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Banking and Finance Project Topics

The Effect of Financial Crime on the Growth of Small/Medium-Scale Businesses

The Effect of Financial Crime on the Growth of Small/medium Scale Businesses

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The Effect of Financial Crime on the Growth of Small/Medium-Scale Businesses

Chapter One

OBJECTIVES OF THE STUDYย ย 

The sole aim of this research is to Examine the effects of financial crimes on the growth of small/medium-scale businesses: a study of selected transport companies in Edo State.

(i) To identify the rate of occurrence of financial crimes on transport companies in Edo State and its effect on the economic growth of the state.

(ii) To determine the government responsibilities, and involvement to enhance development structure in that sector.

CHAPTER TWO

LITERATUREย REVIEW

ย Conceptual Reviewย 

Financial crimes

Financial crimes according to Kumar 2012, is the process by which large amount of illegally obtained moneyย (from drug trafficking, terrorist activity or other serious crimes) is giving the appearance of having originatedย from the legitimate source. But in a simple term, it is the conversion of black money into white money. Thisย takesย oneย toย cleaningย theย hugeย pilesย ofย cash,ย ifย doneย successfully,ย itย allowsย theย criminalsย toย maintainย controlย over their proceeds and ultimately to provide illegitimate cover for their source of income. Financial crimesย plays a fundamental role in facilitating the drug traffickers, the terrorist, the organized criminals, the insideย dealers, the tax evaders as well as the many others who need to avoid the kind of attention from the authoritiesย that sudden wealth brings from illegal activities. These criminal enterprise seek to obtain money and powerย through criminal conduct and then attempt to infiltrate the legitimate society, thereby distorting the terms of theย compact. The generate millions upon millions of dollars for the members of the enterprise and allow theirย associates to live lavish lifestyles that have been forged from the misery and despair that their criminal activityย proceeds.

Financial crimes as an expression is one of the fairly recent origin. Financial crimes is a sophisticated crimeย not to be taken very seriously at the first glance by anyone in the society. As compared to street crimes, it is aย modern crime. At times, people often refer to it as a victimless crime but the reality is that it is not a crimeย against a particular individual, but it is a crime against nations, economic government, rule of law and the worldย at large. Financial crimesย has become a worldwide menace.

Fraud

Fraud according to Wein (1995) sited in Ani Comfort 2015, is an act or course of deception directed to theย detrimentย of another.ย Inย legalย terms,ย fraudย hasย been defined asย an actย of deriving dishonestly ofย somethingย which is or entitled to but for the perpetuation of fraud. While in the words of Orji (1996) cited in Ani (2015), isย defined as the conscious deliberate effort aimed at obtaining unlawful financial advantage at the detriment ofย another person who is the rightful owner of the fraud. In a literal sense, fraud may be used as an umbrella termย of cover almost all classes of white colleen crimes known to law and business. There is a general consensusย among criminology that fraud is caused by three elements namely: will, opportunity and exit, that is, the will toย commit fraud by the individual, the opportunity to execute the fraud and the exit which is the escape fraudย sanctionsย againstย successfulย or attemptedย fraudย or deviateย behaviour.

Theย Nigerianย Economy

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According to Uyoyou & Ebipanipre (2013), the Nigerian Economy being a developing country is characterizedย mainly with the term โ€•informal economic activitiesโ€–. โ€•An informal economy is the unregulated, non-formalย component of the market economy that produces for sale or for other forms of remunerationโ€– (GIABA Report,ย 2001). An informal economy relates to economic activities which are not covered or governed by a formalย arrangement. It has been observed that informal economy in most countries in the West African region is cashย and commodity oriented. Thus, payment for most product purchasing and services are basically done throughย directย cashย payment.ย Theย 2009ย Worldย Bankย reportย revealsย thatย โ€•acrossย Africa,ย moreย thanย 80%ย ofย householdsย do notย use formalย banking.

The infiltration and sometimes saturation of dirty money into legitimate financial sectors and nations accountย can threaten economic and political stability. Economic crimes have a devastating effect on a national economyย since potential victims of such crimes are far more numerous than those in other forms of crimes. Economicย crimes also have the potential of adversely affecting people who do not prima-facie, seem to be the victims ofย the crime. The negative economic effects of financial crimes on economic development are difficult toย quantify, yet it is clear that such activity damages the financial sectorโ€˜s institution that are critical to economicย growth, reduces productivity in the economyโ€˜s real sector by directing resources and encouraging crime andย corruption, which slow economic growth, and can distort the economyโ€˜s external sector international trade anย capital flowsย to the detrimentย ofย long-termย economic development.

