The Effect of Financial Crime on the Growth of Small/Medium-Scale Businesses
Chapter One
OBJECTIVES OF THE STUDY
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
LITERATURE REVIEW
Conceptual Review
Financial crimes
Financial crimes according to Kumar 2012, is the process by which large amount of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is giving the appearance of having originated from the legitimate source. But in a simple term, it is the conversion of black money into white money. This takes one to cleaning the huge piles of cash, if done successfully, it allows the criminals to maintain control over their proceeds and ultimately to provide illegitimate cover for their source of income. Financial crimes plays a fundamental role in facilitating the drug traffickers, the terrorist, the organized criminals, the inside dealers, the tax evaders as well as the many others who need to avoid the kind of attention from the authorities that sudden wealth brings from illegal activities. These criminal enterprise seek to obtain money and power through criminal conduct and then attempt to infiltrate the legitimate society, thereby distorting the terms of the compact. The generate millions upon millions of dollars for the members of the enterprise and allow their associates to live lavish lifestyles that have been forged from the misery and despair that their criminal activity proceeds.
Financial crimes as an expression is one of the fairly recent origin. Financial crimes is a sophisticated crime not to be taken very seriously at the first glance by anyone in the society. As compared to street crimes, it is a modern crime. At times, people often refer to it as a victimless crime but the reality is that it is not a crime against a particular individual, but it is a crime against nations, economic government, rule of law and the world at large. Financial crimes 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 the detriment of another. In legal terms, fraud has been defined as an act of deriving dishonestly of something which is or entitled to but for the perpetuation of fraud. While in the words of Orji (1996) cited in Ani (2015), is defined as the conscious deliberate effort aimed at obtaining unlawful financial advantage at the detriment of another person who is the rightful owner of the fraud. In a literal sense, fraud may be used as an umbrella term of cover almost all classes of white colleen crimes known to law and business. There is a general consensus among criminology that fraud is caused by three elements namely: will, opportunity and exit, that is, the will to commit fraud by the individual, the opportunity to execute the fraud and the exit which is the escape fraud sanctions against successful or attempted fraud or deviate behaviour.
The Nigerian Economy
According to Uyoyou & Ebipanipre (2013), the Nigerian Economy being a developing country is characterized mainly with the term ―informal economic activities‖. ―An informal economy is the unregulated, non-formal component of the market economy that produces for sale or for other forms of remuneration‖ (GIABA Report, 2001). An informal economy relates to economic activities which are not covered or governed by a formal arrangement. It has been observed that informal economy in most countries in the West African region is cash and commodity oriented. Thus, payment for most product purchasing and services are basically done through direct cash payment. The 2009 World Bank report reveals that ―across Africa, more than 80% of households do not use formal banking.
The infiltration and sometimes saturation of dirty money into legitimate financial sectors and nations account can threaten economic and political stability. Economic crimes have a devastating effect on a national economy since potential victims of such crimes are far more numerous than those in other forms of crimes. Economic crimes also have the potential of adversely affecting people who do not prima-facie, seem to be the victims of the crime. The negative economic effects of financial crimes on economic development are difficult to quantify, yet it is clear that such activity damages the financial sector‘s institution that are critical to economic growth, reduces productivity in the economy‘s real sector by directing resources and encouraging crime and corruption, which slow economic growth, and can distort the economy‘s external sector international trade an capital flows to the detriment of long-term economic development.
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
Research Design
This study used a descriptive survey design which is to collect detailed and factual information that describes an existing phenomenon (Ezeani 1998).
The research design is a descriptive research. In Descriptive study both quantitative and qualitative method will be used to analyze the data collected. Qualitative for primary and quantitative for secondary data collected from different institutions that are useful for the existing financial crime situation under being studied.
This study utilizes cross-sectional survey because it helps to collect all relevant data at a single point in time and it is useful in such type of research which is limited in time frame and finance to conduct longitudinal study.
Research Method
The research method is both qualitative and quantitative research. Quantitative approach of doing research will be employed because, quantitative research answers questions through a controlled deductive process allowing for the collection of numerical data, the prediction, the measurement of variables, and the use of statistical procedures to analyze and develop inferences from that data. Further more, qualitative research method will be applied to analyze the primary data will be obtained through questionnaire and interview data collection methods.
Data Collection Procedure (Sampling 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 expected from respondents. Banks personals are mostly Risk and Compliance Directorate directors and managers who are specialized on Anti Financial crime.
