Nigerian banks using a 10 year sample data set, collected from

NDIC annual reports for his analysis. His study failed to consider the possibility of producing spurious results by not

applying the necessary econometric tools.

Akinfala (2005) carried out a research on job involvement/ experience factors and fraudulent behaviors amongst

serving and convicted bankers. The level of job involvement was found to be a function of three factors: motivation,

identification and a feeling of pride that people achieve in their jobs

Nwude (2006) did a study on bank frauds. The methodology he adopted involved an interaction with bank staff of

various cadres with structured questionnaire to identify the fraud forms and characteristics in the banking industry.

In a different study, Otusanya (2008) investigated the role of Bank CEO‟s in the perpetration of corporate executive

frauds in the Nigerian Banking sector. The study posits that, recent banking crises in Nigeria have exposed the

activities of bank executives in corruption and fraudulent practices. The paper locates the role of corporate executives

within the institutional anomie theory called American dream theory, whereby the pursuit of monetary success has

come to dominate society. Given the strong and relentless pressure for everyone to succeed, understood in terms of an

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inherently elusive monetary goal, people formulate wants, targets and desires that are difficult, if not impossible, to

satisfy within the ambit of legally permissible behavior.

Idowu (2009) did a research aimed at finding means of minimizing the incidence of fraud in Nigerian banks Findings

of this study revealed that, so many factors contributed to the incidence of frauds in banks amongst which are poor

management of policies and procedures, inadequate working conditions, bank staff staying longer on a particular job

and staff feeling frustrated as a result of poor remunerations.

Adepoju & Alhassan (2010) opined that bank customers have come to depend on and trust the Automatic teller

machine (ATM) to conveniently meet their banking needs, but that in recent times; there have been a proliferation of

ATM frauds in the country. Managing the risks associated with ATM fraud as well as diminishing its impact is an

important issue that face banks as fraud techniques have become more advanced with increased occurrences.

Akindele (2010) posits that lack of adequate training, communication gap, and poor leadership skills were the

greatest causes of fraud in banks. He advised that adequate internal control mechanism be put in place and that

workers satisfaction and comfort be taking care of.

The research interest of Onuorah and Ebimobowei( 2011), were on „‟ fraudulent activities and forensic accounting .

They called on banks to adopt more proactive measures such as the use of forensic accounting techniques

Abdulrasheed, Babaitu & Yinusa (2012) examined the impact of fraud on bank performance in Nigeria. The study

revealed that Nigerian banks recorded the highest cases of fraud in 2008. Result of the study shows that, there is a

significant relationship between banks profit and total amount of funds involved in fraud..

Lastly, Adeyemo (2012) examined the nature, causes, effects and remedy for bank fraud in Nigeria. The study opined

that the battle for reclusion, uncovering and retribution of fraud, offenders must be fought on two extensive fronts.

First is to reduce the temptation to commit fraud and second is to increase the chances of detection.

The above studies seem to have dwelt largely on perpetrators of frauds and their modus operandi. While it is

generally believed that fraud depletes the quantum of cash deposits at the disposal of deposit money banks, there has

not been any empirical evidence to that effect. That re-enforces the need for this current effort.

3.0 Research Methodology

Research Design

Data set was analyzed using two separate approaches, namely the descriptive and inference statistics. While linear

regression analysis was used to analyze formulated hypothesis, other objectives of study were met with descriptive

statistics on fraud attributes. E-views statistical package was used to test the stated hypotheses.

Data collection

Data for this study was sourced from the annual reports of Nigerian Deposit Insurance Corporation (NDIC) and

quarterly fraud and forgeries report of the Financial Institutions Training Centre (FITC) for the period 1993-2010.