 

CHAPTERย THREE

RESEARCHย DESIGNย ANDย METHODOLOGY

ย ย Research Design

Thisย studyย usedย aย descriptiveย surveyย designย whichย isย toย collectย detailedย andย factualย informationย thatย describes anย existingย phenomenonย (Ezeani 1998).

Theย researchย designย isย aย descriptiveย research.ย Inย Descriptiveย study bothย quantitativeย andย qualitative method will be used to analyze the data collected. Qualitative for primary andย quantitative for secondary data collected from different institutions that are useful for theย existingย financial crimeย situationย underย beingย studied.

This study utilizes cross-sectional survey because it helps to collect all relevant data at a singleย point in time and it is useful in such type of research which is limited in time frame and financeย toย conduct longitudinal study.

Researchย Method

The research method is both qualitative and quantitative research. Quantitative approach ofย doing research will be employed because, quantitative research answers questions through aย controlled deductive process allowing for the collection of numerical data, the prediction, theย measurementย ofย variables,ย andย theย useย ofย statisticalย proceduresย toย analyzeย andย developย inferences from that data. Further more, qualitative research method will be applied to analyzeย theย primaryย data willย beย obtainedย throughย questionnaireย andย interviewย data collectionย methods.

Dataย Collectionย Procedureย (Samplingย Technique)

The target population of the study was banks staff and non-bank personals in Edo state. The capital city is chosen to narrow the geographical data and be manageable in terms of cost and time and also most of institutions head quarter is located in Edo state since the data is collected from there. From each institutions demonstrable experience, better education and knowledge of the subject matter in the area of financial crime is mandatory criteria of selection which is expectedย fromย respondents.ย Banksย personalsย areย mostlyย Riskย andย Complianceย Directorateย directorsย andย managersย whoย areย specializedย onย Anti Financial crime.

CHAPTERย FOUR

ANALYSISย OF FINANCIAL CRIME AND ITS CONESQUENCES INย NIGERIA

Introduction

This chapter focuses on the results and discussion of analysis. There are about five categories ofย discussions. The vulnerability Factor has a checklist of 8 factors that may contribute to makeย Nigeriaย vulnerableย toย financial crime.ย Besides,ย peculiarย featuresย inย Nigeriaย thatย mayย contribute to the problem like illegal hawala and black market foreign exchange are addressed.ย Other part of discussions are such as status of crimes on financial crimeย like corruption,ย tax evasion and human trafficking that contributesย areย among 11 variable factors. Methodsย of financial crime and banks performance on anti financial crime haveย 8 variable factorsย for each. Challenges to fight financial crime in Nigeria like lack of political will, weakย bureaucratic system, and the generally slow pace of reform and poor performance of institutionsย areย included.ย Finally,ย consequenceย ofย Financial crimeย whichย hasย alsoย differentย socio-ย economicย crisis will beย discussedย inย detail.

CHAPTERย FIVE

ย Summary

SUMMARY,ย CONCLUSIONย ANDย RECOMMENDATIONS

Financial crime becomes a global phenomenon both in developing and developed world.ย Especiallyย afterย 9/11ย terroristย attackย theย worldย isย beingย enforcedย toย knowย howย muchย illegalย moneyย flowย isย dangerous.ย Financial crimeย hasย beenย definedย inย differentย waysย andย itย isย common to divide the financial crime process in to three stages as placement, layering andย integration.

The concept of financial crime in Nigeria became a phenomenon after the promulgation ofย the new proclamation No. 657/2009 and Regulation No 171/2009 brought the establishment ofย Nigerian Financial Intelligence Center. Internal and International cooperation is established.ย Nigeria becomes a member of Eastern and Southern Africa Anti Financial crime Groupย (ESAAMLG in 2014. Currently, Nigeria is free from EFCC Monitoring processes and Publicย Statement. Internal cooperation is also achieved though it is not satisfactory among differentย institutions. There are six standard setters on anti financial crime, the major three players are –ย theย Unitedย Nations,ย Economic Financial Crime Commissionย (EFCC)ย andย the Egmont Group.

