CORPORATE FRAUD IN NIGERIA: A CRITICAL ANALYSIS
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CHAPTER ONE
INTRODUCTION
Generally, the global corporate scene during the last century has witnessed growth and substantial improvement with several corporations creating and managing capital that sometimes even surpass that of some countries and the investing public being interested in investing in these companies, corporate crime or corporate fraud is increasingly coming to the fore of most business discourse. Governments and law enforcement agents around the globe have tried to regulate the increasingly alarming rate of corporate crime and company fraud which manifests itself in ways such as manipulation and misrepresentation in terms of falsification, alteration, concealment and misappropriation of funds amongst others.
Fraud in a general sense is simply considered as dishonesty,[1] the crime of obtaining an advantage or some other benefit by deliberate deception. Fraud in its analytical sense, entails an act or concealment to gain unlawful advantage.[2] Section 419 of the Nigerian Criminal Code defines obtaining property by false pretences and cheating which could be synonymous with fraud as:
œAny person who by false pretence and with intent to defraud obtains from any other person anything capable of being stolen, or induces any other person to deliver to any other person anything capable of being stolen, is guilty of a felony and is liable to imprisonment for three years
Its specific legal definition varies by jurisdiction. Fraud is a crime and is also a civil law violation. Many hoaxes are fraudulent, although those not made for personal gain are not technically frauds. Defrauding people of money is presumably the most common type of fraud.
Generally, in criminal law, fraud is the crime or offence of deliberately deceiving another in order to damage him/her usually to obtain property or services unjustly. Fraud can be accomplished through the aid of forged objects.[3]
As regarding the criminological aspect, corporate crime entails crimes carried out either by a corporate organization, or by individuals acting on behalf of a corporation or other business entity such as trustees, agents and other employees. Corporate crimes are defined as, illegal acts, omissions or commissions by corporate organizations themselves as, social or legal entities or by officials or employees of the corporations acting in accordance with the operative goals or standard operating procedures and cultural norms of the organization, intended to benefit the corporations themselves.
Edwin Sutherlands definition of white collar crime[4]also is related to notions of corporate crime. In his landmark definition of white collar crime he offered these categories of crime:
- Manipulation in the stock market
- Commercial bribery
- Misrepresentation in advertisement and salesmanship
- Misappropriation of funds
Considering the past views, it was considered absurd and impossible, that a corporation could be held liable. The argument raised was that a corporation as an artificial person had no physical existence and could therefore not be subjected to the prescribed penalties attached to the offences. Alongside this thinking, there were also those who felt that a corporation had all the attributes of a natural person and should therefore be capable of incurring liability thus entitled to sanctions or punishments attached to offences including physical punishment. The famous principle of corporate legal personality in law was established in the landmark case of Salomon v. Salomon & Co. Ltd,[5] where it was decided that a company upon incorporation or registration under the relevant Act becomes a legal person distinct from its members. This case has statutory backing in Nigerian Company Law as reflected in Sections 37 and 65 of the Companies and Allied Matters Act (CAMA) Cap C20 LFN 2004. Section 65 specifically states that:
Any act of the members in general meeting, the board of directors or of a Managing Director while carrying on in the usual way the business of the company shall be treated as the act of the Company itself and the company shall be criminally and civilly liable thereof to the same extent as if it were a natural person.
The implication of this provision of CAMA is that where a third party has dealt with the organs or officers of the company in good faith, without knowledge of the true state of their relationship with the company, the company shall be primarily liable for any wrongful act of its organs or officers.
The principle of Company Law is therefore founded upon the norms of a separate legal existence and limited liability which is a direct result of incorporation or registration.
The Nigerian Legal system which is fashioned along the doctrines of the English legal system recognizes and accommodates the position at Common Law to the effect that corporations should be criminally liable but not for all offences.
Regardless of the numerous advantages and merits of the doctrine of corporate legal personality, there are exceptions to this principle. These exceptions are borne out of the recognition that the ˜corporate legal entity and ˜limited liability doctrines could be abused and therefore, the benefits of such abuse should not be enjoyed by the abusers. In certain cases, the veil of incorporation of a company shall be lifted or pierced and personal liabilities of members or directors of a company as regarding corporate liabilities for crimes or malpractices shall be enforced[6]The evident problem is that the courts display reluctancy and lack of enthusiasm to accept such general arguments as above in so far as they are not based on the breach of particular statutes or the terms of particular statutes or the terms of particular contracts.
