Audit & Controls Under Universal Banking - Olufemi Awoyemi, Nov 2000

8/14/2019 Audit & Controls Under Universal Banking - Olufemi Awoyemi, Nov 2000

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THE CHALLENGE FOR

AUDIT &CONTROL

UNDER UNIVERSAL BANKING:

-AROLERE-DEFINITION

Being a contribution to the official Journal of the Chartered Institute

of Bankers of Nigeria

By Olufemi Awoyemi

B.sc, ACA, ACITN, AMNIM, AIMC

Tuesday, November 14, 2000

Lagos


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The Challenge for Audit & Control under Universal Banking

By Olufemi Awoyemi2

THE CHALLENGE FOR AUDIT &CONTROL UNDER

UNIVERSAL BANKING

- A Role Re-definition

With or without Universal Banking, there exist infallible reasons to reposition the Audit and

Control function of a financial institution in such a way that will make it more efficient and more

responsive to the dynamics of the financial services provider mindset which the concept of

Universal Banking system to be adopted in Nigeria would only re-emphasise.

INTRODUCTION

Fast emerging as the major route to banking globally is the emergence of a multi-purpose banking

licence that encourages the direct conduct of a broad range of financial activities through a

structure known as Universal Banking.

An attempt at evaluating the concept of Universal Banking within the Nigerian context has

hopefully drawn up a case for a role redefinition of the Audit & Control function from the holistic

definition which sees it as the safeguard of financial records to that; which emphasises its

contribution to overall management efficiency that of the Internal Consultant on Risk, Businessand Control issues.

Times have certainly changed!

The last decade has witnessed such profound changes in virtually all aspects of life leading to a

myriad of changes in how financial intermediation is and should be conducted. From recent

experiences in Nigeria, the changes can be seen from the following insights:

ssssssssssss The new role expected from the capital markets in managing growth of the productive sectors

of the economy and the impact of privatisation of public enterprises.

ssssssssssss The emerging realities of the new democracy, good governance, transparency, integrity and

the elimination of subsidies.

ssssssssssss The evaporation of reverence for institution and authority and its replacement with value

perceptions.

ssssssssssss The growing public demand for information and the right to know.


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By Olufemi Awoyemi3

The banking sub-sector of the financial services industry is also faced with the following changes:

ssssssssssss Market definitional changes intermediation and dis-intermediation at both ends of the

transaction value chain.

ssssssssssss Emerging new models to cash management visibly seen in the successful introduction of

EPS/POS card based schemes serving as a front runner to the use of ATMs, Telephone

Banking and E-payments.

ssssssssssss The upcoming National Automated Clearing System (NACS) which would adjust the current

model and also emphasise the critical issue of cost per transaction and the development of

electronic means of providing low cost mass customisation services.

ssssssssssss Reconciling the cultural differences in commercial and investment banking.

ssssssssssss Emergence of forceful competition from hitherto non-traditional sectors such as retail service

providers, consulting firms, insurance companies, fund managers and specialised agencies.

ssssssssssss The changing risk complexion within the financial services offering.

ssssssssssss The rapid increase in technological changes.

ssssssssssss Changing Profile of the customer.

ssssssssssss Government emergence as a major player creating forceful competition for investable funds.

ssssssssssss Reducing margins from traditional income generating areas coupled with an increasing

shareholders expectation for impressive results.

ssssssssssss The changing ownership structure of most banks tilting from private to institutional/public

banks; government to entirely private; and local to foreign.

ssssssssssss The era of the knowledge worker with the necessary skills and competence, sufficiently

empowered to provide the new level of value adding services to an increasingly discriminating

public for which the question of loyalty to institution is fickle, driven more by value perceptions

of service offering.

ssssssssssss Increasing dearth in skills and competence to drive the new organisations being created at a

frenetic pace.

There appears to be an entire shift in mindset from the banker to the financial service provider

in meeting customer needs. Local and overseas economic and political developments have thus

helped to drive the point home that the realities have changed to create a new and different

operating environment.

BANKS ROLE IN FINANCIAL INTERMEDIATION:


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By Olufemi Awoyemi4

The practice of financial intermediation is a strong premise upon which banking service is firmly

anchored. In the traditional sense therefore, banking business is with reference to commercial

banking, while other varieties that have emerged are exigencies of the evolving needs and new

challenges in the economy, which led to new practices emerging.

