Abstract
Selected Issues
Governance in Nigeria: Focus on the Oil Sector and AML/CFT1
Accountability, governance, and transparency in the state-owned enterprise (SOE) sector facilitate the efficient use of public resources and help to monitor fiscal risks. Reducing leakages in the petroleum sector is especially macroeconomically critical, given Nigeria’s current fiscal and external dependence on oil revenue. Against this background, this paper provides an overview of developments, recent reforms, and challenges, and outlines policy recommendations for stronger governance and corruption prevention, detection, and resolution, including through anti-money laundering and combating the financing of terrorism measures that are useful beyond the petroleum sector.
A. Introduction
1. Issues of transparency and corruption rank high among the concerns of Nigeria’s population and have a substantive impact on macroeconomic outcomes in the country, particularly in the petroleum sector.
According to a recent survey by Nigeria’s National Bureau of Statistics, one out of three respondents that had contact with a public official reported having paid a bribe, and respondents identified corruption as one of the three most pressing issues affecting Nigeria (NBS 2017). Indeed, estimates suggest that the macroeconomic costs of corruption are large: lowering corruption to the levels of other peer countries could boost growth by ½ to 1½ percentage points annually, increase public investment efficiency, and increase the tax-revenue to GDP ratio by 1½ percentage points (IMF 2018).
With oil currently accounting for 57 percent of total government revenues and 94 percent of exports, reducing leakages in the petroleum sector is key to fiscal sustainability and external stability.
2. The government has initiated several reforms that signal its commitment to addressing these concerns.
The National Anti-Corruption Strategy (NACS) for 2017–20 identifies priorities at the national level, including improving asset recovery and management, the adjudication of corruption cases by the court system, investigation and prosecution, and coordination and collaboration among competent authorities.
Strengthening the anti-corruption infrastructure. Key institutions have been bolstered, with additional resources provided to the Economic and Financial Crimes Commission (EFCC), and the passage of the Nigerian Financial Intelligence Unit (NFIU) 2018 Act, which provides the NFIU with operational independence, in line with the Financial Action Task Force’s recommendations.
The National Assembly has passed amendments to the Companies and Allied Matters Act (CAMA, 1990), in part to ensure the transparency of ultimate or “beneficial” ownership (BO) of legal entities and arrangements, which may be abused to conceal or launder the proceeds of corruption and other crimes.
The publishing of the monthly financial and operational reports of the Nigerian National Petroleum Corporation (NNPC) is a good step toward enhancing the transparency and integrity of the oil sector. The 2019 Extractive Industries Transparency Initiative (EITI) report found that Nigeria has fully addressed corrective actions from its first validation and made satisfactory progress overall with implementing the EITI standard. The Petroleum Industry Governance Bill (PIGB), approved by the National Assembly, could be an important step towards improving institutional arrangements and oversight in the oil sector.
The whistle-blower policy and the open government initiative are also welcome steps towards improving governance.
3. This paper discusses further concrete steps to improve the governance of SOEs and of the oil sector, given their importance to fiscal transparency and sustainability. 2To this end, it details the strengths and weaknesses of Nigeria’s SOE governance framework, notes critical pending and future reforms, and highlights the unique potential of anti-money laundering and combating the financing of terrorism (AML/CFT) tools to support anti-corruption efforts in and beyond the SOE sector. It points to a number of important reforms, including with respect to the building of institutions, that would improve transparency and reduce incentives for corruption, thus strengthening corruption prevention. It further argues that when prevention fails, the infrastructure for public-private cooperation in the detection of corrupt acts must not. And where corrupt acts are indeed detected, Nigeria’s criminal justice system must function to counteract impunity.
B. Governance of the State-Owned Enterprise Sector
4. The current ownership arrangements for Federal Government enterprises (FGOEs) follow a dual decentralized model that has become more complex. The state is both the provider of the product or service and the regulator and supervisor of the performance, resulting in an inherent potential conflict. The association of the FGOE with public policy increases the chances that enterprise assets are misused to avoid going through the budget appropriation process or for narrowly political purposes. Ownership functions are fragmented among the Ministry of Finance (MoF), the office of the Accountant General, sector ministries and the Bureau of Public Enterprises.
5. Quantifying the fiscal risks stemming from the SOE portfolio is increasingly challenging. The definition of an FGOE is not consistent across several Acts. There is no standard reporting policy and no aggregated annual report on the financial performance of the overall FGOE sector. A lack of standardized accounting policies complicates quantifying the ‘operating surplus’ of each FGOE. Obtaining a true picture of the FGOEs’ performance or financial situation enabling the authorities to react on time and to be selective in their intervention is therefore difficult.
6. In view of these weaknesses, the central government has decided to strengthen its oversight of the FGOE sector. Performance contracts are being designed to ensure surplus revenue targets are realistic and adhered to. The review of FGOE portfolio to ensure proper classification and separate an SOE from a departmental agency as well as calls for publishing regular quarterly financial statements are also ongoing.
7. One key priority—in line with international practices—is to gradually centralize existing fiscal oversight arrangements and enhance ownership arrangements. Efforts to improve financial and fiscal discipline—as currently planned by the authorities— should be integrated with a broader public financial management reform agenda. A cohesive ownership vision would redesign and streamline the division of regulatory, oversight, policy, and ownership roles and responsibilities. Best–practice examples suggest a central role for the Ministry of Finance in monitoring SOE performance (Table 1).
