Business

CBN warns banks over relationship with politically exposed persons

Published

1 year ago

June 24, 2023

THE CBN’s ARROW ON CARRY-TRADE. By: Victor Ogiemwonyi Last week, the CBN issued a circular in respect of FX collateral for Naira Loans, to the effect that it has now expressly forbidden the use of FX as collateral for Naira Loans. Banks that already are exposed, have been directed to wind down their positions in 90days. This circular, again confirms that, there is a lot of solid thinking going on at the CBN. Carry-Trade , is what is referred to, when you bring FX to trade in another jurisdiction by taking a loan in the local market and collateralizing it with FX deposit. It purely signifies that the investment is short term and only aimed at making a profit. The CBN has used high interest rates to attract investors to its instruments, but want to make it clear, that they will not allow unrestrained speculation. The policy is Excellent in its timing to be sure, to the extent that It will mitigate the speculative capital that can affect an economy quickly. We have seen the destructive impact of currency speculation evidently in Asian Financial crisis in 1997, when speculators took on the Thailand’s currency, the Bhat and the Malaysia currency, the Ringgit with economic consequences so severe, that it prompted Mr Mahathir Mohammad , the then prime minister of Malaysia to call Billionaire George Soros a moron. He explains …..” we spent years developing our economy, that has helped many rise, to the middle class, and a moron like Soros, comes around and ruins everything" Soros responded by describing Mr. Mohammad as “a hindrance to his country” …Soros and other Currency Speculators, say they are a “force for good “ in a market economy, given that their activities ensure bad economic policies, propping up weak currencies are not allowed to stand. They argue that their speculation makes economies competitive. Regardless of the economic logic for and against speculation, countries like Nigeria should be prepared. They have learnt from the Asian crisis and will ensure Speculators are aware, that Nigeria is watching their activities. The recent notice from the CBN points to this. The 90 days given to Nigerian Banks, to wind -down the loans, is also an appropriate time frame to wind down these loans. Most of the loans are already short term in nature, any way. The Carry-Trade, is also a structured speculative trade. It is one, of the ways to speculate in currencies and other market assets, legally. It starts with pairing two interest rates and taking position in currencies and other market assets. If this practice is not checked early, it can become a contagious problem that can create bubble capital rapidly, from Speculative bets. This is commonly referred to as “ Hot Money”.That is the capital that leaves without notice. We cannot , afford such speculative trading now. Let us settle the money already in the system, while we carry on with other reforms quickly, to increase our attractiveness as a destination for investment. The foregoing not withstanding, we must also point out that speculative Capital is not all bad. It is like taking a short term loan, to tidy up your position. Foreign portfolio investments of this type, provides the immediate liquidity that is needed to fund the FX market, that gets the economy going, while we work to restart properly. We must quicken our reform efforts, to make our economy attractive to attract more Foreign Capital. We already have an attractive large market with our huge population. Further investment in Health and Education, with attention to our energy infrastructure and security , will greatly advantage, our population . We will also need to give our youths the technical skills, to make them more employable. Only strong growth, will ensure full employment. We will need double digit growth in the next decade to ensure this, and make our economy attractive. This is why the current high interest rates, need to come down quickly, once the CBN achieves its objective , of mopping up the excess liquidity in the system, and restoring fair stability for the Naira. The Africa Continental Free Trade Agreement (ACFTA) is a gift to Nigeria, if we know what to do with it. We have a potential to substantially increase our exports and reduce our imports, as we manufacture more of what we need. We must sincerely push our Agriculture to produce more, for our own consumption ,and for exports . We have all the God given comparative advantages, good soil, huge population and a deep market, that provides the incentives. As we become more productive overall, the Naira will get stronger. We have just passed a milestone that many are yet to take notice of: we have allowed the Naira to find its value, even in a down economy. The Naira found support at N1900. That means, in the short run, that is the worse we can expect the Naira to dip. The CBN is also now, preemptively and intelligently signaling price, through the funding of the Bureau De Change market, which is essentially the Black Market. We expect Companies who genuinely need FX, to now be able plan for it. Victor Ogiemwonyi is a retired Investment Banker, and writes from ikoyi, Lagos

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The Central Bank of Nigeria (CBN) has issued a new warning to banks and other financial institutions regarding their business relationships with Politically Exposed Persons (PEPs).

CBN said the banks and other financial institutions should apply a risk-based approach to identifying Politically Exposed Persons and apply appropriate Enhanced Due Diligence (EDD) measures when dealing with them.

In a document titled, ‘GUIDANCE NOTES ON POLITICALLY EXPOSED PERSONS’, which was issued to banks on June 22, 2023, but obtained on Saturday, the CBN said the enhanced due diligence is necessary due to the PEPS exposure to corruption.

The apex bank also listed exposure to money laundering, financing of terrorism and proliferation financing (ML/FT/PF) as some of the reasons the banks must apply the EDD and the Customer Due Diligence (CDD).

According to the CBN, PEPS could pose reputational and financial crime risks to banks and other financial institutions due to their political office.

“Politically Exposed Persons (PEPs) who may be vulnerable to corruption thus may portend reputational and financial crime risks to the FI. PEPs pose a high risk of money laundering, financing of terrorism and proliferation financing (ML/FT/PF) due to the possibility that individuals holding such positions may misuse their power and influence for personal gain or advantage to themselves, close family members and/or associates,” the document reads.

In its definition of a PEP, the CBN explained: “PEPs who are or have been entrusted with prominent public positions in Nigeria are known as “Domestic PEPs”.

“PEPs who are or have been entrusted with prominent public positions in any other foreign jurisdiction are known as “foreign PEPs”.

“PEPs who are or have been entrusted with the management or any prominent function within an international organization are known as “International Organizations PEPs”

“Close associates of PEPS: are individuals who are closely connected to a PEP, either socially or professionally and include a PEP’s widely- and publicly known close personal friends, business colleagues, and personal advisors. Close associates also include persons having joint or ownership right in a legal person or arrangement established in favour of a PEP.

“Family members of PEPS: include a PEP’s direct family members, their spouse, their children and their spouses, their parents, and the siblings.”

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Despite the high risk, the CBN informed the banks and other financial institutions not to prevent or close their business relationships with a customer on the grounds of the person being politically exposed.

Aside from direct requests for information from the PEPs, the CBN urged banks to conduct a third-party search by tracking the PEPs on the Internet or media.

“FIs may use the internet and media as sources of information for the determination, monitoring, verification of information in relation to PEPs, although it should be noted that such information may not be comprehensive or reliable,” the CBN suggested.

“Consequently, the CBN issues this Guidance in line with CBN AML/CFT/CPF Regulations 2022, FATF Recommendations, FATF Guidance on PEPs (2013) and Wolfsberg Guidance on PEPs (2017), to assist FIs in the identification and management of risks associated with PEPs.

“This Guidance provides minimum standards for FIs in their relationships with PEPs and does not limit measures to be taken by FIs to meet their statutory obligations. The Guidance Notes will be revised from time to time, as necessary,” the apex bank noted.