Corporate Governance Regulation and Control Fraud in Nigerian Banks A Thesis Submitted in Partial Fulfilment for the Requirements of University of Sheffield for the Degree of Doctor of Philosophy Simisola Imelda Akintoye School of Law University of Sheffield December 2015 Abstract The 2009 banking crisis in Nigeria awakened the country on the need for effective corporate governance regulation. In a bid to prevent future banking crisis in the country, this thesis examines control fraud in the 2009 banking crisis using the first five banks involved as a case study. The research addresses three major areas of concern: first, it investigates the fraudulent activities of the banks’ CEOs in the periods leading to the crisis; second, it explores the involvement of other corporate actors in the banking crisis; lastly, it examines how corporate governance regulation can be improved to reduce the likelihood of future control fraud in the banking sector. The research adopts a socio-legal method that links corporate governance regulations pre and post banking crisis to the role of corporate actors including CEO’s, auditors, shareholders and Regulators in corporate governance. The research explores corporate governance as a driver of control fraud in Nigerian banks. The research suggests that prevention of control fraud is not in itself determined by provision of adequate corporate governance regulation but also include a number of enforcement mechanisms and contribution of corporate participants, a totality of which could help prevent future control frauds in Nigerian banks. The research contributes to theory, practice and policy. First, it integrates and enhances appropriate literature and knowledge on corporate governance regulation in Nigerian banks. Also, by using the concept of control fraud to understand the banking crisis of 2009; the research unfolds a relatively new type of fraud perpetrated by CEOs in collaboration with other corporate individuals. This is the first study of its kind in Nigeria and will be useful for future studies to adopt in conducting similar research. i The research also influences regulators and policy makers by providing a set of recommendations for each actor in corporate governance which can be incorporated into law in the fight against future control frauds in Nigerian banks. ii Dedication To Mum and Dad Without you this would not have been possible iii Acknowledgements My Sincere gratitude and special thanks goes to: - My Supervisor Prof. Andrew Johnston for his endless support, diligence and prompt feedbacks on all my ideas and drafts. - My Second Supervisor Dr. Jay Cullen for his contribution and feedbacks to my research. - My Family: Mum and Dad, Motunrayo, Foluso, Abimbolu and Segun Iyaniwura. - My Husband, Babatunde, for been very supportive in the course of this thesis. - My Son, Enoch, for the joy you have brought to our family. - Above all I am grateful to God for the grace and strength to successfully complete this thesis. iv Contents Abstract………………………………………………………......................i Dedication…………………………………………………………………..ii Acknowledgements…………………………………………………….......iii Contents………………………………………………………………….....iv Abbreviations………………………………………………………….…...xi List of Statutes………………………………………………………….....xiv Codes…………………………………………………………………...…xiv Reports………………………………………………………………….....xv International Reports and Codes……………………………………..........xvi List of Cases…………………………………………………...................xvii Chapter 1: Introduction…………………………………………...................1 1.1 Background to the study………………………………….…………1 1.2 Study Aims and Objectives…………….………………………...…5 1.3 Why Nigeria………………………………………….……………...7 1.4 Originality……………………………………………….…………..9 1.5 Research Questions………………………………………………...10 1.6 Structure…………………………………………………………....11 Chapter 2: Literature Review…....................................................................15 2.1 Introduction……………………………………………………….........15 2.2 The Concept of ‘Corporate Governance’……………………………...17 2.3 Corporate Governance in Banks…………………….………………...22 2.3.1 Early Banking Industry…………………………………………………….22 2.3.2 Development of banking activities in Nigeria……………………….24 2.4 Conceptual Clarification of Fraud……………………………………..28 2.5 Taxonomy of Fraud…………………………………………...……….30 2.5.1 Institutional Investment Frauds……………………………...............31 2.5.2 Corporate Service Frauds………………………..............................31 2.5.3 Business Trading Frauds………………………………....................31 v 2.5.4 General Business Frauds.....................................................................31 2.5.5 Bank Specific Frauds...........................................................................32 2.6 Fraud in Nigeria – 419 Advance Fee Fraud and Others........................32 2.7 From White Collar Crime to Control Fraud……………………….....34 2.8 Control Fraud Defined…………………………………………….