Nigeria: Elements of an Effective Ownership Policy
Nigeria: Elements of an Effective Ownership Policy
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Nigeria: Elements of an Effective Ownership Policy
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8. The current FGOE institutional features are present in the petroleum industry. The institutional fragmentation and overlaps of roles and responsibilities pave the way to strengthen operational efficiencies, management, and accountability. This has a direct impact on the operations of NNPC, which remains the largest source of income for the Federal Government.
C. Governance of the Petroleum Sector and the NNPC
9. Several agencies are tasked to oversee the petroleum industry in Nigeria, with blurred regulatory, policy, and ownership roles. The Ministry of Petroleum Resources (MPR) is responsible for oversight of the overall sector, including all its agencies, and for policy making. The Department of Petroleum Resources (DPR) exercises regulatory powers on behalf of the MPR, and licensing and monitoring powers for oil, gas, and downstream petroleum products. The Petroleum Products Pricing Regulatory Agency regulates petroleum products prices. The Petroleum Technology Development Fund is in charge of training. The Petroleum Equalization Fund is responsible for the equalization of pricing of petroleum products countrywide. NNPC is the national oil company.
10. These overlapping roles pose governance challenges. The Minister of Petroleum, in charge of overseeing the sector and NNPC, is also the chairman of NNPC. The DPR is legally founded in the Act that constitutes NNPC, which calls for an inspectorate Directorate within NNPC. An inadequate budget, limited human resources, and conflicting objectives limit the operational effectiveness of DPR. The Auditor General does not have a direct mandate to audit NNPC. There is no central role for the Ministry of Finance in the current set up.
11. The management of NNPC is a direct consequence of its incorporating Act, with the current board structure creating a number of challenges. The 1977 NNPC Act empowers NNPC to engage in oil and gas related activities. Two key aspects influence the way NNPC operates: (i) the Act does not assign a commercial mandate to NNPC, and (ii) the Act allows NNPC to be an agent of the Federation without defying the commercial aspects of this agency contract. The governance of NNPC faces several challenges: appointment, evaluation, and remuneration policies do not appear to be in place, and the power to make appointments of key board members and CEO remains concentrated in the hands of the President of the Federation. As a result of these governance weaknesses, oversight roles and executive responsibilities run the risk of facing political interference in NNPC’s decision making processes.
12. NNPC’s corporate structure and internal audit and control functions are under transformation. NNPC is a federally owned entity, with 12 subsidiaries incorporated as joint stock companies as per the Company and Allied Matters Act. To be more efficient on the core businesses, NNPC is attempting to become a de facto corporate group by creating four autonomous business units (Upstream, Downstream, Gas and Power, and Refineries) with corresponding subsidiaries. It also aims to move from a compliance-based audit to a risk-based audit and control approach. Needs assessments were completed in 2017, and the overall internal governance architecture has been drafted to promote better board oversight, communication channels, and reporting mechanisms. Policies to support the internal audit and control function have been developed. When fully implemented, this revamp could help NNPC adapt to new challenges (including the transformation to a corporate entity as per CAMA provisions), and better fit within the parameters of a profit-oriented mandate. It would also be important for NNPC to envision an approach to integrating sustainability, including environmental and social considerations, into NNPC operations, with clear indicators that are measurable and monitorable, and feed disclosure reporting.
Fiscal Discipline of NNPC
13. Limited fiscal oversight and a fragmented institutional set up impacts revenue collection. NNPC engages in major fiscal arrangements in the oil sector on behalf of the Federal Government of Nigeria, which mainly consist of Joint Ventures (JVs) and Production Sharing Contracts (PSCs).As reported in 2015 NEITI reports, revenues are often lost or under-collected due to discretionary decision-making in the award of oil blocks, unpaid signature bonuses after a license is awarded or renewed, unpaid royalties, and significant crude oil theft.3 For example, in 2015, NEITI estimates that NNPC owes $ 9.8 billion to the Federal Government, mainly due to deductions from gross oil revenues and opacity in the new JV cash call arrangements. The involvement of various agencies (NNPC, DPR, and Federal Inland Revenue Service) in collecting revenues adds to the lack of clarity.
14. Legal ambiguities generate uncertainty on NNPC revenue transfers. The Constitution requires that all NNPC revenue proceeds be paid to the Federation Account but the NNPC Act states that the NNPC shall maintain a fund from which NNPC can defray all expenses. NNPC thus makes prior deductions out of its gross income with no need to recourse to appropriation by the National Assembly. The Fiscal Responsibility Act mandates NNPC to remit one-fifth of its operating surplus to the Consolidated Revenue Fund of the Federal Government but neither defines “operating surplus” nor provides a limit to deductions (generally related to landing and transportation costs for imported petrol, crude losses, product losses, and pipeline management and repairs). NEITI and Audit General’s Reports have consistently highlighted concerns of transparency and accountability as deductions have increased over the years. Making revenues more transparent requires revisions to the legal framework (Table 2).
Nigeria: Required Revisions to the Legal Framework to Increase Transparency of Revenues
Nigeria: Required Revisions to the Legal Framework to Increase Transparency of Revenues
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Nigeria: Required Revisions to the Legal Framework to Increase Transparency of Revenues
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15. The new funding mechanism for cash calls has helped to reduce arrears accumulation, which had been a recurrent problem in the past.4 Before 2017, gross proceeds were transferred immediately to the Federation Account, and monthly cash calls were paid to JV partners through a budget appropriation process. This set up allowed the Federal Government (FG) to better oversee revenue distribution. However, discrepancies between NNPC approved amounts and FG budget allocations coupled with budgetary process delays contributed then to the accumulation of significant arrears (US$ 5.1 billion 2011–2015; US$ 1.2 billion in 2016). To prevent arrears accumulations, NNPC has begun to first pay cash call obligations and then remit net revenues to the Federation Account in January 2017, decreasing accumulations of cash call arrears but raising concerns about the constitutionality and transparency of deductions in the annual reports of the Office of the Auditor General (OAuGF).
