How Emerging Technologies Expose Nigeria’s Financial System to Fraudsters

• How Emerging Technologies Expose Nigeria’s Financial System to Fraudsters

Though technology is good and its contributions to the growth of Nigeria’s financial services sector cannot be overemphasised, it has, however, brought pains and losses to the sector, investors and the country’s economy at large, STANLEY OPARA writes.

Odum Uwalaka wishes the status quo has not changed from what it used to be 17 years ago when he opened his first bank account. Though he admits that technology has been a big relief, the fact that he also sees it as a huge threat cannot be overemphasised, especially, with respect to his interface with the Nigerian financial services industry

Uwalaka’s dilemma borders on the loss of N1.14m from his savings account after he replied an email, which he though emanated from his bank. The fraudsters had cloned the bank’s logo and used an email address featuring the bank’s name. But despite this experience, Uwalaka has not ceased to use the bank’s Internet banking service and Automated Teller Machines as well as other banking options made possible by technology. Uwalaka’s story is just one case out of many that go unreported.

The activities of fraudsters have become very pronounced in the country’s financial services space, especially in the money and capital markets. Current statistics in the financial services sector confirm the prevalence of fraudulent activities given the degree of losses recorded by the various stakeholders in the value chain.

Banking fraud data

The Nigeria Deposit Insurance Corporation’s data released in the third quarter of 2017 showed that reported cases of fraud, forgery and outright theft involving bank staff stood at N8.68bn in 2016, while actual losses to the nation’s banking industry was N2.40bn in 2016. Similarly, the attempted cases of fraud and forgery as of June 2017 were worth N2.427bn. In addition, the reported cases of fraud and forgery rose by 36.42 per cent from 12,279 cases in 2015 to 16,751 cases in 2016.

In the Nigeria Interbank Settlement System report of the fraud landscape for the year 2016, fraud cases in the year of review grew by 82 per cent over what was reported in 2015 and 1,200 per cent over 2014 on the back of rising usage of new payment platforms. However, actual losses reduced by 2.7 per cent, when compared to the losses in 2015.

Capital market fraud cases

One major event that shook the Nigerian capital market was the case between the Securities and Exchange Commission (the apex regulator of the country’s capital market) and the Group Managing Director, BGL Group, Mr. Albert Okumagba.

On September 28, 2017, the police unit of the SEC arraigned the BGL Group and its officials before the Chief Magistrate Court Zone 6, Abuja on charges of criminal conspiracy, breach of trust and cheating. The alleged offences are contrary to Sections 96, 312, 322 and 323 of the Penal Code Law, Chapter 89.

The SEC had earlier slammed a life ban on Okumagba and his deputy, Mr. Chibundu Edozie, alleging that the BGL Group and its officials breached extant capital market laws and rules that led to a loss of N5.77bn by 32 innocent investors. The SEC also cancelled the licences of Assets Management Limited and BGL Securities Limited belonging to Okumagba.

With the Nigerian capital market getting increasingly sophisticated owing to new technologies and products, the affected investors got caught up in the racket and were left at the mercy of BGL Group and its officials. The controversy bordered on two hybrid products floated by the group called Guaranteed Consolidated Notes and Guaranteed Premium Notes.

On September 19, 2017, the SEC also banned the Managing Director of Partnership Investment Company Plc and Partnership Securities Limited, Mr. Victor Ogiemwonyi, for life from holding directorship positions in any public company in the country following his alleged role in a N4.8bn fraud case involving over 300 investors.

The investors who sought to get back their money petitioned SEC and the Nigerian Stock Exchange.

One of the affected investors, Mr. Arnold Ekpe, had reported the development to the Economic and Financial Crimes Commission, and accused Ogiemwonyi of fraudulently converting over N1.2bn and $80,000 due from the sale of 96,077,872 shares of Ecobank Transnational Incorporated Plc to his personal use.

Other affected investors have equity portfolios in the company. The alleged fraud was said to have been committed under the Partnership Securities Deposit Account platform, which is an hybrid scheme that allows for additional gains on shares aside of dividends, bonuses and rights issues.

The company was said to have advised its clients, who were shareholders in different quoted firms, to buy into the scheme and make additional return of 10 per cent on their investments, payable every six months.

These are the two major cases in recent times, and one thing is common about them: they are products of new technologies, which are prone to intrusion that make the accounts of clients susceptible to being manipulated without the owners knowing about it.

