CESSATION OF THE SALE OF FOREIGN CURRENCY BY THE CENTRAL BANK OF NIGERIA TO BUREAU DU CHANGE OPERATORS

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Aderonke Alex-Adedipe and Feyijuwa Akinyanmi

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Introduction

Nigeria has in recent times, struggled with sustaining the liquidity in the foreign exchange market and stabilizing the value of the Naira. The Central Bank of Nigeria (CBN), the apex regulator of financial institutions and financial activities, has continued to put measures in place to ensure the availability of foreign currency to consumers.

On 27th July, 2021, the CBN announced at the Monetary Policy Committee, the cessation of weekly allocations and sale of foreign currency to Bureau Du Change (BDC) Operators in Nigeria. Today’s article will consider the rationale for the cessation as well as the effects on the Nigerian economy.

BDCs and their Primary obligations

BDCs are essentially non- bank corporate entities licensed by the CBN to carry out foreign exchange business on a small scale. They are primarily licensed to service the foreign exchange requests of customers who require foreign currency for purposes such as Business Travel Allowance (BTA), Personal Travel Allowance (PTA), school fees, medical bills, utility bills and life insurance premium and such other transactions which the CBN may from time to time permit.

Rationale for the CBN’s Decision

The decision of the apex bank to halt the sale of foreign currency to BDCs is based on the premise that BDCs have been conducting foreign exchange transactions which are contrary to their mandate. In addition, BDCs have been accused of being used as conduits for money laundering activities.

It is important to note that the CBN’s Revised Operational Guidelines for Bureau Du Change in Nigeria, 2015 (Guidelines) and other directives of the CBN stipulate that the maximum amount to be allocated to a customer for a foreign exchange request  for BTA or PTA is $5,000 and $4000 respectively. The CBN Foreign Exchange Manual, 2018 also stipulates that BDCs are only permitted to sell foreign exchange to customers who require the foreign currency for BTA, PTA and payment of foreign bills highlighted above. In addition, one of the conditions of sale is that the foreign currency is to be sold to customers at the CBN’s specified profit margin. In reality, however, these rules have not been complied with for many years and sourcing foreign exchange from BDCs has been equivalent to purchasing from the parallel market. In addition, BDCs have continued to deal in foreign exchange transactions with members of the general public, whether or not they meet the required criteria.

To ensure continued liquidity in the foreign exchange market, the CBN has announced that the weekly allocations of the BDCs will be diverted to Authorised Dealers (commercial banks) who are now required to meet the legitimate demands of customers. According to the CBN’s directive to commercial banks, all banks are required to set up teller points at designated branches across the country to fulfil legitimate foreign exchange requests for PTA, BTA, payment of tuition fees, medical payments, amongst others.

Effect of the CBN’s Announcement

The implication of the CBN’s announcement is that whilst existing BDCs have not been barred from dealing in foreign exchange transactions, they are no longer able to purchase foreign exchange from the apex bank. Therefore, their only source of foreign exchange would be from the parallel market.

In effect, the cessation of the sale of foreign currency by the CBN to BDCs will likely create scarcity and result in a spike in the foreign exchange rate in the parallel market. Although the CBN’s reallocation of funds to the commercial banks is intended to curb scarcity, it is unlikely that the commercial banks will be able to fulfil all customers’ obligations in due time.

In addition, BDCs have been a major source of foreign currency to businesses which are not eligible to obtain foreign currency from the official Nigerian Foreign Exchange Market for the purpose of fulfilling their foreign obligations. By virtue of the CBN’s Foreign Exchange Manual, 2018 directing such businesses to obtain foreign exchange from autonomous sources, these businesses have relied on BDCs to provide foreign exchange without breaching anti- money laundering laws. The CBN has, however, by its decision shut another window for businesses to obtain foreign currency.

Conclusion

Although, the decision of the CBN is commendable to the extent that BDC operations beyond their original mandate will now be curbed, it is important to note that this decision may also strain the foreign exchange market, thereby creating further hardship for legitimate businesses with foreign exchange obligations.

It is therefore recommended that rather than cease supply to BDCs, perhaps a more effective solution would be enforcement of applicable CBN regulations which have not been complied with.

