How Nigerian Businesses Can Prevent Internal Fraud Through Legal and Structural Controls

Introduction: The Hidden Threat Inside Successful Businesses [occasioned through Internal Fraud]

Nigeria has a fast-growing business landscape, and in this fast-growing business landscape, many companies appear successful on the surface — elegant offices, loyal staff, steady revenue. However, beneath this stability and shiny surface success they evince to their customer base and the general public, several companies are sitting on silent operational and financial disasters. The danger often lies not in the marketplace, but within the organization itself, occasioned by internal fraud they currently have no knowledge of or control over.

Internal fraud remains one of the most persistent legal and operational threats to Nigerian businesses. It thrives on weak operational and structural controls, informal trust systems, and a complete lack of legal structure.

The Reality of Internal Fraud: When Trust Becomes a Liability

Consider this scenario: a mid-sized trading company with its operational base in Main Market, Onitsha operates several warehouses across the Southeast. Sales are strong, but profit margins begin to shrink inexplicably despite the steady cashflow to the business. After an internal review, management discovers that two warehouse supervisors had been diverting goods to private buyers and falsifying delivery records for months on end, completely unsuspected and undetected. The fraud went unnoticed because no one independently verified stock movements or reconciled sales reports with dispatch logs.

This is not an isolated case. In 2017, a salesgirl working with Shoprite in Lagos State was arrested for diverting over ₦535 million she realized in sales to her personal account instead of official company account. And according to PwC’s 2022 Nigeria Economic Crime and Fraud Survey, 71% of Nigerian companies experienced economic crime or fraud, yet more than half had no formal risk management system in place.

These statistics underscore a simple truth: many Nigerian businesses are not built to prevent fraud. They rely on personal trust instead of process-driven governance to drive operations in their Establishments.

The Legal Foundation of Fraud Prevention

Fraud prevention is not just a matter of finance or management — it is a legal responsibility. Nigerian law already provides strong frameworks for protecting businesses:

• The Criminal Code Act criminalizes employee theft and misappropriation of company assets.

• The Cybercrime (Prohibition, Prevention, etc.) Act 2015 addresses digital diversion, data theft, and electronic fraud.

• The Evidence Act 2011 recognizes digital records, enabling electronic audit trails and evidence in court in cases bordering on fraud.

However, despite the position of the law to safeguard human interests, without internal legal structures, a company cannot effectively rely on these laws as the laws do not operate in a vacuum. The absence of properly executed agreements, policies, or documentation weakens a company’s position when fraud occurs.

Legal Structure as the First Line of Defense against Internal Fraud

Every business, regardless of size, needs customized, enforceable legal instruments from the start at the point of the registration of the company with the Corporate Affairs Commission. To have a proper legal structure, it should be noted that Templates downloaded from the Internet, or copy-paste contracts with numerous boilerplate terms are insufficient. Contracts should be specifically tailored to your operations and the key legal instruments include:

1. Employment Contracts

Before onboarding, each employee should have a written agreement that clearly outlines the terns of their employment, their duties to the business, disciplinary procedures in cases of misconduct, and fraud clauses that specifically outline what they constitute, reporting mechanisms and disciplinary channels. These form the legal basis for termination, restitution, and prosecution when internal fraud occurs and there should be no guess work on this. You have to get it right.

2. Confidentiality and Intellectual Property (IP) Agreements

These Agreements come into play to safeguard sensitive company data, trade secrets, intellectual property, client information, specific business formulas, among others. Without them, pursuing claims for data theft or information leakage becomes difficult as you did not specify what constitutes breaches and the counter-party’s obligations in relation to them.

3. Non-Compete and Non-Solicitation Clauses

This closely ties to Employee Contracts aforementioned. Employees who leave should not be able to immediately replicate your business model or lure away clients and (other) staff to directly compete with you and/or undermine your market positioning or share. Properly drafted restrictions can prevent competitive misuse of company assets in the case of employee exit from the company.

4. Staff Handbook and Fraud Policy

A well-drafted staff handbook defines what constitutes fraud, the reporting process, and the disciplinary consequences and disciplinary proceedings to be followed in cases of breach. It also establishes transparency and accountability standards with a certainty that cannot be second-guessed at any point in time.

5. Internal Approval and Financial Controls

Staff shouldn’t be able to draw money from company accounts, or just get invoices paid upon presentation to Accounting. That is where a formal approval matrix comes in, and this formal approval matrix clarifies who authorizes payments, whether there are two-factor authentications for payment authorization; who reconciles accounts, and who holds access to banking instruments of the company. Segregation of duties amongst different individuals/units in the company ensures that no single staff member can execute and approve financial transactions unchecked by third parties at any given time. That way, financial bleed can be dramatically reduced…unless, of course, the other members of the approval matrix are participants in the intended fraud.

6. Digital Evidence and Cybersecurity Protocols

With increasing online transactions, companies need digital evidence policies and cyber fraud response frameworks to preserve integrity in cases involving online theft or unauthorized system access. Without these, each unauthorized system access presents its own unique challenges that company is not equipped to handle.

When There is No Structure: Legal and Operational Risks

If companies fail to set these controls in motion, even the strongest legal framework becomes powerless against fraud. For example:

• If an employee steals company data but no confidentiality agreement exists, your chances of legal redress are slim because there is no restriction regarding confidentiality of data and the use of same by the receiving party, including what to do with same post-contractual obligation.

• If an employee diverts funds, the funds are forgotten after at ost a are diverted and there is no internal fraud policy, it becomes difficult to establish criminal intent.

• If you terminate a staff member without a valid contract, you risk a wrongful termination suit.

Simply put, trust is not a legal defense in cases of breach. Courts rely on evidence, and evidence comes from structure — contracts, policies, and proper documentation. You should not take these for granted in relation to your business operations.

Building Fraud-Resilient Companies

Fraud resilience begins with governance. Business owners must design their operations with accountability in mind, embedding legal structure into every layer of their organization from the top to the bottom. A legally structured business can:

• Detect anomalies early through audit trails.

• Deter internal misconduct with enforceable penalties.

• Protect itself in court when fraud occurs.

The cost of legal compliance is far lower than the cost of financial loss or reputational damage.

Conclusion: Trust, But Verify — With Legal Backing

In the end, loyalty is not a legal strategy, and hope is not a control system. Businesses that thrive understand that internal trust must be supported by verifiable, legally enforceable structures.

If your company operates in Nigeria and you have not yet implemented these safeguards, now is the time. Build systems that protect your assets, employees, and future.

This publication is intended for general informational purposes only and does not constitute legal advice. For tailored assistance, please contact our Corporate & Commercial and Compliance practice group at corporateservices@kabbizlegal.com