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ANTI-MONEY LAUNDERING POLICY AND ITS EFFECTS ON BANK

PERFORMANCE IN NIGERIA

Article · January 2012

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2012 Idowu, Abiola and Obasan, Kehinde A. 367

ANTI-MONEY LAUNDERING POLICY AND ITS EFFECTS ON

BANK PERFORMANCE IN NIGERIA
Idowu, Abiola
Dept. of Management and Accounting Faculty of Management Sciences
Ladoke Akintola University of Technology, P.M.B. 4000, Ogbomoso.
Oyo State. Nigeria.
Email: [email protected]

Obasan, Kehinde A. (corresponding author)

Department of Business Administration, Faculty of Social and Management Sciences
Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Nigeria
Email: [email protected]

Abstract
This study seeks to review the role of anti-money laundering policy in Nigerian banking sector with its attendance effects on
performance. Three banks in Lagos State (South Western Nigeria) were used for the study. The correlation result indicates the existence
of a strong positive relationship between banks performance and adoption of sound money laundering policy with a value of 0.881. The
coefficient of determination also show a value of 0.775, which implies that anti-money laundering policy actually explain and account
for about 77.5% of the nature of banks performance in the economy. This result is due to the fact that banks do not need to serve as
a channel for illicit monetary activities before they can post a meaningful performance in the industry. Hence, money laundering has
negative consequences on the economy which include loss of revenue to the government, worsens criminal rate in the society, and
threatens the political stability and internal security of a nation. Key words: Performance, Economy, Money Laundering, NBFI.

The effect of money laundering on economic development and regulators, as well as by banks, non-banks financial
are difficult to enumerate but it is clear that such activity institutions often strengthen the required good-governance
damages the financial-sector institutions that are critical to practices that are important to the development of these
economic growth, reduces productivity in the economy's economically critical institutions. Indeed, several of
real sector by diverting resources and encouraging crime the basic anti money-laundering policies such as know-
and corruption, which slow economic growth and distort your-customer rules and strong internal controls are also
external economic sector. Money laundering impairs the fundamental, longstanding principles of prudential banking
development of financial institutions for two reasons. operation, supervision, and regulation.
Firstly, it erodes financial institutions themselves because Although money laundering does not require the use of
there is often a correlation between money laundering and formal financial institutions, reviews of money-laundering
fraudulent activities undertaken by employees. At higher arrangement consistently indicate that banks and non-
volumes of money-laundering activity, entire financial bank financial institutions (NBFIs), such as insurance
institutions in developing countries are vulnerable to companies, are favoured means of laundering illicit funds
corruption by criminal elements seeking to gain further both internationally and within developing countries.
influence over their money-laundering channels. Secondly, The reason for this preference lies in the efficiency of the
customer trust is fundamental to the growth of sound financial institutions which can serve as a low-cost vehicle
financial institutions, and the perceived risk to depositors for relocating illicit money for the launders.
and investors from institutional fraud and corruption is an From an economic development standpoint, the
obstacle to such trust especially in developing countries. adoption of anti-money-laundering policies by government
However, aside protecting such institutions from the financial supervisors and regulators, as well as by banks
negative effects of money laundering itself, the adoption and NBFIs, often reinforce good governance practices that
of anti-money-laundering policies by banks supervisors are important to the development of these economically
Idowu A., Obasan K. A. - Anti-Money Laundering Policy and its Effects on Bank Performance in Nigeria
368 Business Intelligence Journal July

