Nigeria is one of five African countries worst affected by Illicit Financial Flows (IFF). It is estimated that the country loses between USD 15 billion to USD 18 billion in such flows every year. While there is stringent legislation in place governing foreign financial flows this has clearly not been enough to curb these illegitimate cross-border flows. With Nigeria’s foreign exchange reserves under pressure this has serious implications for the country’s development. How can IFFs be tracked and measured to ensure that legislation is being fully implemented and capital controls are transparent? Which methods are used by some investors to illegitimately access the Autonomous Foreign Exchange Market without limit? Which role do banks play issuing supporting documentation to investors who are acting in breach of legislation?
Illicit Financial Flows (IFF) have been defined as illegitimate cross-border flows that are based on an abuse of power which cause harm to a society. It refers to the movement of money across borders that is illegal in its source, transfer or use. It can also be in relation to trade flows or capital flows.
The Central Bank of Nigeria (CBN) is the government agency responsible for monitoring and supervising the foreign exchange market in Nigeria. It is empowered to issue regulations and guidelines to market participants and financial institutions. The CBN regulates the Autonomous Foreign Exchange Market through which transactions eligible for the purchase and sale of foreign exchange are conducted.
The regulatory framework for the importation of capital is broad and designed to promote the free movement of capital. Any person may make a foreign capital investment in any enterprise or security within Nigeria by importing foreign capital into Nigeria through an Authorized Dealer (which include institutions with a banking license that are regulated by the CBN). Such investments can be in the form of equity, loan capital or direct investments in raw materials or machinery. There are however laid out requirements in relation to the importation of capital to prevent exploitation.
In order to import capital into Nigeria investors need to request a Certificate of Capital Importation (CCI) including the provision of adequate supporting documentation. The CCI also allows investors to repatriate unlimited amounts of money from Nigeria. This right is not tied to a minimum amount of investment. It is therefore important that the process of issuance of CCIs is carefully monitored and supervised.
The issuance and use of CCIs is predominantly managed at individual bank levels. Banks who have been authorised by the CBN have employees responsible for issuing CCIs as well as making remittances out of the country on the basis of such CCIs. The CBN attempts to supervise this process and has the power to impose sanctions on banks who: a) release funds based on forged documents; b) engage in fraudulent transactions; c) fail to furnish accurate returns when due; or d) fail to report defaulting customers to the CBN for appropriate action.
Despite the powers of and the checks that have been put in place by the CBN, it appears that the system is being manipulated in an attempt to repatriate funds illegitimately outside the country.
Dr Pallavi Roy (SOAS-ACE, SOAS University of London) and Dr Simeon Obidario (School of Law, SOAS University of London).