Barbarians within the Gates: The Need for International Cooperation

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Monday, 12 October 2009
Why "Barbarians within the Gates"? This evokes the image of Roman times when barbarians flooded the empire and undermined it from within. It is beyond cavil that the meltdown witnessed by the global financial system was in no small way caused by financial renegades that have undermined the system from within and caused it to collapse. Recently a workshop, at Jesus College in Oxford, examined the internal threats to the stability and integrity of financial institutions. In presenting the keynote address, I commented on how financial rogues from within have destabilised the system and I would want to share the Nigerian experience with you.
In Nigeria, we have faced a profound situation where bankers, stockbrokers and all sorts of gurus and high ranking l officers in the financial institutions have been far from transparent with transactions.. Time and time again, questions have been asked about why the Economic and Financial Crimes Commission (EFCC), a law enforcement agency, should engage itself with the cleansing exercise of the Nigerian financial system and the “recovery of debts”. The collaborative effort between the EFCC and the Central Bank of Nigeria is instructive of the role a law enforcement agency can play in strengthening an economy and I will recommend that to other jurisdictions.
My discussion will therefore center on the criminal elements that justify the involvement of the EFCC, with the remedial measures in the Nigerian financial markets by regulatory bodies. It will establish the presence of rogues within the financial system. The discussion will also cover the recent initiative of the EFCC in providing a Transactions Clearing Platform (TCP) for businessmen and third parties that may interface with Nigeria in the quest for genuine investments.
At face value, there should be no basis for the EFCC’s involvement in the recent banking sector cleansing and the recovery of debts. However we must understand that section 7 (2) of the legislation establishing it states that the EFCC “shall be the coordinating agency for the enforcement of the provisions” of the following key legislations:
1. The Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Act 1994.
2. The Banks and other Financial Institutions Act (BOFIA) 1991
These 2 laws alone should suffice to justify the involvement of an organization like the EFCC in the bank cleansing exercise and the recovery of loans by the Central Bank of Nigeria. However it may be necessary to go beyond that. The general issues arising from the exercise in Nigeria have shown that margin loans, other forms of loan facilities and Infraction by lenders, are the critical areas that rogues within the system utilized. We will discuss each one of them and the criminal strands involved.
1. MARGIN LOANS – As understood, margin loans mean lending against the security of a portfolio of shares. It may also mean a loan to acquire shares. It could also mean a combination of both. Outside of the fact that margin loans are speculative given the uncertainty with share prices, the EFCC will investigate such class of loans since they were mostly used to acquire the shares of the lender and these same shares were held as collateral for the loans. The Central Bank of Nigeria Circular BSD/DO/CIR/04/2004 prohibits a bank from financing the acquisition of its own shares and section 60 of BOFIA criminalises the refusal of banks to comply with any circular of the Central Bank. Further to that, section 20 of BOFIA prohibits and criminalises the use of a bank’s own shares as collateral for a loan. The investigations by the EFCC established that not only were banks financing the acquisition of their shares and using the same shares as collateral (contrary to the CBN Circulars and sections 20 and 60 of BOFIA) but also that the margins loans were actually used to artificially engineer the upward movement of the prices of the shares of banks. This of course raises further the spectre of insider trading and other allied criminal activities. Indeed investigations conclusively established that the margin loans were mostly availed to stockbroking firms prior to public offer of the shares of the banks with the intention of driving up the value of the shares of the banks. In a celebrated case a stockbroking firm was availed almost $50 million by three banks and the funds were utilized in mopping up shares.
Some analysts tend to take the position that the massive withdrawal of offshore funds collapsed the Nigerian stock market. Such analysts however conveniently forget the fact that the offshore funds found their way into the Nigerian market as a result of the phenomenal returns and growth which the market offered to global investors. However these phenomenal growth and return were a function of share price manipulation by “barbarians within the gates” of the financial system. Economist may therefore consider whether the effect of the withdrawal of the offshore funds did not really collapse the market but actually led to the market correcting itself.
2. OTHER LOANS AND INFRACTION BY LENDERS: One is tempted to modify the Clintonian cliché to read: “stupid, it is the law not the loan’. A simple loan facility does not at face value invite the EFCC. However where the loan process from application, through processing, to approval, disbursement, utilization and finally repayment has a criminal flavour, then the EFCC will be involved because a criminal law has been flouted. Imagine the following scenarios:
(I) Loan Application Stage: Customer represents that it wants a loan for working capital purposes but utilizes the loan for private use. That is obtaining by false pretences and the EFCC established several such cases.
(ii) Loan Processing Stage: Officers of the bank are compromised and recommend a loan which the fundamentals and cash flow would ordinarily not have supported.
(iii) Loan Approval Stage: The Chief Executive of a bank approving loans that have been turned down by the Credit Committee of the Board of Directors.