critical institutions. As a result of the need to arrest this conceal the criminal sources and nature of such funds and
surge, the “G7” in 1989 convened the Financial Action ultimately making the funds look clean. It is the smuggling
Task Force (FATF) a team saddle with the responsibility in of funds with criminal intention into the channel of the
of examining money laundering techniques, review actions legitimate financial system.
taken so far and setting out measures needed to deter and
defeat the menace. In the end, the committee came up with Historical Background of Money Laundering
48 recommendations on modalities to combat financial
crime. It was this that gave birth to local enforcement in Money laundering has over the years evolved from the
Nigeria with the emergence of various legislations such commission of other crimes. For example, right from time
as the National Drug Law Enforcement Agency Act robbers had always tried to conceal their acts and disguise
(1989); Money Laundering Act No. 7 (2003); Advance their loots so that they could retain their respect in the
Fee Fraud Act (2004); The Economic & Financial Crimes society because robbery was an anti-social behaviour which
Commission Act (2004). All agencies were charged with is condemnable and punishable by law. The period of the
the responsibility of fight against money laundering and 1920s and 1930s was tagged the era of “gangsterism” in the
enforcement of all laws dealing with economic and financial United States of America with the emergence of criminals
crimes in Nigeria. groups which claim exclusive jurisdiction over some areas
With all this concerted efforts put in place to check the and districts for the purpose of perpetrating their criminal
activities of money laundering in Nigeria, the increasing activities.
integration of the world’s financial system through This practice became a fore-runner to modern day
technology has reduced the barriers to free flow of capital organized crime. These groups had powerful and influential
and provide avenue to hide ill-gotten wealth with great leaders who channel their criminal gains secretly into the
difficulties involved in tracing the real owners of such fund regular financial system. The injection of such fund into the
outside regulation. normal financial transactions and business arrangements
was obviously money laundering.
Literature Review Gangsterism developed into Mafia and with the
formation of such deep-rooted criminal organizations
Conceptualizing money laundering has gain the attention like the Chinese Triad, Columbian Cartels, Sicilian Mafia
of many scholars and agency overtime. The draft Article and the Russian Criminal Organizations, organized crime
1 of the European Communities Directive (1990) defines assumed international dimension. This is because the
money laundering as the conversion or transfer of property, growth of organized crimes produced wealth that needed to
knowing that such property is derived from serious crime, be laundered and invested, sometimes across international
for the purpose of concealing or disguising the illicit origin boundaries.
of the property or of assisting any person who is involved in Cases of money laundering which gave weight to
committing such an offence or offences to evade the legal the above historical foundation abound. For example in
consequences of his action, and the concealment or disguise 1932, Meyer Lansky (affectionately called “The Mob’s
of the true nature, source, location, disposition, movement, Accountant”) one of the founding fathers of organized
rights with respect to, or ownership of property, knowing crime and patron saint of money launderers opened an off-
that such property is derived from serious crime. shore account with a Swiss Bank. This account was used to
Ohanyere (2003) view money laundering as the hide the profits of Governor Huey Long of Louisiana in the
procedure by which the proceeds of illegal acts are United States of America. There after, Lansky & Co. were
converted into apparently legal activities, thus concealing allowed to open up slot machine houses in New Orleans.
their criminal origin. In a simple language it involves Money criminally obtained, was smuggled out from the
cleansing (laundering) dirty money in order to cover its United States to a bank in Switzerland and loans were
dirty or illegitimate origin. It is an essential transformation granted by the bank in Switzerland to this gang of criminals
process for the proceeds of crimes such as armed robbery, thereby permitting the return of legal money to the United
prostitution, gambling, arm deals, fraud, sales of hard drugs State. This practice, which signaled the beginning of
and any other act which the law and society prohibit. modern money laundering, was given further impetus by
Hence, money laundering is the integration of illicit the operation of secret banking practices in countries which
funds into the main stream of legitimate finance in order to permitted them.
Business Intelligence Journal - July, 2012 Vol.5 No.2
2012 Idowu, Abiola and Obasan, Kehinde A. 369

