Exposure Draft: Revised Regulatory And Supervisory Guidelines For Bureau De Change Operations In Nigeria 2024

Introduction

The regulation of Bureau de Change Operators (BDCs) remains a topical issue in Nigeria. The Central Bank of Nigeria (CBN) has repeatedly expressed its commitment to addressing the challenges posed by unauthorized operations of some BDCs, which has the potential of undermining the Nigerian financial system. The CBN noted cases of BDC promoters establishing multiple BDCs to access more foreign exchange (forex), deviating from their mandate by selling forex above the permissible limits of $5000 and becoming conduits for money laundering and other illicit financial activities.¹ These culminated in the suspension of forex sales to BDCs and the refund of capital deposits and licensing fees to promoters with pending applications in 2021.²

On February 23, 2024, CBN issued an Exposure Draft of the Revised Regulatory and Supervisory Guidelines for Bureau De Change Operators in Nigeria (the "Exposure Draft").³ The evident objective of this Exposure Draft as gleaned from its provisions, is to enhance the regulation of Bureau De Change operations, aligning with CBN's broader reforms in the Nigerian Foreign Exchange Market (NFEM). This article seeks to highlight key regulatory changes to the operations of BDCs in Nigeria as proposed in the Exposure Draft.

1. Extensive List of Ineligible Promoters

Under the 2018 Code of Corporate Governance for Bureau de Change in Nigeria (the "Code of Corporate Governance"),⁴ individuals and corporate entities are prohibited from owning controlling shares in more than one BDC, while the government and its MDAs are barred from holding equity, whether directly or indirectly,in BDCs.

In a bid to enhance transparency and corporate governance among BDCs, the Exposure Draft provides an extensive list of ineligible promoters which includes the following; ⁵

1. Commercial, merchant, non-interest, and payment service banks;
2. Other Financial Institutions (OFIs), including holding companies and payment service providers;
3. Serving staff of financial services regulatory agencies or financial services providers;
4. Governments at all Levels;
5. Public officers;⁶
6. Non-Governmental Organizations and charitable organizations;
7. Cooperative societies;
8. Academic and religious institutions;
9. Non-Nigerian natural persons;
10. Non-resident non-regulated companies;
11. Telecommunication services providers;
12. Sanctioned individuals and entities;
13. A shareholder in another BDC (whether directly or indirectly); and
14. Any other entity that the CBN may from time to time designate.

We note though that this restriction only applies to direct and indirect ownership in BDCs. These Prohibited Promoters, including financial institutions, may however engage in the BDC sector in other capacities, such as service providers or technical partners for integration, payment processing and card maintenance as may be permitted by the Exposure Draft.

2. Delineation of Permissible and Non-Permissible Activities

Unlike the 2015 Revised Operational Guidelines for Bureau de Change in Nigeria (the "Extant Guidelines"), the Exposure Draft clearly outlines the permissible activities of BDCs which include; ⁷

1. Acquiring foreign currency from tourists, diaspora returnees, expatriates, resident with forex inflow, International Money Transfer Operators (IMTOs), embassies, authorized hotels, the Nigerian Foreign Exchange Market (NFEM), and any other source that CBN may specify;⁸
2. Selling forex for the purposes of Personal Travel Allowance (PTA), Business Travel Allowance (BTA), medical bills payment, school fees payment, and the repurchase of unused Naira from a nonresident from whom the BDC had sourced forex during the course of visit;⁹
3. Opening foreign currency and Naira accounts with Commercial and Non-Interest Banks;
4. Collaborating with banks to issue prepaid cards; and
5. Serving as cashpoints for IMTOs.

Also, the Exposure Draft extends BDCs' prohibited activities to include among other things, maintaining accounts for members of the public, receiving deposits, granting loans, international outward transfers, holding accounts with foreign financial institutions, processing inbound international transfers (except as cash-out points for IMTOs), acting as payment collection agents, financing political activities, and any other activity not expressly permitted or activities labeled as "non-permissible" by CBN.¹⁰

3. Introduction of Tiers of BDC License

The Exposure Draft introduces two categories of BDC licenses: Tier 1 and Tier 2. ¹¹ A Tier 1 BDC license permits operations on a national scale, enabling license holders establish branches and appoint a maximum of 10 Franchisees in each State where they have a branch, subject to CBN's approval. ¹² Conversely, Tier 2 Licensees are confined to operating within one State or the Federal Capital Territory (FCT) and are allowed to maintain a maximum of 2 branches. ¹³ Notably, Tier 2 Licensees do not have the ability to appoint Franchisees.

