Enhancing Financial Inclusion: Telecoms and AML in Nigeria
18 Apr 2019

The rapid development of mobile money is creating unprecedented opportunities for poor people in developing countries to more actively participate in the economy. For millions of underserved individuals around the world, a mobile phone represents more than just a tool for communication; it’s a payment terminal in the pocket.

Every day, the number of mobile device—and mobile money—users grows and offers hope to the billions of people without bank accounts.[1] Mobile banking could be defined as a facility which provides banking services such as balance enquiry, funds transfer, bill payment, and transaction history via a user’s mobile phone.[2]

One of the biggest challenges to enabling the growth of mobile money and the digital finance ecosystem is designing cost-effective customer due diligence (CDD) procedures that enable universal access to mobile money services while preserving the integrity of the financial system. For the regulator, this means designing anti-money laundering and combating the financing of terrorism (AML/CFT) requirements that mitigate the risk of abuse of mobile money while still allowing customers to access and use these services safely and easily.

Many low-income customers face barriers to financial services because they are unable to prove their identity through traditional means. They may live in a country that does not provide national identification documents (IDs), or they may be deprived of services where the costs of conducting CDD are too high, such as in remote areas where electricity is not available. Proportional controls are key to mitigating the risk of criminal activity on the mobile money platform while balancing the dual objectives of financial integrity and financial inclusion.[3]

In an effort to expand financial inclusion and strengthen the mobile money segment of Nigeria’s information and communications technology (ICT) sector, the Central Bank of Nigeria (CBN), and the Nigerian Communications Commission (NCC), signed a Memorandum of Understanding (MOU) on digital payment systems with both parties agreeing to jointly implement a payment systems framework.[4]

The MOU came on the heels of a central bank finding that the financial inclusion rate in Nigeria lower than expected. CBN reached that conclusion after the launch of several initiatives meant to address the issue, including the introduction of microfinance banking, agent banking, tiered know-your-customer requirements and mobile money operation (MMO).

The bank has prioritized ensuring that 80 percent of the bankable adults in Nigeria have access to financial services by 2020.[5]In 2016, 58.4 percent of Nigeria’s 96.4 million adults were financially served, leaving 41.6 percent financially excluded. Of those individuals who had access to financial services, only 48.6 percent utilized “formal” financial firms—a far cry from CBN’s 80-percent goal for 2020.

In line with the MOU on digital payment systems, the central bank issued guidelines for licensing, regulation and operation of payment service banks (PSBs)—e.g., banking agents, telecommunications companies, retail chains and mobile money operators in the country. The focus of this paper is on telecommunications companies.

CBN’s director, Kevin Amuga, said the guidelines were in furtherance of the bank’s effort to leverage technology to promote financial inclusion, enhance access to financial services for the rural poor, low income earners and financially excluded.[6]

Presently, the major telecommunication companies operating in Nigeria are Airtel, 9mobile, Globacom and MTN. Airtel has 44,970,973 subscribers in Nigeria, 9mobile has 16,385,317 subscribers, Globacom has 45,603,638 subscribers and MTN has 66,665,378 subscribers.[7]

The following research question explores how the right balance can be found:

How can telecommunications companies craft AML/CFT measures that meet the goal of financial inclusion without making the financial sector more vulnerable to criminality?

Bank verification numbers

Telecommunications companiesare required to submit a formal application for the grant of a PSB licence addressed to the Governor of the Central Bank of Nigeria.[8] The application is to be accompanied with a detailed business plan or feasibility report that will, at a minimum, include the Bank Verification Number (BVN) and Tax Clearance Certificate of each member of the board and significant shareholders.[9] A significant shareholder is a person with an interest of 5 percent or more.[10]

Under the program, accountholders are expected to register for BVNs using biometric software that assigns depositor a unique identity that can be verified at any bank where the customer has accounts. The purpose of the project is to use biometric information as a means of first identifying and verifying all individuals that have accounts in Nigerian banks and subsequently using the technology to authenticate future transactions.

