The Impact of Control Fraud on the Banking System: Evidence from a developing Country

Recent global financial crisis have awakened the need to regulate corporate governance across the world. The fall of multi-national companies like Enron in the USA and Bank of Credit and Commerce International (BCCI) in the United Kingdom have brought to the fore the impact of fraud in corporate governance regulation. In Nigeria, fraud in the banking sector has reached epidemic levels contributing to the Nation’s economic depression. This research tests the hypothesis that the inadequacy of corporate governance regulation in the banking sector creates the opportunity for a web of financial crimes where the company is used as a fraud mechanism. This type of fraud, known as control fraud mainly involves people who are in ‘control’ of the company, particularly directors using their position as a weapon to defraud. The evidence collected from 5 banks involved in the recent banking crisis in Nigeria in 2008 and 2009 financial years supported this hypothesis. The research adopts a socio-legal methodology to assess the link between corporate governance regulation and control fraud. The research further suggests that control fraud is a peculiar challenge of Nigerian banks and there is therefore the need for regulatory involvement that takes into consideration the peculiarities of the country and addresses the institutional challenges faced in the system, particularly corruption and regulatory enforcement It is important that corporate governance regulation is specifically designed to meet the needs of a particular jurisdiction as opposed to transplanting western norms.