Using anti-money laundering measures to curb pension fraud in Nigeria
24 Jan 2019

Anti-money laundering author Ehi Eric Esoimeme devles into the issues surrounding pension fraud in Nigeria. Of interest is a revised approach to the processing of death benefits in one of Africa’s most populous states. Will the new measures prove effective, or can more be done?

This is his study on the matter:

     1.INTRODUCTION

Following a series of complaints from retirees, who alleged that Pension Fund Administrators (PFAs) have wrongfully paid their death benefits to their next of kin or legal beneficiaries while they are still alive and in active service without their consent,[1] the National Pension Commission of Nigeria, on the 3rd of October, 2018, revised its procedures on the processing of death benefits by proposing the following measures:

  • PFAs are required to enhance the internal controls and carry out further investigations on the documentation submitted by the next of Kin/legal beneficiary of the deceased before submission to the National Pension Commission for approval;
  • PFAs shall ensure due diligence and conduct search at the Probate Registry of the issuing authority to confirm the genuineness of the documents as well as the verification of the information of the named administrator and sureties;
  • All PFAs shall henceforth be required to contact the employer of the deceased in verification and/or, confirmation of death of the employee;
  • PFAs shall ensure that the affixed current passport photograph of the next of Kin/legal beneficiary, shall be certified by the deceased employer;
  • Next ofkKin/legal beneficiaries shall be required to submit a valid means of identification or a letter from a Notary Public where a means of identification is not readily ascertainable;
  • PFAs shall confirm the death certificate of the deceased issued by the hospital and police report (where death is by accident);
  • The Officer of the PFA that undertakes the due diligence in the Probate Registry, hospital or police authority shall write and sign a report on the findings of the exercise; and
  • The National Pension Commission shall ensure that the appropriate beneficiary is indemnified by the PFA in the event of payment to a wrong beneficiary.[2]

While the above measures could strengthen the processes and practices in processing and payment of death benefits, it may be unable to significantly curb the menace of pension fraud.

A strong due diligence process where the owner of the pension account and the next-of-kin/legal beneficiary are duly identified before the establishment of a business relationship is capable of reducing the risks associated with pension fraud to the barest minimum.

The proposed measures by the National Pension Commission are applicable after the establishment of a business relationship.

A carefully balanced approach has to be taken, because if identification processes are too lean, monitoring may make a limited contribution to risk mitigation, and manual or electronic scanning of transactions may not be able to identify individual suspicious activity effectively. [3]

  1. CUSTOMER IDENTIFICATION PROGRAMME
    PFAs should be required to implement a written customer identification program (“CIP”) appropriate for its size and type of business. The program must include procedures to identify and verify the true identity of the legal beneficiaries to the pension account and to take appropriate follow-up action where necessary. This measure is in line with the Financial Action Task Force (FATF) Recommendations (Recommendation 10) and the Nigerian Money Laundering Prohibition Act 2011 (as amended) (Section 3).A customer seeking to open a pension account with a PFA should be requested to provide proof of his name (e.g. valid passport or driving licence) and provide proof of his address (e.g. Utility bill/tenancy agreement). It is not sufficient for the customer to provide only his personal information. The customer should also be required to provide proof of the name of the next-of-Kin/legal beneficiary to the pension account and proof of address.The information collected and verified will help PFAs determine risks posed by a particular pension account, allowing the institution to ensure that it has the proper controls in place, including suspicious activity monitoring procedures, and to monitor and report on the risks of a particular client.Customer identification and verification can reduce the risk of impersonation fraud.; it will prevent a situation where a criminal impersonates a next-of-Kin/legal beneficiary to a pension account by using the identity of the real beneficiary.

    1. RECORD KEEPING

    PFAs should keep all records of the identification data obtained through the customer due diligence process (e.g., copies or records of official identification documents such as passports, identity cards, driver’s licenses and similar documents, account files and business correspondence, including the results of any analysis undertaken such as inquiries to establish the background and purpose of complex and unusual large transactions), for at least five years after the business relationship is ended, or after the date of the occasional transaction.

    This measure is in line with the Financial Action Task Force Recommendations (Recommendation 11) and the Nigerian Money Laundering Prohibition Act 2011 (as amended) (Section 7).

    The rationale for record keeping is to facilitate the reconstruction of individual transactions and provide, if necessary, evidence for the prosecution of criminal activity.[4]

    1. SUSPICIOUS TRANSACTIONS REPORTING

    Reporting measures are key to anti-money laundering/countering the financing of terrorism (AML/CFT) efforts and support law enforcement investigations.[5]

    These measures can be used by PFAs to curb pension fraud. The transaction record of a pension payment should be used to monitor the activities of the pension account for suspicious activities.

    If a PFA suspects or has reasonable grounds to suspect that funds are being paid to the wrong person, it should report promptly its suspicions to the police. This measure is in line with the Financial Action Task Force Recommendations (Recommendation 20) and the Nigerian Money Laundering Prohibition Act 2011 (as amended) (Section 6).

    1. TRAINING FOR ANTI-FRAUD/ MONEY LAUNDERING COMPLIANCE

    PFAs are recommended to train all appropriate personnel with respect to their responsibilities to comply with the requirements of due diligence, record keeping and reporting. PFAs training programs should provide relevant examples of fraud/money laundering in the pension scheme and should discuss pension policies and procedures, liability issues and regulatory requirements.

    In addition, the training program should provide for regular updates to ensure employees are kept current in Anti-Fraud/Money Laundering policies and regulatory changes. This measure is in line with the Financial Action Task Force Recommendations (Recommendation 18) and the Nigerian Money Laundering Prohibition Act 2011 (as amended) (Section 9 (1) (b)).