16. The publication of contracts is necessary to reduce fiscal risks. Petroleum contracts (sales contacts, service contracts, PSCs, and JVs) that have a significant impact on public finances are kept fully confidential which can facilitate abuse in the negotiation process, prevent public scrutiny, and represent fiscal risk (Table 3). With attention to confidentiality of commercially sensitive data, and in line with international transparency standards, it is important that contracts be fully disclosed.
Nigeria: Steps to Increase the Transparency of Petroleum Revenue
Nigeria: Steps to Increase the Transparency of Petroleum Revenue
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Nigeria: Steps to Increase the Transparency of Petroleum Revenue
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17. Budget allocation and actual expenditures of NNPC differ significantly, and NNPC’s participation in the appropriation process seems limited. Nigeria’s budget process is governed by the Constitution, the Finance (Control & Management) Act and the Fiscal Responsibility Act. They require NNPC (along with other FGOEs) to submit, as part of the appropriation bill process, its revenue and expenditure estimates to the Budget Office, which submits it to the National Assembly for approval. However, amounts approved by the NNPC do not often match Federal Government budget allocations. In fact, the Ministry of Finance is in charge of revenue forecasting and scenario modeling but is constrained in its technical and sector expertise as well as by limited data access. NNPC’s budget is not published, nor identified in the federal government’s budget. There is also no information on the operational surplus of NNPC, while non-appropriated spending is increasing due to NNPC’s first deductions, calling for significant changes (Table 4).
Nigeria: Towards Good Practice in Budget Allocation and Documentation
Nigeria: Towards Good Practice in Budget Allocation and Documentation
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Nigeria: Towards Good Practice in Budget Allocation and Documentation
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Transparency of NNPC
18. The legal framework for fiscal transparency has been significantly enhanced with the issuance of the FRA. The FRA requires that fiscal and financial affairs be conducted in a transparent manner and that SOEs (including NNPC) provide full and timely disclosure and wide publication of all transactions and decisions involving public revenues and expenditures and the implications for their finances. On the company side, the NNPC Act provides that the corporation shall prepare and submit to the National Council of Ministers, in each financial year, a report on the activities of the Corporation, which includes a copy of the audited accounts of the Corporation for that year and the auditors’ report.
19. NEITI has played a pivotal role in improving financial disclosure standards in the oil industry. Incorporated as a Government Agency in 2007 (to protect its role from political interference), Nigeria is one of the few countries to have legislated the EITI with the 2007 EITI Act.5 The Act gives Nigeria’s EITI a mandate to develop a framework for transparency and accountability in the reporting and disclosure of all extractive industry companies’ revenue due to or paid to the Federal Government and enables EITI to conduct financial, physical and process audits of Nigeria’s oil and gas industry. As a result of NEITI’s efforts, NNPC now publishes monthly financial and operation reports and monthly petroleum statistics and annual statistical bulletins. Of note, in February 2019, the Board of EITI agreed that Nigeria reached ‘satisfactory’ progress in implementing the EITI standards as the first Anglophone African country.6
20. Despite recent reforms, improving auditing and data reconciliation is essential for proper monitoring of NNPC’s financial situation. NNPC is self-reporting and its figures cannot be verified or challenged by other government bodies, complicating the validation of information. There are concerns about the accuracy of revenue statements and room for enhancing the level of disclosure, including on what NNPC ultimately considers as net revenue. As highlighted by NEITI, there is significant scope to improve the regularity of NNPC disclosures (for example, NNPC Financial and Operational Reports are available only until November 2018, while the last Annual Statistical report and petroleum statistic were published in 2017 and 2016 respectively) and to subject them to analysis. For instance, NEITI noted that its auditors under the EITI framework have not independently verified the information and data from NNPC monthly reports. Further, there are data discrepancies between the NNPC, Audit General, Central Bank of Nigeria, and Accountant General. Finally, the Fiscal Responsibility Act requires NNPC to prepare and publish audited accounts but there is no published audit report to date.
21. Strengthening transparency is needed to ensure that Nigeria receives maximum benefits from the oil and gas sector. The IMF’s Fiscal Transparency Code requires that resource corporations report on project-level fiscal payments to and from the government, which should be reconciled with government receipts in line with international standards, with no major unexplained reconciliation error. In line with good practices, it is important for the NNPC to disclose all revenue transfers and remittances to the Federation Account by providing complete and timely information that ensure accountability of its receipts and expenditure. In addition, NNPC could consider further enhancing and integrating its transparency practices by reporting on environmental, social, and governance considerations. The recently adopted Sustainability Disclosure Guidelines by the Nigeria Stock Exchange could provide useful guidance in this respect.7
Oversight of NNPC
22. The Constitution does not give the Auditor-General a direct mandate to audit NNPC. It establishes the appointment of the Auditor-General to audit public accounts and offices of the Federation. It explicitly excludes the accounts of government statutory corporations from the scope of the Auditor General’s mandate but grants the Auditor-General power (not defined) to conduct periodic checks aimed at (i) verifying that budget appropriations are spent in accordance with the Ministry of Finance’s instructions and (ii) investigating expenditure patterns of the government including inflows and outflows of NNPC revenues to the Federation Account.