CHAPTER FOUR
ANALYSIS OF FINANCIAL CRIME AND ITS CONESQUENCES IN NIGERIA
Introduction
This chapter focuses on the results and discussion of analysis. There are about five categories of discussions. The vulnerability Factor has a checklist of 8 factors that may contribute to make Nigeria vulnerable to financial crime. Besides, peculiar features in Nigeria that may contribute to the problem like illegal hawala and black market foreign exchange are addressed. Other part of discussions are such as status of crimes on financial crime like corruption, tax evasion and human trafficking that contributes are among 11 variable factors. Methods of financial crime and banks performance on anti financial crime have 8 variable factors for each. Challenges to fight financial crime in Nigeria like lack of political will, weak bureaucratic system, and the generally slow pace of reform and poor performance of institutions are included. Finally, consequence of Financial crime which has also different socio- economic crisis will be discussed in detail.
CHAPTER FIVE
Summary
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Financial crime becomes a global phenomenon both in developing and developed world. Especially after 9/11 terrorist attack the world is being enforced to know how much illegal money flow is dangerous. Financial crime has been defined in different ways and it is common to divide the financial crime process in to three stages as placement, layering and integration.
The concept of financial crime in Nigeria became a phenomenon after the promulgation of the new proclamation No. 657/2009 and Regulation No 171/2009 brought the establishment of Nigerian Financial Intelligence Center. Internal and International cooperation is established. Nigeria becomes a member of Eastern and Southern Africa Anti Financial crime Group (ESAAMLG in 2014. Currently, Nigeria is free from EFCC Monitoring processes and Public Statement. Internal cooperation is also achieved though it is not satisfactory among different institutions. There are six standard setters on anti financial crime, the major three players are – the United Nations, Economic Financial Crime Commission (EFCC) and the Egmont Group.
According to the National risk assessment on the vulnerability of the country to financial crime and financing of terrorism, several deficiencies were addressed by FIC. However, some researchers argue that anti financial crime law of the country in general and those provisions to fight financial crime in the banking sector in particular are not sufficient to fight the problem. Trade Based Financial crime such as mis-pricing, illegal hawala and black market are considered as complex part of trade based financial crime and its relationship with tax evasion is very high. The collaboration and coordination of stakeholder agencies also have been low in order to prevent and suppress it. Others also did not agree that banks have been taking their responsibilities in combatting financial crime or terrorist financing.
The general objective of the study is to investigate the country’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 and consequences of financial crime. This study used a descriptive survey design. The data collection techniques are Primary and Secondary data collection methods. The data collected by using different methods was analyzed through regression method.
The study focused on different factors induce financial crime such as on nine methods of vulnerability factors emanated from government’s performance evaluation, status of nine types of crimes to contribute financial crime, the position of banks to comply with Anti-Financial crime requirements and other factors like capital flight.
A checklist of 9 factors that may contribute to make Nigeria vulnerable to financial crime was provided. Accordingly, lack of effective monitoring of cross border transactions, lack of awareness and failure to criminalize financial crime are high vulnerability factors. Use of other persons’ name is one of the successful methods of financial crime. Transportation transactions also cloak illicit sources of funds or serve in the legitimization process.
When we see the performance of banks, Reporting Suspicious Transaction (STR) is below medium level. On the other hand, banks Cash Transactions Report (CTR) above cash limit is with higher performance but Politically Exposed Persons (PEPs) at a low level. Respondents of banks experts are in a high level of awareness but non-bank institutions show low level of awareness.
Methods that criminals use are classified into eight points. Among eight evaluating points of request use of other persons account name is the highest method of financial crime followed by purchase of transportation, cash holding and import-export businesses.
The country’s strategic location, weak bureaucratic system and lack of political will remain a high challenge. Failure to criminalize financial crime is high, Tax evasion; contraband has a significant crime factor for financial crime. Relatively illegal arms trade is a higher crime threat than drug trafficking in Nigerian case of financial crime. Other crime factors such as theft/fraud, counterfeiting, killing of person, and receiving money for illegal purpose indicates as a low percentage. Generally, Nigeria’s performance on AML comparing to developed countries is low and medium to its neighbors.
Conclusion
Nigeria had the 12th-fastest growing economy in the world in 2012 and has experienced annual economic growth rates averaging 10.9 percent over the past 10 years, compared to a regional average of 5.3 percent, although the 2015, UNDP – Human Development Index ranks Nigeria as 174th out of 188 countries.