4. Franchising Standards

The Exposure Draft mandates a Tier 1 BDC Operator seeking to appoint Franchisees to develop a franchising policy which must be approved by CBN. Franchisees are required to adopt the name, branding, technology platform and rendition requirements of their Franchisor. Additionally, as part of its supervisory responsibilities, a Franchisor is obligated to submit consolidated reports covering both its own operations and those of its Franchisees to CBN fostering compliance through a trickle-down system. Furthermore, all Franchisees of Tier 1 BDCs must be incorporated as limited liability companies adopting the name of their respective Franchisor, including the phrase "BDC Franchise."

5. Introduction of Two-Stage Final License Application Procedure

The Exposure Draft maintains a two-stage license application process comprising¹⁴ the Approval-in-Principle (AIP) and the Final License stage but further delineates the Final License stage into two substages: the Provisional Approval and the Final License stage.¹⁵ An AIP is granted by CBN to the promoters of a BDC once CBN finds the application satisfactory. With an AIP, the promoters of a BDC can incorporate the BDC with the Corporate Affairs Commission but cannot commence operations. After incorporation and within 6 months from the issuance of an AIP, the promoters of a BDC must apply for the grant of the final license by CBN.

Upon the satisfactory review of documents submitted and a pre-licensing inspection assessing the preparedness of a BDC, CBN will grant a Provisional Approval authorizing the BDC to initiate integration with relevant institutions like the Nigeria Interbank Settlement System (NIBSS) and the Tax Identification Number Verification Portal of the Federal Inland Revenue Service (TIN Verification Portal of the FIRS).¹⁶ Subsequently, within 60 days from the grant of Provisional Approval, the BDC must apply for a Final License.¹⁷ Once notified of CBN's decision to grant a license, the BDC must pay the non-refundable license fee and mandatory caution deposit to the designated CBN account before the Final License is granted.

6. Participation in the Forex Market as Authorized Dealers

Under the Exposure Draft, BDCs may participate in the Nigerian Foreign Exchange Market as authorized dealers. To do this, BDCs must first apply to the Director of CBN's Trade and Exchange Department for the Authorized Dealership License.¹⁸

7. Limitations on Foreign Currency Sales and Purchases

Under the Exposure Draft, BDCs are limited to providing a maximum of $4000 as Personal Travel Allowance (PTA) to individuals and $5000 as Business Travel Allowance (BTA) to businesses every 6 months. ¹⁹ Additionally, the Exposure Draft permits BDCs to sell up to $5000 or $10,000 to individuals annually for medical expenses or educational fees respectively, subject to being provided with necessary documentation. For medical expenses or educational fees, the foreign currency must be directly transferred from the BDC's domiciliary account to the medical facility or educational institution.²⁰

In addition, except for forex sales less than $500, a beneficiary of a BTA or PTA can only receive up to 25% of the foreign currency purchased in cash while the remaining 75% is to be transferred electronically to the beneficiary's domiciliary account. ²¹ Likewise, the Exposure Draft requires that where a BDC sells above $500 to a customer, naira proceeds must be transferred by the customer to the BDC's naira account and cannot be settled in cash.²²

When providing foreign currency purchase services at border control areas to resident Nigerians, BDCs are also obligated to transfer all naira proceeds due to the customer to the customer's naira account or prepaid card unless the sum is below or equivalent to $500.²³ However, for a non-resident customer without an active naira account, the BDC in exchange for foreign currency will issue such customer a Naira prepaid card obtained from a commercial or non-interest bank and credit it with Naira.

8. Corporate Governance Requirements

The Exposure Draft introduces variations in the minimum and maximum number of Directors a BDC must have. For Tier 1 BDCs, the Board must consist of a minimum of 5 Directors and a maximum of 9 Directors,²⁴ with at least 2 being independent Non-Executive Directors ("INED").²⁵ The Board of Tier 2 BDCs on the other hand, must consist of a minimum of 5 Directors and a maximum of 7 Directors with at least 1 INED.²⁶ Additionally, all Tier 1 BDCs are required to have at least 1 Executive Director other than the MD/CEO while Tier 2 BDC may elect to have an Executive Director in addition to the MD/CEO.²⁷ This is in contrast with Paragraph 2.2.2 of the Code of Corporate Governance which provides that the MD/CEO shall be the only Executive Director of a BDC.