The niche or specialised banking system mandatorily imposed through legislation restricting or

delimiting activities for commercial and merchant banks had worked well for Nigeria prior to 1990.

The liberalisation of bank licensing under the Structural Adjustment Programme (SAP) introduced

in Nigeria in 1986, resulted in the growth of new banking firms, mostly in the investment banking

end. This was as a result of the liberal system, which encouraged distortions and created

enormous foreign exchange arbitraging opportunities for the banks.

Through a number of policy measures however, some of the functional barriers betweencommercial and merchant banks have been dismantled, with commercial banks being permitted

to undertake traditional merchant banking activities (e.g. leasing, investment advisory services

and other fee based services) and vice versa. All these happened without much structural

change to favour investment banks which carried on business with mostly short-term funds, no

chequeing account facilities, lacking access to the clearing house and the much needed low cost

and stable funds (i.e. Savings Accounts).

There exist in the market now banks (merchant and commercial), competing with little or no

differentiation in product and service offering; thus encouraging banks to reward their people for

finding creative means outside regulatory requirements to satisfy their customers who could be

less bothered with the legal definitions given to them by the regulatory framework. This has led to

sharp practices by some bank officials, operating, not entirely outside the managements

knowledge. Profits have to be declared through creative destruction of values that underline the

very essence of the banking business.

It might be appropriate to pause here to allow you reflect on the above scenario and ponder on

how the Audit and Control function in banks have fared. The success index/rate here, I dare say,

would be a function driven more by the ability and extent to which individual banks subscribe to

self-regulation. In managing its need to survive the harsh realities of the economy vis--vis

regulatory requirements (better still bottlenecks) defining how to play in the market place; banks

are often faced with challenges, which anyone that has worked in the inspectorate division, are

often looked upon to resolve.


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By Olufemi Awoyemi5

While it is in order to criticise the exceptions in other units, it may be well to look at how this

traditionally honourable profession is structured to function to enable us deal with the causes of

those exceptions we point out (which I dare say are fallouts of the gaps between business

realities and regulatory requirements). The legacy of the failed banks in Nigeria, the continuing

debate over the quality of risk assets being carried by banks and the obvious gaps in

customer/market demands vis--vis regulation are all pointers that all may not be well with the

way the function is positioned. We should not act out the role of the ostrich that buries its head in

the sand assuming that the sun is not there.

Thus, the question is how do we achieve the legal integration between commercial banking and

other forms of financial services that would facilitate the flow of financial intermediation without the

recourse to what I would term - creative banking?

THE CURRENT SITUATION:

The financial services environment is characterised by an array of legislations on banking,

insurance and securities business with three separate apex regulatory authorities viz: CBN,

NAICOM and SEC respectively.

Separate licences must be obtained to engage in either while there does not exist a harmonised

requirement for all three businesses. The truth of the matter is that, current practices present a

scenario where the product offerings are seen as competing products for the same customers

funds. Apart from the compartmentalisation, which the legal framework gives it, a further

compartmentalisation occurs within each sector to create sub-sectors i.e., discount house,

merchant, mortgage, development etc.

In the case of banking, internal supervision, taking its cue from the supervisory bodies have

focussed more on banking within regulatory definitions rather than on functional definitions. This

non-recognition of functional realities have led to gaps and arbitraging opportunities which market

participants have exploited either to their respective organisations advantage or either helped

themselves.

Currently, banks offer insurance products as an add-on service to their product offering without

any regulatory framework to avoid sub-optimisation or undue risk carriage by the banks that

expects the partnering insurance company to be fully compliant with NAICOMs standards. In this


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By Olufemi Awoyemi7

Universal banking in its general sense is not alien to the Nigerian Banking System. We already

have existing in Nigeria, situations where banks own securities or/and insurance companies with

separate and sometimes, not distinct management structures. In most cases however, they exist

as subsidiaries to the banks without any reporting implications.

Before the advent of merchant banks in Nigeria in the 1960s, the then existing Banks were

actually operating to a large extent as Universal Banks.