Year Amount of Bank funds

involved in fraud(N,M)

Actual / expected losses

sustained by banks(N’M)

Total deposit liabilities (N’M)

1993 1419.07 246.37 144971.6

1994 3399.39 950.65 177373.8

1995 1011.36 229.13 210945.6

1996 1600.68 375.243 258968.10

1997 3777.9 227.44 314185.50

1998 3196.91 692.25 392478.24

1999 7404.28 2730.06 569798.52

2000 2851.11 1080.57 838592.56

2001 11243.94 906.3 1017195.72

2002 12919.55 1299.69 1226624.12

2003 9383.67 857.46 1415785.86

2004 11754 2610 1814745.44

2005 10606.18 5602.05 2469069.71

2006 4832.17 2768.67 3412273.30

2007 10105.81 2870.85 5337174.33

2008 53522.86 17543.09 8702996.20

2009 41265.50 7549.23 9989843

2010 21291.41 11679 10837144.06

Total 211585.79 60218.053 49130165.66

Source: NDIC annual reports (1993- 2010)

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4.0 Data Analysis

Data estimation: Unit root tests A unit root test was conducted using the Augmented Dickey Fuller test to guard against spurious relationships.

Summary of Augmented Dickey fuller Unit Root Test

Variable T-Statistic Critical Value Level

ACL -9.86 -3.09 2nd

level

AMT -5.51 -3.09 2nd

level

TDL (-1) -4.29 -3.12 2nd

level

Computed with e-views version 7

Since calculated Dickey fuller test statistics are less than 5 % critical values (for the variables), we reject the null of

nonstationarity.

Regression Analysis

Model Specification: Specifically, we have

AMT = Amount of bank funds involved in fraud.

ACL = Actual cash lost to fraud

TDL = Total deposit liability of insured money banks

TDL (-1) = Lagged variable of total deposit liability of insured money banks

Thus, the functional form is given as:

AMT = f (TDL) and ACL = f (AMT).

Mathematically, we have the regression equations as:

AMT = β0 + β1TDL + e

ACL = β0 + β1AMT +e

Where β1 > 0 and „‟e‟‟, representing the unexplained variation encountered in the model

Hypothesis

H01: There is no significant relationship between the amount of „‟ Bank funds involved in fraud‟‟ and total deposit

liabilities of insured money banks in Nigeria?

H02: There is no significant relationship between the amount of „‟Bank funds lost to fraud‟‟ and. and total deposit

liabilities of insured money banks in Nigeria?

H03: There is no significant relationship between the amount of „‟Bank funds involved in fraud‟‟ and the amount of

„‟Bank funds lost to fraud‟‟ by insured deposit money banks in Nigeria

Hypothesis Testing

Decision Rule

Table.2: Result of the Global statistics and model selection Criteria:

Test Statistics Relationship between

AMT & TDL(-1)

Relationship between

ACL & TDL(-1)

Relationship between

ACL & AMT

R-Square 0.542603 0.604167 0.785013

Adjusted R-Square 0.512110 0.577778 0.771577

S.E. of Regression 10005.73 3070.120 2221.707

Sum of squared Residuals 1.50E+09 1.41E+08 78975689

Log likelihood -179.6436 -159.5591 -163.1894

F-Statistics(calculated) 17.79428 22.89475 58.42317

Prob(F-Statistics 0.000745 0.000241 0.000001

Mean Dependence Var. 12356.87 3527.746 3345.447

SD dependence Var. 14324.78 4724.815 4648.538

Akaike Info Criterion 21.36984 19.00695 18.35438

Schwarz Criterion 21.46786 19.10498 18.45331

Hannan-Quinn criter 21.37958 19.01670 18.36802

Durbin-Watson stat 1.822300 2.751206 2.136371

C 4455.710 777.7966 -78.22900

Coefficient 0.003508 0.001221 0.291396

F-statistics( Tabulated) 4.49 4.49 4.49

T-test (computed) 4.218327 4.784846 7.643505

T-test( Tabulated) @ 0.95 1.7396 1.7396 1.7396

Results as obtained from E-Views version 7

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Table 2 above shows the results of the global statistics on the amount of bank funds involved in fraud, Actual cash

lost to fraud and total deposit liabilities of insured deposit money banks in Nigeria.

F-test was used to test the overall significance of the explanatory variables taken together, while the student t-test was

used to test for the significance of each explanatory variable. The coefficient of determinations (R2) was used to test

for goodness of fit of the study.