Where a prospective or current Director has a potential or existing membership on the Board of other entities regulated by CBN, approval of CBN shall be required to assume or continue office.²⁸ Notably, the Exposure Draft also emphasizes maintaining a gender inclusive Board by requiring the Board to consist of both genders.²⁹

9. Financial Requirements for License Application and Renewal

The Exposure Draft introduces some fundamental changes in the financial requirements for obtaining and renewing a BDC license. These changes are highlighted in the table below for easy reference.³⁰

Under the Exposure draft, BDCs are required to pay their annual renewal fee no later than 31 days before the conclusion of each financial year.³¹ The Exposure Draft is silent on whether or not the minimum capital is to be paid-up however, based on the provisions of the Companies Regulations 2021³², the share capital must be fully issued.

10. Creation of Functional Units

The Exposure Draft requires all BDCs to create and maintain an Operations unit, Compliance unit, Risk Management unit, Internal Audit unit, Information Technology unit, and a Legal Services unit.³³ This would provide better structure to operations and enhance compliance and efficiency.

11. Additional Compliance and Reporting Requirements

The Exposure Draft also requires BDC to ensure compliance with certain additional requirements as highlighted below.

1. AML/CFT and KYC Requirements- The Exposure Draft reemphasizes the AML/CFT obligations of BDCs including the requirement to train their employees³⁴ on the prevention of money laundering, terrorist financing and proliferation of weapons of mass destruction as provided for under the Extant Guidelines and by extension CBN's AML/CFT Regulations 2022.³⁵ The Exposure Draft requires the verification of the customers' BVN or Tax Identification Number (TIN) before each transaction is processed.³⁶ Businesses seeking Business Travel Allowance (BTA) must also submit a letter of request, stating the purpose of the visit, incorporation or registration certificate, an invitation letter from their overseas business partner, and their tax clearance certificate.³⁷ For non-resident individuals, their passports must be validated by the relevant authorities before transactions can proceed.³⁸
2. Data Protection and Privacy- Considering the volume of sensitive information collected by BDCs, the Exposure Draft emphasizes that BDCs must prioritize privacy and confidentiality and comply with the Nigerian Data Protection Regulation.³⁹ Hence, BDCs will be required to register with and file returns annually to the Nigerian Data Protection Commission.
3. Reporting Requirements and Financial Statements⁴⁰- In an effort to curtail excesses and monitor compliance, the Exposure Draft imposes extensive reporting obligations on BDCs. BDCs are required to submit reports to the CBN on a daily, monthly, and annual basis. These reports encompass various areas such as sources of funds, customer information, forex sales and purchases, statement of assets and liabilities, income statements, and audited financial statements. Beyond routine reporting, BDCs are obligated to subject their financial statement to external audit before submitting the financial statement with an abridged copy to the Director of the CBN's Other Financial Institutions Supervision Department.⁴¹ The external auditor engaged is required to submit a copy of the management letter to CBN within three months from the close of the financial year.⁴²
4. Prudential Requirements⁴³-The Exposure Draft outlines prudential guidelines for BDCs, mandating them to uphold sufficient insurance coverage for cash in office and in transit against fire and staff fidelity. Additionally, it fixes the maximum borrowing limit to 50% of shareholders' funds unimpaired by losses and requires maintaining a Net Open Position limit in foreign currency equivalent to 30% of shareholders' funds unimpaired by losses. Importantly, Dividends are not to be paid until all preliminary expenses, organizational expenses, shares selling commission, brokerage, the number of incurred losses, and other capitalized expenses not represented by tangible assets have been entirely written off.

12. Preservation of Records

The Exposure Draft revises the minimum record retention period for BDCs from 6 years to 5 years.⁴⁴

13. Revocation of License⁴⁵

As part of its oversight and regulatory functions, under the Exposure Draft, CBN reserves the authority to revoke a BDC license on any of the following grounds:

1. Forgery, altering or defacing of foreign currency;
2. Ownership of multiple BDCs;
3. Obtaining foreign currency illegally or through fraudulent means;
4. Conviction by court on grounds of fraudulent or dishonest practices;
5. Failure to commence operations within 6 months after the grant of licence;
6. Failure to pay statutory fees including renewal fee within the stipulated time;
7. Failure to render returns for 3 consecutive months;
8. Rendering false returns or selling foreign currency based on falsified documents;
9. Maintaining business association with street traders;
10. Submitting false information during and after the application process;
11. Operating from an unapproved location;
12. Transacting business with an account other than a designated BDC account;
13. Purchasing or selling foreign currency above specified limit; or
14. Failure to comply with applicable law.

