The illicit financial activities described in the country have reached a pandemic level. They promote public sector corruption, which occurs because BDCs facilitate the process for such activities. The shortcomings of the current operations of foreign exchange offices in Nigeria far outweigh their importance, and these must either be properly regulated or prohibited.

Slowing the tide of illicit financial flows through money services businesses

If there is a long overdue decision for the Nigerian economy, it is the stopping of the supply of foreign exchange (forex) to the country’s exchange bureaus (BDC) by the Central Bank of Nigeria (CBN ). This was due to the unpatriotic and bold abuse of their trade guidelines over the years, which weakened the naira, encouraged money laundering activities, and fostered illicit financial flows from Nigeria to other jurisdictions.

Central Bank of Nigeria Governor Godwin Emiefele announced on July 27 that the CBN would no longer approve BDC license applications and would also stop providing foreign currency to existing licenses. The move was based on the Monetary Policy Committee’s observation of how the BDCs had become wholesalers, making large, multi-million dollar foreign exchange transactions, above their sell limit of $ 5. $ 000 per person.

The governor of the CBN noted the astronomical increase in the number of operators from 74 dealers in 2005 to 5,689 in June of this year. Also, there are an average of 500 BDC applications per month, pushing Nigeria towards dollarization of the national economy.

Before the shutdown, the CBN sold each of the 5,000 BDCs for $ 20,000 per week, or more than $ 100 million per week and $ 1.57 billion per year. To ensure that genuine customers have access to forex, the central bank subsequently ordered commercial banks to set up FX counters to ensure the direct sale of currencies to members of the public.

All over the world there are BDC operators, and they play different roles. Their main role is to ensure the availability of forex for small businesses and other categories of users. However, the Nigerian BDCs simply gave in to excesses. Preliminary results suggest that most operators have left some room for arbitrage, instead seeking to profit from the efforts of the CBN, which is primarily focused on strengthening naira through the application of monetary policy.

The tendency for BDCs to profit from market manipulation by obtaining naira notes, then using them to buy dollars, taking a position, influencing the market rate over a period of time, and then selling the dollars bought from from the official source for huge profit is totally immoral. , and certainly illegal.

The Economic confidential, by explaining the “short†and “long†basics of forex trading operations have highlighted how such manipulations occur. A “long” position in forex trading involves buying a particular currency at a specific rate while selling another currency, while expecting the currency purchased to appreciate against the currency sold.

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 redeemed at a lower rate.

… The BDCs collectively organize and plot the “short†position to pressure the CBN to devalue the currency, despite the risk that may arise if the CBN decides not to devalue the currency or if it raises interest rates. ‘interest at a level that could stifle the manipulators. They often speculate and attempt to influence public opinion with devaluation prescriptions. If it is successful, they profit from it.

An economy like Nigeria’s, prone to shocks from low oil revenues and the country’s overvalued currency, makes it an easy target for speculative manipulators. These people, who are part of established BDCs and who allegedly act in collusion with other players, exploit information asymmetry in the forex market to organize a “short†position against the naira. However, although they are aware of the overvaluation of the naira, it is usually not possible to act in this regard as they do not know when the CBN may devalue the currency.

In response, the BDCs collectively organize and plot the “short” position to pressure the CBN to devalue the currency, knowing the risk that may arise if the CBN decides not to devalue the currency or if it decides not to devalue the currency. raises interest rates to a level that could stifle manipulators. They often speculate and attempt to influence public opinion with devaluation prescriptions. If it is successful, they profit from it.

Alternatively, they use platforms where currency buyers get their information, forcing them to post rates that would spread pessimism against the currency they wish to manipulate, as the power of the currency in the parallel market is heavily dependent on people’s confidence in its worth. If people believe that the currency is not worth holding, then the CBN is forced into a bind. And, in the end, it collapses.

US economist Paul Krugman said that “fixed exchange rates are very prone to speculative attacks, especially when established stakeholders assume that the exchange rate regime may come to an end.” The situation in the Nigerian forex market is worse as most traders have low confidence in the naira as they only see it as their cow of arbitrage. Thus, they attack it profusely in an illicit manner with speculation, which is paved with the unexplained absurdities of the black market.

Not too long ago, a website named “AbokiFX” which displays exchange rates was restricted by the CBN due to allegations related to these preliminary findings. And the relative stability of the market since the regulation of BDCs and the closure of such sites justifies the measures of the CBN.

Based on studies by the Financial Action Task Force (FATF) and the United Nations Office on Drugs and Crime (UNODC), these monetary service providers can be used for money laundering, funding terrorism and illicit financial flows. They can serve as a convenient intermediary for all kinds of crimes.

It is an attractive vehicle through which criminal and terrorist funds can enter the financial system. A major weakness is the poor regulation of customer due diligence rules, compared to that involved in opening a bank account. In addition, the cash nature of the transactions, the global reach (in the case of remittances) and low thresholds are significant risks.

BDCs have also been prolific avenues for the commission of corruption over the years. Cases of corruption, with BDCs as accomplices, have been routinely reported in most cases of public sector corruption, due to the informal, unofficial and monetary nature of the market.

BDCs are used at all stages of the money laundering process, especially during the investment phase. Once the transaction is completed, it is difficult to trace its origin.

Among other things, the most important factor that can indicate the possible misuse of BDCs, according to the FATF, indicates their possible use for illegal activities. Many cases involve low value wire transfers. However, since the total value of funds involved, over a long period of time, is large, there is sufficient research linking the uncontrolled remittance industry to other criminal activities, including trafficking / smuggling of money. people, drug trafficking, arms smuggling and other national security issues.

BDCs have also been prolific avenues for the commission of corruption over the years. Cases of corruption, with BDCs as accomplices, have been routinely reported in most cases of public sector corruption, due to the informal, unofficial and monetary nature of the market.

When the Central Bank of Nigeria introduced the cashless policy in 2019, financial experts predicted how the economy would be more inclusive by reducing the physical movement of money. The major advantage of doing so was also to pave the way for more effective monetary policies, and above all, for better monitoring of illicit financial flows.

The BDC, being a meeting place for physical money, has benefited from a prodigious level of under-observed activity, with almost non-existent anti-corruption and anti-money laundering surveillance. This has earned them to undermine the ethical conduct of the Nigerian economy by facilitating the entry and exit routes for embezzled funds. Another intriguing dimension is how they manage to never run out of money. However, their proximity to traditional marketing, whereby many importers exchange the naira for the dollar, has made this not only possible, but fast and flexible.

Due to our low level of cross-data on people and organizations, this makes BDCs attractive to crime and thwarts law enforcement efforts to prevent delinquency.

The illicit financial activities described in the country have reached a pandemic level. They promote public sector corruption, which occurs because BDCs facilitate the process for such activities. The shortcomings of the current operations of foreign exchange offices in Nigeria far outweigh their importance, and these must either be properly regulated or prohibited.

Center for Fiscal Transparency & Integrity Watch is an accountability platform based in Abuja, Nigeria.