Accordingย toย theย Nationalย riskย assessmentย onย theย vulnerabilityย ofย theย countryย toย financial crime and financing of terrorism, several deficiencies were addressed by FIC. However,ย some researchers argue that anti financial crime law of the country in general and thoseย provisions to fight financial crime in the banking sector in particular are not sufficient to fightย the problem. Trade Based Financial crime such as mis-pricing, illegal hawala and blackย market are considered as complex part of trade based financial crime and its relationship withย tax evasion is very high. The collaboration and coordination of stakeholder agencies also haveย been low in order to prevent and suppress it. Others also did not agree that banks have beenย takingย their responsibilities inย combattingย financial crimeย orย terroristย financing.

The general objective of the study is to investigate the countryโ€™s stand and performance on anti-financial crime and to highlight potential consequences of financial crime in Nigeria. The study may be used as a base line for further study and creates public awareness on the issue andย consequencesย ofย financial crime.ย Thisย studyย usedย aย descriptiveย survey design.ย Theย dataย collection techniques are Primary and Secondary data collection methods. The data collected byย usingย different methodsย was analyzedย throughย regressionย method.

The study focused on different factors induce financial crime such as on nine methods ofย vulnerability factors emanated from governmentโ€™s performanceย evaluation, status of nine typesย of crimes to contribute financial crime, the position of banks to comply with Anti-Financial crimeย requirementsย andย otherย factors likeย capitalย flight.

A checklist of 9 factorsย that may contribute toย make Nigeria vulnerable to financial crimeย was provided. Accordingly, lack of effective monitoring of cross border transactions, lack ofย awarenessย andย failureย toย criminalize financial crime areย highย vulnerability factors. Use ofย otherย persons’ย nameย isย oneย ofย theย successfulย methodsย ofย financial crime.ย Transportationย transactionsย alsoย cloakย illicitย sourcesย ofย fundsย orย serveย inย theย legitimizationย process.

When we see the performance of banks, Reporting Suspicious Transaction (STR) is belowย medium level. On the otherย hand, banksย Cash Transactions Reportย (CTR) above cash limit isย with higher performance but Politically Exposed Persons (PEPs) at a low level. Respondents ofย banks experts are in a high level of awareness but non-bank institutions show low level ofย awareness.

Methods that criminals use are classified into eight points. Among eight evaluating points ofย request use of other persons account name is the highest method of financial crime followedย byย purchaseย ofย transportation,ย cashย holding andย import-exportย businesses.

The countryโ€™s strategic location, weak bureaucratic system and lack of political will remain aย high challenge. Failure to criminalize financial crime is high, Tax evasion; contraband has aย significant crime factor for financial crime. Relatively illegal arms trade is a higher crimeย threat than drug trafficking in Nigerian case of financial crime. Other crime factors such asย theft/fraud, counterfeiting, killing of person, and receiving money for illegal purpose indicates asย a low percentage. Generally, Nigeriaโ€™s performance on AML comparing to developed countriesย isย lowย andย medium toย itsย neighbors.

Conclusion

Nigeria had the 12th-fastest growing economy in the world in 2012 and has experienced annualย economic growth rates averaging 10.9 percent over the past 10 years, compared to a regionalย average of 5.3 percent, althoughย the 2015,ย UNDP โ€“ Human Development Indexย ranks Nigeriaย asย 174thย out ofย 188ย countries.

Financial crime is a major threat for the country even though economic growth is achieved. Itย has different challenges to the country. Given its strategic location within the Horn of Africa,ย Nigeriaย isย vulnerableย toย transnationalย smugglingย activitiesย andย trafficking,ย illegalย hawalaย operation, weak integration among stakeholdersย on anti financial crime and other situationsย are challenging to Nigeria. The level of capital flight in the country as it is assessed in theย literature review part ofย this researchย is very high. Corruption, Erosion of financial sector,ย undermining legitimate private sector and privatization efforts, socio political consequences,ย distortionย ofย externalย sector,ย nations’ย reputationย riskย andย negativeย imageย areย theย majorย consequencesย ofย financial crime.