Financial crime is a major threat for the country even though economic growth is achieved. It has different challenges to the country. Given its strategic location within the Horn of Africa, Nigeria is vulnerable to transnational smuggling activities and trafficking, illegal hawala operation, weak integration among stakeholders on anti financial crime and other situations are challenging to Nigeria. The level of capital flight in the country as it is assessed in the literature review part of this research is very high. Corruption, Erosion of financial sector, undermining legitimate private sector and privatization efforts, socio political consequences, distortion of external sector, nations’ reputation risk and negative image are the major consequences of financial crime.
The country has made several progresses to alleviate the problem. Nigeria‘s performance on AML comparing to developed countries is low and medium to its neighbors. The progress can be classified as legal, operational, and cooperation and coordination.
On the legal perspective, Nigeria has made substantial progress in the last three years on strengthening its legal framework. In recognition of these efforts, as of October 2014, Nigeria is no longer subject to the EFCC monitoring process. The FIC is also committed to achieving membership in the Egmont Group of Financial Intelligence 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; Nigeria’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 persons’ name, purchase of transportation, holding cash and engaging in import and export business are the top four methods of financial crime that criminal’s use in Nigeria to disguise their illicit money. On the other hand, bank deposit and purchase of luxurious goods are relatively low in Nigeria.
Though, imposing of reporting requirements on banks, insurances, foreign exchange bureaus, customs and revenue authorities, is encouraging, microfinance institutions, designated non- financial businesses and professions (DNFBPs) such as lawyers, notaries, accountants, transportation agents, and precious stones and metal dealers are not still reporting to the Financial Intelligence Center.
Cooperation and coordination in building of capacity among stakeholders on AML/ CFT issues, and improving coordination and information sharing between relevant institutions still remains more work.Political will remains still as a problem to combat financial crime across the Nigerian government and limited commitment at the working level in some institutions, coupled with a weak bureaucratic system and the generally slow pace of reform in Nigeria, continues to presents 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 in order to fill the gap and address the remaining vulnerabilities that induce financial crime.
Recommendations
Financial crime increased crime and corruption, reduction in government revenue, undermining legitimate private sector and privatization efforts, causes socio-political danger and a hazard on nations’ bad reputation risk and negative image.
Even though Nigeria’s performance of AML is in a good progress, there are still some remaining gaps. As per the finding, the researcher recommends the following points on government institutions NBE, Commercial Banks, FIC and etc. in particular and the government in 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, NBE, judiciary, and law 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 KYC and CDD performance of banks. Therefore, it is very important to issue 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 take corrective actions and may be important to penalize banks with major
- Thereare some conflict of interest between compliance department and bank management, i.e., sometimes, bank management wants to mobilize deposit and attract customers regardless of AML requirements while compliance department wants to assess the risk of financial crime. Therefore, it is important either to make compliance department independent or responsible directly for the president 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 rest could be incorporated with the passage of time.
- Work with the FIC to effectively implement a software system and to enhance analyticalcapacities through continued training and capacity building. Encourage engagement with DNFBPs and conduct sector-specific risk assessments in order to best allocate
- The selection of comprehensive data base system from advancedcountries will help improve analytical capacities and the quality of financial intelligence the FIC is able to provide police, investigators, and
- Controlon Licensed and unlicensed institutions in operating of foreign currency exchange and Illegal Hawala Money Transfer, black market foreign Currency Exchange and Forgery Currency Notes circulation is the peculiar features that aggravates financial crime are expected from the National Bank of .
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 of capital flight and financial crime.
Good governance and institutional quality alleviates the problem that emanates from poor governance and weak institutions. Fighting of corruption seeks political commitment on generally identified areas. Systems must be implemented to tackle Trade Based Financial crime through under and over invoicing for import and export goods.
Government should support the development of effective regulatory structures for emerging technologies, such as mobile banking, to help promote financial inclusion goals. Implementation of functional regulation and enforcement of rules: on bank or a non-banking financial institution transferring money, asset transfer etc.
Finally, the government should seek active membership in the Egmont Group in the near term and must work with the international community to hamper the ability of corrupt and tax-evading Nigerian laundering their money in the global financial system. This could be accomplished by establishing a global system of automatic exchange of tax information. In this way, Nigerian authorities could much more easily track the bank accounts of tax evaders have established around the world.
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