CBN Clamps Down on FX Rules Violators after Forensic Audit
The Central Bank of Nigeria has concluded a forensic audit into undelivered foreign exchange forward contracts and is now reviewing appropriate legal action against violators of FX rules and regulations.
The CBN announced that it will work with law enforcement and regulatory agencies to pursue civil, administrative, or criminal sanctions where necessary, based on findings from the audit. This development was contained in a document titled ‘Frequently Asked Questions (FAQ) on the Settlement of Undelivered Forward Contract’, published on its website.
According to the apex bank, banks and their clients have been directed to ensure proper documentation, comply strictly with FX regulations, and submit only valid transactions for settlement. While the CBN remains committed to honouring all legitimate obligations, it emphasised that all transactions must align with existing rules to preserve the integrity of the FX market and protect the nation’s reserves.
In a bid to promote market discipline and fairness, the CBN had in September 2023 appointed Deloitte to carry out a comprehensive forensic audit of all transactions under the Retail Secondary Market Intervention Sales (RSMIS), including undelivered forward contracts. The audit was designed to verify the legitimacy and compliance of each transaction, ensuring they met both contractual and regulatory requirements.
The audit process involved detailed reviews of contract documentation, trade confirmations, import/export records including Form M and Customs data, and compliance with all relevant CBN circulars. The audit uncovered significant irregularities and infractions in the execution of several forward contracts. These findings were based on objective and verifiable data, and affected counterparties were given a chance to respond before final decisions were made to invalidate certain contracts.
Some of the specific reasons for contract invalidation included discrepancies in company names between approved sales results and Form M entries, sales values exceeding demand or import cost, importation of non-permissible items such as milk by unauthorised companies, incorrect or blank Forex Forms, vague or missing item descriptions, and instances of FX sales without actual demand. In all such cases, the CBN reiterated that no right to FX settlement arises where the underlying transaction is tainted by illegality, misrepresentation, or regulatory non-compliance.
While all valid and verified contracts have been honoured and payments made accordingly, the invalid ones were cancelled, and no FX settlements were carried out on them. In such cases, Naira deposits previously received from the counterparties were returned. The CBN confirmed that it is engaging with law enforcement agencies to determine further actions in instances involving potential fraud or abuse of the FX system.
The apex bank explained that paying invalid contracts would have encouraged rule-breaking and led to unnecessary depletion of Nigeria’s FX reserves. Upholding such transactions would have contravened the bank’s statutory responsibilities and exposed it to potential legal risks and a loss of public confidence.
On whether banks or counterparties can appeal the audit outcome, the CBN stated that the audit was conducted by an independent expert, Deloitte following a transparent and fair process. Authorised dealer banks were contacted and given the opportunity to explain the identified infractions before final decisions were made. Therefore, the matter of undelivered forward contracts is now considered concluded and closed.
Going forward, the CBN reaffirmed its commitment to strengthening due diligence, ensuring strict compliance with documentation requirements, and enhancing transparency and accountability in forward contract settlements. It maintained that future contracts must meet all legal and regulatory standards to qualify for settlement.
A foreign exchange forward contract is an agreement between two parties to exchange a specified amount of currency at a predetermined rate on a future date. In these transactions with the CBN, counterparties typically paid Naira upfront in exchange for future delivery of US Dollars. The CBN clarified that any such contract may be cancelled if found to be based on fraud, misrepresentation, lack of proper documentation, or breach of regulatory guidelines.