Chapter 3- Oceanic Bank (Nigeria Transparency, Ethics & Money Laundering)

The Case Study: Ethics & Money Laundering in Nigeria

1. LEAD Team Challenge Brief

Agenda:

Emerging Economy Enterprises Week 4 Leadership team roles:
Date: Wednesday 20th February Chair – Hugo Core
Time: 15:00 Coaches – Thierry Hammer
Capture – Haider Gohar

Meeting Outline:

15:00 – Meet & Greet
15:10 – Leadership team introduces case study
15:20 – Investment team introduces their section
15:30 – Action teams debating:
Action Team A
Action Team B
16:00 – Break for Action teams / Leader team – analyzing research
16:10 – Chair requests missed research
16:25 – Break Leader team / Action teams discuss missed research
(AT SAME TIME INVESTMENT TEAM IS ASSIGNING CREDITS)
16:35 – Leadership team presents postulates / reflections
17:00 – Meeting adjourned

Summary of case study
The Case Study is about the conviction of Mrs. Cecilia Ibru, the former managing director of Oceanica Bank, who was charged for financial crimes. Mrs. Ibru used some companies or nominees like her son or her son’s nanny to acquire and mask ownership of assets, including shares of companies and several choice real property in Nigeria and abroad.
She is one of a large number of executives held in connection with the near-collapse of nine banks in 2008.

The government removed Mrs Ibru along with other executives from a number of financial institutions in 2008. The central bank then had to step in and bail out nine banks which were on the brink of collapse because of reckless lending and fraud.

Mrs. Ibru pleaded guilty to a less serious charge on the basis of a plea bargain. The Court found her guilty as charged and sentenced her to six months in prison and a fine involving a forfeiture of 199 assets worth over 1.5 billion USD.

Challenges:

* How was the former Ceo Cecilia Ibru able to get away with approving loans?
* Was she personally behind some companies that wanted these loans? … If so, then what was the benefit for her?
* Why did Mr. Limidu sanusi take the approach of being very outspoken about distress in the banking system?
* Why did the former CEO Cecilia Ibru take the plea bargen? Why did the Government offered her the plea bargen?
* The challenges the law is facing is whether her jail time was enough?

2. INVESTMENT Team Challenge brief 

CASE: OCEANIC BANK, NIGERIA

State Frame

Nigerian Financial System  

The Nigerian financial system consists of the formal sector (bank and non-bank financial institutions) and the informal sector (savings and loan association, local money lenders, etc.). The institutions are regulated by the Central Bank of Nigeria (CBN), Federal Ministry of Finance, Nigeria Deposit Insurance Corporation (NDIC), Securities and Exchange Commission (SEC), the National Insurance Commission (NIC), and the Federal Mortgage Bank of Nigeria (FMBN). The informal sector is largely loosely organized without any form of formal regulation. To interpret the financial system and evaluate its performance requires an understanding of its functions in the economy. With reference to the allocation of resources and economic efficiency, the financial system performs three major functions, which are vital to economic growth and development. First, the system provides convenient and efficient payments system without which specialization in production, so vital to productivity improvements would be greatly impeded. Secondly, the financial system pools savings from net surplus units and channels them to productive investment.

Nigerian financial sector evolution and background

 The quality of lending and oversight is also vastly improved from pre-2008, where the main business of banks was lending money to management to invest in the stock market.

 When dollar funding was readily available many banks made the mistake of taking dollar deposits and term lending these dollars to oil companies. As the dollar shortage developed the banks had to pay back the dollar deposits but could not get the dollar term loans back, leading to an acute funding squeeze.

Main Investment factor - MACRO

Investors dislike Nigerian banks for many reasons. It is not currently possible to get money out of Nigeria. They are unlikely to put new money into a country when they have no idea if they will be able to get cash out and at what rate.

Main Investment factor - MICRO

Nigerian banking from inside

(According to studies carried out by some academics, private bankers, etc)

A sector-specific reason for the dislike of Nigerian banks is the distrust of the balance sheets.

Fraud has been acknowledged as one of the principal threat to the development of the banking sector worldwide. 

Banking job is one of the best paid jobs in Nigeria. 