 

5 THINGS TO DO TO MONITOR YOUR COMPANY’S DATA PROTECTION PRACTICES IN NIGERIA

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By Seun Timi-Koleolu and Eustace Aroh 

Introduction

As data usage in Nigeria is fast becoming an inevitable part of business practices, the regulatory oversight of the National Information Technology Development Agency (NITDA) in protecting personal information now cuts across most sectors of the economy. More than ever before, it is important that all companies assess their practices in view of the Nigeria Data Protection Regulation (NDPR) to avoid penalties which could be as much as 1-2% of the annual revenue of the company.

In assessing the level of compliance by companies with the NDPR, NITDA requires companies to engage a licensed Data Protection Compliance Organisation (DPCO) to conduct a data protection audit and file the report with NITDA. Although the deadline for data protection audits for the audit year of 2020 to 2021 lapsed on June 30, 2021, companies who are yet to carry out the audit are encouraged to engage a DPCO who is empowered to apply and obtain specific extension for each company.

Companies who have been audited and therefore in good standing, are expected to continuously monitor their data protection practices, ensuring they remain compliant. In this article, we have itemised five things companies should do to properly monitor their data protection practices.

1. Appoint a Data Protection Officer

Any company or organisation that meets the following criteria is expected to appoint a Data Protection Officer (DPO) within 6 months of commencing operation. The company:

  1. processes personal information of over 10,000 Nigerians;
  2. processes sensitive personal information in the regular course of its business;
  3. processes critical national information; or
  4. is a government agency or ministry.

The DPO is to be knowledgeable in data protection; and will be responsible for monitoring compliance with the NDPR, advising the management, employees and third-party privy to personal information, and acting as the primary contact person for NITDA.

2. Conduct Data Protection Impact Assessment

A data protection impact assessment (DPIA) is a process carried out by the DPO to assess and minimise the possible risk to a data processing activity. For a company launching a new business process or activity which would involve the use of sensitive information or heavy use of personal information of individuals, the DPO of the company is to carry out a DPIA to identify, evaluate and minimise possible data protection risks. This will help companies address the risks in the processes and ensure continuous compliance with the NDPR.

3. Carry Out Regular Internal Audit

A company may monitor its compliance level by carrying out a periodic internal audit of its data protection practices to map, identify systems and improve these practices.

4. Conduct Periodic Due Diligence on Third Party

Under the NDPR, a company that qualifies as a data controller will be responsible for the actions of its data processors (data administrators) i.e. third parties using personal information to provide services to the business. Consequently, companies are expected to conduct due diligence on the third party to ensure their data processing practices are in line with the NDPR.

5. Submit to an Audit by a Licensed Data Protection Compliance Organisation

All companies that collect or process the personal information of over 1,000 individuals are required to submit to a data protection audit by a DPCO. The DPCO shall review the data protection documentation of the company, assess the systems and practices of the company and assess the knowledge of the staff before providing recommendations.

Conclusion

It is advisable for companies with the personal information of Nigerians (including foreign companies) to ensure such information is processed in compliance with the NDPR to avoid regulatory sanctions. These companies are further advised to implement these five steps to ensure their continued compliance with the NDPR.

Pavestones is a full-service law practice and a licensed DPCO supporting Nigerian and foreign clients. For more articles on data protection or clarity on our article above, contact Pavestones at info@pavestoneslegal.com

THE REGULATORY FRAMEWORK AND GUIDELINES FOR MOBILE MONEY SERVICES IN NIGERIA

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By Aderonke Alex-Adedipe and Baraebibai L. Ekpebu

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Introduction

The Central Bank of Nigeria (CBN), on 9, July 2021, issued The Regulatory Framework and Guidelines for Mobile Money Services in Nigeria (“The Framework”) which is essentially a more robust framework in comparison to the Guidelines on Mobile Money Services in Nigeria (“The 2015 Guidelines”) issued in 2015. The purpose of the Framework, according to the CBN, is to promote financial inclusion within the country.

The emergence and dominance of mobile money operators (MMOs) in Nigeria has simplified financial transactions for the average citizen through the operation of mobile phones.  Therefore, walking into the banking hall is no longer necessary. These factors have made it necessary for the CBN to create an enabling environment for mobile money services in Nigeria, primarily geared towards achieving availability, acceptance, and usage of mobile payment services and systems nationwide.

