BUREAU DE CHANGE OPERATIONS AND STRUCTURE IN NIGERIA: A NEW LEAF?

A.   INTRODUCTION:

On May 22, 2024, the Central Bank of Nigeria (CBN) in the exercise of its regulatory powers issued the Regulatory and Supervisory Guidelines for Bureaux De Change Operations in Nigeria 2024[1] (the Guideline).

Significantly, the Guideline follows Nigeria’s move to address currency fluctuation and volatility of the Naira, as well as illicit financial flow within the country. In what appears to be a new leaf for Bureau De Change (BDC) operations in Nigeria, the Guideline amongst other matters, introduces new licensing requirements and categories of BDCs, as well as revise permissible activities, financial requirements, corporate governance requirements, and AML/CFT/CPF obligations for BDCs.

The Guideline, which took effect on June 3, 2024, supersedes the Revised Operational Guidelines for Bureaux De Change 2015 and other circulars or guidelines previously issued by the CBN’s Financial Policy and Regulation Department.

This article succinctly examines the new regulatory framework under the Guideline applicable to the operations and structure of BDC businesses in Nigeria, highlighting its implications and growth opportunities.

B.   BDCS: OVERVIEW OF REGULATORY TERRAIN:

By way of definition, a BDC is any company licensed by the CBN and incorporated with the sole object of carrying on retail foreign exchange business in Nigeria. Without more, BDCs are prohibited from conducting any business other than the retail of foreign exchange in Nigeria. It is immaterial that such other intended business is within the financial services sector.

An underpinning with activities in Nigeria’s financial services sector is the regulatory oversight of the CBN. For BDCs, it is no different. The CBN sits as the principal regulator of BDCs, and the trade in foreign exchange.[2] Other regulatory institutions to which BDCs are subject include the Corporate Affairs Commission (CAC), the Nigeria Data Protection Commission (NDPC), the Nigeria Financial Intelligence Unit (NFIU), the Federal Inland Revenue Service (FIRS), etc.

C.    LICENSING AND COMPLIANCE OBLIGATIONS FOR BDCS UNDER THE NEW REGULATORY REGIME:

The Guideline introduces new licensing categories among other compliance obligations some of which are succinctly discussed below:

1.    Licensing Categories, Application, and Capital Requirement: The Guideline creates a 2-tier license category for BDC licenses. Tier 1 licensed BDCs require a minimum share capital of ₦2 Billion and reserve the right to operate in any state within Nigeria as well as the FCT. This also includes the privilege to appoint and maintain franchisees. Tier 2 BDCs on the other hand, must have a minimum share capital of ₦500 Million and are only permitted to establish up to 5 (five) branches within one state in Nigeria, without the option to appoint franchisees.

Application for both license categories must be conducted in 2 (two) stages: (i) Approval-In-Principle (AIP) which is obtained as a pre-condition for the incorporation of the BDC, and not an approval to commence operation; and (ii) a Final Approval (FA). Obtaining a Final Approval/Final License becomes possible only after an applicant has obtained a Provisional Approval (PA) granted upon application no later than 6(six) months after the grant of an AIP. An applicant is expected to within 60 (sixty) days after the grant of PA satisfy the conditions of the PA, as well as conclude integration into the electronic transactions and reporting architecture[3] of various regulatory and stakeholder institutions including the CBN, NIBSS, NFIU, and FIRS.

Upon satisfying the foregoing requirements and receiving the CBN’s notice of its decision to grant the license, the applicant is required to pay a non-refundable license fee of ₦5 million for a Tier 1 BDC and ₦2 million for a Tier 2 BDC, respectively.

2.    Non–Eligible Promoters: For the obvious reason of preventing conflict of interest, and shady dealings in foreign exchange, the Guideline prohibits an extensive list of persons from participating in the ownership of BDCs, either directly or indirectly. These non–eligible promoters include but are not limited to commercial, merchant, non-interest, and payment service banks; financial holding companies; Other Financial Institutions (OFI), including International Money Transfer Operators (IMTOs), and payment services providers; serving staff of financial services regulatory and supervisory agencies and regulated financial services providers; government; non–governmental organizations; cooperative societies; charitable organizations; other persons that the CBN may from time to time designate is ineligible. etc.

3.    Corporate Governance Requirements: The Guideline imposes strict corporate governance requirements on BDCs. For Tier 1 BDCs, the board of directors must consist of a minimum of 5(five) and a maximum of 7(seven) directors, while Tier 2 BDCs must have between 3(three) and 5(five) directors. These numbers must include Independent Non-Executive Directors (INEDs), Executive Directors, and the Managing Director/Chief Executive Officer. The Guideline also mandates gender diversity, prohibiting single-gender boards. Additionally, the selection and appointment of directors, the chairman, and other senior management must meet specific assessment and fitness criteria, including integrity, educational qualifications, knowledge of financial institutions, and the ability to contribute meaningfully to the board. INEDs must also comply with the requirements of the Guideline as well as the CBN Code of Corporate Governance 2018.