As part of onboarding, a customer must go to any of the bank’s branches with a valid means of identification, fill out a Bank Verification Number Enrolment Form and enroll in the biometric ID program. Thereafter, an acknowledgment slip with the transaction ID will be issued to the customer. Within 24 hours, the system confirms the enrolment and a unique BVN is generated. The customer will immediately receive an SMS notification with the Bank Verification Number. Customers are expected to submit their BVN to their bankers for linkage to all their accounts.[11]

The project will help to identify all the bank accounts of board members and significant shareholders of telecommunications companies, thereby enabling the central bank to determine the exact amount of funds owned by the individuals and investigate any signs of illicit financial activity.

But while the project has much to commend, it fails to capture shareholders who own less than 5 percent of a company. This loophole potentially allows corrupt individuals seeking to circumvent the disclosure to circulate their shares friends or family members while still retaining control in the firm.

The “fit and proper” test

Knowing your employees is as important as knowing your clients, even in the telecommunications sector.[12] That concern is perhaps echoed by the central bank’s decision to bring telecom firms under the purview of the Approved Persons’ Regime for Financial Institutions 2015.

Under the regime, only “fit and proper persons” are approved for appointment to board and top management positions in banks and other financial institutions. The regulation sets baseline standards for candidates occupying or intending to occupy the under-listed board and senior/top management positions in Nigerian banks, discount houses, development finance and other financial institutions.

Fitness tests assess the competence of candidates for such positions, including their capacity to fulfill their job responsibilities, while propriety tests assess their integrity and suitability.

What this means is that any senior-level manager and shareholders with 5-percent stakes or higher must pass the fit-and-proper test before being granted a Payment Service Bank licence. This measure is in line with the approach adopted by the United Kingdom in the Payment Services Regulations 2017 and the Electronic Money Regulations 2011.

A condition for authorisation under both the United Kingdom Payment Services Regulations 2017 and the Electronic Money Regulations 2011 is that the applicant must satisfy the Financial Conduct Authority (FCA) that individuals a qualifying holding are fit-and-proper persons who understand safety and soundness needs. To do this, applicants must inform the FCA of individuals or entities with qualifying holdings and permit the authority to assess the stakeholders.

Background screening of candidates occupying or intending to occupy the under-listed board and senior/top management positions is essential, specially for criminal history. Used effectively, the pre-employment background screenings can reduce turnover, deter theft and embezzlement, and prevent litigation over hiring practices.

Despite the advantages of fit-and-proper tests, there have been damning reports that some politicians are using fraudsters working in banks to launder public funds. According to the Chairman of the Economic and Financial Crimes Commission, Ibrahim Magu, criminals have been aiding politically exposed persons and others to commit various financial crimes.[13] This revelation epitomises systemic failure aggravated by the Central Bank of Nigeria’s weak regulation.

Whistleblowing policy

Under Paragraph 7.1 of the central bank’s Guidelines for Licensing and Regulation of Payment Service Banks, its Code of Corporate Governance for banks applies to telecommunications companies as well.

For the purpose of this paper, the focus will be on Paragraph 5.3 of the Central Bank of Nigeria Code of Corporate Governance for Banks and Discount Houses in Nigeria, 2014, which requires covered entities to have whistleblowing policies known by employees and stakeholders alike. The policies must assure confidentiality and encourage stakeholders to report unethical activity to their firms and/or the Central Bank of Nigeria.

For telecom companies, this means that they must implement whistleblower programs in order to obtain a Payment Service Bank licence. Such programs strengthen AML programs by ensuring that employees have a means to report malfeasance by senior staff, such as failures to report suspicious activity or currency transactions.

Whistleblowing reports filed by an employee of a telecommunications company would assist tremendously in tracing and identifying illicit assets, but there have been concernsover the number and quality of such reports submitted by the financial sector in Nigeria. The absence of financial incentives may have a role to play in this.