Scope of the Framework

The Framework provides coverage of the entire mobile money ecosystem which includes the Regulators, MMOs, Infrastructure Providers, Other Service Providers, Consumers, and Mobile Money Agents. Notwithstanding, the Framework provides for two categories of Mobile Money Services for operation in Nigeria. These are;

a.The Bank-led Model: This model is characterised by a bank, either acting alone or with a consortium of banks, with or without other approved organizations, seeking to deliver banking services via a mobile payments system while acting as the lead initiator.

b.The Non-bank led Model: This model is characterised by the lead initiator being a corporate organization that has been specifically licensed by the CBN to deliver mobile money services to customers.

 

Notably, The Telco-led model, where a Mobile Network Operator is the lead initiator has not been sanctioned by the Framework. This is in contrast with the provisions of the Guidelines which give recognition to this model. This exclusion, according to the CBN, has been made to provide the apex bank with full control over monetary policy operations, minimise risks and ensure that the offerings of financial services are driven only by organizations within the CBN’s regulatory purview.

Notable Provisions

Savings Wallet: MMOs are permitted, subject to obtaining a no “objection letter” from the CBN to offer savings wallet services for unbanked citizens in Nigeria. The modalities for the operation of a savings wallet are clearly defined and these include; a requirement for a Savings Wallet Principal Pool Account, and a Savings Wallet Interest Pool Account. Other rules on the operation of mobile wallets include specifications on charges, minimum balance, savings periods, the procedure for determination of interest payable to subscribers, disclosure requirements for MMOs, automation of interest distribution, and the proportion to be retained by an MMO where applicable.

Permissible and Non-Permissible Activities: The Framework clearly spells out activities that are permissible and those which are prohibited for MMOs. Amongst permissible activities include; wallet creation and management, electronic money issuance, agent recruitment and management, pool account management, non-bank acquiring, and card acquiring. On the other hand, MMOs are prohibited from granting any form of loans, advances, and guarantees (directly or indirectly), issuing insurance, or accepting foreign deposits.

Transaction Limits: Know Your Customer (KYC) requirements have been incorporated into the Guidelines as there are now three types of transactions namely; customers at KYC tier 1 can transact to a daily limit of N50,000 with a daily cumulative transaction limit of N300,000 while customers with KYC tier 2 have a daily cumulative transaction limit of N200,000 and a cumulative balance limit of N500,000 and KYC tier 3 may transact daily to a limit of N5,000,000 with no applicable limits to their account balance.[1]

 

Consumer Protection and Sanctions: MMOs are required to resolve all customer complaints within 48 hours[2], ensure customers understand the transactions they enter and make adequate disclosures to customers[3], provide mechanisms to mitigate against a loss of service, fraud, and customer information, ensure proper communication channels are put in place, and the Nigeria Deposit Insurance Corporation (NDIC) is also mandated to provide insurance for mobile money deposit wallet subscribers.[4]  Where a Deposit Money Bank (DMB) acting as a settlement bank fails/defaults, customers of the MMO enjoy a maximum coverage of up to N500,000.

The CBN also bears the responsibility of facilitating the assumption of the deposit liability of a failed MMO, in which instance the subscriber’s funds in the pool account shall be transferred to the MMO appointed to assume liability. In addition, the CBN may impose financial penalties against an MMO, its board of directors, officers, or agents, withhold corporate approvals, suspend defaulters from mobile money operation or even revoke a defaulter’s mobile money operation license.

Conclusion: A robust mobile money system is an essential aspect of any modern economy. Over the years, mobile money has continued to play an important role in the promotion of financial inclusion in Nigeria. The standard of living of a significant number of previously unbanked citizens has been improved as more families are able to save and manage cash flows. Mobile money reduces the need to handle raw cash and promotes commercial transactions by a significant number of citizens in the “lower to the middle class”. The CBN’s formulation of policies and rules governing this sector is therefore a step in the right direction for financial inclusion in the Nigerian economy as a holistic application of the Framework will ensure a smoother operation of the Mobile Money Sector in Nigeria.

