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A raft of new legislature designed to tackle money laundering and terrorist financing signifies a big change for the financial services market. James King reports.

Nigeria’s anti-money laundering and combating the financing of terrorism (AML/CFT) framework has been transformed in recent weeks, as a raft of new legislation, along with fresh guidance from the country’s central bank, has shaken up the decade-old system of existing rules. For Nigerian financial institutions, these changes will have profound implications, as the costs and complexity of operating in Africa’s largest economy both increase.

On May 12, 2022, Nigerian president Muhammadu Buhari signed into law three separate acts designed to tackle money laundering and terrorist financing. These included the Money Laundering (Prevention and Prohibition) Act, the Terrorism (Prevention and Prohibition) Act and the Proceeds of Crime (Recovery and Management) Act. The Money Laundering Act will have the most far-reaching consequences for financial services firms, as it replaces earlier legislation first published in 2011.

“The new AML law that was passed in May has tightened — rather strictly in a number of different places — the old AML law that it repealed,” says Dayo Okusami, partner with Nigerian law firm Templars.

In particular, the Money Laundering Act introduces prohibitions against the “splitting” of transactions, whereby individuals and corporate entities split payments to keep the value of a transaction below regulatory reporting requirements. As a result, it is no longer possible to execute two or more transactions to the same beneficiary — either a financial institution or designated non-financial business — in an effort to evade reporting requirements.

“The authorities have identified a loophole, in this case transaction splitting, and they’ve placed an obligation on financial institutions and designated non-financial businesses to close it,” says Mr Okusami.

Significant difference

The obligations on relevant institutions do not end there. New requirements include the need to identify and verify customers, to put in place appropriate risk management mechanisms for politically exposed persons, and to evaluate new business products and technologies for money laundering and terrorist financing risks.

Meanwhile, one of the biggest changes has seen the termination of attorney-client privilege rights in relation to the acquisition or sale of property or business, and managing client money, among other transactions. “This represents a drastic change for the Nigerian market,” adds Mr Okusami.

The new Money Laundering Act also expands the definition of property to include virtual assets, such as cryptocurrencies and non-fungible tokens. This comes amid a period of regulatory uncertainty for digital assets in Nigeria, after the Central Bank of Nigeria (CBN) prohibited banks and financial institutions from enabling transactions with cryptocurrencies last year. More recently, in May 2022, the Nigerian Securities and Exchange Commission (SEC), the financial markets regulator, published new rules permitting some digital asset-related activities.

“In my opinion, we are happy to be regulated,” says Daluchi Iweanya, a compliance professional in Lagos. “What is not clear currently is that the SEC is releasing regulations at a time when the CBN has a ban on cryptocurrency. Will the SEC and CBN agree to have a unified approach? This is the key question. That handshake [between the two regulators] really has to happen.”

Digital tools needed

Meanwhile, the CBN has also taken steps to enhance the country’s AML/CFT system through the publication of a guidance note relating to ‘other financial institutions’, such as microfinance banks, at the end of May. The note makes clear that an institution’s internal AML/CFT controls should match the size and sophistication of its business, while minimum standards are also introduced with respect to efforts to combat money laundering and terrorist financing, including risk management policies and monitoring systems.

Nigerian microfinance groups have enjoyed an explosive growth trajectory in recent years by tapping into a large underbanked population. Yet, some of these institutions lack the capabilities and expertise to deploy strong AML/CFT measures. “Most microfinance banks in Nigeria rely on manual processes in terms of their approach to AML/CFT due to resource constraints, both financial and human resources, and an experience gap [relative to] commercial banks,” says Ms Iweanya.

The transformation of Nigeria’s AML/CFT framework could lead to significant market changes over time. For one, the increasing cost of compliance is likely to hit smaller market players hard. Meeting these new regulatory requirements will require higher spending on both technology and human capital, leaving some exposed to a rising tide of AML/CFT related expenditures. As a result, consolidation may be on the cards.

“Some newer financial institutions may struggle with the need to conduct AML/CFT risk assessments on their products because of their focus on market penetration and the limited regulatory oversight. I believe that eventually, when we have adequate regulatory oversight in this sector, and compliance is effectively enforced on all, we may see many players being forced to merge to achieve compliance, a consolidation like that of the banking sector in 2005,” says Ms Iweanya.

Nevertheless, as Nigeria’s economy matures, the need to enhance its AML/CFT framework has become urgent. In 2019, the Intergovernmental Action Group against Money Laundering, a regional body affiliated with the Economic Community of West African States, noted that the country’s existing system to combat money laundering/terrorist financing threats was “averagely effective”. If Nigeria is to live up to its potential as a key economic and political power, its approach to AML/CFT must be better than average.

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