(iv) Loan Disbursement Stage: What if part of the disbursement went into private pockets and not the purport   customer? This is a classic case of money laundering that the EFCC established in respect of several accounts.
(v) Loan Utilisation Stage: Utilising the loan to mop up the bank’s shares (Contravenes BOFIA which criminalises it) which we have discussed under margin loans
(vi) Repayment Stage: Where the terms of the loan states that the cash flow from the business financed is supposed to be paid to the bank but borrower diverts same. It is criminal diversion of funds.
(vii) Collateralisation Stage: Contrary to the banks’ own credit policies, undeserving companies were given unsecured loans. In a single case, an unsecured loan of about $100 million was availed to a company whose balance sheet size and cash flow would not support even a secured loan for that amount.
The investigations also established the existence of fictitious collateral and customers criminally tampering with the collateral given or even a bank accepting a collateral unknown to law or not legally viable.
The EFCC’s involvement with the cleansing exercise of the financial system by the Central Bank has led to the following direct results:
To date classified bad loans of N114 billion (about $700 million USD) have been recovered.
Filed 188 count charges against 4 Chief Executives and 11 Directors of banks as well as 1 Chief executive Officer of a stockbroking firm.
INTERNATIONAL COOPERATION
The Nigerian scenario described above is not peculiar. Other jurisdictions for different reasons have experienced the phenomena of professionals working from within the system to undermine the global financial system. It is therefore necessary from the point of view of law enforcement that there should be greater level of cooperation in respect of financial crimes. From a domestic point of view, I will recommend the Nigerian Experience of a collaborative effort such as the one between the Central Bank of Nigeria and the EFCC.
From a transnational perspective, if it is accepted that the financial system impacts not just on the economy, but also the politics and polices of countries, then it is necessary that innovative solutions in law enforcement should also follow suit. . I will suggest in this context that countries must resolve that as a matter of protocol, rather than upon request, Suspicious Transaction Reports that might impact on each other must be shared promptly. For instance if Country ‘A’ gets a Suspicious Transaction Report that has a Nigerian element, then country ‘A’ as a matter of protocol must share that Suspicious Transaction Report with Nigeria even where Nigeria has not made a request for such. This will enable countries keep track of illicit economic activities even across their borders and might even be the basis of triggering fresh investigations. In any case, it is irrefutable that the barbarians within the system often launder the proceeds of their crimes across transnational borders and this mode of cooperation will be useful in tracking deposits and assets.
THE EFCC’S TRANSACTION CLEARING PLATFORM
Permit me to inform the audience about the creation of a Transactions Clearing Platform (a Business Help Desk) that the EFCC has recently created. When I took over the helm of affairs at the EFCC, one of the things that struck me was that we required a more innovative approach to fighting cybercrime as well as the utilization of preventive measures in addressing economic crimes.
On the generic level, the EFCC has launched an anti-corruption Revolution Campaign (ANCOR) which is aimed at Nigerians effectively participating in and taking ownership of the fight against economic, financial crimes and corruption.
As to specific business transactions, Nigeria for long has been identified with fraudulent letters (aka 419) and business proposals and as a result the EFCC has now put in place a mechanism for the smart utilization of technology to tackle the problem. An adjunct service arising there from is a Transactions Clearing Platform (TCP) of the EFCC that will assist individuals and companies undertake BASIC due diligence in respect of business proposals received from or intended for execution in Nigeria. Key components of the Transaction Clearing Platform are:
1. The platform is staffed by dedicated officers of the EFCC and is informed by the need to ensure that any one who gets defrauded as a result of a fraudulent business proposal from Nigeria is as a result of failure to utilize the services of the EFCC through the TCP.
2. It is informed by the need to conduct preliminary due diligence before consummating a business transaction..
3. At a basic level, it will verify for genuine investors the veracity of business proposals from Nigeria.
4. The verification will be basic and parties will be advised to do further due diligence as shall be deemed necessary.
5. The platform will disseminate advisory emails to victims and potential victims of 419 using email addresses extracted from the depository of suspected and convicted fraudsters in Nigeria.
I therefore invite you to visit our website (www.efccnigeria.org) and take advantage of this service. With the EFCC’s Transactions Clearing Platform, we will be proud to say that only a person who wants to be defrauded by scammers will be so defrauded as a result of ignoring the service we are providing.
CONCLUSION
Distinguished audience, what I have presented to you is a brief and I trust we will do better justice to the issues raised in this presentation during discussion session. Thank you for your time and attention.
Mrs. Farida Waziri (AIG RTD)
Executive Chairman, Economic and Financial Crimes Commission
Executive Chairman's Address at the IMF Meeting in Instabul Turkey
Source: The Economic and Financial Crimes Commission (EFCC)
 
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