The findings revealed that greed is a foremost cause of fraud (followed by inadequate staffing and poor internal control), as greater part of the staff considered their remuneration as sufficient. 

Level of bank staff involvement

It was also observed that banks’ staff got involved at all stages of fraud, including: initiation, execution and concealment.

Sector Dynamism

The 10 largest banks in Nigeria have a market capitalisation of US$6.5bn. These 10 banks account for almost the entire sector.

If the Nigerian economy does not grow much the banks have plenty of growth potential. The Nigerian mortgage and retail lending market is practically non-existent and the vast majority of transactions are still cash rather than electronic. Previously retail lending was difficult as Nigeria did not have a national identity (ID) system. This is changing as a biometric ID system is introduced. According to the World Bank, Nigerian bank loans equate to 23% of GDP, compared to 179% in South Africa and 45% in Kenya.

View of types of fraud in the industry

Among all the types of fraud, computer fraud is perceived as the highest type of fraud currently affecting banks (followed by fake payment, forgeries, defalcation and so on). On the other hand, unofficial borrowing (these seem to suggest that bank employees no longer view them as types of fraud since the practice is common and widespread in the industry, and particularly benefits them in some way) and foreign exchange malpractice/divertion (is viewed as a perfectly normal business practice aimed at generating higher returns for the ban; this may be one of the reasons for the striving “black market”) were not perceived as bank fraud. 

The findings aforementioned are in line with the most common types of bank frauds in Nigeria identified by Alashi (1994) and Adeyemo (2012), which are forgeries, unofficial borrowing, defalcation, theft and embezzlement, impersonation, computer frauds, account-opening fraud, poor internal control, greed, inadequate staffing, poor book-keeping, inadequate training and re-training.

Consequences of banks fraud ranked in order of importance

Loss of revenue, patronage and customers’ confidence top the list. Loss of corp. image and facilitaties distress are at the bottom

Well known Nigerian private bankers and academics’ beliefs

Need to establishment of adequate internal control system has also been identified as necessary in fraud prevention (Olatunji, 2009 and Akinyomi, 2010).

Akinyomi: “The prevention and detection of frauds are basically the responsibility of the management, through the establishment of an effective and efficient internal control system (…) the importance of the internal control unit of any organization, especially banks cannot be undermined. Since the lack of an effective internal control system, according to the findings, is the major cause of bank fraud. Management of every bank should create and establish a standard internal control system. This will promote and enhance the liquidity, solvency and going concern concept of the banks.”

The 

prevention and detection of frauds are basically the responsibility of the management, through the establishment 

of an effective and efficient internal control system.

Finally, the importance of the internal control unit of any organization, especially banks cannot be undermined. 

Since the  lack of  an effective  internal control  system, according to the findings, is the major cause of bank 

fraud. Management of every   bank   should create and establish a  standard   internal   control system. This will 

promote and enhance the liquidity, solvency and going concern concept of the banks.   

Globally against Fraud

A lot of organizations in their effort to advance their image have resorted to developing ethical guiding principles and codes of moral values. The whole essence of these is to guarantee that all organizational members irrespective of position or rank, complies with the least standard of ethical responsibility in order to encourage the reputation of such firms in their selected industry, earn the goodwill of clients and thus improve their competitive advantage.

Opportunity

Even if the Nigerian economy does not grow much the banks have plenty of growth potential. The Nigerian mortgage and retail lending market is practically non-existent and the vast majority of transactions are still cash rather than electronic. Previously retail lending was difficult as Nigeria did not have a national identity (ID) system. This is changing as a biometric ID system is introduced. According to the World Bank, Nigerian bank loans equate to 23% of GDP, compared to 179% in South Africa and 45% in Kenya.

Investment Team Challenge: 

1. How someone is supposed to invest in an industry whose financial statements do not reflect the economic reality? 

2. What steps can the company follow to provide reliability and transparency to the investors?

3. How can corruption risk and non-ethical behaviours from the managers/board be mitigated?

ACTION Team Response & Reports

Action Team A's Response and Reports

Action Team “A” have responded to the lead team challenges but were unsure whether we needed to suggest future actions for the company based from lead team questions.

