Slowing the tide of illicit financial flows through money service businesses

By Maryam Mohammed   If there is one decision for the Nigerian economy that has been long overdue is the stoppage of forex supply of Bureau Du Change (BDC) operators. This is due to the unpatriotic and audacious abuse of their trade guidelines over the years, which weakens the Naira, encourages money laundering and promotes […]

By Maryam Mohammed

 

If there is one decision for the Nigerian economy that has been long overdue is the stoppage of forex supply of Bureau Du Change (BDC) operators. This is due to the unpatriotic and audacious abuse of their trade guidelines over the years, which weakens the Naira, encourages money laundering and promotes illicit financial flows from Nigeria to other jurisdictions.

The Central Bank of Nigeria Governor, Godwin Emiefele, announced on July 27, 2021, that the CBN would no longer approve BDC licence applications and would also stop providing forex to existing licensed ones. The decision was premised on the Monetary Policy Committee’s observation of how BDCs had become wholesale dealers, conducting large FX transactions worth millions of dollars – above their sales limit of $5,000 per person.

The governor noted the astronomical rise of operators from 74 dealers in 2005 to 5,689 in June 2021. Also, there is an average of 500 BDC applications monthly, pushing Nigeria towards the dollarization of the domestic economy.

Prior to the stoppage, the CBN sold $20,000 weekly to over 5,000 BDCs, translating to over $100m weekly and $1.57bn annually. To ensure that genuine customers have access, the Bank directed commercial banks to set up FX Teller Points to ensure the direct sale of FX.

All over the world, there are BDC operators, and they play different roles. The primary role is to ensure forex availability to small businesses and other categories of users. However, the Nigerian BDCs have deviated to excesses. Preliminary findings suggest that most operators have allowed room for arbitrage targeting to profit off the efforts of the CBN – who is focused on strengthening  the Naira through monetary policy.

The tendency at which the BDCs enjoy market manipulation by getting Naira notes, then using it to purchase dollars, take a position, change the rate over a given period, sell the dollars they purchased for wide profit is entirely illegal because there are margins set by CBN.

The Economic Confidential magazine explains the “short” and “long” basics of Forex trading operations would highlight how such manipulations happen. A “long” position in FOREX trading involves buying a particular currency at a specific rate by selling another currency while expecting the bought currency to appreciate against the sold currency.

On the other hand, a “short” position involves borrowing a particular currency at a specific rate to sell and acquire another currency while expecting the borrowed currency to depreciate against the acquired currency so that you can buy it back at a lower rate.

An economy like Nigeria’s that is prone to shocks due to the low oil revenues and overvaluation of the country’s currency makes it an easy target for speculative manipulators. These people, who are very much among the established BDCs and allegedly in connivance with other actors, exploit the information asymmetry in the Forex market to mastermind a “short” against the Naira. However, despite grasping the overvaluation of the Naira, doing that would not be possible because they are unaware of when the CBN may devalue the currency.

As a response, they collectively organize and plot the “short” to pressure the CBN into devaluing the currency despite knowing the risk that may come with it if the CBN decides not to devalue the currency or increases interest rates at the level that could suffocate the manipulators. They often speculate and try to influence public opinion with devaluation prescriptions. If it happens, they profit.

Alternatively, they use platforms where Forex buyers source information by getting them to post rates that would spread pessimism against the currency they wish to manipulate since the power of the currency at the parallel market defends significantly on people’s confidence in its value. If the people believe the currency is not worth holding, the CBN is forced into a tight angle. In the end, it caves in.

The American economist Paul Krugman states that “fixed exchange rates are very prone to speculative attacks, especially when the established stakeholders assume the exchange regime might be coming to an end”. The situation in the Nigerian Forex market is worse because most traders have low confidence in Naira; they see it only as their arbitrage cow. Thus they profusely attack it illicitly with speculation, which is paved by the unaccounted absurdities of the black market.

Not long ago, a website named “AbokiFX” that posts currency rates was restricted by the CBN over allegations along with such preliminary findings. And the relative stability of the market since the regulation of the BDCs and the closure of such websites vindicates the CBN measures.

Based on studies by Financial Action Task Force (FATF) and United Nations Office on Drugs and Crime (UNODC), these currency service providers can be used for money laundering, terrorist financing and illicit financial flows. They can serve as a convenient conduit for all sorts of criminality.

It’s an attractive vehicle through which criminal and terrorist funds can enter the financial system. A significant weakness is poor regulation in customer due diligence rules compared with opening a bank account. Also, the cash character of transactions, worldwide reach (in case of money remitters),  low-thresholds are significant risks.

BDC’s are used at all stages of the money laundering process – particularly during the placement stage. Once the transaction is completed, it is difficult to trace its origin.

Among others, the most important factors that may indicate possible misuse of BDCs, the FATF states several features indicate their use for illegal activity. Many cases involve small value wire transfers. However, given that the total value of funds over a long period is significant, there is enough research linking the uncontrolled money remittance sector and other criminal activities, including trafficking/smuggling in persons, drug trafficking, smuggling of arms and other national security issues.

The BDCs have, over the years, been also a prolific route for the perpetration of corruption. Cases of corruption with BDCs as accomplices have been reported in most cases of public sector corruption—due to the informal, unofficial and cash-based nature of the market.

These illegal activities are at a pandemic level. It enables public sector corruption, and it occurs because the BDCs are making the process easy for such activities. The shortcomings of the current operations of BDCs far outweigh their significance, and it is either properly regulated or outlawed.  

Ms Mohammed is of the Center for Fiscal Transparency & Integrity Watch