The carting away of war loots by some German officials categorized into one of a few types such as bank methods,
to secret bank accounts in Switzerland at the end of World smurfing, currency exchanges, and double-invoicing."
War II brought to lime light the use of secret banking
concept for money laundering. Also, the BCCI Drug The Money Laundering Process
Money Scandal which involved Panama, U.S. Luxembourg
and London’s secret banking network as well as the money Money laundering is not a solitary act but a process that
laundering activities of the off-shore banks in Cayman is accomplished through three basic steps can be taken at
Island etc. lend credence to the view that secret banking the same time in the course of a single transaction, but can
greatly facilitates money laundering. In fact, the banking also appear in well separable forms.
system had been the veritable vehicle that acted as a catalyst
for money laundering. It is not surprising, therefore that Placement ⇒ Layering ⇒ Integration
any attempt to proffer solutions to the menace of money
laundering without a serious focus on financial institutions There are also common factors regarding the wide range
globally is bound to be a fruitless exercise. of methods used by
Money laundering as an expression is one of fairly recent Money launderers when they attempt to launder their
origin. The original sighting was in newspaper reporting criminal proceeds.
the Watergate Scandal in the United States in 1973. The Three common factors identified in laundering
expression first appeared in a judicial context in 1982 in operations are:
America and it has been widely accepted and is in popular • The need to conceal the origin and true ownership
usage throughout the world. of the proceeds
The Nigerian economy did not care about the colour • The need to maintain control of the proceeds
of monies brought in until 1989 when she could not • The need to change the form of the proceeds in
meet up with the recommendations of FATF and was order to shrink the huge volumes of cash generated
consequently listed among the Non Cooperative Countries by the initial criminal activity.
and Territories (NCCT) and perceived to be a “Money Placement Stage involves placing or presenting the
Laundering Heaven”. This discouraged other countries illicit money before banks or financial institutions or
from having business relationship with any country on the smuggled out of the country. The aims of the launderers
list. However, in the bid to shrug off this uncomplimentary are to remove the cash from the location of acquisition so as
position, several agencies and laws were established such to avoid detection from the authorities and then transform it
as the National Drug Law Enforcement Agency (NDLEA), into other assets forms, e.g.Travelers’ cheques, Postal order
Money Laundering Decree (1995) (Money Laundering Act etc. This stage is also referred to as immersion which may
LFN 1999). Advance Fee Fraud and Other Fraud Related also be achieved by a wide variety of means depending on
Offences Decree (1995) Repealed in 2006 the opportunities available or presented to the ingenuity of
However, money laundering techniques have become the criminal, his cohorts and their network. It is the most
so complex and sophisticated that the operators are always vulnerable stage in money laundering particularly if the
steps ahead of law makers and enforcement agents. fund involved is raw cash. Placement of huge sums of
They take full advantage of the boom in communication money in most cases, attracts attention, arouses suspicion
technology such as the internet while their techniques and may lead to reporting to law enforcement agencies.
range from the purchase and resale of any luxury item for Layering stage involves the creation of complex web of
example, car, jewel etc. to passing “dirty” money through transactions aimed at dissociating the illegal monies from
a complex web of domestic and international legitimate their criminal origin. Such transactions not only prevent
business. However, the commonest type of money any audit trail being left but also conceal the source and
laundering that banks encounter on a daily basis takes the ownership of fund. It is often referred to as dilution or
form of accumulated cash transactions which are normally heavy soaping since it involved transferring of money or
deposited in the banking system or exchanged for items funds to off-shore countries and once deposited in a foreign
of value such as travelers’ cheques, money and/or postal bank, the fund can be moved through accounts of “Shell”
orders, bank drafts, gold, diamond etc. Corporations which exist solely for laundering purpose.
Salinger (2005) opined that money laundering takes Integration stage of the process involves the introduction
several different forms although most methods can be of the funds into the legitimate economic and financial
Idowu A., Obasan K. A. - Anti-Money Laundering Policy and its Effects on Bank Performance in Nigeria
370 Business Intelligence Journal July

system. This stage provides apparent legitimacy to the inflated prices by domestic companies owned by money
criminality derived wealth as nobody would ever suspect its launderers from off-shore companies which they also own.
criminal origin. This stage is also referred to as “spinning”, The difference between the inflated price and the actual
“repatriation”, or “re-integration”. price is then deposited off-shore and repatriated by choice.
A typical example is the recapitalization of an ailing
public company with laundered money by buying off either Effect of Money Laundering
all or a substantial proportion of its equity with a view
to assume full control and ownership of such company. According to Brent (2002), when considering the effect
Another example is over-invoicing of imports which of money laundering on developing economies like Nigeria,
enables huge sums of money to be transferred abroad it is particularly useful to distinguish among five directions
simply upon proof of complete but false documentation. that the money-laundering flows may take with respect to
This technique involves importing goods at deliberately such economies, as illustrated in Fig 1 below.