We have also answered the investment team questions and suggested actions relevant to each question.

Key area to focus on

-          Company strategies

-          Organisational structure

-          Managerial System

-          Competition within local market

-          Size of domestic market

-          Location, is capital city best for development

Response to lead team questions / challenges

* How was the former CEO Cecilia Ibru able to get away with approving loans?

“The report concluded that: ‘...she was the overbearing chief chef directing the cooking of the books at the bank.” As per case study comment above she was running the show. But how far rooted was the fraud in the company? Was it just CEO or the entire management framework, how deep rooted was it within the company?

As the CEO she had autonomous control and would have influenced key decisions. It can be viewed as full freedom, she was even married to a the Nigerian Minister of Foreign Affairs at the Time Michael Ibru.

* Was she personally behind some companies that wanted these loans? … If so, then what was the benefit for her?

Yes, in a number of industries (food, retail, beauty products). Companies were held in her “fake” names.

The benefit was personal, pumping her companies full of money from the loans allowed her to obtain assets across the world (199 assets across the world were seized at a value of USD $1.5 Billion). Doesn’t determine what are the assets but could be derived as personal wealth.

* Why did Mr. Limidu sanusi take the approach of being very outspoken about distress in the banking system?

Despite rapidly growing economy the bank has faced too higher profile legal challenge. The failings of Cecilia has led to the punishment of 1 person, but the plea bargain presented an opportunity to give her a less harsh sentence on the basis it would provide less of an embarrassment over the Nigerian Banking system.

* Why did the former CEO Cecilia Ibru take the plea bargain? Why the Government did offered her the plea bargain?

She took the plea bargain so she didn’t face a much larger stint in jail (13 years in total)

Government offered her the pleas bargain to potentially save face of Nigerian Society

* The challenges the law is facing is whether her jail time was enough?

This was a high profile case so there was pressure for it not to be scrutinised to far by the public, however there must have been some form of pressure on the “law” to not give Cecilia Ibru to harsh a sentence seeing as her husband was in the government.

Response to Questions from Investment team

Questions from the investment team have been answered below and key actions summarise the research.

1.       How someone is supposed to invest in an industry whose financial statements do not reflect the economic reality?

There is a prominent list of obstacles, but the main priority is the sever lack of regulatory and institutional frameworks that ensures enforcement to encourage better standards of corporate governance (Rossouw, 2005). It would be a more attractive market to investors if they had more security in the knowledge that instances like this carry harsher penalties and are investigated to a high standard.

However, there is a great deal of ambiguity and uncertainty about what corporate social responsibility or governance really means as well as what drives a business to pursue it (Babalola, 2012). It is all well having a great governance framework but without the people to enact it how can its influence be spread.

However contrary to the point above the banking sector in Nigeria went under heavy regulation in 2004 and capitalisation levels were raised leading to a reduction in the number of banks from 120 to 25 (ALB, 2018) and there are 4 main acts (ALB, 2018).

1. Companies and Allied Matters Act (CAMA) 1990
2. Nigerian Deposit Insurance Corporation Act 2006
3. Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995
4. Financial Reporting Council of Nigeria Act 2011

However these acts don’t grant governance to the senior management boards and this is where the key issue lies. And in 2014 Nigeria introduced “The Code of Corporate Governance for Banks and Discount Houses 2014” that states:

·         A minimum number of five and maximum number of 20 directors on the board

·         The board shall consist of executive, non-executive directors and independent directors

·         Non-executive directors should exceed the executive directors.

ACTION 1A: Adopt The Code of Corporate Governance for Banks and Discount Houses 2014 strategy. Replace senior management of entire company. Incentives will need to be required to bring skilled employees to work at a “disgraced company”, suggest these are remuneration based. Ensure external auditors are used to provide accurate and detailed set of accounts available to public and investors. Suggest using a recognised international auditor such as KPMG or Deloitte and a recognised Nigerian auditor.

2.       What steps can the company follow to provide reliability and transparency to the investors?

(Kaushil)

The company is 100% owned by Nigerian citizens, therefore these are the key stakeholders within the business and it is vital to provide 100% transparency within the bank and its actions. Investors in the bank are most likely going to be from within Nigeria, as the investment team pointed out this is due to the fact money is not easily taken out of Nigeria. Therefore any investment in the company is going to need to be from within Nigeria.