Universal banking as presented here therefore does not suggest that a bank should necessarily

engage in all service offerings, which its new licence would permit. Rather, the position is for

each bank to identify its core competence area coupled with its identified market focus, determine

what product and service mix would best help it actualise its corporate objectives.

What is the scope envisioned for universal banking in Nigeria?

Central to the rationale of the advocacy for universal banking is the issue of the wide range of

activities, which may be permissible under the arrangement, and the economies of scale and

scope derivable therefrom.

The wider range of services would necessarily embrace the following:

` Financial intermediation as currently provided by retail (commercial) banking outlets.

` Funds management;

` Investment (merchant) banking services;

` Financial advisory service including financial consulting;

` Unit trusts;

` Mutual funds;

` Mortgage finance;

` Securities trading including derivatives (options, hedges, bonds etc);` Underwriting business (brokering, issues, swaps etc);

` Insurance (life and general);

` Trusteeship accounts, and;

` Pension funds.

What the above represents therefore is the alignment of financial services options along a

common stream i.e. allowing one single bank to meet the total financial needs of a customer,

lending credence to a lifecycle proposition that ensures that a single customers financial needs


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By Olufemi Awoyemi8

can be adequately anticipated, appreciated and responded to in a cost effective manner and for

which he is also rewarded. This further confirms the value link in customer relationship

management (CRM) and profitability.

By implication, it is possible for a bank to own a single entity that combines all these functions or

enter into strategic partnering arrangements to meet these needs. Further possibilities are:

` Mergers and Acquisitions;

` Diversification; and

` Internationalisation or overseas partnering

Since processing cost has been a contentious issue in the pricing of financial services, it is

expected that the consequence of universal banking would lead to a higher potential for banks

internal returns through the synergy achievable from the integration made possible through a

multi-purpose banking arrangement.

Whether the adoption of an all-purpose bank would lead to better returns for the organisation (as

against niche players) or not, remains an open question. It is however generally, agreed that the

consumer would be better for it.

The basic argument is that a portfolio of different services can be produced and marketed by the

banks more cheaply than if each is supplied separately, although this position is not unassailable,

the following economies of scope have been identified:

ssssssssssss Through diversification, fixed costs (branch network, technology, etc) can be shared

between services. There may also be personnel and skills to be derived from a banks

reputation.

ssssssssssss Access to information about multiple customer base creates competitive advantage that

may be utilised in other services by banks;

ssssssssssss The branch network and other delivery channels established by the bank (telephone and

internet banking, home visits, ATMs e-cards etc) can be used to supply a wide range of

services given the substantial fixed costs of delivery systems.

ssssssssssss Several services can be marketed simultaneously, and the bank may gain both a

marketing advantage and a reputation or image advantage in being seen to be offering a

wide variety of services.


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By Olufemi Awoyemi9

ssssssssssss To the extent that risks on alternative products or services are not perfectly correlated,

economies in risk management can be secured within a diversified portfolio of services

and products.

AUDIT & CONTROL: THE NEED FOR A REDEFINITION OF ROLE

A major challenge raised by all these dramatic changes in the banking industry directly affects the

Central Bank and the regulation of financial activity. The strenthg of the new competitive

environment and the explosion of new technologies makes it unfeasible to continue with the

constraints which it imposes on banks, albeit artificially. Deregulation becomes a necessary

responses, a response with far reaching consequences for the industry as a whole.

Deregulation (guided or aided) together with the compelling forces of change will lead to less

profitable banking in the immediate short run with a higher degree of risk which might lead to

some banks needing assistance and bail-outs by competitors or the Central Bank. The risk

associated with the level and degree of expression allowed the banks may further increase the

risk profile of the banking system.

To attempt resolving the emerging dilemma and having articulated the broad needs for Universal

Banking in Nigeria in (See Box), let us examine the role for the audit and control function as it

plays its custodian role in the financial service industry..

For this purpose, I have embraced, as the major driver for Universal Banking in Nigeria, the need

to deepen banking practices through the creation of public safety nets, encourage the co-

ordination of all business entered into by banks with a view to eliminating creative banking as

currently known, introduce self regulation as an indication of corporate worth and pre-requisite for

corporate governance and enthrone the much required market discipline needed to assure the

investing public.