 

 

 

[1] See Central Bank of Nigeria three-tier Know Your Customer requirements https://www.cbn.gov.ng/out/2013/ccd/3%20tiered%20kyc%20requirements.pdf Accessed on the 14 July 2021

[2] Section 18 (f) of the Framework and Guidelines on Mobile Money Services in Nigeria

[3] Section 18.0 of the Framework and Guidelines on Mobile Money Services in Nigeria

[4] Section 10.1.1 of the Framework and Guidelines on Mobile Money Services in Nigeria

DOING BUSINESS IN NIGERIA: OPTIONS FOR REPATRIATION OF CAPITAL FOR FOREIGN INVESTORS IN NIGERIA

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By Seun Timi-Koleolu and Feyijuwa Akinyanmi

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Repatriation of capital and profits is an important area of consideration for foreign investors willing to invest in the Nigerian economy. Foreign investors need assurance that their capital and the profits gained can be transferred out of the country at any time without any hassle. In our previous article, we considered the relevance of a Certificate of Capital Importation (CCI) to foreign investors in Nigeria. In this article, we will consider the ways foreign investors can structure their capital inflow into Nigerian businesses to be eligible for repatriation and the options open to foreign investors for repatriation of funds.

Ways of structuring capital Inflow
An important factor to consider when a foreign investor intends to repatriate its funds is the structure of the capital inflow, as it may determine the investor’s repatriation options in the future. A foreign investor can structure its capital inflow into a Nigerian company as equity investment(through the purchase of shares), or debt investment(through a loan to the Nigerian Company).
Please note that the capital invested in the Nigerian company may take the form of funds, goods or services. Examples of goods are equipment, plants, machinery, raw materials, which will be used by the Nigerian company for its operations. Such goods will, however, have to undergo valuation to determine the monetary value of the goods.

Options open to foreign investors for repatriation of capital

1. Repatriation through a Certificate of Capital Importation: A CCI is a certificate issued by the Central Bank of Nigeria (CBN) through an authorized dealer (a commercial bank) to a foreign investor confirming the inflow of foreign currency or goods into Nigeria for investment purposes.
Capital inflowed either as debt or equity as stated above and the related profits can be outflowed (repatriated) out of Nigeria using a CCI, as shown in the diagram below.

Please note that foreign investors who do not have a CCI would be required to source for foreign currency for repatriation, from autonomous sources as they would not be granted access to the official Nigerian Foreign Exchange Market. This process is more expensive and may be fraught with practical difficulties including the risk of breaching anti-money laundering laws.

2. Repatriation of Payments for Technology Transfer Services: Asides from repatriation through CCIs, another way foreign investors can repatriate their funds from Nigeria is by structuring the agreements for technology transfer services rendered to the Nigerian company as Technology Transfer Agreements (TTA).

TTAs are agreements that provide for the transfer of foreign technology to Nigerian parties. They include:(i)Trademark License Agreement; (ii)Technical Know-How Agreement; (iii)Management Services Agreement; (iv)Technical Services Agreement; (v)Technical Services Agreement; (vi) Consultancy Services Agreement; (vi)Software License Agreement; (vii)Franchise Agreement; (viii) Research and Development Agreement; (ix) Hotel management Agreement e.t.c.

Where foreign investors enter into a TTA with the Nigerian company, they will be required to seek the approval of the National Office for Technology Acquisition and Promotion (NOTAP) by registering the TTA with NOTAP in accordance with the National Office for Technology Acquisition and Promotion Act (NOTAP Act). The fees payable for the provision of the technology transfer services must also be approved by NOTAP.

Registration of a TTA in accordance with the NOTAP Act will enable the foreign investor to repatriate in foreign currency, any payment due to it under the TTA. Please note that NOTAP will not approve the registration of a TTA, where it is observed that the technological interest and integrity of Nigeria is not given adequate consideration in the negotiation, drafting and implementation of the TTA, or where it does not fulfil the requirements provided in the NOTAP Act. Other requirements for the registration of a TTA include:(i) provision for capacity building of Nigerians with respect to the technology in the TTA; (ii) payment of applicable taxes by the foreign company; (iii) inclusion of methods for the domestication of the technology, local raw material development, skills acquisition etc in the TTA; and (iv) evidence of registration or pending registration of the intellectual property in Nigeria (where applicable) etc.