SEC also banned Mr. Taofik Lawal and Mrs. Iyabode Lawal from operating in the Nigeria capital market for mismanagement of stocks and unauthorised sale of shares following complaints against WT Securities Limited and its directors. An investigation by the regulator found them culpable of mismanaging the stocks of Mrs. Opral Mason Benson and the unauthorised sale of Nigerian Breweries Plc shares belonging to Ngozi Onyekwere Nwachukwu.

In recent times, SEC had also handed over various degrees of ban to fraudulent capital market operators for offences relating to unauthorised sale of securities via different electronic platforms.

Ponzi schemes

The NDIC data also showed that three million Nigerians lost N18bn to the Mavrodi Mundial Movement Ponzi scheme (alias MMM), which was the most popular Ponzi scheme in Nigeria in recent time.

The МММ is a Russian company that perpetrated one of the world’s largest Ponzi schemes of all time in the 1990s. By different estimates, from five to 10 million people lost their savings then. Most investors were believed to be aware of the fraudulent nature of the scheme, but still hoped to profit from it by withdrawing money before it collapsed.

Edith Nwokolo, a victim of the scheme, who claimed to have lost about N350,000, says, “As a businesswoman, MMM connected me to people I never knew after I filled my bio-data online and made my first financial commitment. I never met these people but I was always getting payments from them through my bank account until the whole thing crashed.”

From the foregoing, it can thus be inferred that the Ponzi scheme thrived on the back of technology.

Technology pep up our lives

For the Head, Information Technology at Wema Bank Plc, Adewale Saka, technology has changed the face of financial services forever in Nigeria and across the world, of which people are no longer confined to physical locations and limited by time frames. According to him, bank customers. For instance, can now bank from their bedrooms to any part of the world as and when they consider fit.

He emphasizes, “Technology has not only redefined and simplified financial services, it has also brought such services to the doorsteps of almost every household in Nigeria and beyond. Opening and operating accounts can now be done without visiting a bank or physically interacting with human beings and from the comfort of your office, bedroom or even while in transit.”

With channels like the Automated Teller Machines, mobile and Internet banking, Saka says the financial services sector is now exposed to new types of risks associated with the use of technology for service rendering, adding that such risks can be due to human errors, system failures, fraud and cybercrimes.

The banker further laments that banks in Nigeria have lost a lot of money to various fraudulent services perpetrated through electronic channels, adding that fraud attempts, successful frauds, hacks and scams have steadily increased as banking takes centre stage in the digital world.

The Head, Corporate Services Division, Nigerian Stock Exchange, Mr. Bola Adeeko, says technology has exposed investors and the entire capital market to a better experience and performance, citing current developments like dematerialisation, direct cash settlement and the electronic dividend management system, as examples.

Adeeko, who recently completed his tenure as the interim Chief Executive Officer of the Central Securities Clearing System Plc, describes the innovations as important and dynamic improvements in the capital markets system.

Dematerialisation, according to him, is a particularly important development in that it improves market velocity and integrity, while the direct cash settlement and e-dividend initiative are part of a series of enhancements aimed at boosting investor protection.

“I believe the collective aim of the SEC, NSE and CSCS is to further enhance the attractiveness of the Nigerian capital markets, which in turn will help fuel the next wave of economic and developmental investment in Nigeria. These are important steps on the road back to economic growth and diversification,” the expert explains.

Dematerialisation pursues a move from physical manifestation of asset ownership to digital, of which the physical share certificates of shareholders in different listed companies are converted to digital formats, which are resident with the Central securities Clearing System.

The direct cash settlement ensures that investors directly receive the proceeds of the sale of their shares. Initially, such proceeds were credited to the accounts of brokers before being remitted to the investors.

The e-dividend management system, which moves in tandem with the direct cash settlement, ensures that dividends are credited directly into investors’ bank accounts against the current system that relies on posting of dividend warrants.

Regulators and technological trends

The CBN, in its IT Standards Blueprint, says globally, banking institutions depend on technology to help them achieve their vision and strategy, which has consequently help them to transform operations, products and customer interaction.

According to the apex bank, technology plays an important role in product innovation, gaining market advantage, operational efficiency and communicating in the global market place; and thus is strategic for the continual existence and success of the Nigerian financial services sector.

The Director, Banking and Payment Department, CBN, Mr. Dipo Fatokun, says there is a need for continuous effort by stakeholders to develop efficient, reliable and strong electronic payment systems in the country.

To achieve broad objectives of the payment systems, he says the CBN develops and regulates the implementation of regulations to facilitate the growth of initiatives that will harmonise payment operations in the country.