Conclusion

The Exposure Draft presents a dual prospect for BDC operations. While it promises to enhance CBN's oversight, it raises new challenges for BDCs such as the significant increase in minimum share capital which may prompt mergers and acquisitions. The additional reporting and compliance requirements in the Exposure Draft indicate a more stringent regulatory environment. Hence Stakeholders must prioritize compliance to mitigate regulatory risks. Stakeholders are therefore advised to ensure timely and thorough compliance with extant regulations towards mitigating exposure to regulatory action. Stakeholders may also begin exploring possible partnership particularly in relation to technical services in anticipation of the revised guidelines.

Footnotes

1 https://www.cbn.gov.ng/Out/2021/CCD/CBN%20Update%202021%20(July)%20.pdf (Last accessed February 29, 2024)

2 https://www.cbn.gov.ng/out/2021/ccd/circular%20for%20bdc%20refunds.pdf (Last accessed February 29, 2024)

3 https://www.cbn.gov.ng/Out/2024/FPRD/Revised%20Regulatory%20and%20Supervisory%20Guidelines%20for%20Bureau%20De%20Change%20Operations%20in%20Nigeria.pdf (Last accessed February 29, 2024).

4 Paragraph 3.2.1 of the Code of Corporate Governance for Bureau de Change in Nigeria (2018).

5 Paragraph 2.0 of the Exposure Draft

6 This is as defined in 5^th Schedule Part IV of the Constitution of the Federal

7 Paragraph 3.1 of the Exposure Draft

8 Paragraph 4.0. of the Exposure Draft

9 Paragraph 5.0 (a) of the Exposure Draft

10 Paragraph 3.2 of the Exposure Draft

11 Paragraph 6.0 of the Exposure Draft

12 Paragraph 6.1 and 12.0(viii) of the Exposure Draft

13 Paragraph 6.2 of the Exposure Draft

14 Paragraph 8.0 of the Exposure Draft

15 Paragraph 8.2 of the Exposure Draft

16 Paragraph 8.2.1(iv) of the Exposure Draft

17 Paragraph 8.2.2 of the Exposure Draft

18 Paragraph 10.0 (viii) of the Exposure Draft

19 Paragraph 10.0 (vi) of the Exposure Draft. This limit applied on a quarterly basis under the Extant Guidelines.

20 Paragraph 10.0 (vi)(b) and (c) of the Exposure Draft

21 Paragraph 10.0 (vi)(e) of the Exposure Draft

22 Paragraph 10.0 (vi)(f) of the Exposure Draft

23 Paragraph 10.0 (v)(c) of the Exposure Draft

24 Paragraph 9.1 of the Exposure Draft

25 Same as footnote 24

26 Same as footnote 24

27 Same as footnote 24

28 Paragraph 9.1 (vi) of the Exposure Draft

29 Paragraph 9.1 (iv) of the Exposure Draft

30 Paragraph 7.0 of the Exposure Draft

31 See footnote 31

32 Regulation 13 Companies Regulations 2021

33 Paragraph 14.0 of the Exposure Draft

34 Paragraph 16 of the Exposure Draft

35 Reg 41 of the CBN Anti-Money Laundering, Combating the Financing of Terrorism and Countering the Proliferation Financing of Weapons of Mass Destruction in Financial institutions Regulation 2022

36 Paragraph 10.0 (iii) of the Exposure Draft

37 Paragraph 10.0 (vii) of the Exposure Draft

38 Paragraph 10.0 (iv) of the Exposure Draft

39 Paragraph 10.0 (ii) of the Exposure Draft

40 Paragraph 11.0 (iv) of the Exposure Draft

41 Paragraph 17.0 (iv) of the Exposure Draft

42 Paragraph 17.0(vi) of the Exposure Draft

43 Paragraph 15.0 of the Exposure Draft

44 Paragraph 18.0 of the Exposure Draft and Paragraph 14.0 of the Extant Draft

45 Paragraph 19.0 of the Exposure Draft

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.