The roles would have to shift based on the following facts:

Supervision of the entire financial service offering of a bank

The chief inspector of the bank whom I would choose to call the Head of Audit and Control, would

have to wear two hats that of the internal consultant to the bank, one who is sufficiently


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By Olufemi Awoyemi10

knowledgeable about the happenings in the market place and equally competent to steer the

bank away from non-compliance with statutory provisions; and that person who ensures that the

banks systems and procedures, driven by the need to meet customer demands are not in conflict

with control objectives i.e. legal, regulatory and professional practices which defines current best

practice.

In fulfilment of this role, the implementation of the 25 Core Principles for effective banking

supervision issued by the Basle Committee on Banking Supervision in September 1997 becomes

imperative.

The CBNs supervisory function would have to be restructured to embrace the technological

advancements prevalent in (if not ahead of) the industry. On-line functionalities and inter-

operability of systems either through consortiums or inter-bank relationships would have to betracked, this time, not from an historical perspective. It now becomes all embracing.

Enthronement of a Sound System and Public safety Net

Under the new dispensation, a strong safety net of effective supervision, introduction of deposit

insurance schemes for the users of other components of the financial services industry in the

event of insolvency and lastly, CBNs appreciation of its role as the lender of last resort.

For the Audit and Control function of a bank, it has to restructure itself and seek collaborative

working relationship with the risk management group in confirming that all necessary steps have

been taken to protect the bank from such risk as financial exposure, contingent risk of associated

firms, electronic business failures, systemic transaction failures amongst others and seek to

manage relationships with the central co-ordinating authority to establish that the bank has a

sound system and strong safety net in place.

Self-Regulation through Positive Assurance

Given the wide range of permissible activities, a pre-requisite for sound management would be

the ability of the financial service provider to complement statutory regulation through effective

self-regulation. This requires probity, transparency and accountability, which are far from being

visible in the Nigerian Financial System. The Audit and Control function should champion the buy-

in for rules and regulations that promote healthy competition and put peer pressure on other

market players.


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An approach, which I believe may be exploited along these lines, is the concept of Positive

Assurance practiced by the leading companies of the world. The concept encourages the

collective responsibility approach to managing risk by sharing the responsibility for ensuring the

integrity of the whole financial system of the organisation between the audit function and line

managers.

The line managers agree with the audit function various business issues and usual

exceptions/problems and controls in form of action plans are formulated. In this regard, the Audit

& Control functions role is to measure the sensitivity of risk associated with transactions from this

unit, trail the transactions and act as a supervisory body to the units transactions. Where

business exigencies would result in a shift or departure from existing framework, the Audit &

Control function is contacted to provide sound advice, devise a way out or confirm the

organisations inability to engage in that line of transaction.

Exceptions under this approach should and must form a veritable input into discussions about the

business strategy.

Responsive Corporate Governance

The high leverage position of most banks, considering the capital base (as adjusted for by non-

performing loans) vis--vis the depositors funds mobilised to sustain operations gives a clear

indication of the premium the investing public places on any particular financial institution.

Based on the insurance claim analogy used earlier on which emphasises the potential increase in

the overall risk profile of multi-purpose banks, the exposure to price risk in the securities business

in addition to the traditional credit risk goes a long way in expanding the safety net.

The Audit & Control function of banks would have to champion the institution of responsive

corporate governance within the organisation. Borrowing from the Internet solution to virus attacks

and security breaches, financial institutions would have to create firewalls between different

activities undertaken as well as ensure the ring-fencing of risks in their operations. A more

qualitative responsibility would be bestowed on the function as it positions itself to answer

questions on risk management and conflict of interest situations rather than ask the questions.

Another major concern is that of managing conflicts of interest and insider dealings within the

Universal Banking Structure. Possible areas of conflict are:

ssssssssssss

Deposit mobilisation and securities funding & Lending and underwriting business


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ssssssssssss Securities business and lending for the accounts of customers and for the banks own account

(as currently being practiced in the UK)

The issue of double standards which have plagued the Chief Inspectors for some time now, would

now be an issue at the front table of all chief executives, who would require the support of the

Audit & Control function to resolve.

Skill and Competence Requirement

The Audit & Control function would have to embrace other non-technical person requirement for

the very conduct of its day-to-day responsibilities.