    1. AUDIT FOR COMPLIANCE  WITH ANTI-FRAUD/ MONEY LAUNDERING MEASURES 

    PFAs must have an independent testing or audit function for Anti-Fraud compliance, including Suspicious Activity Reporting. Audit programs should focus on high-risk accounts and should include comprehensive transaction testing.

    This measure is in line with the Financial Action Task Force Recommendations (Recommendation 18) and the Nigerian Money Laundering Prohibition Act 2011 (as amended) (Section 9 (1) (d)).

    1. COMPENSATION AND OVERSIGHT

    PFAs should design compensation programs that balance quantitative and qualitative factors and that provide measurement tools to assess employee performance in both areas.

    They should also ensure that account relationship managers are subject to the same or a higher degree of oversight and control as managers of other areas of operation that may expose a PFA to risk. Internal controls, audit and compliance processes should ensure that account managers operate with appropriate oversight and are subjected to periodic audit checks.[6]

    This measure is in line with the Financial Action Task Force Recommendations (Recommendation 18) and the Nigerian Money Laundering Prohibition Act 2011 (as amended) (Section 9 (1)).

    8. CONCLUSION 

    To reduce the fraud risks associated with the nex of Kin/legal beneficiaries of the deceased, the National Pension Commission should direct PFAs to adopt customer due diligence measures, record keeping

    measures, transaction monitoring measures and reporting measures. PFAs should be mandated to apply a risk-based approach to their compliance programs.

    Adopting a risk-based approach implies the adoption of a risk management process for dealing with fraud and money laundering.

    This process encompasses recognising the existence of the risk at the customer due diligence stage, undertaking an assessment of the risks at the enhanced due diligence stage and developing strategies to manage and mitigate the identified risks at the Enhanced on-going monitoring stage.[7]

    The Financial Action Task Force (FATF) Recommendations support the development and implementation of a risk-based approach to anti-money laundering and countering the financing of terrorism measures.

    This risk-based approach allows countries, within the framework of the FATF requirements, to adopt a more flexible set of measures, in order to target their resources more effectively and apply preventive measures that are commensurate to the nature of risks, in order to focus their efforts in the most effective way.

    Independent testing (audit) should review a PFA’s risk assessment for reasonableness.

    Additionally, management should consider the staffing resources and the level of training necessary to promote adherence with these policies, procedures, and processes.

    For those PFAs that assume a higher-risk fraud profile, management should provide a more robust anti-fraud compliance program that specifically monitors and controls the higher risks that management and the board have accepted.[8]


    About the authorEhi Eric Esoimeme is the Deputy Editor-in-Chief of DSC Publications and also a contributor at KYC360. His published work includes two books: ‘The Risk-based Approach to Combating Money Laundering and Terrorist Financing’ and ‘Deterring and Detecting Money Laundering and Terrorist Financing: A Comparative Analysis of Anti–Money Laundering and Counter-terrorism Financing Strategies.’ For more information on Ehi’s books, visit here. His articles can be downloaded here.

    This article is expressing personal opinions and is meant for information purposes only. The article does not intend to replace professional or legal advice. It is recommended that readers seek independent professional or legal advice, or speak to authorised persons/organisations.

    REFERENCES:

    [1] The Punch (2018), ‘Investigate death certificates before payment, PenCom tells PFAs’, Available at: https://punchng.com/investigate-death-certificates-before-payment-pencom-tells-pfas/ (accessed 31st of October, 2018).

    [2] National Pension Commission (2018), ‘Revised Procedures on the Processing of Death Benefits’, Available at: https://www.pencom.gov.ng/wp-content/uploads/2018/10/CIRCULAR-ADDENDUM-A0001.pdf (accessed 20 November, 2018).

    [3] Financial Action Task Force (2013), ‘FATF GUIDANCE Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion’, Available at: http://www.fatf-gafi.org/media/fatf/documents/reports/AML_CFT_Measures_and_Financial_Inclusion_2013.pdf (accessed 13 January 2017).

    [4] Financial Action Task Force (2011), ‘FATF GUIDANCE Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion’, Available at: http://www.fatf-gafi.org/media/fatf/content/images/AML%20CFT%20measures%20and%20financial%20inclusion.pdf (accessed 13 January 2017).

    [5] Financial Action Task Force (2013), ‘GUIDANCE FOR A RISK BASED-APPROACH: PREPAID CARDS, MOBILE PAYMENTS AND INTERNET-BASED PAYMENT SERVICES’, Available at: http://www.fatf-gafi.org/media/fatf/documents/recommendations/Guidance-RBA-NPPS.pdf (accessed 12 January 2017).

    [6] Permanent Subcommittee on Investigations (1999), ‘Private Banking and Money Laundering: A Case Study of Opportunities and Vulnerabilities’, Available at: https://www.hsgac.senate.gov/subcommittees/investigations/hearings/private-banking-and-money-laundering-a-case-study-of-opportunities-and-vulnerabilities (accessed 21 January 2017).

    [7] Esoimeme, E.E. (2015), ‘The Risk-Based Approach to Combating Money Laundering and Terrorist Financing’, Eric Press; Available on Amazon: https://www.amazon.co.uk/Risk-Based-Combating-Laundering-Terrorist-Financing/dp/9789486030/ref=sr_1_2?ie=UTF8&qid=1437508453&sr=8-2&keywords=ehi+eric+esoimeme

    [8] Federal Financial Institutions Examination Council (2014), ‘Bank Secrecy Act/Anti-Money Laundering Examination Manual’, Available at: https://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/ffiec-bsa-aml-examination-manual.pdf (accessed 10 January 2017).

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