In consideration of the above, it is quite evident that the extant company laws generally including those of Nigeria failed to provide complete remedies for corporate crime outside statutory contradiction or breach. As a result of this, corporate crime can only be treated under the realm of general criminal jurisdiction and not strictly an aspect of corporate law.
The provisions of CAMA under section 315 (a-d); as with the provisions under section 311(2); provide for the protection of minority members of the company from illegal and oppressive conduct of the majority members. It does not provide any serious statutory solution or remedy against a company for corporate crime committed against public interest. Even the Criminal Code provision (under sections 434-439) relating to frauds by Trustees and Officers of Companies and corporations through false accounting is obviously intended to protect the company itself and not the general public (including the government). As identified earlier, the vicarious liability of a company for the acts of its organs and officers is a common law principle that has been statutorily acknowledged in Nigeria by the provision of section 65 of CAMA. Also, in recent legislative history in Nigeria, the Failed Bank (Recovery of Debts) and Financial Malpractices in Banks Act is an example of such law. The law imposes criminal liability on both the individual corporate officer and the corporate body.[7]
On the other hand, in both Tort and contract, there is the general common law principle that the company will only be liable if the acts of the officers or agents are within the objects of the company. This is in correspondence with the ˜ultra-vires rule, which has been modified by section 39(3) of CAMA to the effect that if the ultra-vires acts are later ratified by the company, the company becomes liable, even though it originally acted outside its objects.
Fraud takes on many forms. The Canadian Institute of Chartered Accountants defines fraud as œan intentional act by one or more individuals among management, other employees, those charged with governance or third parties, involving the use of deception to obtain an unjust or illegal advantage.. These activities can include misappropriation of cash or inventory, fraudulent financial reporting and money laundering.
Fraud, apart from being a criminal act, is also a type of civil law violation known as a tort[8]. A civil fraud typically involves the act of intentionally making a false representation of a material fact with the intent to deceive which is reasonably relied upon by another person to that persons detriment.
The rate of companies and multinationals around the globe that were found window dressing[9] their operating revenues and profits or applying income smoothening in reporting their operating performance was quite alarming. These financial corporate frauds involve substantive amounts of money and are geared towards maintaining or increasing the share price of the perpetrating companies in the stock exchange market. Corporate fraud (also known as accounting scandals or corporate accounting scandals) are political and business scandals which arise with the disclosure of malpractices by trusted executives of large public companies. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understanding expenses, overstating the value of corporate assets or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations and affiliates.
In public companies, this type of œcreative accounting, amounts to fraud and investigations that are typically launched by government regulatory agencies, such as the Nigerian Securities and Exchange Commission.(SEC)
Considering the case of IGP v. Mandilas and Karaberis and Anor, the court held liable the company and its manager for the offence of stealing. In his judgment, Thomas J. relied on the principle that a corporation acts through its agents and that once such agents act within the scope of their employment, the principal, which is the corporation, would be vicariously and criminally liable. One aspect that was baffling was the fact that the employer (the company) of the second accused was given a fine of N400, 000 only, while the second accused (employee) of the first accused defendant company was sentenced to one year imprisonment with hard labor.
In Nigeria, one of the most notable corporate frauds is the case of Cadbury Nigeria Plc.[10]The company was found to be falsifying its financial and accounting reports by inflating its profit figures by millions of Naira. It was discovered that the profit reported by the company for some years were overstated by about N1 billion to N2 billion via creative accounting. Cadbury, which is one of Nigerias leading companies, was fined for publishing misleading accounts for a number of years in order to boost its profit. The suspicion, however, is that it is not the only company engaged in this practice. Also, in recent years, according to the Nigerian Deposit Insurance Corporation (NDIC), the volume and frequency of fraudulent practices in Nigerian banks have been on the increase. This has led to the conviction of several bank executives in Nigeria.
Sometime in October 2010, Former Managing Director and Chief Executive Officer of Oceanic Bank plc, Mrs. Cecilia Ibru was convicted of fraud by a Federal High Court in Ikoyi Lagos state, south west Nigeria. Ibru who is among about 20 sacked bank executives being prosecuted in court for money laundering and mismanagement of depositors funds was also said to have been sentenced to a six months imprisonment with a forfeiture of a whooping sum of N150 billion.