Whilst it would continue to emphasise quality accounting and auditing skills, it is becoming

apparent that that this two requirements are insufficient to discharge the functions required of

todays Chief Inspectors. At a minimum, the Chief Inspector would have to be sufficiently

competent on the two areas identified above and equally competent in the areas of Information

Technology, Business strategy & development, process management and people management.

He would have to be able to manage the control implication in each of this areas, determine and

identify risk points in the business chains and set about providing quality information for executive

consideration. A key need now is the ability of the Audit & Control personnel to achieve a buy-in

to changes in procedure and processes in tandem with the operations group. A lot of inter-personal skills are now required from him in the management of the function.

A natural extension of this new reality is the need for the Audit & Control head to be at the cutting

edge of information technology both in its usage and in its applicability. The users of the banks

services are in most cases, more technology friendly than the banks which seeks to introduce

these initiatives, the inspectorate, in fulfilling its control function must be well versed in strategic

deployment of IT controls as a minimum to an effective discharge of its functions.

Efficient Market Information

In furtherance of the governments policy of deregulation and liberalisation of the economy, the

principle of a free market which emphasises free entry and free exit would be have to be pursued

in the financial services sector leading to a review of accounting and disclosure requirements.

Under this scenario, reputation would be driven more by the level of reliability placed on the

quality of information disclosed to the market and investing public. The converse could result in a

loss of confidence and patronage. This intrinsic market disciplinary mechanism would go a long


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way to help instil in banks management the need to take seriously the audit reports written by its

inspectorate function.

CONCLUSION

By way of synthesis, the main conclusions reached concerning the business facilitation and

confidence-assuring role, which the Audit & Control function is set to provide, is the minimum

required to guarantee the integrity of the financial service sector, even as banks prepare

themselves for the advent of Universal Banking in Nigeria.

However, and I would like to conclude on this note, Inspite of the merits of universal banking, it

must be noted that generally it is not a panacea to bank failure and does not guarantee success

of the banks. The most critical guarantee of success for a bank and indeed for any kind ofbusiness endeavour is the quality of management.

It is therefore an enlightened opinion that the favourable and satisfactory discharge of the Audit

and Control function would play a major role in ensuring that the quality of management required

is in place and maintained. This is the Inspectorates unwritten fiduciary relationship with the

investing public, their own quota to the economic development of our various institutions and our

country.

END

BOX I

Variants of Universal Banking models are briefly described below:

German:

Universal Banking means that banks are permitted to offer all the various kinds of financial

services. This includes classical banking activities, like the credit and deposit business, as well


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as investment services, securities placement and brokerage, and even insurance activities, real

estate trading and others. German universal banks also hold stock in non-financial firms.

United Kingdom:

The universal banking model in the UK implies that banks are able to offer the full range of

financial services to corporate and personal customers: commercial and investment banking,

securities trading and brokering, derivatives trading, underwriting, fund management and

insurance. It also implies the absence of regulatory barriers restricting the allowable range of

banks business and forcing a compartmentalisation of functions and institutions. The big

universal banks in the United Kingdom are equally referred to as bancassurers.

Korea:

Universal banking is the offering of financial services to corporate and personal customers.

However, the Banking Act of Korea governs the range of services and products of universal

banking in Korea, especially in the area of securities related businesses.

Japan:

Universal banking is the banking system in which banks can establish close relations with their

corporate customers through many channels, including bank loans and shareholding. Article 65

of the Security and Exchange Act of 1948 prohibited banks from underwriting securities and it

established a strict separation of banking business and security business in Japan. This is to saythat Universal Banking did not exist in strict sense in post-war Japan.

Switzerland:

Universal banking which summarises in meaning as the offering of wide range of financial

services to customers includes deposit taking, lending, underwriting, the distribution of new issues

of debt and equity securities, securities trading and brokerage, investment management, fee-

based advisory activities, foreign exchange transactions, and a wide range of derivative

instruments related to risk management such as options, futures, forward contracts, and swaps.Universal banking in Switzerland allow earnings diversification and economies of scale and scope

on the cost side, and to a certain extent, on the revenue side.

United States:

Universal banking here simply means a market based financial intermediation system as against

a bank-based model, which emphasises the relative importance of long-term debt in companies

total debt. American banks operate a more specialised form of banking, not becoming giant

institutions with an enormous but slow reacting internal organisation.


