Highlights of the Revised Regulatory and Supervisory Guidelines for Bureau de Change Operations in Nigeria

Background

On the 23rd of February 2024, the Central Bank of Nigeria (CBN) released an exposure draft of the Revised Regulatory and Supervisory Guidelines for Bureau de Change (BDC) Operations in Nigeria (the Draft Guidelines), inviting the public to provide comments on the Draft Guidelines. The Draft Guidelines aim to strengthen the regulatory framework that governs and supervises BDCs[1] and their operations in Nigeria.

The CBN has been actively implementing measures to address the volatility in the Nigerian foreign exchange market. These measures include the reversal of the naira-for-dollar policy,[2] the 50% repatriation of international oil companies proceeds,[3] the restriction of crypto platforms like Binance,[4] and the regulation of international money transfers.[5]

BDCs are a major player in the Nigerian foreign exchange market, and the regulation of their operations is one of the measures deployed by the CBN to stabilise the market. As such, the Draft Guidelines, developed pursuant to the powers bestowed upon the CBN by the Bank and Other Financial Institutions Act (BOFIA) 2020 and the Central Bank of Nigeria Act, 2007 (CBN Act), seek to enhance CBN’s regulation, supervision, and oversight of the Nigerian foreign exchange markets.

The Draft Guidelines propose several key provisions that, if released as is, will impact BDCs’ operations in Nigeria, including, but not limited to, an increase in capitalization and licensing requirements;[6] limitations on permissible and non-permissible activities such as restrictions on street trading;[7] requirements for sourcing foreign currencies;[8] operational guidelines;[9] corporate governance structures;[10] anti-money laundering (AML) measures;[11] and penalties for non-compliance.[12]

Summary of the Draft Guidelines

List of Non-Eligible Promoters and Members

The Draft Guidelines delineate the categories of persons that are prohibited from owning or controlling BDCs. Such persons include commercial, merchant, non-interest and payment service banks, other financial institutions, serving staff of regulated financial institutions and regulators, public officers, non-governmental organizations, charitable organizations, and academic and religious institutions.[13]
It further contemplates restricting a shareholder from participating in the ownership of more than one BDC, an attempt to prevent market monopolies and abuses.[14]

Prohibition of Street Trading and Other Permissible/Non-permissible Activities

The Draft Guidelines evince the regulatory intent of the CBN to promote market integrity and prevent manipulation. Thus, the Draft Guidelines outline both permissible and non-permissible activities for BDCs.
Notably, BDCs may only engage in five permissible activities,[15] setting out twenty-three non-permissible activities for BDCs in Nigeria.[16] One of the major prohibitions is street trading, a prevalent practice among BDCs in Nigeria.[17] The permissible and non-permissible activities can be seen as an attempt by the CBN to stop the prevalent illicit financial activities caused by street trading and other untraceable transactions.

Sources and Sale of Foreign Currencies

The Draft Guidelines also set out the sources from which BDCs may source foreign currencies. These include tourists, diaspora returnees, expatriates, residents with foreign exchange inflows, International Money Transfer Operators, authorized hotels, the Nigerian Foreign Exchange Market, and other sources specified by the CBN.[18]
When any of the permitted sources sell the equivalent of USD10,000 and above to a BDC, such a seller would be required to declare the source of the foreign exchange and comply with all applicable laws, including AML and foreign exchange laws and regulations.[19] [20]In addition, customers of BDCs would be able to transfer foreign currencies from their domiciliary accounts with Nigerian banks to BDCs.[21]
Cash purchases of foreign currency from a BDC above USD500 will be transferred by the BDC to the customer’s Naira bank account, but where the customer is a non-resident, the BDC shall issue the customer a prepaid Naira card.[22] Cash purchases of foreign currency equivalent to USD500 or less may, however, be paid in cash to customers.[23]
Sale of foreign currencies by BDCs must solely be for purposes stated in the Draft Guidelines, which are personal travel allowance (PTA), business travel allowance (BTA), medical bills, school fees, and repurchasing unused Naira from non-residents, implying that BDCs may not sell foreign currencies outside of these stipulated purposes.[24]

Categories of Licences and Increase in Minimum Capital Requirement

The Draft Guidelines introduce two tiers of BDC licences, with varying operational scope and minimum capital requirements: Tier 1 BDC licence; and Tier 2 BDC licence. The Tier 1 BDC licence allows its holders to operate nationwide, in all states of the country, and can appoint franchisees subject to approval of the CBN, with the minimum capital requirement for a Tier 1 BDC Licence being N2 billion.[25]
Conversely, the Tier 2 licence requires a lower minimum capital of N500 million and restricts operations to one state or the Federal Capital Territory, with a single head office and two branches. Unlike Tier 1 licensees, Tier 2 licensees are not permitted to appoint franchisees.[26]
The two-tier licence and minimum capital requirements are a substantial change from the current requirement of N35 million for a general license, which is not divided into tiers, under the Revised Operational Guidelines for Bureaux De Change of 2015 (Current Guidelines).
The application process for obtaining a licence involves two stages: approval-in-principle and final approval, comprising provisional approval and the issuance of a final license.[27] Final approval for a licence under the Draft Guidelines is contingent upon several conditions, including system integration with various CBN platforms and the Nigeria Interbank Settlement System, obtaining an operational code from the CBN’s Director, Trade and Exchange Department, and obtaining the relevant written confirmation the Nigerian Financial Intelligence Unit.[28][29]