23. The role of the Auditor-General can be strengthened (Table 5). The Office of the Auditor General (OAuGF) is resource-constrained, as it requires greater financial and operational independence to strengthen the overall quality of its audit function (Table 5). According to the law, the Auditor General is the only physical person in the OAuGF that can be considered civil servant. The rest of the office instead depends on a British Ordinance that was never converted into Nigerian law, de facto eliminating a legal basis to grant civil servant status for OAuGF employees, which has affected the regularity of their salaries and the allocation of an operational budget to conduct audits and to do capacity building (in the last two years, a total of $300 was allocated by the Accountant General to the OAuGF for training purposes). In addition, the relationship between the OAuGF and the Committees of the National Assembly and other external stakeholders needs to be strengthened to enhance the usefulness of the Auditor General Report as an effective instrument for legislative oversight over the NNPC’s operations.8
Nigeria: Strengthening the OAuGF and National Assembly’s Oversight Functions
Nigeria: Strengthening the OAuGF and National Assembly’s Oversight Functions
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Nigeria: Strengthening the OAuGF and National Assembly’s Oversight Functions
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24. The fiscal oversight role of the Ministry of Finance should be strengthened (Table 6). The Finance (Control and Management) Act gives the Minister of Finance powers to supervise and control the expenditure and finances of the Federation and all matters related to the financial affairs of the Federation which are not by law assigned to any other Minister. Despite these general powers, the Ministry’s fiscal oversight function over NNPC should be strengthened and enhanced. The Petroleum Unit, which was established in the Ministry with a mandate to provide sector revenue forecasting and support to the Federal Inland Revenue’s audit functions, needs to be enhanced through additional training on the sector, appropriate staffing (total of 6 people) and greater resources. The oversight unit should be responsible for oversight of, among other things, planning and budgeting arrangements, in year and end-of-year reporting requirements, dividend policy, and financial assistance from the Government, including guarantees and quasi-fiscal activities.
Nigeria: Strengthening the Role of the Ministry of Finance
Nigeria: Strengthening the Role of the Ministry of Finance
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Nigeria: Strengthening the Role of the Ministry of Finance
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25. An effective sanctions and enforcement regime would also help. This may include giving to the Auditor General and the Ministry of Finance the legal powers to enforce sanctions for individuals and institutions for the non-remittance of revenues to the Federation Account, failure to disclose information required by the laws, and non-compliance with requirements related to process, expenditure, and mismanagement of public assets.
The PIGB Act
26. Recognizing the above challenges, the government has tried to push for the approval of the Petroleum Industry Bill (PIB)—a key element of its Economic Recovery and Growth Plan—to improve institutional weaknesses. The PIB aims at redesigning the overall institutional architecture of the oil industry in a bill of four acts. The first act—the Petroleum Industry Governance Bill (PIGB)—aims at: clarifying separation of ownership, policy making, and regulatory roles and responsibilities among the agencies; establishing a commercially oriented focus for petroleum entities; promoting transparency and accountability in the administration of the petroleum resources; and creating a conducive business environment. Following a number of versions over the past decade, the PIGB had been approved by parliament in 2018 and is now awaiting final presidential approval.
D. Using AML/CFT Tools in and beyond the SOE Sector
27. Further strengthening Nigeria’s AML/CFT regime will bolster critical aspects of the anti-corruption effort in and beyond the FGOE sector, including by diminishing the underlying financial incentives. The proceeds of corruption must almost always be laundered, i.e., made to appear legitimate to be spent, transferred, or invested. As such, the AML/CFT tools for identifying, tracing, and confiscating ill-gotten gains play a dual role: helping to detect, investigate, and sanction corrupt practices that have already occurred while also diminishing the incentive to engage in such practices in the future.
28. The Nigeria AML/CFT National Strategy 2018–2020, adopted in June 2018, reflects the government’s high-level commitment to strengthening the AML/CFT regime. The Strategy recognizes a strong AML/CFT regime as key to the country’s socio-economic and political development and includes the review and enactment of AML/CFT legislation, as necessary; the issuance of related guidelines and regulations; awareness-raising for the private sector; the provision of adequate resources, e.g., funding and staffing, in the public sector; and enhanced stakeholder collaboration.
Selected Challenges in PIGB
Implementation of the PIGB would represent a clear break from past practices by restructuring institutional arrangements and calling for greater transparency. Its effectiveness will be strengthened by ensuring the following selected challenges are addressed:
Coordination: The PIGB gives responsibilities for rents and royalties to the Nigerian Petroleum Regulatory Commission, for PSCs to the Petroleum Asset Management Company (PAMC), and of other contracts by NNPC (especially JV) to the National Petroleum Company (NPC). Coordination between these different parts of the new fiscal regime is critical and may require adequate information flows among these institutions, assistance in audit processes, and sharing expertise.
Monitoring and oversight: Additional safeguards are required to subject new institutions to effective government oversight, whilst continuing to operate independently of political interference. The PIGB’s objective is to improve clarity of the roles and responsibilities of sector agencies. According to PIGB, the NPC and PAMC will be subject to Companies and Allied Matters Act and the Securities and Exchange Commission’s Codes of Corporate Governance. This will enhance the corporate governance but there is no single oversight unit that can monitor these entities.