To find out more on CCIs; registration of TTAs with NOTAP; and managing the risks foreign investments, please click on the links below.
• https://pavestoneslegal.com/foreign-investments-in-nigeria-managing-the-risks/
• https://pavestoneslegal.com/insights-on-obtaining-the-national-office-for-technology-acquisition-and-promotion-notap-approval/ 
• https://pavestoneslegal.com/doing-business-in-nigeria-the-relevance-of-the-certificate-of-capital-importation-to-foreign-investors-in-nigeria/  

 

REGULATORY REQUIREMENTS FOR OBTAINING A DIGITAL SUB-BROKER LICENCE; SEC RULES & FINTECH IN NIGERIA

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By Aderonke Alex-Adedipe and Eustace Aroh

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Over the last decade, technology has continued to disrupt the financial sector while regulators have struggled to keep up. The capital market sub-sector has not been spared as fintech companies facilitate transactions in Nigerian and foreign listed securities through digital platforms.

In a move to maintain oversight over all activities within the Nigerian capital market, the Securities and Exchange Commission (“SEC”) obtained an order from the Investment and Securities Tribunal directing Chaka Technologies Limited (a Fintech company that offers Nigerians the opportunity to purchase Nigerian and foreign quoted shares through a digital platform) to refrain from facilitating investment in securities. Consequently, on April 22, 2021, the SEC issued the Major Amendments (“Amendment”) to the Securities and Exchange Commission Rules and Regulations, 2013 (“Rules”), making significant changes to the provisions relating to Sub-Brokers.

Who is a Sub-Broker?
The Rules define a Sub-Broker as a person or company who is not a member of an Exchange but acts as an agent of a sponsoring broker/dealer or assists investors in buying and selling securities through the sponsoring broker/dealer. The Amendment now recognises that a Sub-Broker may utilize a digital platform to engage investors and interact with sponsoring brokers (“Digital Sub-Broker” or “Sub-Broker Serving Multiple Brokers Through A Digital Platform”).

In effect, Digital Sub-Brokers such as Chaka, Bamboo and Rise now fall within the ambit of the Rules and are required to be registered with the SEC, provided the requirements for registration are complied with.

What can a Sub-Broker do?
A Sub-Broker may purchase and sell securities on behalf of investors through the sponsoring broker. The Sub-Broker is required to remit any fund, certificate and warrants supplied to it by the investor to the sponsoring broker within two (2) working days of receipt.

What are the obligations of a Sub-Broker?

Records of transactions
Under the Rules, a Sub-Broker is required to keep adequate records of transactions for and on behalf of investors. The records should include: (i) the mandate form; (ii) proof of payment for the purchase of shares; (iii) all communications with the investors, amongst others.

Risk Management

Specifically, all Digital Sub-Brokers are required to implement a risk management practice which includes the implementation of the following:

  1. procedures and controls to monitor and test the algorithms on a regular basis;
  2. internal policies to address technology risks;
  3. adequate cyber-security mechanism;
  4. an anti-money laundering/combatting financing of terrorism (AML/CFT) policy in line with applicable regulation;
  5. operational and technical controls systems to manage the risks;
  6. ensuring that all electronic communication is digitally signed, encrypted and secured with a backup stored in soft and secured form;
  7. a complaint management policy in compliance with SEC Rules; and
  8. complying with the SEC technology risk guidelines, amongst others.

What are the requirements for obtaining a Digital Sub-Broker license?
In addition to fulfilling all the requirements applicable to a Sub-Broker, Rule 67(4) of the Rules, specifically contains provisions that are clearly tailored towards fintech businesses. Some of the requirements for obtaining the Digital Sub-Broker license include:

  1. providing a detailed description of the technology infrastructure to be used by the proposed Sub-Broker;
  2. evidence of adequate KYC processes in respect of investors;
  3. evidence of notice of potential risks and obligations of parties issued to investors; and
  4. evidence of minimum paid-up capital of Ten Million Naira and current fidelity insurance bond covering twenty per cent (20%) of the minimum paid-up capital.

Conclusion
The development of fintech in Nigeria has provided the average Nigerian with multiple investment opportunities within the capital market sub-sector and consequently, required regulators such as SEC to provide adequate protection for investors through regulation. This effort is indeed commendable. Chaka Technologies Limited became the first company to obtain the Digital Sub-Broker licence as announced in its public statement of June 23, 2021.
In anticipation of continuous innovation and disruption, a holistic review of the SEC Rules to include, where applicable, provisions permitting digital involvement is advised. In addition, an integration of all current amendments into the Rules will prove most helpful and unambiguous to investors seeking to penetrate the Nigerian market.