Analysis of variance (ANOVA) The test showed evidence of a causal relationship between past values of TDL and the current TDL, thus a one-year

lagged TDL was introduced

The relationship between amount of bank funds involved in fraud and total deposit liability of insured money banks

posted an R-Square of 54.26%, adjusted R-square of 51.21 %. This gave rise to the model

AMT = 4455.71 + 0.00358TDL ………Eq 1

2) The relationship between Actual cash lost to fraud and total deposit liability of insured deposit money banks

posted an R-Square of 60.41%, Adjusted R-square of 57.78 %. The resulting estimated model is presented thus.

ACL= 777.8 + 0.001221TDL ………….Eq 2

3) The relationship between Actual cash lost to fraud and Amount of bank funds involved in fraud posted an R-

Square of 78.5 %, Adjusted R-square of 77.16% .This gave rise to the model

ACL = -78.23 +0.29AMT ……………....Eq 3

While F- calculated at 0.95 is (17.79, 22.89 and 58.42) respectively for the three relationships, F- tabulated is 4.49

Thus we reject H0 for hypotheses 1-3 and conclude that the relationships are significant and that the models can be

used for meaningful analysis and decision making. T-test conducted on each of the variables was significant at 95%

level of significance.

One of the major contributions of the present study therefore is that it is possible from these models of equation 1, 2

and 3, to predict financial losses that banks could sustain, given that levels of fraud indicators and total deposit

liabilities are known.

Granger causality Test

The study also employed the Granger causality test to measure the precedence and information content of the

variables

Null Hypothesis: Observations F-Statistic Prob.

AMT does not Granger Cause ACL 16 0.30773 0.7412

ACL does not Granger Cause AMT 16 0.96002 0.4128

TDL(-1) does not Granger Cause ACL 15 16.2187 0.0007

ACL does not Granger Cause TDL(-1) 15 17.6906 0.0005

TDL(-1) does not Granger Cause AMT 15 10.4880 0.0035

AMT does not Granger Cause TDL(-1) 15 57.2248 3.E-06

Computed with e-views statistical package

Result of the test indicates that, there exists a bi-directional relationship between AMT and TDL (-1) on one hand and

ACL and TDL (-1), on the other hand.

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Descriptive statistics

Table 3: Ranking of fraud attributes in the Nigerian Banking industry for the period 2001-2010

S/N Fraud Type No. of

bank

frauds

(2001-

2010)

Percentage

Contributions

Rank Percentage

contributions of fraud

types to the amount

bank funds involved in

fraud (2001-2010)

Rank Percentage

contributions of

fraud types to

Actual losses

sustained by banks

(2001-2010)

Rank

1 Cashiering Fraud 401 2.27 8th

1.85

11th

1.52 12th

2 Falsification of

Accounts

300 1.69 11th 1.73

12th 2.65 10th

3 Forged Cheques with

forged signature

2254 12.73 3rd

13.06

2nd 5.15 7th

4 Printing of bank

documents illegally

54 0.30 15th

0.28

16th 0.09 17th

5 Clearing Frauds 338 1.91 10th

23 1st 19.64 2nd

6 Computer Fraud 356 2.01 9th

5.30 7th 2.48 11th

7 Telex fraud 56 0.32 14th

0.82 14th 0.10 16th

8 Foreign Exchange

Fraud

31 0.18 17th 6.44

6th 0.17 14th

9 Cross Firing of

cheques and kite

flying

36 0.20 16th

1.209

13th 3.35 8th

10 Theft of cash/

suppression of

lodgment

786 4.44

6th

1.91

10th

6.24 5th

11 Suppression of

entries

Cash/ cheques

1301 7.35 5th

12.18

4th 6.14 6th

12 Opening and

operating of

fraudulent loan A/C.