Also, a United Kingdom High Court in London ordered Mr Erastus Akingbola, former chief executive of Intercontinental Bank, to forfeit over £78 million to the bank. Akingbola was sacked in August 2009 by the Central Bank of Nigeria (CBN) along with four bank bosses over allegation of mismanagement. He was arrested in 2010 after he returned from the UK and later arraigned in court by the Economic and Financial Crimes Commission (EFCC) which also seized some of his assets.[11]
According to the UK court judgement dated March 24, 2011, he will forfeit sums of £8,540,134.58, £68 million and £1.3 million (making a total of £77.84 million) to Intercontinental Bank.
It was learnt that Intercontinental Bank had approached the UK court after it successfully obtained a freezing order against huge sums of monies paid into various shell companies set up by Akingbola in the Cayman Islands and in which members of his family were beneficiaries.
The issue of corporate fraud is a global issue, this will be elaborated on in the next chapter. In chapter 2 we will discuss the various theories of fraud which have been propounded through time and the cause, effect and rampancy of fraud in a global perspective.
1.1:BRIEF HISTORY OF FRAUD: The prominence of fraud can be traced as far back as the great civilizations of antiquity for example, in ancient egypt, scribes were assigned to the monitoring of the pharaohs incoming and outgoing grain and gold inventories so as to prevent fraud and theft.[12] Also in the ancient greek civilisation, Aristotle reports on the fraud surrounding the enactment of the Seisachtheia,[13] or Solons shaking-off of burdens in the 6th century BC, which released the Greeks from slavery for debts. In Roman times, Ciceros Verrine Orations attest to the multiple thefts and the fraudulent collection of tax proceeds by Verres, the Governor of Sicily. The major religious texts also address the concept of fraud:. for example, the Torah provides: Thou shalt not have in thy bag divers weights, a great and a small. Thou shalt not have in thine house divers measures, a great and a small. But thou shalt have a perfect and just weight, a perfect and just measure thou shalt have: that thy days may be lengthened in the land which the LORD thy God giveth thee. For all that do such things, and all that do unrighteously, are an abomination unto the LORD thy God. (Deuteronomy 25.13-16)The Quran also addresses fraud as seen in the narration of the destruction of the Madyan cities by an earthquake because of the Madyans refusal to cease commodity fraud despite Prophet Shuaibs imprecations to that end (Quran VII, 85-93).Surat 83 dedicated exclusively to defrauders begins thus:œWoe be unto those who give short measure or weight; who, when they receive by measure from other men, take the full, but when they measure unto them, or weigh unto them, they cause [them] loss (Quran LXXXIII, 1-3)
The Bible also weighs in and states:œA false balance is abomination to the Lord: but a just weight is his delight. The getting of treasures by a lying tongue is a vanity tossed to and fro of them who seek death. (Proverbs 11.1, 21.6) Fraud is also found in less ancient times such as the middle age where fraud was centered on staple goods and tax collection. Also coin clipping became a scourge in England during the 17th-18th centuries. Another example is the famous south sea bubble case. The South Sea Bubble founded in 1711[14] is a magnificent illustration of a frenetic purchase of shares, at an artificially inflated price, followed by a fraudulent crash in 1720.
[1] The legal dictionary-
[3] See chapter 43 & Section 468 of Criminal code
[4] Contained in his speech at the American Sociological Assoc. Dec 27 1939
[5] Salomon v A .Salomon[1897] AC 22- established the doctrine of corporate personality
[6] See Section 23 ICPC act .Lifting the corporate veil. See Nathaniel Adeniji v State [1992] 4 N.W.L.R
(Pt. 248) 1
[7] See Section 15, 16& 18 of FBFM 2004
[8] Torts are civil wrongs recognized by law as grounds for a lawsuit
[9] Window dressing is a fraudulent strategy used by managers to improve
the appearance of performance before presenting it to customers
[10] Corporate governance issues in financial reporting- The Cadbury challenge
By oladele solanke
[11] Akingbola v EFCC see also Akingbola v FRN[2012] 9 Nigeria Weekly Law Report
[12] The stolites generally considered as lawmakers also monitored the financial
operational system of egypt
[13] was a set of laws instituted by the Athenian lawmaker Solon (c. 638 BC“558 BC) in order to rectify the widespread serfdom and slaves that had run rampant in Athens by the 6th century BC, by debt relief.
[14] The south sea bubble was a British joint-stock company founded in 1711, created as a public-private partnership to consolidate and reduce the cost of national debt.
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