The role of the Ministry of Finance: The MoF’s role in monitoring key financial information in relation to NPC and PAMC and assessing fiscal risks arising from their activities is not provided under the PIGB. This is particularly important given that NPC would be entitled to retain revenue from its operations to cover its expenses, debt liabilities, and cash call obligations in the JVs. The PIGB also excludes the new NPC from the provisions of the Fiscal Responsibility Act 2007 and the Public Procurement Act 2007. This creates additional fiscal risks as NPC is excluded from budgetary planning, borrowing limitations, conditions for guarantees by the federal government, public procurement provisions and fiscal transparency requirements
Formalize Appointment, Remuneration, and Evaluation Policies: The PIGB remains silent on transparency and formalization of the appointment process, evaluation, and remuneration of the members of the Commission and of the board of directors of NNPC and AMC
29. Several of the AML/CFT reforms discussed in the following sections would have a direct impact on promoting and ensuring good governance in the SOE sector. Greater visibility into the beneficial ownership (BO) of legal entities (i.e., companies) and arrangements (i.e., trusts), along with the strengthened implementation of existing measures designed to enhance scrutiny of the finances of politically exposed persons (PEPs)9 – whether via transaction monitoring or asset declaration – would advance the authorities’ efforts to uncover acts of corruption, including those that involve SOEs; track the associated proceeds; and prevent those proceeds from being laundered and spent (see text table for illustrative examples).
Transparency of Beneficial Ownership
30. Ensuring the transparency of ultimate (or “beneficial”) ownership is critical to prevent, detect, and investigate the abuse of corporate vehicles to engage in corruption. Corrupt officials may form or use legal persons (e.g., companies) to obscure their part in a bribery or kickback scheme; strike advantageous deals with themselves, their family, or their associates (see Text Table 1 below); or launder the associated proceeds. The risk of the abuse of corporate vehicles is particularly acute in the SOE sector, where large sums of state resources are regularly expended to procure equipment or obtain services and expertise from contractors, whether local or foreign.
Examples of Acts of Corruption in the SOE Sector and AML/CFT Tools to Address Them
Examples of Acts of Corruption in the SOE Sector and AML/CFT Tools to Address Them
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| Cooking the Books: An external accountant hired by an SOE discovers serious – and seemingly deliberate – discrepancies in the ledgers of the previous Chief Financial Officer (CFO). | Suspicious Transaction Reports (STRs)10: The accountant files an STR with the national financial intelligence unit (FIU), noting possible complicity within the SOE. |
| Hiring Yourself: A high-level SOE executive attempts to steer a lucrative contract to a previously unknown parts supplier that submitted a relatively unattractive bid. | Transparency of Beneficial Ownership: After consulting the official corporate registry, the contracting committee determines that the supplier is “beneficially” owned by the high-level executive. |
| Receiving Kick-Backs from a Foreign Partner: An SOE Metering Technician receives several wire transfers from a firm incorporated in a small country known as an offshore financial center. | International AML/CFT Cooperation: With help from the FIU, investigators obtain critical information from overseas counter-parts: the firm is a shell company with possible ties to the SOE’s foreign partner. |
| Taking Bribes from a Local Contractor: The Chief Executive Officer (CEO) of an SOE makes several large, all-cash deposits into her bank account. Her salary is paid in regular intervals by direct deposit. | Enhanced Monitoring of PEPs: As required by law, the bank monitors the PEP’s account closely, requests information on the funds’ origin, and suspends her account/submits an STR when there is no response. |
Examples of Acts of Corruption in the SOE Sector and AML/CFT Tools to Address Them
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| Cooking the Books: An external accountant hired by an SOE discovers serious – and seemingly deliberate – discrepancies in the ledgers of the previous Chief Financial Officer (CFO). | Suspicious Transaction Reports (STRs)10: The accountant files an STR with the national financial intelligence unit (FIU), noting possible complicity within the SOE. |
| Hiring Yourself: A high-level SOE executive attempts to steer a lucrative contract to a previously unknown parts supplier that submitted a relatively unattractive bid. | Transparency of Beneficial Ownership: After consulting the official corporate registry, the contracting committee determines that the supplier is “beneficially” owned by the high-level executive. |
| Receiving Kick-Backs from a Foreign Partner: An SOE Metering Technician receives several wire transfers from a firm incorporated in a small country known as an offshore financial center. | International AML/CFT Cooperation: With help from the FIU, investigators obtain critical information from overseas counter-parts: the firm is a shell company with possible ties to the SOE’s foreign partner. |
| Taking Bribes from a Local Contractor: The Chief Executive Officer (CEO) of an SOE makes several large, all-cash deposits into her bank account. Her salary is paid in regular intervals by direct deposit. | Enhanced Monitoring of PEPs: As required by law, the bank monitors the PEP’s account closely, requests information on the funds’ origin, and suspends her account/submits an STR when there is no response. |
31. The passage of amendments to the Companies and Allied Matters Act (CAMA, Repeal and Re-enactment) Bill, 2018 represents a critical step forward, but they have yet to be enacted. In view of the relevant Financial Action Task Force (FATF) recommendations, and Nigeria’s commitments under the EITI and at the London Anti-Corruption Summit of 2016, the Government crafted amendments to the CAMA that would mandate the disclosure of beneficial interests in a company’s shares and task the Corporate Affairs Commission (CAC) to compile and maintain the resultant information in the public domain. The Amendment (“Repeal and Re-enactment”) Bill was passed by the Senate on May 18, 2018, and by the House of Representatives on January 17, 2019. Presidential approval is needed for its enactment.
32. The lack of reliable BO information is a significant impediment to the full use of key AML/CFT tools to support Nigeria’s anti-corruption framework (Table 7). Among the affected tools are the NFIU’s analysis of STRs involving corporate entities and law enforcement’s efforts to conduct financial investigations (“follow the money”) in certain corruption cases. In the present environment, the authorities must request BO information from financial institutions (FIs), which are required to “identify and take reasonable steps to verify” the BOs of their legal person clients per the Central Bank of Nigeria (AML/CFT in Banks and Other Financial Institutions in Nigeria) Regulations, 2013. However, the authorities have found some FIs resistant to providing this information, while others are slow to do so, and still others provide information that is later determined to be inaccurate or incomplete.
