Central Bank unveils new FX measures aimed at curbing money laundering

Following the CBN’s Monetary Policy Committee (MPC) statement last week in which it noted “strong” domestic FX pressures that it said were “not necessarily linked to an increase in the import of goods,” the Central Bank of Nigeria (CBN) has released a circular outlining new FX measures.

The CBN has for sometime been worried about the high FX demand within the country, which has thus far defied all efforts to tighten it, alongside the observed slowdown in Nigeria’s economy.

A report by Standard Chartered Bank’s research arm, indicated that the Interbank rates spiked briefly to above 40% following delays to Nigeria’s FAAC allocation (the monthly sharing of Federation revenue among the three tiers of government) in September. The report said this coincided with the US FOMC’s decision not to taper its asset purchases in September, and new foreign portfolio inflows to Nigerian markets. Even so, dollar-Naira continued to trade outside of the preferred band on the interbank market; robust demand for physical USD cash from the bureaux de change (BDC) segment was blamed.

Razia Khan, African economist, who wrote the report for Standard Chatared Bank indicated that while the CBN reaffirmed its commitment to FX stability at the MPC meeting, it suggested that rising non-import-related demand for FX may have been attributable to political developments in Nigeria (“the build-up of political activities”) and increasing dollarisation. Following the MPC meeting, Central Bank Governor Sanusi Lamido Sanusi promised the implementation of new measures “aimed at combating money laundering” among BDCs, which may have served as the conduit for capital flight from Nigeria. The new FX circular brings these measures into effect.
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WDAS suspended in favour of a Retail Dutch Auction System

According to the report, effective October 2, Nigeria’s official FX auction, the bi-weekly Wholesale Dutch Auction System (WDAS) of the CBN will be replaced by a bi-weekly Retail Dutch Auction System (RDAS). This move partly reverses earlier FX liberalisation, which allowed banks to collate all bids on behalf of individual clients and make a single FX bid at the WDAS.

Under the retail system, banks will place bids on behalf of individual clients, who qualify to buy FX at the official auction. This change will allow the authorities to monitor, more accurately, various sources of FX demand and any potential duplication of FX demand in the system. Banks will remain responsible for all documentation requirements.

Under the retail system, banks can only buy FX from the CBN against proof that their customers are bidding for FX. Under the previous wholesale system, banks could buy FX from the CBN and then sell the FX to clients, albeit at regulated spreads. The new regulation should allow the CBN to resume a faster pace of FX reserve accumulation. High demand for FX in recent weeks had led to falling reserves.

Limits on NGN debit and credit cards raised

The report also shed light on limits on Naira credit and debit cards, which have been raised to $150,000 per annum from $40,000 previously. This is subject to authorised dealers and card issuers filing monthly returns with the CBN. The settlement of credit card FX transactions will continue to use interbank FX funds rather than FX sourced directly from the CBN through its official FX auctions.

The reform serves two purposes. First, raising the limit on card transactions discourages the use of physical cash, especially for large amounts. This is in line with the CBN’s cashless policy initiative, encouraging the adoption of e-channels of money transfer. Second, it gives regulators greater oversight over demand for FX, even when the FX is sourced through the interbank market.

The CBN will now authorise all importation of foreign banknotes

The report also gave indications that from now on, all importation of foreign-currency banknotes by authorised dealers will require prior CBN approval. Each application lodged to the Director of the Trade and Exchange Department at the CBN will have to state both the amount of foreign currency cash required and its purpose. The measure reinforces the anti-money laundering stance of the authorities.

KYC requirements tightened

In light of the new drive, authorised dealers with banks are permitted to continue to sell cash FX to BDCs, subject to a maximum limit of $250,000 per week per BDC. Authorised dealers will be tasked with performing Know Your Customer (KYC) checks on their BDC clients. BDCs will have to submit weekly returns detailing how they use funds purchased from all sources. If they fail to do this, the CBN will impose “appropriate sanction.”

Previous CBN regulation aimed at supporting the FX rate often imposed new limits on sales to BDCs. By permitting these sales to continue, albeit subject to a USD250,000 weekly limit per BDC, the authorities hope to gain better oversight of FX demand in this sector. According to local news reports, the CBN has already revoked the licences of several BDCs following particularly high volumes of cash transactions.

Given that BDCs were long viewed as a potential source of FX leakage in the system, these measures should boost confidence in the sustainability of the FX band.

Inflows from international money transfers will be paid in Naira only

Going forward, any receipt of funds through international money transfer companies will be paid out in NGN only. The authorities hope that this will stem the dollarisation of the Nigerian economy, where foreign currency is frequently used for domestic transactions.

All money transfers will be done at the prevailing interbank FX rate on the day of the transaction. Banks are required to publicise these rates in an open and transparent manner.

Reducing oil theft levels is still key

Investors are expected to react positively to the new measures. Increased BDC demand for FX, in quantities that were difficult to explain and largely impervious to monetary tightening, had long weighed on the FX rate. Lower demand for FX from the BDC segment should support NGN appreciation in the near term. Longer-term, greater success in reversing declining oil output levels will still be needed to support the sustainability of the FX rate.

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