235 1.33 12th

2.69

9th 3.30 9th

13 Over-invoicing for

service to the bank

79 0.45 13th

0.16

17th 0.21 13th

14 Robberies (Armed) 472 2.67 7th

4.24 8th 11.15 3rd

15 Fictitious bank

Branch

2 0.01 18th

0.001

18th 0.01 18th

16 Miscellaneous fraud 1361 7.69 4th 12.67 3rd 28.67 1st

17 Fraudulent

withdrawals

4994 28.20 1st 11.71

5th 9.03 4th

18 ATM Withdrawal 4647 26.25 2nd 0.45 15th 0.10 15th

Source: Computed from a collation of FITC quarterly reports by this author for the period (2001-2010)

4.1 Discussion of results

In line with the above ranking of fraud attributes:

1). The most frequent type of fraud beleaguering the Nigerian banking industry is „‟ fraudulent withdrawals‟‟ This is

closely followed by ATM withdrawals and „‟ forged cheques using forged signatures‟‟.

2) The fraud type that impacted so much on bank deposits is „‟Clearing frauds‟‟. That is followed by‟‟ forged

cheques using forged signatures‟‟ and miscellaneous frauds.

3) The fraud type that inflicted the highest amount of financial losses on bank deposits is „‟Miscellaneous frauds‟‟

This is followed by „‟clearing frauds‟‟ and Armed robbery attacks.

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5.1 Recommendations

The above research findings are very significant and have far reaching consequences on the Nigerian banking

industry. It has become expedient to act on them in order to guard against future occurrence.

To further buttress this point, Ogunleye (2010) has cautioned that, the best forms of defense against the risk of fraud

in any organization are proactive measures. For an organization to create a corporate environment that prevents,

deters and timely detects frauds, it needs to understand why fraud occur, types and methods of perpetration as well as

to identify its business areas that are at risk and implementing appropriate procedures to address them. It is a well

established fact that before fraud can take place, there must be:

An item worth stealing

A potential perpetrator willing to steal and

An opportunity for crime to take place.

It follows therefore that successful prevention of fraud in an organization lies in the isolation of the perpetrators from

the assets and from opportunities and knowledge required for access. In other words, walls of policies, procedures,

devices and controls need to be erected to surround and isolate each factor in the equation to combat fraud. It is for

this reason that the system of internal control is identified as very critical in minimizing the incidence of fraud in any

business organization

Other Organizational Measures that should be adopted in the fight against fraud are those relating to the attitude and

culture of the organization and the way in which it deals with fraud. These are indirect controls which convey the

message that fraud will be detected, that action will be taken and that the repercussions could be severe. Some of

these measures include:

Pre-employment Screening:

Conducive working Environment:

Effective control /zero tolerance for fraud at the branch level.

Administrative, Accounting and Personnel controls:

Enactment of fraud policy, fraud training and resolution strategy

Whistle blowing policy:

Contingency Plan

Insurance Policy

Beefing up of Physical Security/Access Controls and Control over the IT environment

The internal audit unit must be effective and truly independent in order to enhance objectivity in financial

reporting

The general public and Government with her agencies should be seriously involved in the fight against

fraud.

There is need for a paradigm shift and enforcement of sanctions/ due process.

Stakeholders need to improve on prudential regulation of banks designed to encourage the adoption of best

practices in the industry.

A credit bureau has also been established by the Central Bank of Nigeria to provide centralized information

on bank loans within the system. This is needed to frustrate the activities of predatory borrowers who had

hitherto capitalized on the absence of such database to commit loan frauds in the system.

The regulatory authorities should continue to encourage collaboration amongst various stakeholders. That

has become necessary in order to facilitate understanding and reduce areas of distrust on the one hand and

nurture opportunity for information sharing on the other hand

5.2 Concluding Remarks.

The threat of fraud in the Nigerian banking industry can be contained by taking the right steps. A bank that is alert to

the risks that affect its business, that puts in place appropriate controls and procedures, monitors the operation of

these controls and their effectiveness, creates favorable working environment and maintains an anti –fraud culture, is

going to be better placed to deter, prevent and at worst detect fraud timely. Above all, the fight against fraud requires

a holistic approach through the efforts and cooperation between individuals, organizations, law enforcement agencies

and other stakeholders.

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