Nigeria: Steps to Strengthen the Transparency of Beneficial Ownership
Nigeria: Steps to Strengthen the Transparency of Beneficial Ownership
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Nigeria: Steps to Strengthen the Transparency of Beneficial Ownership
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Politically Exposed Persons and Asset Declaration
33. Applying special scrutiny to PEPs’ financial dealings, including via asset declaration requirements, makes detection of corrupt acts and ML more likely. Such scrutiny also deters criminals from attempting to carry out corrupt acts in the first place.
34. In line with the FATF recommendations, Article 18 of the 2013 CBN regulations puts relevant requirements on FIs. These include to (i) obtain senior management approval before establishing (or continuing) business relationships with PEPs; (ii) conduct enhanced ongoing monitoring of those business relationships; (iii) render monthly returns on all PEP transactions to the CBN and the NFIU; and (iv) take reasonable measures to establish the source of wealth and of funds of PEP customers.
35. In practice, FIs struggle to identify their PEP clients (Table 8). To facilitate their compliance with the requirements noted above, banks, BDCs, and other FIs requested a list of qualifying Nigerian officials from the CBN. However, the preparation of such a list falls outside the CBN’s remit, is unlikely to prove a sufficiently comprehensive or dynamic solution and could foster private sector complacency. The Chartered Institute of Bankers of Nigeria (CIBN), Nigeria’s banking association, is therefore taking the welcome step of working with consultants to develop a proprietary account and transaction monitoring tool. A similar, but still nascent, effort on the part of the Association of Bureaux de Change Operators of Nigeria (ABCON) would also be welcome, especially as BDCs already appear to lag other Nigerian FIs in the implementation of their AML/CFT-related obligations.
Nigeria: Steps to Strengthen Scrutiny of PEPs
Nigeria: Steps to Strengthen Scrutiny of PEPs
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Nigeria: Steps to Strengthen Scrutiny of PEPs
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36. In parallel, all “public officers” must declare their assets, but the completed forms are not available to the public. Per the Fifth Schedule to the Constitution, all “public officers”, whether at the local, state, or federal level, must declare their assets immediately after taking office, every four years thereafter, and again at the end of their terms/service. The Code of Conduct Bureau (CCB) is responsible for receiving and analyzing completed asset declaration forms, but must currently do so on a confidential basis, thereby limiting the potential for civil society organizations and members of the general public to identify, and bring the CCB’s attention to, assets that have not been declared—or that have not been declared accurately. Moreover, the current forms do not contain fields to capture certain highly relevant information, such as sources of income, beneficially owned assets, or personal property above a certain value.
37. The CCB receives few completed asset declaration forms and is in need of additional resources (Table 9). The CCB has no list of declarants, i.e., specific individuals that it considers to be “public officers”, estimating only that they number between 4 and 4.5 million. Yet it received fewer than 17,000 completed asset declaration forms in 2018. Even this number of forms is difficult to process, as the CCB works with limited resources and on an almost exclusively manual/paper-driven basis with a relatively small number of staff (889) spread out among a national headquarters and 36 state-level offices. The CCB’s budget allocation declined from $8.5M to $8M in FY 2019.
Nigeria: Improving Asset Declaration by Public Officials
This would require the National Assembly to issue guidelines for the release of information per paragraph 3(c) of the Third Schedule to the Constitution; to amend sections 12, 14, and 15 of the Freedom of Information Act (2011); and, potentially, to amend both the Code of Conduct Bureau and Tribunal Act (1991) and the Official Secrets Act (1962) (so as to clarify the CCB’s custodial responsibilities with respect to completed asset declaration forms). In parallel, i.e., while working to enact these changes to the legal framework, the Government should encourage public declaration on a voluntary basis.
Nigeria: Improving Asset Declaration by Public Officials
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This would require the National Assembly to issue guidelines for the release of information per paragraph 3(c) of the Third Schedule to the Constitution; to amend sections 12, 14, and 15 of the Freedom of Information Act (2011); and, potentially, to amend both the Code of Conduct Bureau and Tribunal Act (1991) and the Official Secrets Act (1962) (so as to clarify the CCB’s custodial responsibilities with respect to completed asset declaration forms). In parallel, i.e., while working to enact these changes to the legal framework, the Government should encourage public declaration on a voluntary basis.
Nigeria: Improving Asset Declaration by Public Officials
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This would require the National Assembly to issue guidelines for the release of information per paragraph 3(c) of the Third Schedule to the Constitution; to amend sections 12, 14, and 15 of the Freedom of Information Act (2011); and, potentially, to amend both the Code of Conduct Bureau and Tribunal Act (1991) and the Official Secrets Act (1962) (so as to clarify the CCB’s custodial responsibilities with respect to completed asset declaration forms). In parallel, i.e., while working to enact these changes to the legal framework, the Government should encourage public declaration on a voluntary basis.
AML/CFT Supervision
38. AML/CFT-specific supervision is critical to ensuring that financial institutions faithfully implement the full range of their AML/CFT-related obligations, including with respect to the transparency of BO, the identification of PEPs, the submission of (corruption-related) STRs, and the implementation of targeted financial sanctions. Absent adequate AML/CFT supervision, private sector compliance levels tend to remain sub-par, whether owing to ignorance, incompetence, or the knowing facilitation of illicit activity.
