Corporate Fraud Control And Prevention Systems In Commercial Banks

Commercial banks are corporate financial institutions that accept monetary deposits from customers and effect withdrawals upon demand by the depositors. Commercial banks like every corporate institution are registered under the company and Allied Matters Act (CAMA) of 1959 and 1990 as amended. Commercial banks play a central role in the domestic and  international financial system of an economy. One of the intermediate roles of commercial banks is to ensure that capital is allocated in an efficient manner to facilitate growth and development in the economy  through  savings,  investments and lending of credits to customers. Commercial banks provide the mechanism for settling personal and business transactions including fund transfers for both domestic and international trade. Commercial  banks, therefore, represent an important nerve centre of an economy, which controls  and lubricates its operation via an effective implementation of the monetary policies initiated by the Central Bank of Nigeria.

Commercial bank activities in Nigeria, according to Aigbokhaevbolo (2001), started in 1892 with the establishment of the African Banking Corporation by the British West Africa. The bank was later known as the Standard Bank Ltd, which is now called First Bank of Nigeria PLC. This was followed by the establishment of the Barclays Bank Ltd. (now Union Bank of Nigeria PLC) in 1917. Since then, the number of commercial banks in Nigeria has increased. According to the Central Bank of Nigeria Report (2006), 89 Commercial banks operated in Nigeria prior to the conclusion of the banking industry consolidation exercise in December, 2005. However, only 25 of them survived the consolidation exercise, although some of the banks have merged since then e.g. IBTC and Stanbic banks. The consolidation exercise was the recent regulation on the capitalization of commercial banks to a minimum of N25 billion in Nigeria.

Commercial banks operating in Nigeria fall into two categories: the old and new generation banks. According to Ekine (2008), Nigerian commercial banks are mainly classified into old and new generation  banks. He stated that  the old generation banks are distinguished from the new generation banks  by age, rural banking activities and their general method of operations. Ekine  further stated that the old generation commercial banks are more conservative   in their operations than the new generation banks, even though all the banks  have adopted computerization and the use of electronic on-line  banking  services. The above assertion is in line with Agu (2008) that old generation commercial banks of the Nigerian banking sector are still greater labour  intensive in their operations despite the current age of computerization and Internet banking. StanbicIBTC Bank in a special Report (2008) stated that the old generation banks were those few highly regulated banks mostly controlled  by government before the introduction of the  Structural  Adjustment  Programme (SAP) in 1986. It was also stated in the Report that with the reduction and privatization of government shareholding in banks which arose from the Structural Adjustment Programme new commercial banks categorized as the new generation banks were established. The old generation commercial banks, according to the Report, are those commercial banks that have fully embraced the rural banking operation policy of the federal government introduced in 1976.The old generation commercial banks have many of their branches in rural towns and communities all over the country; a practice which  is still strange to the new generation banks in Nigeria. The StanbicIBTC Bank Special Report also stated that the old generation banks are the likes of First Bank, Union Bank, UBA and Afribank.

The development in information and communication technology (ICT) has changed the profile of commercial banks in Nigeria. The huge investments  in information and communication technology by the  banks  show  their desire to function on a comprehensive electronic platform. The banks have adopted many electronic and on–line banking products for their services. Some of the products are Automated Teller Machine (ATM),  Electronic  Point-of-Sale  (POS) Terminal services, Internet-banking (i-banking) and mobile banking services which are SMS-Based. These products make use of various forms of electronic cards. According to Ogbulie (2007), the application of information  and communication technology products has become the dominant issue in commercial banking in Nigeria. The introduction of the on-line and electronic real-time banking services has resulted in new payment systems and fund transfers that give the banking customers the needed satisfaction in modern banking. However, he stated that those products are often threatened by frauds.

Achaka (2004) defined fraud as an action of dishonesty, deceit, false claims, unlawful possession and dispossession of money, goods and services thereby causing the other party to be at disadvantage. Frauds can occur to individuals and also to business organizations including commercial banks. Fraudulent activities that occur in business environments are called corporate frauds. Corporate frauds are criminal activities in business organizations targeted to diminish by misappropriation, misrepresentation and manipulation the assets, revenues and profits of the organization. Ochejele (2004) defined corporate frauds as a deliberate step taken by one or more individuals who may be internal or external to a business organization, to deceive or mislead the organization with the objective of taking an unfair advantage of money, goods and services. Common corporate frauds are embezzlement, payment against uncleared cheques and unauthorized lending.

Corporate frauds can be committed by the persons in management, the employees of a business organization and people external to the organization. Sometimes it is committed by a collaboration of the employees with external parties. Corporate frauds most times portray a betrayal of trust and a breach of the core fabric of the working and personal relationships in a business environment. Corporate frauds have become more advanced, complex and devastating in recent years with the emergence of sophisticated systems associated with the great advances in Information and Communication Technology (ICT). Ochejele (2004) stated that the  incidence  of  corporate frauds in the Nigerian banking system has become even  more pronounced in  this era of increasing globalization of the financial markets and other economic institutions. Aderinokun (2007) stated that Nigerian commercial banks lose billions of naira every year because of  various forms of fraudulent  activities.  He stated that commercial banks in Nigeria lost more than N48 billion between 2001 and 2006 because of the increasing incidence of fraudulent activities in banks. Nigeria Deposit Insurance Corporation (NDIC) Report (2007) in support stated that the number of fraud cases in Nigerian banks grew  from  1193 in  2006 to 1553 in 2007 involving N4.83 billion and N10.05 billion respectively.

The Report listed the causes of bank frauds as follows: poor accounting system, weak internal control, and inefficient supervision of  subordinates,  uncompetitive remuneration and perceived inequality in reward as well as disregard of know-your-customer (KYC) policies.

Commercial banks are adversely affected by frauds because of the huge financial assets handled by them. The computerization of banking and the use   of electronic banking services also aid fraudulent activities in banking environment by making perpetration easy and fast. Ovuakporie  (1998)  identified different forms of bank frauds, which include payment against uncleared cheques, unauthorized lending and borrowing,  impersonation,  cloning of cheques and money laundering. Ovuakprie stated that the banks are affected by many electronic frauds owing to the use of the Internet and other computerized devices. According to the author, newer forms of fraud that use  the advantage of technological progress have also developed. These include: Unauthorized Automated Clearing House (ACH) draft, multiple electronic deposits of the same cheque and electronic intra bank transfer. Commercial banks are usually equipped with corporate fraud control  and  prevention  systems to reduce the prevalence of fraudulent activities. Corporate fraud  control and prevention systems are established to ensure that bank assets and transactions are secured. Corporate fraud control in particular is the restraint, authority, command, regulation and a check on the activities of an organization. It is to ensure that the objectives of the organization are met. It is the means of operating, regulating, directing and testing the activities of the organization that establishes them. Onah (2003) stated that control defines the power and  authority of an organization to direct, order or restrain the activities and conduct of people, internal and external, with a view to ensuring their  conformity with organizational plans and objectives. The author further stated that control focuses on the ability of the organization to determine  and  effectuate its intentions using its human resources. Control describes all the organizational efforts to ensure that employees, customers, investors and other parties’ behaviours are in line with the organizational plans  and  standards.  After the organizational standards and plans have been set, control represents  the organizational efforts to ensure the people’s compliance with those  standards. Fraud control, therefore, means the measurement and correction of performance activities in order to ensure that enterprise objectives and plans devised to attain them are being accomplished. It consists of  verifying,  checking and regulating to ensure that everything occurs in conformity with the plans adopted, the instructions issued and the principles established.