CHAPTER ONE

INTRODUCTION

1.1    Background of the Study

The importance of the banking industry in the Nigerian economy cannot be overemphasized. Banks have been credited with an enable image of being an important source of capital for the development of the economy. This recognition drives largely from an assumed role of most banking institution in mobilizing various deposits channeling them towards profitable investment outlets. To the extent of the size, type and level of such investment along with other complementary factors that contribute to the nation’s economic development. Banking system therefore has been seen as an agent of economic growth and perhaps economic development.

However, having known the importance of banking industry to the economic development, there exist various factors that restrain the effective functioning of the banking industry the world over. Among these factors is fraudulent activities that is seen to affect almost every bank world over. An important characteristic of fraud is the intent of doing wrong. Thus, fraud could be an intentional distortion of financial statement and misappropriation which involves the act of criminal deception to obtain unjust or illegal advance for which the penalty may be severe, but it also has a wide implication in law relating to. There is general consensus that fraud is caused by three acronyms called “WOE” i.e. Will, Opportunity and Exit. The will to commit fraud is the individual, opportunity to execute the fraud and exit which is the escape from sanction. However bank fraud may be caused by numerous factors – among which are:

·                    Absence of detailed, manual and poor internal control;

·                    Inadequate training and retaining bad management;

·                    Poor bookkeeping and inadequate job rotation;

·                    The poor e-banking system through internet facilities;

One of the prime means of fraud in our banks today is internet fraud. Some of the frauds are the handwork of outsiders, others are perpetrated by the and sometimes management of the bank concerned. The most significant percentage of fraud is done by the fraudsters in collaboration with bank staff. As a result of this very serious economic crime, some staff in the industry is either being dismissed or their appointment terminated or prematurely retired.

In the banking industry, fraud is the number one the business world. No company is immune to fraud. It is in all workers of life in the government. In insurance, in export trade, the banking everywhere special organization have been formed to combat it, and international police commission tries to deal with it at international level but it has not and cannot be eradicated. It is waxing in strength, it is an expanding industry. However, the researcher was able to lay hands on some commendable write-ups on the 1998 Nigerian Deposit Insurance Corporation (NDIC) annual report on fraud and forgery cases in commercial banks. However, the number of reported fraud cases increased by about 20 percent from its 17 in 1997 to 564 in 1998 on the other hand the total amount involved in reported loses in 1998 reduced to N3,129.11 million from N3,590.31 million in 1997 though the actual 1 expected loss stop at a higher lecel of N673.5 in relative to N224.54 million in 1997 according to write ups on fraud by the Central Bank of Nigeria – the common forms of fraud are organization fraud, confidence schemes (a.k.a 419) and occupation fraud (management employee, computer, procurement and financial reporting fraud). The smooth of the underworld who are principally involved in bank fraud are always ahead of the bank planning, and it is difficult to predict when and how they would strike. They are people whose Intelligent Quotient (IQ) is much higher than the average banker. The fraudsters think and act fast because that is the stock in trade.

1.2    Statement of the Problem

Frauds in financial institutions vary widely in nature, character are method of perpetration in general, it may be classified into two ways: (i) Perpetration (ii) method used on the basis of perpetrations there are three broad categories, internal, and mix. Internal perpetration of fraud are related to those committed by members of staff (insiders). External perpetration are those committed by non-staff while mixed fraud involved outsiders colluding with staff (insiders).

The most important and common types of fraud highlighted by bank Administration Institute (1989) in fraud prevention and detection series are discussed below:

a)           Advance Fee Fraud (419): This involves agent approaching a bank, a company or an individual with an offer to access large fund at below market interest rates often for long term. The purposed source of such funds is not specifically identified as the only way to have access is through the agent who must receive a fee or commission “in advance”.

b)           Cheque Kiting: Kiting is defined by the US Comptroller of the Currency’s Policy. Guidelines for National Bank Directors as “method whereby a depositor utilize the time required for cheque to clear to obtain an authorized loan without interest charge”.

c)            Account – Opening Fraud: This usually starts when a person might use the account within a short period.