“In its regulatory role, the CBN is careful to approach the dynamics of payment systems policy creation as a delicate balance in order not to stifle innovation and growth in the payment systems,” Fatokun adds.

According to him, technological developments have led to disruptive innovations by financial technology companies in the financial system, of which the innovations have facilitated the expansion of electronic payments and helped in providing financial services to previously unreached groups.

But he laments that the CBN has tried to incorporate all service providers into the regulatory space, but some prefer to remain in the unregulated space due to perceived difficulties of licensing and regulation.

“The collaboration between financial technology companies (FinTechs) and banks will always continue to be on the rise; none can displace the other. There will be more prominence for the FinTechs going forward,” Fatokun notes.

The Market Wide Technology Infrastructure Committee, which is a sub-committee of the Capital Market Committee of SEC, states that it will continue to identify and apply appropriate technologies to Nigerian conditions, and where appropriate, suggest methods of training and retraining market participants to enable them to effectively develop, acquire, support and utilise the technology to enhance the competitiveness and participation level in the market.

The committee also reiterates its commitment to automating pre- and post-trading services, examining and recommending technologies for centralised clearing, automation of trading, and new trade reporting regimes to achieve economy of scale and simplified but effective monitoring and regulation.

In a bid to move the capital market forward, the committee says it will be “benchmarking information technology security practices obtainable in the Nigerian capital market against best practices to improve the control, management and security of information technology assets by market operators.”

To this end, the Acting Director-General, SEC, Dr. Abdul Zubair, says the commission’s resolve to drive market operations for improved performance cannot be overemphasised, adding that three approaches – dematerialisation, direct cash settlement, and the e-dividend management system – will produce the expected result.

Confirming the progress made in the area of dematerialisation, Zubair states, “By the second quarter of 2017, the process had paid off, with nearly all share certificates now digitised, thus completing the process of digitalisation and therefore overcoming the problems associated with damages to or loss of physical share certificates.”

International financial bodies’ perspectives

The Moody’s Analytics report on the Impact of Electronic Payments 2016 put on record that increased electronic payment usage added $460m to Nigeria’s Gross Domestic Product from 2011 to 2015. Year-on-year growth in electronic payment adoption statistics show that Nigeria is firmly on the journey towards a digitalised economy, in which electronic transactions will increasingly play a role in the financial system, according to the rating agency.

Paul Andrews, the secretary general, International Organisation of Securities Commissions, which is the global securities regulator, says, “It is now important to maintain the momentum and keep working together toward better informed and better protected investors and clients. The reality of today´s capital markets that are increasingly interconnected and digitalised has only reinforced the critical importance of investor education and financial literacy.”

The RSA Fraud and Risk Intelligence Service, in its 2017 Global Fraud & Cybercrime Forecast, describes ‘mobile’ as the new cybercrime target. According to the report, 60 per cent of the overall is originating from mobile devices, while 45 per cent of transaction volume originates also from mobile devices.

According to the RSA, a new phishing attack is launched every 30 seconds, with the annual cost of phishing to global organisations put at $9.1bn. Phishing, therefore, is the fraudulent practice of sending emails purporting to be from reputable companies in order to induce individuals to reveal personal information, such as passwords and credit card numbers.

Stakeholders bare their minds

On the level of online security risk in the country, Michael Odusami, the President of Maxut Consulting, a FinTech company, says a lot of the challenges faced is around social engineering, of people impersonating others and so on.

According to him, a majority of the fraud recorded within the country is carried out by people inside the system itself, “people who know how the system works and they compromise it.”

He adds that a lot still needs to be done to secure transactions in the sector.

The Electronic Payment Providers Association of Nigeria, worried by the huge financial losses to electronic fraud in the country’s financial system, opines that there is a need for players in the business to invest in big data analytics in order to address the problem.

The association, led by Onajite Regha, projects that the financial losses to electronic fraud will hit N6tn by 2021 if not nipped in the bud, while advising that the best way out of the challenge is for banks to invest in technology solutions like the big data analytics, which offers real-time detection of electronic fraud before it occurs.

The National President, Constance Shareholders Association of Nigeria, a minority shareholders’ group, Alhaji Shehu Mikail, laments that shareholders are always at the receiving end when fraud happens in the financial services sector, whether in the banking industry or the capital market.

“The people who are at risk when a stockbroker commits share fraud are the shareholders, and if the situation is not properly addressed, they lose their money. Also, when major bank frauds occur, it is still the shareholders that bear the brunt. They bear the brunt because the affected banks lose money and declare less profit, which translates to lower dividends to shareholders,” he explains.