General consensus of Nigerian trade policy is the enhancement of competitiveness of its domestic industries, with a view to adding value to local economies. The trade policy also seeks to create an environment that is proactive in terms of capital inflows, and to adopt the relevant technologies to do so (Samuel & Umogbai, 2013). The government is promoting inwards growth and there presents opportunities for capital fund sourcing.

ACTION 2B: Have small arm to the investment strategy that focusses on “clean business”. This, for example, could look at Nigerian companies looking for capital that meet the requirements listed out by the government that avoid corruption and show due diligence. This would be branded as a clean business arm and promotes the Oceanic Bank are on a path to improvement.

3.       How can corruption risk and non-ethical behaviours from the managers/board be mitigated?

(Anna)

Corruption is a complex issue that may damage the company's performance and reputation long-term. It is sometimes challenging to detect, however in Oceanic Bank’s case corruption was visible. Unfortunately, other than restructuring the company’s board of directors as well as the CEO is essential. Laundering at such scale cannot be done without the upper management level as well as assistance from the government (Deloitte, 2018). Therefore, the initial steps in fighting corruption are to replace existing staff with people with strong ethical beliefs as well as rebuilding trust in the public eye.

·         By being conspicuously transparent, operating with integrity and accountability in all operations as well as including anti-corruption ideals into company culture and mission.

·         By publicly disclosing and regularly monitoring robust anti-bribery and anti-corruption systems throughout all operations and those of subsidiaries, as well as raise awareness through information sharing. Sharing information and data empowers all stakeholders to make the right decisions and improves accountability.

·         By publishing financial accounts for each country of operations and publishing clearly what is paid to each government in taxes, concession fees and other contributions. This not only builds trust in the company but is also a deterrent to extortion and stakeholders can see if the money paid by business to governments is accounted for

·         By listing who the real beneficial owners of their company and their subsidiaries are, and by promoting with governments the establishment of public registers of beneficial owners

·         By supporting and promoting governance reforms in all state institutions at all levels including at the local level to ensure that they perform well and for the betterment of society

(Deloitte, 2018)

ACTION 3A: By implementing a zero-tolerance policy towards corruption in the culture at all levels of the company. It is essential to rebuild trust within the company and public relations, otherwise the future of FDI’s and customer loyalty is deemed. As being a part of Ecobank, there should be a clear difference between the two enterprises as well as a strong company mission statement ensuring the scandal wouldn’t repeat.

Bibliography

ALB (2018) Banking Regulations 2018, available from https://www.africanlawbusiness.com/publications/banking-and-finance/global-legal-insights---banking-regulation-5th-ed./nigeria/overview (cited 19th February 2019)

Babalola, Y. (2012) The impact of corporate social responsibility on firms’ profitability in Nigeria, European Journal of Economics, Finance and administrative sciences, 45(1), pp39-50

Deloitte (2018) Another way to fight corruption and restore trust, available from (cited 19^th February 2018)

Roussouw, J. (2005) Business Ethics and Corporate Governance in Africa, Business & Society, 44(1), pp94-106

Samuel, I. & Umogbai, M. 2013, ‘The Impact of Commercial Banks Activities on International Trade Financing: Evidence from Nigeria’, CLEAR International Journal of Research in Commerce & Management, Volume 4 (6), pp.113–118

Oceanic Bank (Nigeria Transparency, Ethics & Money Laundering)

Action Team B:

1) Answers to the Lead team challenges:

* How was the former CEO Cecilia Ibru able to get away with approving loans?

She was able to get away by using her authority (power abuse) as the managing director/CEO of Oceanic Bank, where she’s been in upper management since the early 90’s (1990 to be specific) and a CEO for approximately 12 years by the time of the scandal. In other words, she is considered as an insider who shaped the bank’s leadership. Additionally, her strong reputation within the Nigerian banking industry as well as her social status in which she was seen as a woman of integrity and enterprise.

