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BDCs and illicit financial flows, By Center for Fiscal Transparency & Integrity Watch


The outlined illegal financial activities in the country have attained a pandemic level. They enable public sector corruption, which occurs due to the fact that the BDCs are making the process easy for such activities. The shortcomings of the current operations of bureaux de change in Nigeria far outweigh their significance, and these have to either be properly regulated or outlawed.

Slowing the tide of Illicit Financial Flows through Money Service Businesses

If there is one decision for the Nigerian economy that has been long overdue, it was the stoppage of foreign exchange (forex) supply to Bureaux De Change (BDC) in the country by the Central Bank of Nigeria (CBN). This was due to the unpatriotic and audacious abuse of their trade guidelines over the years, which weakened the naira, encouraged money laundering activities and promoted illicit financial flows from Nigeria to other jurisdictions.

The governor of the Central Bank of Nigeria, Godwin Emiefele, announced on July 27 that the CBN would no longer approve BDC licence applications and would also stop providing forex to the 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 CBN governor noted the astronomical rise in the number of operators from 74 dealers in 2005 to 5,689 in June this year. Also, there is an average of 500 BDC applications monthly, pushing Nigeria towards the dollarisation of the domestic economy.

Prior to the stoppage, the CBN sold $20,000 weekly to each of over 5,000 BDCs, translating to over $100 million weekly and $1.57 billion annually. To ensure that genuine customers have access to forex, the central bank had subsequently directed commercial banks to set up FX Teller Points to ensure the direct sale of foreign exchange to members of the public.

All over the world, there are BDC operators, and they play different roles. Their primary role is to ensure the availability of forex to small businesses and other categories of users. However, the Nigerian BDCs have simply yeilded to engaging in excesses. Preliminary findings suggest that most operators have allowed room for arbitrage, seeking to rather profit off the efforts of the CBN, which is essentially focused on strengthening  the naira through the application of monetary policy.

The tendency by which BDCs enjoy market manipulation by getting naira notes, then using these to purchase dollars, taking a position, influencing the market rate over a given period, and then selling the dollars purchased from the official source for a huge profit is entirely immoral, and certainly illegal.

The Economic Confidential, in explaining the “short” and “long” basics of forex trading operations have highlighted 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 it can be bought back at a lower rate.

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

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 who act, allegedly, in connivance with other actors, exploit the information asymmetry in the forex market to mastermind a “short” position against the naira. However, despite being aware of the overvaluation of the naira, acting in this regard tends not to be possible because they are unaware of when the CBN may devalue the currency.

As a response, BDCs collectively organise and plot the “short” position to pressure the CBN into devaluing the currency, despite knowing the risk that may come with this if the CBN decides not to devalue the currency or it increases interest rates at the level that could suffocate the manipulators. They often speculate and try to influence public opinion with devaluation prescriptions. If this succeeds, 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 depends significantly on people’s confidence in its value. If the people believe the currency is not worth holding, then the CBN is forced into a tight corner. And, in the end, it caves in.

The American economist, Paul Krugman stated 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 the naira, as 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 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, in comparison with that involved in the opening of a bank account. Also, the cash character of transactions, worldwide reach (in case of money remitters), and low-thresholds are significant risks.

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

BDCs…



Read More : BDCs and illicit financial flows, By Center for Fiscal Transparency & Integrity Watch

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