Minimum capital requirements

Under CBN guidelines, telecommunications firms that would improve financial inclusion must have a minimum capital deposit of N5 billion.[14] Although the CBN requires proof of deposit when firms apply for an Approval in Principle, the central bank can provide a provisional PBS licence to subsidiary of the telecom company.

Telecommunications companies that have indicated interest in driving the financial inclusion plans of the Federal Government are MTN, Airtel, 9mobile, Ntel, and Globacom[15], all of which are large corporations.[16] Smaller institutions have yet to signal an interest in licensing, likely because they cannot afford the capital deposits. While this could have a negative impact on Nigeria’s financial inclusion goals, it is likely to have a relatively small effect, since the larger telecommunications companies cover the majority of Nigerians.

Know-your-customer (KYC) obligations

Telecommunications companies are required to adopt a risk-based approach with regard to KYC obligations while ensuring that every customers has complied with KYC standards. Under AML rules, firms must monitor relevant accounts for suspicious transactions and report such transactions to the appropriate agency.[17]

The so-called “three-tiered” KYC approach introduced by CBN[18] seeks to implement flexible account opening requirements for low-value and medium-value accountholders subject to caps and transaction restrictions. This means that account opening requirements will increase progressively with less restrictions on operations. However, the main objective of the approach is to promote and deepen financial inclusion.[19]

The structure ensures that the accounts remain attractive to customers of different socio-economic levels while close watch is kept on the risks involved.[20]

Low-value accounts, for example, are subject to close monitoring by the financial institutions but less scrutiny by bank examiners. The accounts can be opened at branches of financial institutions by the prospective customer or through banking agents. No amount is required for opening of accounts. Such accounts cover mobile banking products issued in accordance with the Central Bank of Nigeria Regulatory Framework for Mobile Payments Services in Nigeria.

Conclusion

This paper critically analysed the Central Bank of Nigeria’s guidelines for the licensing, regulation and operation of telecommunications companies to determine that the Financial Inclusion and Anti-money laundering Strategy for telecommunications companies could achieve its desired objective if the following recommendations are implemented:

    • Paragraph 6.1 of the Central Bank of Nigeria Guidelines for Licensing and Regulation of Payment Service Banks should be modified to mandate that the detailed business plan or feasibility report of telecommunications company must include the Bank Verification Number of all shareholders of the company. This measure would help to prevent a situation where a corrupt individual with just 2 percent of the company’s shares connives with other friends and family to control a greater stake in the firm.
    • The Central Bank of Nigeria’ Revised Assessment Criteria for Approved Persons’ Regime for Financial Institutions 2015 should be further revised to allow for ongoing screening for specific positions in telecommunications companies, as circumstances change, or for a comprehensive review of departmental staff over a period of time. Telecommunications companies should have a policy that mandates that the lie detector test should be taken once every five years by all staff of the company. For staff in very sensitive positions, the lie detector test should be taken every three years.
    • The Central Bank of Nigeria should ensure that telecommunications companies are subject to adequate regulation and supervision and are effectively implementing the Financial Action Task Force (FATF) recommendations. CBN is strongly advised to enforce its regulations and punish errant banks/telecommunications companies so as to discourage their serial abuse of guidelines for the financial sector.
    • Paragraph 5.3 of the CBN Code of Corporate Governance for Banks and Discount Houses in Nigeria 2014 should be modified to mandate financial institutions and telecommunications companies to expressly prohibit retaliation by employers against whistleblowers and provide them with a private cause of action in the event that they are discharged or discriminated against by their employers. Alternatively, the whistleblowing policy could offer incentives to encourage whistleblowing in the financial sector.
    • Paragraph 6.6 of the Central Bank of Nigeria Guidelines for Licensing and Regulation of Payment Service Banks should be modified to allow for flexible capital requirements that are proportional to the size of the issuer. This is the approach adopted in Japan, and it is an approach that would improve financial inclusion in Nigeria.