Corporate Governance Structure

The Draft Guidelines lay a foundation for corporate governance for BDCs. Each tier of licence has a minimum and a maximum number of persons that can be on a BDC’s board of directors. Tier-1 BDCs would have a minimum of five and a maximum of nine board members, while Tier-2 BDCs would have a minimum of five and a maximum of seven board members. This is a notable departure from the current requirement outlined in the Current Guidelines, which specified a board composition of a minimum of three directors and a maximum of five.[30]
In order to ensure gender diversity, the Draft Guidelines provide that there must be a representation of all genders on the board of a BDC.[31] A BDC must also have an external auditor, whose appointment shall be made by the Board, ratified by the shareholders at a general meeting, and approved by the CBN.[32]

Operations of BDCs

The CBN would, under the Draft Guidelines, authorise BDCs to engage in a range of activities, including dealing in bank notes, coins, plastic cards, and other permitted businesses.[33] Central to the operations of BDCs is the safeguarding of customer privacy and personal information; as such, they would be required to comply with the Nigerian Data Protection Regulations.[34]
The Draft Guidelines further provide that transactions with residents and non-residents of Nigeria would require a verification process and a means of identification such as bank verification number or tax identification number.[35]
On foreign currency cash purchases by BDCs, the Draft Guidelines provide that sellers of foreign currencies to BDCs must declare the source of foreign exchange for cash purchases exceeding USD10,000.[36] Additional operational requirements for foreign currency cash purchases by BDCs are set out in the Draft Guidelines, including the transfer of the Naira proceeds to the customer’s Naira account or prepaid card.[37]
Similarly, stringent guidelines are in place for the sale of foreign currencies by BDCs to customers, with limits and documentation requirements imposed for various purposes such as travel allowances, medical bills, and school fees. Notably, the limit for PTA or BTA is between USD4000 and USD5000, with a restriction that it can only be sold to an individual once every six months.[38] For medical bills, the limit is USD5000 once a year,[39] while for school fees, there is a cap of USD10,000 issued once a year.[40]
Additionally, BDCs are required under the Draft Guidelines to establish banking relationships by opening domiciliary and Naira accounts with approved financial institutions for the purpose of conducting day-to-day operations.[41]

Regular Reporting

In line with the CBN’s stringent oversight, BDCs are tasked with providing daily and monthly reports of their activities, along with annual audited financial statements.[42]

Franchising

The Draft Guidelines outline the franchising standards for Tier-1 BDCs when appointing franchisees.[43] Franchising BDCs are required to have a franchising policy subject to the approval of the CBN, and the same regulatory policies that apply to the BDCs are applicable to franchisees.[44] It is pertinent to mention that the franchisor, or BDC, can appoint a maximum of ten franchisees in a state.[45]

Anti-Money Laundering Framework

The Draft Guidelines seek to mandate BDCs to comply with AML, customer due diligence, and Counter Financing of Terrorism (CFT) provisions, necessitating transparent record-keeping of all transactions, verification of customers, and issuance of electronic statements/receipts to customers.[46] Accordingly, BDCs would have to establish and implement comprehensive AML/CFT/CPF policies, appoint a compliance officer, and maintain a dedicated compliance unit to oversee compliance efforts and liaise with regulatory authorities.[47]
BDCs found to be in violation of any provision of the guidelines are subject to penalties outlined in the CBN AML/CFT/CPF (Administrative Sanctions) Regulation or any other relevant regulation issued by the CBN.