39. The CBN’s AML/CFT (Administrative Sanctions) Regulations of 2018 addressed an important gap in its supervisory framework; the pilot program for risk-based supervision is welcome. The Regulations provide the CBN with an adequate legal basis to impose administrative sanctions and penalties for non-compliance with AML/CFT-related obligations, and include a detailed schedule laying out the specific sanctions and penalties to be imposed in response to identified violations. The CBN reports that it has begun to issue sanctions in accordance with the new regulations, but that the schedule will likely have to be updated on an ongoing basis, to ensure that the applicable penalties remain sufficiently dissuasive in the context of normal inflation. The pending commencement of a pilot program for risk-based supervision represents a substantial step toward increasing effectiveness. The risk-based approach (RBA) entails the classification of supervised entities by money laundering and terrorist financing (ML/TF) risk and the subsequent varying of the frequency, scope, and intensity of inspections in accordance with that classification. As such, it should enable the CBN to focus its limited resources more sharply.
40. However, limited human resources continue to pose a challenge (Table 10). The CBN incorporates AML/CFT-related components into its annual prudential inspections of each of Nigeria’s 34 primary mortgage banks. But the limited number of dedicated AML/CFT inspectors precludes regular AML/CFT inspections of those banks or of a sufficient sample of BDCs, which were labeled as “high-risk” in Nigeria’s 2016 National Risk Assessment. Only 2.3 percent of licensed BDCs received AML/CFT on-site inspections in 2018 (relative to 2.5 percent in 2017).
Nigeria: Strengthening AML/CFT Supervision of FIs, BDCs
Nigeria: Strengthening AML/CFT Supervision of FIs, BDCs
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Nigeria: Strengthening AML/CFT Supervision of FIs, BDCs
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Effectiveness of the Nigerian Financial Intelligence Unit (NFIU)
41. A critical component of every country’s AML/CFT regime is its FIU. It collects, analyzes, and disseminates STRs related to ML, TF, and the related, underlying (or “predicate”) offenses, such as fraud, bribery, the diversion of public funds, and other forms of corruption. The private sector is on the front lines of the fight against corruption, with FIs functioning as the primary conduit for attempts to transfer, store, or launder ill-gotten gains. FIUs therefore play an essential role in translating confidential, private sector-generated tips into criminal investigations and prosecutions. In 2018, for example, the NFIU disseminated 134 STRs to its former parent agency, the Economic and Financial Crimes Commission (EFCC); 88 involved possible corruption.
42. The passage of the NFIU Act in 2018 represents a major milestone. It assures the NFIU’s operational independence in line with the FATF recommendations, thus restoring the NFIU’s international network by enabling its reconnection to the secure information-sharing platform for the 159 FIUs that comprise the Egmont Group. Moreover, the Act gives the NFIU the power to conduct inspections of FIs and DNFBPs, thereby putting it in a position to help ensure that they submit – and maintain the confidentiality of – STRs in all cases of suspected corruption, regardless of the prominence of the affected customer or the size of his or her business. The NFIU has also benefited from the recent confirmation of a new director and the provision of its own line-item in the FG budget. The NFIU’s budget for the current fiscal year saw a substantial increase, with many resources already invested in the training of analysts.
43. The NFIU’s close collaboration with its domestic partners is already yielding results but would benefit from additional formalization (Table 11). The NFIU’s domestic partners, including the EFCC and the closely related Independent Corrupt Practices and Other Related Offenses Commission (ICPC), report that it can be relied upon to provide timely and accurate information, whether held by the NFIU itself or by a foreign partner – and that, in the latter case, working with the NFIU to obtain information is generally more efficient than pursuing the same via mutual legal assistance channels. Still, to the extent that this collaboration is based at least partly on good faith and/or interpersonal connections, it will be important to formalize it to make it more sustainable over the long term.
Nigeria: Maintaining Momentum Generated by the NFIU Act
Nigeria: Maintaining Momentum Generated by the NFIU Act
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Nigeria: Maintaining Momentum Generated by the NFIU Act
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Vigorous Prosecution and Timely Conclusion of Corruption-Related Cases
44. The timely and effective administration of criminal justice, particularly in high-profile cases, is key to deterring future corruption. Strengthening the application of the tools discussed above for detecting and investigating corruption will be in vain to the extent that the criminal justice system fosters a sense of impunity by failing to convict and sanction offenders in a timely manner, if ever.
45. A recent budget increase for the EFCC and the confirmation of a new director for the ICPC – both critical law enforcement agencies – are welcome. An infusion of resources allowed the EFCC to hire 1,200 additional staff in 2018, while opening 3 new “zonal offices”. It is now working to train recent recruits and build the skills of existing investigators. By contrast, the ICPC conducted its last recruitment in 2012; the new director, confirmed in December 2018, plans to work with both the Government and external development partners to address any resource gaps. Both agencies report that they conduct parallel financial investigations in corruption and other cases involving the generation of illicit proceeds.
46. But further efforts are needed to reduce procedural delays in the criminal justice system (Table 12). The EFCC and ICPC report that many of their prosecutions stretch on for years, as wealthy and sophisticated defendants leverage appeals and adjournments to delay their trials, often in contravention of the law. Moreover, the retirement, promotion, or movement of judges among different assignments leaves some cases in limbo while forcing others to be retried, owing to persistently poor caseload management at all levels of the criminal justice system. Those rare corruption cases that manage to advance without undue disruption tend to advance slowly, as judges record the proceedings in longhand and motions are filed manually.