The country has made several progresses to alleviate the problem. Nigeriaโ€˜s performance onย AML comparing to developed countries is low and medium to its neighbors. The progress can beย classifiedย as legal,ย operational,ย andย cooperationย andย coordination.

On the legal perspective, Nigeria has made substantial progress in the last threeย years onย strengthening its legal framework. In recognition of these efforts, as of October 2014, Nigeria isย no longer subject to the EFCC monitoring process. The FIC is also committed to achievingย membership inย theย Egmont Groupย ofย Financialย Intelligenceย Units.

On operational perspective, the finding reveals that, Banks are well performing to make awareness among the staff and management, keeping records for reasonable time, and Cash Transaction Report (CTR). But there is a deficit of undertaking Politically Exposed Persons (PEPs) enhanced Customer Due Diligence (CDD), Suspicious Transaction Reports (STR) and continuous CDD. Neither National Bank of Nigeria nor Financial Intelligence Centertakes any corrective measures against failure of bank requirements of Anti Financial crime. Further more; Nigeriaโ€™s vulnerability to financial crime is relatively due to lack of inadequate Know Your Customer requirements, lack of awareness on non-bank institutions and lack of effective monitoring of cross border transactions. Use of other personsโ€™ name, purchase of transportation, holding cash and engaging in import and export business are the top four methods of financial crime that criminalโ€™s use in Nigeria to disguise their illicit money. On the other hand, bankย depositย andย purchaseย ofย luxurious goods areย relativelyย lowย inย Nigeria.

Though, imposing of reporting requirements on banks, insurances, foreign exchange bureaus,ย customsย andย revenueย authorities,ย isย encouraging,ย microfinanceย institutions,ย designatedย non-ย financial businesses and professions (DNFBPs) such as lawyers, notaries, accountants, transportationย agents, and precious stones and metal dealers are not still reporting to the Financial Intelligenceย Center.

Cooperation and coordination in building of capacity among stakeholders on AML/ CFT issues,ย and improving coordination and information sharing between relevant institutions still remainsย more work.Political will remains still as a problem to combat financial crimeย across theย Nigerian government and limited commitment at the working level in some institutions, coupledย with a weak bureaucratic system and the generally slow pace of reform in Nigeria, continues toย presentsย challenges.

Finally, though several efforts and advancements have been made by the government, financial crime is a huge problem to the country and I forward the following recommendations inย orderย toย fillย the gap andย address theย remainingย vulnerabilitiesย thatย induceย financial crime.

Recommendations

Financial crimeย increasedย crimeย andย corruption,ย reductionย inย governmentย revenue,ย undermining legitimate private sector and privatization efforts, causes socio-political danger andย aย hazardย onย nationsโ€™ย badย reputationย riskย andย negativeย image.

Evenย thoughย Nigeriaโ€™sย performanceย ofย AMLย isย inย aย goodย progress,ย thereย areย stillย someย remainingย gaps.ย Asย perย theย finding,ย theย researcherย recommendsย theย followingย pointsย onย government institutionsย NBE, Commercial Banks, FIC and etc. in particular and the governmentย inย general.

  • In order to reduce vulnerability, banks should strengthen their KYC, and DNFBs andprofessions should start to comply with KYC requirement. With this respect, FIC must finalize procedures and directives on how DNFBs and professions report suspicious transactions. FIC should also work more to create public awareness since lack of awareness is high vulnerability factor.
  • Continue forging informal and formal working relationships among reporting entities, theFIC,ย NBE,ย judiciary,ย andย lawย enforcement bodies.
  • Proclamation No 760/2012 on the registration of vital events and issuing of nationalidentification card National ID is not issued yet which pose significant impact on KYCย andย CDDย performanceย of banks.ย Therefore,ย itย isย veryย importantย toย issueย National
  • Conducting enhanced CDD is a remedy of most of the methods of financial crime, butsome banks failed to comply with this requirement. Therefore, NBE and FIC should takeย correctiveย actionsย andย mayย beย importantย toย penalizeย banksย withย major
  • Thereareย someย conflictย ofย interestย betweenย complianceย departmentย andย bankย management, i.e., sometimes, bank management wants to mobilize deposit and attractย customers regardless of AML requirements while compliance department wants to assessย theย riskย ofย financial crime.ย Therefore,ย itย isย importantย eitherย toย makeย complianceย departmentย independentย orย responsibleย directlyย forย theย presidentย of respective
  • FIC in collaboration with other competent institutions should identify PEPs and distribute At least major PEPs (top level officials) should be identified and the restย couldย beย incorporatedย withย theย passageย ofย time.
  • Work with the FIC to effectively implement a software system and to enhance analyticalcapacities through continued training and capacity building. Encourage engagement withย DNFBPsย andย conductย sector-specificย riskย assessmentsย inย orderย toย bestย allocate
  • The selection of comprehensive data base system from advancedcountries will helpย improve analytical capacities and the quality of financial intelligence the FIC is able toย provideย police,ย investigators,ย and
  • Controlonย Licensedย andย unlicensedย institutionsย inย operatingย ofย foreignย currencyย exchange and Illegal Hawala Money Transfer, black market foreign Currency Exchangeย and Forgery Currency Notesย circulation is the peculiar features that aggravates financial crimeย are expectedย from theย National Bankย ofย .