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According to the research work conducted by Jordi Canals (Universal Banking: International

Comparisons and Theoretical Perspectives, 1997), Bank presence on companies supervisory

boards is basically limited to the three largest German banks (Deutshe Bank, Dresdner, and

Commerzbank). These banks, not always the largest lenders to the companies concerned,

generally possess small holdings in the equity of the companies they invest in.

Generally speaking, German companies finance themselves by a much lower proportion of bank

debt than Japanese or Spanish companies. They rely much more on generated cash flows.

Third, the evidence of recent decades shows that only on very rare occasions do German banks

intervene in the restructuring of companies. Therefore, it can hardly be said that their role in these

process is critical.

Forth, there is no direct relationship between the number of votes a bank has on a supervisory

board and its influence in the companys decisions. When the controlling shareholder is a bank, it

incurs a greater risk due to the concentration of investment in a particular company.

BOXIIThe Need for Universal Banking in Nigeria:

Historically, commercial banking was established in Nigeria to facilitate colonial economy

anchored on imports and exports with little emphasis on raising finance for long-term industrial

projects. This continued through the early years of independence when the first merchant bank

Nigeria Acceptances Limited (now NAL Merchant Bank) was licensed in 1960. Its primary focus

was acceptance business: i.e. discount of trade bills drawn by Nigerian Exporters and British

Exporters and later added issuing houses on the creation of the Lagos Stock Exchange.

Subsequently, the Banking Decree of 1969 drew the line between commercial banks and

merchant banks.

The huge dollar inflows from petroleum which facilitated wholesale international trade attracted a

number of foreign banking institutions to seek merchant banking licence in Nigeria and later came

the indigenisation decrees which created great opportunities in share issue business.


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As a result of the calibre of staff, lean structure and relative efficiency, marketing support from

parent companies, petrodollar and urban based modern economy, the merchant banks then

performed relatively better. Sourcing deposit was not really an issue at that time.

However, with the onset of economic depression, share issue waned. The deregulation of forex

market as part of financial liberalisation and deregulation come to the rescue. Many Nigerians

sought licences as merchant banks, most of which were with the objective of benefiting from

profits derivable from forex allowance, real price of which was heavily subsidised by government.

With the economy on decline and competition rising, opportunities for substantial long-term capital

raising diminished. The Nigerian economic situation has not made any long-term deposit possible

in the last 10 years or so.

Merchant banks could not cope due to limited branching, lack of access to float through

chequeing account and membership of clearing house. Until 1989, merchant banks maintain

accounts with CBN and use CBN cheques for day-to-day transactions.

Commercial banks with bigger, cheap and stable deposits coupled with good management

excelled. Shareholders of merchant banks begin to clamour for returns equivalent to the ones

delivered by commercial banks especially given the capitalisation arrangement since 1997, whichprescribed uniform capital requirement for both merchant and commercial banks.

For now, there apparently is not enough business for the number of merchant banks as the

Nigerian economy is weak and its capital market, shallow. Furthermore, commercial banks have

gradually encroached on the business of merchant banks.

A major reason for Universal Banking in Nigeria is the need to deepen banking practices, which

will evolve with the influx of foreign banks into Nigeria. With globalisation, this should necessarilyhappen, as it is the trend in other parts of the world (See Box III). More foreign banks will be

encouraged to open shops in Nigeria wholly or by buying into existing institutions if the regulatory

environment is less restrictive and future banking crisis and distress will be lesser and more

controllable.

Another reason is the increasing financial sophistication and need of the modern day bank

customer who would be better off with a one-stop financial centre.


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BOX III

Impact of Globalisation on Banking - Trends:

Latin America has opened up its financial system to foreign investment so much that over half ofall bank assets now belong to foreign controlled institutions.

Asia is also opening up to foreign investment in the financial system and in the next one year it is

estimated that foreign institutions will control at least 40% of the banking systems of Thailand,

South Korea and Indonesia.

The story is the same in Eastern Europe German, Dutch, Irish and Austrian banks now control

over half of all bank assets in Poland and in Hungary, foreigners have almost a 90% market shareof the banking industry.