Record-keeping of Transactions and Accounting

BDCs must maintain meticulous records of all transactions for transparency and regulatory compliance, retaining documents obtained from customers for a minimum of five years following transaction completion.[48]
In terms of financial management, BDCs would have to maintain accurate books of accounts and prepare financial statements in accordance with approved standards, such as the International Financial Reporting Standards.[49] These financial statements would undergo an external audit by appointed auditors, and the audited statements would be submitted to regulatory authorities for approval and publication.[50]

Grounds for Revocation of Licence

The Draft Guidelines outline the grounds for the revocation of BDC licenses, which include engaging in fraudulent practices, failure to comply with regulatory requirements, unauthorized activities, and failure to pay licence renewal fee.[51]

Renewal of Licence

BDC license would expire annually, on December 31st of each year. Renewal would have to occur within the first 31 days of the subsequent year, accompanied by the payment of the annual license renewal fee as specified by the CBN. Failure to renew a license within the stipulated timeframe would result in the licence lapsing.[52]

Conclusion

With over 4173 BDC licenses revoked shortly after the publication of the Draft Guidelines, coupled with reports of intervention by officials of the Economic and Financial Crimes Commission (EFCC) to curb street trading by unlicensed BDCs, CBN continues to step up the reform of, and take enforcement actions to sanitize, the Nigerian foreign exchange market.[53]

To ensure compliance with the regulatory changes proposed in the Draft Guidelines, BDCs need to take proactive measures, which may include assessing their capitalization and licensing status, embracing digitalization to enhance operational efficiency, implementing robust KYC and AML processes, reviewing governance structures to align with regulatory expectations, and prioritising transparency and accountability in all operations.

[1] A BDC is a company licensed by the CBN to carry on only retail foreign exchange business in Nigeria. Section 1.4 of the Draft Guidelines.

[2] A BDC is a company licensed by the CBN to carry on only retail foreign exchange business in Nigeria. Section 1.4 of the Draft Guidelines.

[3] The naira-for-dollar policy was introduced in May 2021 to increase the transparency of remittance inflows into the country.

[4] Premiumtimes, FX: CBN imposes 50% cap on IOCs repatriation, February 15, 2024 (https://www.premiumtimesng.com/business/business-news/668737-fx-cbn-imposes-50-cap-on-iocs-repatriation.html).

[5] DABA, Binance halts Nigeria operations amid intense crypto crackdown, March 5, 2024 (https://dabafinance.com/en/news/binance-halts-nigeria-operations-amid-intense-crypto-crackdown)

[6] In January 2024, CBN issued the Guidelines for the Operation of International Money Transfer Services in Nigeria to address the issues of foreign exchange volatility.

[7] Sections 7 and 8 of the Draft Guidelines.

[8] Section 3 of the Draft Guidelines.

[9] Section 4 of the Draft Guidelines.

[10] Section 10 of the Draft Guidelines.

[11] Section 10 of the Draft Guidelines.

[12] Section 16 of the Draft Guidelines.

[13] Section 22 of the Draft Guidelines.

[14] Section 2 of the Draft Guidelines.

[15] Section 2(xvi) of the Draft Guidelines.

[16] Section 3.1 of the Draft Guidelines.

[17] Section 3.2 of the Draft Guidelines.

[18] Section 3.2(a) of the Draft Guidelines.

[19] Section 4 of the Draft Guidelines.

[20] Section 4(ii) of the Draft Guidelines.

[21] Section 4(iii) of the Draft Guidelines.

[22] Section 4(vi) of the Draft Guidelines.

[23] Section 4(vii) of the Draft Guidelines.

[24] Section 5(a) of the Draft Guidelines.

[25] Sections 6.1 and 7.0 of the Draft Guidelines.

[26] Sections 6.2 and 7.0 of the Draft Guidelines.

[27] Section 8.0 of the Draft Guidelines.

[28] Section 8.2.2 of the Draft Guidelines.

[29] Section 5.1 of the Current Guidelines.

[30] Section 9.1(iv) of the Draft Guidelines

[31] Section 9.4(i) of the Draft Guidelines.

[32] Section 10(i) of the Draft Guidelines.

[33] Section 10(ii) of the Draft Guidelines.

[34] Section 10(iii)& (iv) of the Draft Guidelines.

[35] Section 10(v)(a) of the Draft Guidelines.

[36] Section 10.0 (v) of the Draft Guidelines.

[37] Section 10(vi)(a) of the Draft Guidelines.

[38] Section 10(vi)(b) of the Draft Guidelines.

[39] Section 10(vi)(c) of the Draft Guidelines.

[40] Section 10 of the Draft Guidelines.

[41] Section 11.0 of the Draft Guidelines.

[42] Section 12 of the Draft Guidelines.

[43] Section 12(vii) of the Draft Guidelines.

[44] Section 12(viii) of the Draft Guidelines.

[45] Section 16.0 of the Draft Guidelines.

[46] Id.

[47] Section 18 of the Draft Guidelines.

[48] Section 17(i) & (ii) of the Draft Guidelines.

[49] Section 17(iii) of the Draft Guidelines.

[50] Section 19 of the Draft Guidelines.

[51] Section 21 of the Draft Guidelines.

[52] CBN Press Release dated March 1, 2024 (CBN Revokes Operational Licenses of 4,173 BDCs) https://www.cbn.gov.ng/Out/2024/CCD/CBN%20Press%20Release%20(BDCs%20Revocation)%20010324%20.pdf

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