Nigeria: Advancing the Effective Prosecution and Timely Conclusion of Corruption-Related Cases
Nigeria: Advancing the Effective Prosecution and Timely Conclusion of Corruption-Related Cases
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Nigeria: Advancing the Effective Prosecution and Timely Conclusion of Corruption-Related Cases
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E. Conclusion and Key Policy Recommendations
47. The Nigerian authorities must accelerate their anti-corruption efforts to maintain momentum against both entrenched challenges and evolving threats. Despite the high-level commitment of the administration and the deep devotion of many public servants working in the SOE sector, as well as in the country’s anti-corruption and AML institutions, the Nigerian government will need to accelerate and intensify its reforms in this area—as stated in its Economic Recovery and Growth Plan— if it is to have a durable impact on the incentive structures that underpin corruption in Nigeria. This paper has examined issues in two key areas of the anti-corruption effort—SOE governance, especially in the petroleum sector, and AML/CFT efforts.
48. Achieving critical improvements to SOE governance and AML/CFT efforts will require a combination of legislative action, institutional reform, and additional resources.
Legislative Action. The authorities should prioritize the enactment and implementation of the PIGB and the CAMA (Repeal and Re-enactment) Bill of 2018. They should also consider legislative action to design an overall ownership policy for SOEs, improve fiscal and financial discipline with a broader public finance management reform, and enhance the transparency of public revenue flows and coordination among collecting institutions.
Institutional Reform. The MOF should regain a central role in the oversight of fiscal risks while the Auditor General should have a legal basis to operate effectively; the CBN will need to fully implement the risk-based approach with respect to its AML/CFT supervision; and the judiciary will need to embrace both legal requirements and best practices related to its management of individual cases and system-wide caseloads.
Additional Resources. The authorities should prioritize the allocation of any new or newly available resources to: (i) the Oversight and Oil and Gas Departments within the MOF; (ii) the Auditor General’s staffing and operational and training budgets; (iii) the CCB; (iv) the ICPC; and (v) the judiciary, such that these are all able to carry out their core functions efficiently, leveraging technological solutions as available and appropriate.
Extractive Industries Transparency Initiative. 2019. “Nigeria Validation.” Decision reference: 2019-20/BM-42. February 27, 2019.
IMF. 2018. “Strengthening Transparency and Governance in Nigeria”. Nigeria Selected Issues. IMF Country Report No. 18/64
Nigeria Extractive Industry Transparency Initiative (NEITI). 2019. “Nigeria Validation”. EITI Board Decision 2019-20/BM-42
Nigeria Extractive Industry Transparency Initiative (NEITI). 2016. “2016 Oil and Gas Industry Audit Report”
Nigeria Extractive Industry Transparency Initiative (NEITI). 2015. “2015 Oil and Gas Industry Audit Report”
Office of the Auditor General for Federation of Nigeria (OAuGF). 2018. ““Annual Report of the Auditor-General for the Federation on the Accounts of the Federation of Nigeria for the year ended 31st Dec. 2016”
Office of the Auditor General for Federation of Nigeria (OAuGF). 2017. “Annual Report of the Auditor-General for the Federation on the Accounts of the Federation of Nigeria for the year ended 31st December 2015”
United Nations Office on Drugs and Crime (UNODC). 2017. “Corruption in Nigeria. Bribery: Public Experience and Response.” UNODC, Vienna, and National Bureau of Statistics
Prepared by Ozlem Aydin Sakrak, Pasquale di Benedetta, Jay Purcell (all LEG), and Monique Newiak (AFR).
The broader anti-corruption strategy should include also efforts to strengthen governance and thereby reduce vulnerabilities to corruption across a range of key state functions, including tax administration, procurement, market regulation, FX policies, and financial sector oversight, as discussed in the accompanying staff report.
The extractive Industries Transparency Initiative (EITI) provides international standards for the good governance of oil, gas and mineral resources along the value chain of the sector. NEITI is the Nigerian chapter of EITI.
NNPC participates in the JVs arrangements with international or domestic oil companies for upstream operations in which the Nigerian government is a majority share equity investor. This usually entitles NNPC to receive a production share equal to its ownership stake (petroleum revenue). In return, NNPC pays cash liabilities that are its share of the operating and capital expenses associated with its JV activities (cash call payments).
Extractive Industries Transparency Initiative (EITI) provides international standards for the good governance of oil, gas and mineral resources along the value chain of the sector.
The EITI Board confirmed Nigeria’s efforts to use the EITI as a crucial diagnostic of oil and gas industry oversight to support reforms of state participation, license management and off-budget revenues. While discrepancies between rules and practice in the governance of the extractive industries persist, the Board considered that the latest EITI disclosures adequately reflected practical challenges in the mining, oil and gas sectors.
The guidelines are to primarily provide the value proposition for sustainability in the Nigerian context. It also articulates a step by step approach to integrating sustainability into organizations, indicators that should be considered when providing annual disclosures, and timelines for such disclosures.
Standing Committees have been set up in both the Senate and House of Representatives to oversee Nigeria’s oil and gas industry, such as Committees on Petroleum Resources (downstream and upstream) and Public Accounts Committee.
The Financial Action Task Force (FATF), the global AML/CFT standard-setter, defines domestic and foreign PEPs as individuals who, “are or have been entrusted…with prominent public functions, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, [and] important political party officials.”
STRs are confidential disclosures made by banks, other financial institutions, and designated non-financial businesses and professions (DNFBPs), such as accountants, lawyers, and notaries, to a national FIU, based on the suspicion that a client may be engaged in money laundering, terrorist financing, or related criminal activity. STRs are then analyzed by the FIU and, when appropriate, disseminated to law enforcement for possible investigation.