BOX IV

Universal Banking in Nigeria: Contending Issues

Here is a brief highlight of certain contending issues, which must necessarily be addressed:

ssssssssssss Do we need universal banks or specialised banking?

ssssssssssss Should banks be in insurance business? What are the implications?

ssssssssssss Perceived and real threat to the stability of the financial system vis--vis our recent experience

with liberalisation and reforms.

ssssssssssss How do we raise and diversify the level of competence and skills within the shortest period of

time?

ssssssssssss How do me mitigate failure arising from the high risk of the investments made by some banks

based on the combination of a highly recessive business cycle and excessively high interest

rates?

ssssssssssss How does the public react to universal banking?

ssssssssssss How prepared is the regulatory and supervising authorities?

ssssssssssss What method of changeover is envisaged and time frame?

ssssssssssss How real is the existence of significant economies of scale and what influence does it bear on

the decision to diversify?


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ssssssssssss How do we deal with the conflicts and problems arising from the different cultures, traditions

and working practices of the different facets of the new banks?

ssssssssssss How do we integrate other banking practices i.e. Islamic Banking?

ssssssssssss Harmonisation of regulatory framework; CBN/NSE/SEC/FMBN/NAICOM etc.

ssssssssssss Capital requirements of banks

ssssssssssss Reform of the payment system and clearing house arrangements.

ssssssssssss Operational cost/Technology cost

ssssssssssss Ownership structure of Banks and need for internationalisation and strategic alliances.

BOX VBank Fraud & Theft Highlights

Here is a brief highlight of Fraud and theft cases reflecting worldwide developments:

ssssssssssss Not surprisingly, the Internet has been a fertile ground for fraud; it allows fraud promoters to

mimic legitimate business more convincingly reach potential victims more efficiently and at

far less cost than any other medium.

ssssssssssss Federal prosecutors in the in the US charged two men with conspiracy to commit securities

fraud in what was alleged to be the latest example of internet fraud when they published false

news stories about stock prices on the internet and sold their shares when the prices rose.

ssssssssssss The entire US auditing profession is to be investigated after the publication of a report

commissioned by the US Securities and Exchange Commission, exposing rampant violation

of share ownership regulations by partners and staff at PWC, the worlds biggest auditor.

Although the SEC has no jurisdiction over the big international accounting firms outside the

US, it said it had identified problems that suggest not only lack of sufficient global safeguards,

but also a systematic failure by professionals within certain firms to adhere to even their own

firms existing controls.

ssssssssssss Merrill Lynch, the US investment bank, is investigating an alleged fraud involving the illegal

transfer of $40m of one of its clients funds into a Swiss bank account. The client is the banks

largest in the Middle East Arab International Bank and the funds were sent to a UBS

Geneva account in six tranches between 1996 and 1998.


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Internal documents pinpoint problems with Merrill Lynchs internal supervision and

management controls which contributed to the alleged fraud. The documents reveal an Arab

International bank employee who died three months before the transactions were conducted

ordered five of the six fund transfers. One or more Merrill Lynch employees including

managers in London, approved all of the transfers none of who spotted that an unauthorised

employee originated it.

Although the SEC has no jurisdiction over the big international accounting firms outside the

US, it said it had identified problems that suggest not only lack of sufficient global safeguards,

but also a systematic failure by professionals within certain firms to adhere to even their own

firms existing controls.

ssssssssssss The head of Britains three intelligence agencies have held an unprecedented summit in

response to the rising threat from international organised crime. The heads of M15, M16 andGCHQ assembled for the first time in secret session to brief Prime Minister Tony Blair that

international gangs may now be the biggest threat to national security. Blair has responded by

agreeing to a request by the agencies to divert resources from counter-espionage and

counter-terrorism to combat the escalating financial crimes.

M16 will expand its operations against drug traffickers; M15 is expected to double the

PSD10m it spent last year on fighting serious crimes while GCHQ is to step up interception of

computerised transactions linked to money laundering and fraud, and international telephone

traffic between gangs.

The fastest growing areas of criminal activity in the UK are:

` The red mafia a term covering Russian and eastern European gangs having siphoned

billions of dollars from the former soviet union through fraud, extortion and smuggling now

being invested in London property and in stocks and shares.