d)           Money Transfer Fraud: Fraudulent money transfer may result from a request created solely for the purpose of committing a fraud or the alteration of a genuine funds transfer request. A genuine request can be altered by changing the beneficiary’s name or account number or changing the amount of the transfer. These day “yahoo boys: the name given to scammers in Nigeria that send fake emails to would-be victims asking them to apply for fake contracts or fake lottery thereby winning non-existing money from a dead billionnaire’s account in different part of the world. They connive with fraudulent bankers in the Western Union department to withdraw their ill-gotten hard currencies or without the knowledge of the bank as regard to the authenticity of the beneficiary.

e)           Talex Fraud: Transfer of funds from one location to another can be affected through the talex. The message though often coded can be altered to enable diversion of the funds to an account not originally intended.

f)            Monetary Laundering Fraud: This is a means to conceal the existence, source or use of illegally obtained money by converting the cash into untraceable transaction in a bank. The cash is disguised to make the income appear legitimate.

g)           Computer Fraud: Computer frauds can take the form of corrupting the programmes and even breaking into the system via a remote sensor by a computer programmer or specialist diskettes can also be tempered with to gain access to authorized areas or even give credit to an account for which funds where not originally intended.

h)          Loan Frauds: Loan fraud occurs when credit is extended to non-borrowing customers or to borrowing customers who 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 with plausible but falsified statements, document etc.

Intense financial pressure during the economic crisis have led to an increase of fraud, according to a survey of fraud experts conducted by the ACFE. Result of the survey, published in the new ACFE report “occupational fraud: a study of the impact of an Economic Recession” also found that layoffs are pervasive and are leading holes in organizations’ internal control systems. The report, recently detailed in the Wall Street Journal, is based upon the responses of more than 500 randomly selected Certified Fraud Examiners (CFEs). CFEs are experts in fraud detection, prevention and deterrence, and must pass a rigorous exam as well as meet high professional, educational and ethical standards. More than 55.4 percent of respondents said that the level of fraud has slightly or significantly increased in the previous in months compared to the level of fraud they investigated of observed in years prior. Additionally, about half (49.1 percent) of respondents cited increased financial pressures as the biggest factor contributing to the increase in fraud, compared to increased opportunity (27.1 percent) and increased rationalization (23.2 percent).

The Central Bank of Nigeria that the backward development in Nigeria was attributable to weaknesses in the internal control systems of the banks. This has clearly pointed out to picture of how fraud has been perpetrated in the financial strength of Nigeria’s banks. In a shell, the damage which the menace has done to the banks is innumerable and needs urgent attention. Therefore, the attempt to put an end to the economic degradation gave rise to the topic of this research.

Moreover, the curb fraudulent act in the banking industry is fair and accurate credit transactions to prevent identity theft, improve resolution of consumers disputes, improve the accuracy of consumers records, make consumer access to, credit information and for other purpose and also the provisions to help reduce identity theft, such as the ability for individuals to place adverts on their credit histories if identity theft is suspected.

It reduces customer patronage and this hinders banks’ ability to make profit.

Fraud will also increase the running cost of the bank when they employ more Inspectorate staff to detect and prevent fraudulent act.

Customer may lose their money that had been deposited in the bank to fraudsters, because most of this money is not easily recoverable. It also brings untold hardship to the customer and their family.

1.3    Objectives of the Study

The objectives of the study are as follows:

1.           To identify the causes of fraud in banks

2.           To identify the various types of fraud being perpetrate in banks.

3.           To determine the adverse effect of fraud on banks and it customer.

1.4    Research Questions

          i)       What are the causes of bank fraud?

ii)      How often are the fraud being perpetrated or committed in banks?

iii)     What are the various kinds of fraud being carried out in banks?

iv)     What are the adverse effect of fraud on banks and its customers?

1.6       Significance of the Study

The research work will provide possible to take the menace of fraud happening in Guarantee Trust Bank. It will further state the effect of this fraud to customer and the bank.

The research work will also serve as a blueprint to the banking industry in general in controlling fraud. It will also serve as a valuable material that will be kept in library for students to use as a reference material.

1.6    Scope of the Study

The study will be based on common to manual and computerized accounting system of Guarantee Trust Bank.

It will also contain the effect of these on the bank and its customers and it will also provide way forward to these fraud in the bank. The study shall be limited to Guarantee Trust Bank, Kano road branch, Kaduna North, Kaduna.

1.7    Limitation of the Study

Constraints of data affected the study in how small (amount) the intensive academic responsibilities further compounded, the combination of the two was hectic and stressful.