According to Appendix A, one could see that the two auditors were Nigerian who appear to only work on the assumption that the data given by the Oceanic Bank board of directors is correct, meaning there was no real independent oversight for the bank’s leadership.

* Was she personally behind some companies that wanted these loans? … If so, then what was the benefit for her?

Yes, in fact 70% of Nigerian Naira 278 billion non-performing loans went for her personal use and direct members of her family. An example of this would be the luxury gift company that was registered in Nigeria and US with high annual revenue. Also, the main customer of this company was the Oceanic Bank.

The main benefits for Cecilia Ibru were:

* Stolen $1 billion;

* 199 of properties across US, Nigeria, Europe and the Middle East;

* Benefit of her political connections since she was a representative of the National Honours List of Nigeria.

* Why did Mr. Limidu Sansui take the approach of being very outspoken about distress in the banking system?

As the governor of Nigerian Central Bank, he rescued five leading banks with public money, using N400 billion. The rescue was necessitated by a high level of non-performing loans made before the 2008 financial crisis (a large proportion of which were high-risk unsecured margin loans), meaning that tackling the high NPL load remains a key objective of the Nigerian central bank and ministry of finance.

* Why did the former CEO Cecilia Ibru take the plea bargain? Why did the Government offer her the plea bargain?

Short jail sentence for her, while the EFCC received a smooth confiscation of financial and property assets and an opportunity for a quick turnaround of Oceanic.

Although short, any jail sentence to a person as well-entrenched in the Nigerian establishment as Mrs Ibru is an achievement.

* The challenges the law is facing is whether her jail time was enough?

Answered above

2) Answers to the investment team challenges:

* How someone is supposed to invest in an industry whose financial statements do not reflect the economic reality?

Diversify the risk across the market leaders, which will hopefully mean that the market’s high growth rates will outweigh the risks posed by the developing market’s poor institutional oversight and corporate governance.

Have a good grasp of the macro factors shaping the country – a good call on oil prices will likely be reflected by solid performance by the Nigerian economy in general and banking sector in particular.

Seek to differentiate companies on the basis of activities that pose a higher organizational challenge – successful expansion in other countries, partnerships with Western banks, telecommunication firms, tech companies etc, well-executed corporate successions, expansion in underserved market segments and higher than average levels of corporate access and disclosure.

These would underpin the future of any successful bank, and are less likely to be done well by a bank managed by incompetent crooks. The above constitute Alexey’s effectual action.

Refer to Appendices B &C

* What steps can the company follow to provide reliability and transparency to the investors?

1) High disclosure by providing more detailed financial statements than Nigerian standard practice (refer to Appendix D)

2) High level of managerial engagement with investors

e.g. analysts’ calls during financial results

3) seek a strategic alliance with a leading western financial service company in order to improve transparency and financial performance

4) use one of the leading four international auditors (Pwc, Deloitte, KPMG and EY) and regularly rotate them

The above constitute of Alexey’s causal action

* How can corruption risk and non-ethical behaviours from the managers/board be mitigated?

Answered above (plus rotate leadership)

Appendices

Appendix A: Financial Statements 2010

Appendix B: NPL in Nigeria (Overview)

Appendix C: Oil price (Brent crude)

Appendix D: Example of a detailed financial statement https://www.marketscreener.com/11-PLC-11782300/pdf/837099/11%20PLC_Annual-Report.pdf

Causal action (Aizhan):

The company should implement and develop E-commerce Application (developing more electronic transactions in order to be more transparent for customers and prevent fraud)

Better digital technologies in order to facilitate, oversight and prove the company’s financial operations

Effectual action (Aizhan):

Drive towards a greater financial inclusivity for Nigerian customers that are currently underserved by the financial system, by providing them access to a greater array of financial services through a wider range of technological channels. This will be key for maintaining growth rates as well as rebuilding the bank’s reputation as a credible and socially-orientated institution.

Sheherazed:Causal action:

* Strengthen the company’s financial position
* Conduct a strategic review by a credible international consultancy agency (such as McKinsey)

Sheherazed Effectual action:

Acquire a rival with good financial practices

Sell off a stake of Oceanic bank to one of the major global financial firms (to raise competitiveness)