Generally, the Nigerian government: Should scrutinize vigilantly the vulnerability from border transactions, consistent information sharing and coordination among agencies; expand awareness raising and training efforts to rural regions. Political commitment to control annual inflows and out flow of external borrowing is needed since it constitute the most consistent determinant ofย capitalย flightย andย financial crime.

Goodย governanceย andย institutionalย qualityย alleviatesย theย problemย thatย emanatesย fromย poorย governanceย andย weakย institutions.ย Fightingย ofย corruptionย seeksย politicalย commitmentย onย generallyย identifiedย areas.ย Systemsย mustย beย implementedย toย tackleย Tradeย Basedย Financial crimeย throughย underย andย overย invoicingย forย import andย export goods.

Government should support the development of effective regulatory structures for emergingย technologies, such as mobile banking, to help promote financial inclusion goals. Implementationย of functional regulation and enforcement of rules: on bank or a non-banking financial institutionย transferringย money,ย assetย transferย etc.

Finally, the government should seek active membership in the Egmont Group in the near termย and must work with the international community to hamper the ability of corrupt and tax-evadingย Nigerian laundering their money in the global financial system. This could be accomplished byย establishing a global system of automatic exchange of tax information. In this way, Nigerianย authorities could much more easily track the bank accounts of tax evaders have establishedย around ย theย world.

References

  • Arnone, Marco (2010),ย Internationalย anti-financial crime Programs,ย Empiricalย Assessmentย and Misuse in Criminal Regulation, Journal of Financial crime Control , Vol. 13,ย No.ย 2. Pageย 231.
  • Anteneh,ย Mekonnenย (2014):ย Combatingย financial crimeย andย financingย ofย terrorism:ย training document.
  • Araujo, Ricardo Azevedo (2006), The Effects of Financial crime and Terrorism on Capitalย Accumulation and Consumption, Journal of Financial crime Control, Vol. 9 No. 3ย Pageย 265.
  • Ayele Yitayew(2014); Anti Financial crime and Combatting Terrorist Financing (AML/CTF) complianceย practicesย inย Nigeriaโ€™sย Commercialย Banks;ย Opportunitiesย andย Challenges.
  • Bachus, Alison S. (2004), From Drugs to Terrorism: The Focus Shifts in the International Fightย againstย Financial crimeย afterย Sep.ย 11,ย 2001,ย Arizonaย J.ย Intโ€™lย andย Comp.ย Law,ย Vol.21.ย No.3. Pageย 842.
  • Barbut, Lisa A. (1995), Financial crime: An International Challenge, Tulane J. of Intโ€™l andย Comp.ย Law, P.163,ย Vol.3.ย Pageย 163.
  • Binyamย Shiferaw(2011):ย Financial crimeย andย Countermeasures:ย Aย Criticalย Analysisย ofย Nigerianย Lawย withย Specificย Referenceย toย theย Bankingย Sector.
  • Bourne,ย Jane (2002), Financial crime: whatย is being done to combat it?ย A Comparativeย Analysis of the Laws in the United States of America, the United Kingdom and Southย Africa,ย S.ย Afr.ย Mercantileย Lawย Journalย vol.14ย issuedย Pageย 475.

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