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Experts worry over rising cases, sophistication, unreported bank frauds

•Photo: Lamido Soludo, CBN Governor .Ibrahim Umar, NDIC boss

By Kingsley Ighomwenghian, Finance Editor

Whoever thought the migration from the use of chip and pin to magnetic stripe cards for transaction settlement would stop the then rising cases of bank frauds in the country, have been proved wrong, going by new findings by experts that the ever unrelenting fraudsters have now developed new ways to fleece unsuspecting bank customers of billions of Naira from their accounts.

According to the Nigeria Deposit Insurance Corporation (NDIC) in its 2010 annual reports and account, loss suffered by banks from fraud and forgeries was N21.29 billion, with ATM remaining the commonest type.

The amount lost to fraud and forgeries in 2010, the corporation said, was the lowest since 2008, when the industry reported N53.522 billion loss, representing a 60.22 per cent drop. Also, the number of fraud cases reduced by 13.15 per cent from 1,764 to previous year’s 1,532, just as the report noted that those with very low probability of recovery were minimal.

The latest discovery by the Central Bank of Nigeria (CBN) is that the cases are daily growing in sophistication, including situation where fraudsters now do “reverse transfer of funds.”

This is a situation where the fraudsters reverse the process a customer would normally perform to transfer funds from his/her bank account through the e-banking portal to that of a beneficiary. Customers are often times not alerted when such transactions are small, take place, only to be discovered later, and in many cases, it is done on several customer accounts simultaneously.

As if that were not enough, another cause of worry today, is that Nigerian banks now hide or under reporting incidences of frauds and forgeries from the regulators whenever they do occur. Some of the unreported cases are discovered accidentally long after they happened, or the truth found out about others that were previously under-reported. The thinking is that the bank erroneously believes that reporting such could invariably de-market the affected institutions, according to Emmanuel Obaigbena, a deputy director at the CBN and chairman, Nigeria electronic Fraud Forum (NeFF), which comprises senior e-banking officials of the various banks.

Speaking at the NeFF August meeting co-sponsored by Union Bank and the United Bank for Africa, last week in Lagos, Obaigbena said the apex bank may consider imposing sanctions on banks found to have hidden or under-reported frauds and forgeries.

According to him, “fraud is an international phenomenon and especially, the aim (reporting to the regulator), is to be proactive. We want to be able to nip whatever problems there are in the bud before it gains ground.

“…I am not particularly happy that many banks are not giving us accurate statistics! I don’t know why they are scared, it is not de-marketing, but to save the industry… one institution suffered fraud recently, but reported something very minimal. We are looking at imposing sanctions for wrong information, because you are not helping the industry by doing that.

“We are working with the NIBSS (Nigeria Inter-Bank Settlement System) to change reporting format that we already have (in the industry). We would apply the big stick… there is nothing for us to be afraid of,” he stressed further.

The CBN in its new corporate governance code, a draft of which was exposed August 7, 2012 on its website has proposed that banks should start reporting on frauds and forgeries in their annual accounts, among others.

Latest statistics

In a presentation at the meeting, Oluseyi Akindehinde, chief technical officers and partner at Digit Encode, consultants to the CBN, lamented the challenges often encountered while seeking data on fraud and forgeries from the banks.

“Internal fraud cases have been rising in the last three months,” he said, noting that data could only be obtained from eight banks in the quarter between April and June, out of which only about five were received directly and the others stumbled upon.

What has been discovered, he said, is that external fraud vectors such as phishing, an electronic mail scam where fraudsters attempt identity theft through obtaining personal information like usernames, passwords and credit card details by masquerading to be institutions they are not.

Akindehinde noted that phishing accounted for 73 per cent of total frauds, and the rest- internet bank. In all, he stressed that internal sources (bank staff) were responsible for 9 per cent of the number and the rest- external parties.

He explained that about N1.15 billion was lost by eight banks that reported fraud in the 2012 second quarter, and that the figure could be much more when the true and entire industry picture is obtained. Of this amount however, those perpetuated with staff connivance accounted for N900 million or 78.26 per cent, while the external resulted in N250 million loss to the affected banks.

According to him, “in the last three months, every bank in Nigeria has probably suffered an internal fraud of N52 million on the average, or N19 million monthly, which at the end of the year could go to about N4 billion.

Also reviewing “e-payment fraud trends: Interswitch perspective” at the NeFF meeting, Oshioke Ojior, Chief Risk Officer of Interswitch, agreed also that the fraudsters are now modifying their approach. He however said the increase in frauds in the months of May, June and July which have always recorded higher cases of fraud in the global web environment, may not be unconnected with the fact that people traditionally travel for summer during the period.