` Alabanian gangs engaged in human trafficking, prostitution, arms dealing and drug

smuggling.

` Turkish drug barons are tightening their grip on the heroin trade by flooding the market

with cheap imports and assassination of opponents.

` Cigarette smuggling by Asian gangs has reached epidemic levels and is estimated to cost

the treasury PSD 1.7billion in Jan/Feb 2000 alone.

` West African criminal gangs in Britain are rapidly expanding their operations from credit

card and advance-fee fraud to other criminal operations, including welfare fraud across the

European Union.


20/21



` The Italian mafia was behind an attempt to break into the Lloyds insurance market earlier

this year by buying up brokerages.

ssssssssssss President Bill Clinton recently approved $30billion spending for Americas intelligence

services, which have been given increased powers to seize the assets of drug traffickers.

ssssssssssss The Russian government is to consider measures to control the flight of capital from the

country, including taxing all transfers of money to pay for imports. This is intended to curb the

practice of over invoicing for imports as an illegal way of transferring exchange earnings out of

the country.

ssssssssssss Barclays, Citibank and ABN Amro are considering legal action against two top European rivals

(UBS and BNP, the biggest banks in Switzerland and France) to recover huge losses from an

alleged PSD300million fraud by a fugitive Indian metals trader, Mr. Madhav Patel. The fraud

involved fake metals cargoes and finance obtained via forged documents.

ssssssssssss Deutshe bank has collected its second largest fine from British regulators in three years, with

a PSD1.5m penalty for its role in the Sumitomo copper trading scandal. This comes on top of

the PSD2m the bank had to pay in April 1997 in connection with the activities of its fund

manager, Peter Young.

Deutsche bank, it was claimed, failed to check thoroughly the motive of the client on whose

instructions it bought substantial amounts of copper as well as failing to report on the large

positions it had built up.

ssssssssssss The Financial Action Task Force (FATF) which groups 26 large countries, is expected to draw

up a list of around 20 criteria to define non-cooperative countries it intends to put on thename and shame list. It also plans to impose further financial sanctions that may require

banks and other financial institutions to report all transactions above certain level of the non-

compliant jurisdictions as suspicious, where at the moment, they would do so only if there

were some reasons for suspicion.

ssssssssssss The ringleader of a counterfeiting gang that flooded Britain with fake PSD50m was jailed

recently for 12 years. Between 1993 and 1998, two out of every fake notes in circulation were

produced by the gang.

ssssssssssss A counterfeiting technique known as skimming is more popular than ever in the UK where

credit card fraud soared by 40% last year. Organised criminals have fuelled the rise to a

record PSD190m and may go higher.


21/21



References:

1. Universal Banking: International Comparisons and Theoretical Perspectives, by Jordi Canals

1997

2. Universal Banking in the United States: what could we gain? What could we lose? by

Saunders, Anthony M., 1994

3. Towards Universal Banking- Risks and Benefits for Transition Economies by Buch, C. 1997

4. Universal vs. Specialised Banks by Steinherr, A. 1996

5. Conflict of Interest in Universal Banking: Evidence from Post-Issue performance of IPO firms

by Ber, Y. and Yafeh, Y. 1997

6. Universal Bankis and the European Banking System: Prospects and Problems by Paulet, E.

1996

7. Seminar Papers on the Challenges of Universal Banking in Nigeria organised by Pharez,

November 23, 1998. (Contributors: Mr. Victor Odozi, Mr. G. A. Ogunleye, Dr. Bodun Adedipe,

Dr. Lawrence Osa-Afiana and Mr. Nebolisah Arah)

8. Universal banking in the twentieth Century by Teichova, Alice. 1994

9. Universal banking and the Financing of Industrial Development by Charles W. Calomiris. 1995

10. Financial Systems Design: Universal Banking Considered - Burr Ridge, III: Richard D. Irwin by

Saunders Anthony and Eds. Ingo Walter. 1996

11. Fraud & Theft Alert, Jan & Feb 2000 edition. Vol. 9 No.1 & 2

12. Central Bank of Nigeria Regulatory Framework documentation and public pronouncements on

the subject.

13. Various Newspaper contributions on the topic.

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Audit & Controls Under Universal Banking - Olufemi Awoyemi, Nov 2000

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