4.    Permissible and Non – Permissible Activities: BDCs are permitted to acquire foreign currency from approved sources, sell foreign exchange under approved conditions, open and maintain foreign currency and naira accounts with commercial or non–interest banks, collaborate with its bankers to issue prepaid debit cards, serve as cashout points for IMTOs, and engage in any other activity that the CBN may specify. Conversely, BDCs are prohibited from ‘street trade’ of foreign currencies, maintaining any type of account for any member of the public or accepting any asset for safekeeping/custody, taking deposits from or granting loans in any currency to members of the public, retail sale of foreign currencies to non – individuals (except for business travel allowance, international outward transfer, offshore business), or maintaining foreign correspondent relationship with any foreign establishment, acting as custodians of foreign currency on behalf of customers, receiving international money transfer – except where acting as cash out point for IMTOs. BDCs are further prohibited from obtaining foreign currency from any unauthorized sources, trade-related import activities, serving as payment or collection agents to any customer, dealing in gold or other precious metals, carrying on capital markets, insurance and or pension activities, establishing subsidiaries, carrying on transactions that involve illicit financial flows, or financing political activities.

5.    Sourcing Foreign Currencies: The Guidelines now permit BDCs to buy foreign currencies from the Nigerian Foreign Exchange Market (NFEM), subject to meeting the requirements of an authorized dealership license. Furthermore, BDCs are under strict AML/CFT/CPF obligations permitted to source/purchase foreign currency from tourists, diaspora returnees, expatriates with foreign exchange inflow from work, travel, investment, or their domiciliary account, IMTOs, embassies, and diplomatic missions in Nigeria (except those from countries sanctioned by the UN Security Council), hotels authorized to buy foreign currencies as well as other sources specified by the CBN from time to time.  Payments by BDCs for cash purchases of foreign currencies must be made via electronic transfer to the customer’s naira account for transactions exceeding USD500. Where the customer is a non-resident, a BDC may issue prepaid Naira cards in line with relevant KYC requirements. Additionally, BDCs are required to demand a declaration of the source of foreign exchange from sellers of an equivalent of US$10,000 and above, as well as comply with AML/CFT/CPF regulations and foreign exchange laws and regulations.

6.    Sale of Foreign Currencies by BDCs: To combat the unbridled use of foreign currency within Nigeria, BDCs are only authorized to sell foreign currencies for specific purposes; and payment by the customer for all such sales shall be by electronic transfer to the BDCs’ Naira account. The permitted purposes for which BDCs may sell foreign currencies to customers include Personal and Business Travel Allowance, payment of overseas medical bills and school fees, payment of professional examination and annual subscription fees, and repurchase of unused Naira from non–residents, provided that receipt of purchase of the Naria shall be presented by such non – resident.

7.    Operations of BDCs: BDCs are required to deal in banknotes and coins, plastic cards, and other businesses falling within the list of permissible activities to which BDCs may deal. BDCs are also required to ensure the confidentiality and protection of personal information in compliance with the Nigeria Data Protection Act 2023. Other operation obligations include among others, the requirement to open for business operation from 8:00 am to 4:00 pm each working day, and obligatory transaction-specific KYC for resident and non–resident customers, including the presentation/verification of Bank Verification Number (BVN) or Tax Identification Number (TIN) or passport identification document respectively.  BDCs are also required to ensure that all customer-present transactions shall be electronically credited or transferred to the same customer’s naira account or prepaid card.  

8.     AML/CFT/CPF obligations: All BDCs are required to comply with the requirements of the Money Laundering (Prevention and Prohibition) Act 2022, Terrorism (Prevention and Prohibition) Act 2022, and any other relevant laws and regulations concerning AML/CFT/CPF policy, development of compliance unit/function, compliance officer designation + duties, cooperation with supervisory authorities, conducting customer due diligence, monitoring and reporting suspicious transactions report with the NFIU, record keeping for all transactions, and employee training on AML/CFT/CPF.

9.    Prudential requirements: BDCs are now required to maintain a Net Opening Position limit in foreign currency of the equivalent of 30 percent of its shareholders’ funds, maintain a borrowing limit of 50%(fifty percent) of shareholders’ funds, and maintain insurance cover over cash (both Naira and foreign currency) in office, transit, fire, and staff fidelity risks. Notably, BDCs must only pay dividends upon fulfilling certain conditions stipulated by the Guideline including meeting its minimum capital requirements, satisfying corporate governance and prudential requirements, etc.  

10. Preservation of records, Accounting, and Change in Ownership: In addition to AML/CFT/CPF obligations, BDCs are required to maintain records of transactions and documents obtained from customers for at least 6(six) years after the consummation of the transaction. Also, BDCs must keep appropriate books of account free from material errors in line with the standards approved by the Financial Reporting Council of Nigeria. Such financial statements must be externally audited by appointed auditors. It is essential to note that BDCs are prohibited from entering into any agreement or arrangement that results in the change of ownership or control of such BDC, whether by way of sale, transfer, merger, amalgamation, or employment of a management agent, except with the prior approval of the CBN.

D.   IMPLICATIONS OF THE NEW REGULATORY REGIME FOR NEW AND EXISTING BDCS:

The Guideline sets a new leaf for BDC operation and structure in Nigeria. With the introduction of more stringent and regulated operations among varying compliance obligations, the CBN demonstrates its readiness to among others guarantee a thoroughly supervised foreign exchange market, as well as adequately combat the menace of illicit foreign exchange flow, and street trading in foreign exchange.

For existing BDCs, this improved regulatory terrain makes for stricter regulatory oversight and a more capital-intensive operation. This is however mitigated by the new opportunities for growth through the Guideline’s introduction of expansion options like branch opening and franchise arrangements – depending on the license tier an existing BDC may opt for – which present an opportunity for greater market reach.

 Additionally, with the authority to issue prepaid cards in collaboration with their bankers, as well as serve as cash points for IMTOs, BDCs stand a chance to deepen existing market share within the financial services market. On the flip side, the new regulatory regime by way of its consequence introduces – to some extent – market entry barriers for new and intending BDCs.