Adapted from: Brent (2002) “The Negative integration elsewhere, thus playing little or no role
Effects of Money Laundering on Economic Development” in the economy itself (although the "fees" for money
a. Domestic money-laundering flows in which illegal laundering activity may remain).
domestic funds are laundered within the developing
country's economy and reinvested or otherwise spent Despite the global approach at the eradication of money
within the economy. laundering all over the world, the crime continues to thrive
b. Returning laundered funds originate in the developing due to the following reasons:
country, are laundered (in part or in full) abroad, and a. The failure of countries to implement existing United
returned for integration. Nations anti-money laundering measures such as a
c. Inbound funds, for which the predicate crime occurred resolution of the United Nations against illicit traffic in
abroad, are either initially laundered ("placed") abroad narcotic and psychotropic substance.
or within the developing country, and ultimately are b. Conflict of laws due to the failure to adapt the United
integrated into the developing economy. Nations Model Law by all nations.
d. Outbound funds, which typically constitute illicit c. The sophisticated nature of the crime militates against
capital flight from the developing economy, do not its eradication.
return for integration in the original economy. d. The proliferation of non-banking financial institutions
e. Flow-through funds enter the developing country as all over the world has assisted the business of money
part of the laundering process and largely depart for laundering.
Business Intelligence Journal - July, 2012 Vol.5 No.2
2012 Idowu, Abiola and Obasan, Kehinde A. 371

e. The hypocritical attitude of some nations militates professional status, marital status, position, etc. while the
against this struggle. second section contained twenty (20) statements formulated
f. When the laundered money results in the in-flow of to establish the level of awareness of the respondents as
capital to their country, they conceal it, but when they well as the extent of success of various anti-money laundry
are the victims, they complain. policies among bank staffs in Lagos State (appendix
g. The level of corruption in many countries is a big 1). A simple percentage and Pearson Product Multiple
setback for the crusade against money laundering. Correlation were employed to analyze the collected data.
This challenge is more in developing nations where
for lack of facilities money laundering cannot be easily Results
detected by law enforcement agencies and they depend on
the cooperation of the banks. However, the international From table 2 (see appendix), the following revelations
pressures that has recently broken the Swiss rigid secret emerges:
Banking Tradition as well as the Technology that has put • That majority of the bank’s staffs is aware of the
some law enforcement agencies in Europe and America Anti-Money Laundering Policy and understands its
on-line with certain banks has made information collection provisions. This awareness could be attributed to the
easy in the former and automatic in the latter. If the on-line massive enlightenment campaign embarked upon by
facility is available in every nation, this certainly would go the bank management and the government.
a long way in combating the global money laundering. • That majority of the respondents disagreed with the
Although Ikpang (2011) opined that the Federal statement that money laundering has no negative
Government of Nigeria has demonstrated genuine concern impact on the economy and call for a joint effort to
and commitment in the enforcement of money laundering arrest its implication on the economy.
laws through the enacting of 2011 amendment to the previous • That bank Anti-Money Laundering Policy has a
law, which send a warning signal to the perpetrators that the positive impact on its operations, while Government
country is no safe haven for them. has created enough awareness about money laundering
in Nigeria in order to reduce political instability which
Methodology is often financed by money laundering since it affect
government plans.
This study used a descriptive survey design which is to • That the enactment of EFCC Act reduces the incidence
collect detailed and factual information that describes an of money laundering through its provisions and
existing phenomenon (Ezeani 1998).The target population procedures as well as regular training of banks officials
of the study was banks staffs in Lagos State Nigeria. A on Anti-Money Laundering techniques. Similarly,
census of three banks was taken. A simple random sampling applying Know Your Customer (KYC) and Know Your
technique was used to select 200 personnel with an average Business (KYB) conditions also enhance dealing with
of 67 staff from each bank while only 180 questionnaires customers.
were returned. Of these, 72 (40%) were females; while 108 • That government has shown enough commitment
(60%) were males with age ranges from 25-52 years, with in tacking money laundry while some political
an average age of 38.5 years. The academic qualifications office holders are protected by the loop-hole in the
of the participants are: OND, HND, B.Sc., B.Ed., B.A, constitution in perpetrating this fraudulent act without
M.Sc, M.A, PhD. being checked by the EFCC Operatives.

Instrument Test of Hypothesis

A structured questionnaire was used for the collection In order to validate the aim of this study, the following
of data on the study. The questionnaire was specifically hypothesis was subjected to test.
designed to accomplish the objectives of the study. The first *Ho: That Anti-Money Laundering Policy has no
section collected information such as age, sex, experience, significant effect on banks performance.