….39 2.9 Theories of Control Fraud......................................................................42 2.9.1 Differential Opportunity......................................................................43 2.9.2 Theory of Concealment.......................................................................46 2.9.3 Theory of Deviation.............................................................................47 2.9.4 Theory of Collusion.............................................................................48 2.10 The Mechanics of Control Fraud……………………………………..48 2.10.1 The ‘Yes Men’....................................................................................49 2.10.2 The Fraud Vehicle – An Arm’s Length Transaction………………..50 2.10.3 Looting of Funds....................................................................….......52 2.11 Notable Cases of Control Fraud……………………………………..53 2.11.1 The US Savings and Loans Debacle of the 1980’s……………..…53 2.11.2 Enron……….…......………………………..……………………...56 2.11.3 Bank of Credit and Commerce International………………............60 2.12 Summary and Conclusion: Bad corporate governance as a driver of control fraud……………………………………………………………..64 Chapter 3: Methodology and Theoretical Underpinnings………....……..67 3.1 Introduction………………………………..………………….........………... 67 3.2 Methodology................................................................................….......67 3.3 Theoretical Underpinnings…………………………………….........…69 3.4 Data and Sources………………………………………………........…75 3.5 Limitations of the Research……………………....………........……...76 3.6 Ethical Considerations……………….………......……………............76 vi Chapter 4: Control Fraud of CEOs in the Nigerian Banking Sector……...77 4.1 Introduction…………………………..........…………………………..........7 7 4.2 The legal position of directors………………………………………...78 4.3 Development of control fraud in Nigeria……………………...………82 4.3.1 The banking Reforms of 2004……………………….………………82 4.3.2 Cadbury Financial Reporting Scandal……….……………………....89 4.4 Control Fraud of the five CEO’s……………...........……………….....93 4.4.1 Oceanic Bank – Cecilia Ibru…………………………………............95 4.4.2 Intercontinental Bank – Erastus Akingbola………........……...……..98 4.4.3 Finbank – Okey Nwosu………………………………………….....102 4.4.4 Union Bank – Bartholomew Ebong………….....………………….104 4.4.5 Afribank – Sebastian Adigwe……………..........………….............105 4.5 The Big Five: What Went Wrong?....................................................107 4.5.1 Control Fraud through CBN’s Expanded Discount Window (EDW) Operations…………………………...........……………………………...109 4.5.2 Control Fraud through collaborative embezzlement…………........113 4.5.3 Control fraud against the Public ……………………….......….......115 4.6 Who bears the risk?.........................................................................117 4.7 Summary and Conclusion………………………...…................…120 Chapter 5 The Role of the Regulatory Framework in the Perpetration of Control Fraud in Nigerian Banks...............................................................122 5.1 Introduction.....................................................................................122 5.2 The Pre-Crisis Era of Corporate Governance in Nigeria (1990- 2009)...........................................................................................................124 5.2.1 Companies and Allied Matters Act, 1990 (Now 2004)…...........…124 5.2.2 Banks and Other Financial Institutions Act 1991 (Now 2004).......129 5.2.3 SEC Code of Best Practices on Corporate Governance in Nigeria (SEC Code) 2003…………………………………………........................131 vii 5.2.4 Code of Corporate Governance for Banks and Other financial Institutions Post Consolidation (CBN Code), 2006………….......……….133 5.3 The Post-crisis Era of Corporate Governance (2009-to date).........137 5.3.1 Code of Corporate Governance for Public Companies in Nigeria, (SEC Code) 2011………………………………………………….................…137 5.3.2 CBN’s CEO Tenure Policy…………………..............…………...143 5.3.3 Code of Corporate Governance for Banks and Discount Houses in Nigeria 2014.............................................................................…..............147 5.4 The Problem of regulatory multiplicity in Nigerian banks..............151 5.4.1 Board Size and Independence…………………….………………154 5.4.2 Chairman/CEO Appointment………………………...…………..158 5.4.3 Audit Independence.........................................................................159 5.5 Should Corporate Governance Regulation be rules-based or principles-based?........................................................................................161 5.6 Overview of the proposed Financial Reporting Council (FRC) of Nigeria