In a presentation also, Niyi Ajao, executive director, operations of NIBSS lamented that fraud “attempts we are hearing about now are too sophisticated. The banks are not forthcoming with accurate disclosure so that we can work together to enhance controls.”

He noted that total amounts paid through electronic transactions have been growing since August last year, hence the need for banks to pay attention to the security of their channels and portals.

CBN, NDIC frauds/forgeries reports

Between 2003 and the first half of 2011, bank frauds and forgeries worth N169.152 billion has been reported in the industry (the figures for full 2011 figure is yet to be released by the CBN and NDIC).

According to the CBN’s 2011 half-year report, between January and June, 2011, there were 1,393 attempted cases involving N6.5 billion, out of which 410 or 70.56 per cent of cases succeeded, resulting in a loss of N1.95 billion to the banks. In the second half of 2010, the report said, there were 5,960 reported cases involving N11.6 billion, that led to the loss of N8.0 billion.

“Similarly, 116 ATM-related cases valued at N17.2 million were reported in the first half of 2011, compared with 411 cases amounting to N82.2 million recorded in the second half of 2010. The development was attributed to the improvements in risk management practices in the banking system,” the apex bank explained further in the report.

The most significant loss from 2003 to 2010, according to available data was in 2008, when total amount involved stood at N53.522 billion, representing an astronomic 434.95 per cent rise compared with the N10.005 billion for 2007, according to the annual report of NDIC.

The corporation also reported that N43.517 billion of the sum was committed with the connivance or collusion of 313 bank, accounting for N34.14 billion, or 64.11 per cent of the total involved. In 2007, N2.59 billion or 25.93 per cent was lost. The corporation also estimated actual loss by the banks of N17.543 billion, representing 32.77 per cent of the total loss, compared with 28.69 per cent, in 2007.

In 2010, total loss to fraud and forgeries stood at N21.29 billion, down by 48.4 per cent when compared to the N41.26 billion reported in 2009, representing a decline of 60.22 per cent from the 2008 level.

The NDIC noted in the 2010 report that the top 10 banks with the highest number of reported frauds cases accounted for N10.87 billion or for 51.08 per cent of the total amount in the period, down from N37.18 billion or 90.10 per cent, a year earlier.

Also, the number of fraud cases reduced by 232 or 13.15 per cent from 1,764 to 1,532 last year, just as the report noted that those with very low probability of recovery was low, or fully covered by Fidelity Insurance Bond was put at over N11.68 billion  in 2010, compared with over N7 billion in 2009.

The corporation classified causes of frauds and forgeries into two: the institutional or endogenous factors and environmental or exogenous factors.

While the “institutional causes of frauds and forgeries in insured banks include poor accounting and weak internal control systems, ineffective supervision of subordinates, uncompetitive remuneration and perceived sense of inequity in reward, disregard of know your customer (KYC), rules etc. Environmental causes of frauds include undue societal demands, low moral values, slow and tortuous legal process, lack of effective deterrent or punishment and at times reluctance on the part of individual banks to report fraud cases due to the negative publicity it could attract to their image.”

Following this revelation, the NDIC urged the nation’s banks to “strengthen their operational risk management frameworks in the areas of internal control and security systems to reduce the incidence of frauds and forgeries, insured banks should also thoroughly screen prospective employees by obtaining status reports from previous employers and relevant agencies and should desist from deploying casual workers staff to sensitive positions. Insured banks should also endeavour to educate their customers on the use of the ATM and other e-banking services as well as the need to safeguard their Personal Identification Numbers (PIN).”

Analysis of the frauds and forgeries perpetrated by the banks include: presentation of forged cheques, granting of unauthorised credits; posting of fictitious credits and fraudulent transfers withdrawals. Others are cheque suppression, loss of money to armed robbers and lodgment of stolen warrants and overdraft cheques.


In a keynote address at the NeFF meeting, Femi Olalokun, ED, Operations and IT and chief operating officer, UBA Plc, who represented Phillip Oduoza, the group managing director, spoke of the need to constantly contain fraud in the industry for the economy to enjoy the benefit of the ongoing cashless policy initiative, which according to him presents huge opportunities.

Technology, Olalokun said, keeps innovating, hence the need for all stakeholders to get involved in the value chain by establishing standards for each participants in the transaction space for us to guaranty such transactions and get customer buy-in.

NeFF, he said, needs the encouragement of stakeholders to deliver on its mandate, just as “collaboration is critical among all stakeholders as the various parties come together to provide the platform for electronic transactions. Issuers, Acquirers, Switchers and Processors all have to integrate to provide service to the public. A chain is as strong as its weakest link.”

Industry standards among card schemes, third parties, acquiring devices, and systems, he believes, “are an imperative to manage technical and operational complexities and fraud risks. Compliance to these standards must be monitored and sanctions for non-compliance must be instituted,” he stressed.


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