Idowu A., Obasan K. A. - Anti-Money Laundering Policy and its Effects on Bank Performance in Nigeria
372 Business Intelligence Journal July

Model Summary (b) in the society, and threatens the political stability and
internal security of a nation. Hence, the need to check the
Std. Error activities of the main channel of transporting this poisonous
Adjusted Durbin-
Model R R Square of the
R Square
Estimate
Watson substances from passing through the economy in order to
1 .881(a) .775 .701 13.55974 1.607 avoid its contaminating effect in its effective functioning.
The understanding of the implication and the sincerity
a Predictors: (Constant), Anti money laundering policy
b Dependent Variable: Banks performance in Nigeria of government as well as the willingness of the concern
players in the industry to foster the growth of the economy
in totality lead to the formulation of various policy and
Coefficients (a) procedures aimed at militating against such nefarious
activities without jeopardizing the primary interest of
Unstandardized Standardized various stakeholders in the system.Hence the establishment
t Sig.
Coefficients Coefficients
Model of the EFCC and ICPC to spear head the fight against money
Std. Std.
B
Error
Beta B
Error laundering and other related activities in the country.
1 (Constant) -21.400 14.222 -1.505 .229 In the same vein, Nigerian Banks must follow global
Anti money pattern by identify and report transactions of a suspicious
laundering 13.800 4.288 .881 3.218 .049 nature to the financial intelligence unit in the respective
policy
country as well as train their staffs in anti-money laundering
a Dependent Variable: Banks performance in Nigeria and instruct them to report activities that they deem
suspicious. Also, the installation of anti-money laundering
The correlation result above indicates the existence of software that filters customer data, classifies it according
a strong positive relationship between banks performance to level of suspicion and report anomalies. Such anomalies
and adoption of sound money laundering policy with a would include any sudden and substantial increase in funds,
value of 0.881. This is due to the fact that banks do not need a large withdrawal, or moment of cash to a bank secrecy
to serve as a channel for illicit monetary activities before jurisdiction.
they can post a meaningful performance in the industry.
This assertion is confirmed by the study coefficient of References
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regulated, a bank need to show total conformity with all Fraud Related Offences Act 2006
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Appendix 1

List of Statement and Corresponding Responses

RESPONSE
S/N STATEMENT
SA A UD DA SD
1 All Bank staff are aware of anti-money laundering policy 74% 26%
2 All Bank staffs understand the term Money Laundering. 70% 30%
3 Money Laundering has no negative impact on the economy 4% 10% 34% 52%
4 All Nigerians should fight the monster call money laundering 62% 26% 8%
5 Bank Anti-Money Laundering Policy has a positive impact on its operations. 60% 36% 4%
6 Money laundering has helped crime to grow. 50% 22% 10% 18%
7 Money laundering does not affect government plans 4% 18% 8% 42% 28%
8 The enactment of EFCC Act reduces the incidence of money laundering. 38% 48% 6% 6% 2%
9 Banks eradicate money laundering through its policies and procedures 48% 36% 4% 10% 2%
10 Money laundering has weakened our currency (Naira) 22% 50% 14% 10% 4%
11 Regular training of banks officials on Anti-Money Laundering techniques is a deviation
2% 14% 4% 38% 42%
from the core banking activities.
12 Cancellation of subscription from laundered money is a good decision from the CBN. 8% 4% 4% 44% 40%
13 Applying KYC and KYB conditions are essential in dealing with customers. 8% 12% 10% 40% 30%
14 Government has shown enough commitment in tacking money laundry. 36% 28% 6% 16% 14%
15 The EFCC through its various activities has reduction laundered money in Nigeria. 34% 50% 6% 4% 6%
16 The success of the Anti-Money Laundering Policy depends on government
34% 52% 4% 10%
determination and sincerity.
17 Over protection of officials hinders EFCC & ICPC operations. 50% 38% 4% 2% 6%
18 Money laundering is a stimulant to economic growth. 6% 4% 2% 50% 38%
19 Political instability is financed by money laundering. 42% 32% 8% 10% 8%
20 Government has created enough awareness about money laundering in Nigeria. 20% 50% 2% 22% 6%
Source: Field Survey 2011

Idowu A., Obasan K. A. - Anti-Money Laundering Policy and its Effects on Bank Performance in Nigeria

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