Mikail, therefore, calls on SEC to ensure that shareholders first get their money from stockbrokers whenever they are defrauded, even if it will take selling off some assets belonging to the stockbroker or the company through which the fraud is committed. This, according to him, will protect the interest of shareholders and boost their confidence in the market.

Owing to the degree of losses incurred by Nigerian banks to fraudsters, another minority shareholder, Kemi Osodi, says banks must continue to invest in human capital development, adding that the lenders should continue to evaluate their systems against possible risk exposure.

The Country Managing Director, Accenture Nigeria, Mr. Niyi Yusuf, notes that although the banks and the financial regulators have put certain measures in place to address increasing fraud cases like separation of duties , introduction of Bank Verification Number and the enactment of the Cybercrime Law that was passed by the Federal Government in 2015, the measures are not enough, given the advanced technology methods that fraudsters use to defraud the banks and their customers.

He appeals to the financial institutions to invest in the technology of big data analytics, adding that such investments will allow the banks to monitor the behavioural pattern of genuine bank account owners in order to prevent fraud before it occurs.

Yusuf also stresses the need for banks to continually upgrade the skills set of their staff members, in line with global technological trends and best practices.

Commenting on Ponzi schemes, the Managing Director, NDIC, Alhaji Umaru Ibrahim, laments that despite repeated warnings by the CBN and the corporation, Nigerians still patronised the MMM, which shows the level of greed among some citizens and their huge exposure to becoming victims in the case of fraud.

Ibrahim emphasises that the proliferation of virtual currencies, such as Bitcoin, Ripples, Monero, Litecoin, Dogecoin and Onecoin as currencies or medium of exchange in Nigeria is becoming worrisome. He describes the development as Internet-based transactions, which have not been authorised by the CBN due to the risks involved in their operations.

He adds, “Any person or group of persons who invest their money in Ponzi schemes does so at their own risk. The Ponzi schemes are the phenomenon of illegal fund managers, popularly called ‘Wonder Banks’, which have continued to defraud unsuspecting members of the public of their hard earned money.

“We will like to reiterate the fact that these fund managers are illegal, as they are neither licensed by the CBN to take deposits from members of the public, nor are those who patronise them covered by the NDIC deposit insurance scheme.”

The collaboration continues

In a bid to get rid of fraudulent investment outfits in the Nigerian capital market so as to boost investors’ confidence, the SEC, CBN, NIBBS, CSCS and National Pension Commission entered into a partnership, the capital market regulator says in a response to enquiries.

It adds that the proliferation of fraudulent investment outfits in the nation’s capital market informed the collaboration, noting that the collaboration is intended to stop fraudulent deals and ensure adequate checks in the financial system.

SEC states, “There is the need for prospective investors to seek the help of financial advisers while investing in the capital market to confirm those financial outfits that are registered with the commission. This will help ascertain the true position of any investment outfit before any financial transaction can be carried out.”

Owing to the fact that the SEC does not have powers to prosecute criminal matters, which characterise about 99 per cent of fraud cases in the Nigerian capital market, the regulator says its partnership with the Economic and Financial Crimes Commission is aimed at ensuring that fraudsters are brought to book.

Collaboration under the Nigeria electronic Fraud Forum, according to NeFF 2016 annual report released this year, has given rise to decisive outcomes that will steady the ship of payment systems in the country.

The report states, “Interventions in our law enforcement model has been made, attention of the judiciary has been drawn to the need for more training of our judges on cybercrime, useful discussions have commenced with our telecoms regulator in the face of an increased use of mobile platforms for payments (occasioned by the introduction of USSD) on more protective measures for users.”

Fatokun, who is also the Chairman of the NeFF, says to check fraud cases in the entire financial system, the forum is seeking the extension of the BVN to all customers of other financial institutions aside the banks. He notes that the NeFF is advocating the early passage of the Payment System Management Bill, which is expected to address contemporary payment challenges in the nation’s financial space.

The NeFF also says it will collaborate with the National Information Technology Development Agency to implement a national policy document on cloud computing, and also set up an industry committee on block chain technology to monitor developments and make recommendations, among others.

Thus, the NIBSS believes that the directive by the CBN for the establishment of industry fraud desks, sending of all electronic interbank transactions to the Central AntiFraud Solution, introduction of biometrics to the ecosystem, and most importantly, ongoing collaborations, will go a long way in reducing fraud menace in Nigeria’s financial space, going forward.