Early Detection of Unregistered Financial Institutions in Nigeria: Mechanisms, Gaps, and Global Lessons
The Growing Threat of Unlicensed Financial Operators
Unregistered and unlicensed financial institutions – including fraudulent investment schemes, illegal deposit-takers (“wonder banks”), and other unauthorized operators – pose a serious threat to Nigeria’s financial system. Operating outside regulatory oversight from authorities like the Central Bank of Nigeria (CBN) or Securities and Exchange Commission (SEC), these entities often collapse suddenly, causing massive losses. The recent CBEX Ponzi scheme reportedly defrauded Nigerians of over ₦1.3 trillion, highlighting the urgent need for early detection mechanisms.
Current Detection Mechanisms in Nigeria
Central Bank of Nigeria (CBN)
The CBN maintains strict licensing requirements under the Banks and Other Financial Institutions Act (BOFIA) 2020, prohibiting unlicensed operations. Key detection tools include:
- Off-site surveillance of financial returns and intelligence
- Public advisories through the Financial Services Regulation Coordinating Committee
- Anti-money laundering (AML) rules requiring banks to report suspicious activities
Securities and Exchange Commission (SEC)
SEC Nigeria has strengthened its monitoring capabilities with:
- A dedicated Monitoring Department scanning for red flags
- Blacklists of illegal operators and public warnings
- Enhanced collaboration with EFCC for joint investigations
Economic and Financial Crimes Commission (EFCC)
EFCC plays a critical enforcement role through:
- Financial intelligence analysis via the Nigerian Financial Intelligence Unit
- Whistleblower programs including the “Eagle Eye” mobile app
- Inter-agency coordination for raids and asset seizures
Strengths and Limitations of Current Approaches
Strengths:
- Robust legal mandates under BOFIA 2020 and ISA 2025
- Multiple oversight layers across agencies
- Growing whistleblower culture and public reporting channels
Limitations:
- Mostly reactive rather than proactive detection
- Resource and capacity constraints for monitoring
- Limited use of advanced data analytics and technology
- Over-reliance on public complaints after damage occurs
Recommendations for Improvement
- Deploy advanced technology: Implement RegTech/SupTech tools for automated monitoring of suspicious financial patterns
- Enhance whistleblower programs: Offer financial incentives similar to U.S. SEC’s 10-30% reward model
- Strengthen inter-agency collaboration: Create a joint task force with real-time information sharing
- Expand public awareness: Launch nationwide campaigns on red flags and verification methods
- Improve rapid response protocols: Develop swift action plans for freezing accounts and issuing warnings
International Best Practices
Key lessons from global regulators:
- United States: SEC’s successful whistleblower program and FinCEN’s data analytics
- United Kingdom: FCA’s proactive warnings and collaboration with tech platforms
- Singapore: MAS’s Investor Alert List and strict fintech oversight
Conclusion
While Nigeria has established foundational detection mechanisms, transitioning to proactive surveillance through technology, incentivized whistleblowing, and seamless inter-agency coordination will significantly enhance early identification of unlicensed financial operators. Adopting global best practices can help protect investors and maintain financial system stability.
Muazu Umaru is the Director, Policy and Research, Intergovernmental Action Group against Money Laundering in West Africa (GIABA), Dakar, Senegal
Credit: Daily Trust