 

About the author: Ehi Eric Esoimeme is the Deputy Editor-in-Chief of DSC Publications Ltd and a KYC360 contributor. His published works include The Risk-Based Approach to Combating Money Laundering and Terrorist Financing and Deterring and Detecting Money Laundering and Terrorist Financing: A Comparative Analysis of Anti–Money Laundering and Counterterrorism Financing Strategies. For more information on Ehi’s books, visit here.

This article is expressing personal opinions and is meant for information purposes only. The article does not intend to replace professional or legal advice. It is recommended that readers seek independent professional or legal advice, or speak to authorised persons/organisations.

Photo: GodwinPaya [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)]

REFERENCES:

[1]Chatain, P. L., Zerzan, A., Noor, W., Dannaoui, N., and Koker, L. D. (2011), ‘Protecting Mobile Money against Financial Crimes: Global Policy Challenges and Solutions’, Available at: http://documents.worldbank.org/curated/en/854951468337169489/pdf/600600PUB0ID181Mobile09780821386699.pdf(accessed 17th of March, 2019).

[2]Dr. Agwu, E. M. & Dr. Carter, A. L. (2014), ‘Mobile Phone Banking in Nigeria: Benefits, Problems and Prospects’, International Journal of Business and Commerce, Vol. 3, No.6: Feb 2014[50-70].

[3]Castri, S. D., Grossman, J. and Sihin, R. (2015), ‘Proportional risk-based AML/CFT regimes for mobile money: A framework for assessing risk factors and mitigation measures’, Available at: https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2015/10/Proportional-risk-based-AMLCFT-regimes-for-mobile-money.pdf(accessed 6 April, 2019). See also the Financial Action Task Force (2013), ‘FATF Guidance: Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion’, Available at: http://www.fatf-gafi.org/media/fatf/documents/reports/AML_CFT_Measures_and_Financial_Inclusion_2013.pdf(accessed 3 April 2018).

[4]The Guardian (2018), ‘NCC, CBN sign MoU on mobile money, financial inclusion’, Available at: https://guardian.ng/business-services/ncc-cbn-sign-mou-on-mobile-money-financial-inclusion/(accessed 30 March, 2019).

[5]Central Bank of Nigeria (2018), ‘National Financial Inclusion Strategy (Revised)’, Available at: https://www.cbn.gov.ng/Out/2019/CCD/NATIONAL%20FINANCIAL%20INCLUSION%20STRATEGY.pdf(accessed 30 March, 2019).

[6]Premium Times (2018), ‘CBN issues guidelines for licensing, regulation of payment service banks’, Available at: https://www.premiumtimesng.com/business/business-news/293746-cbn-issues-guidelines-for-licensing-regulation-of-payment-service-banks.html(accessed 30 March, 2019).

[7]Nigerian Communications Commission (2019), ‘Market Share by Operator (GSM) (January 2019)’, Available at: https://www.ncc.gov.ng/stakeholder/statistics-reports/industry-overview#view-graphs-tables-2(accessed 7 April 2019).

[8]The Central Bank of Nigeria Guidelines for Licensing and Regulation of Payment Service Banks 2018, para. 6.0.

[9]The Central Bank of Nigeria Guidelines for Licensing and Regulation of Payment Service Banks 2018, para. 6.1.

[10]The Central Bank of Nigeria’ Revised Assessment Criteria for Approved Persons’ Regime for Financial Institutions 2015, para. 7.0.

[11]Central Bank of Nigeria (2018), ‘Bank Verification Number’, Available at: https://www.cbn.gov.ng/Paymentsystem/BVN.asp(accessed 6 April 2018).

[12]SSA ZAIDI (2015), ‘Banks need to follow Know Your Employees norms for robust internal AML control systems’, Available at: https://www.moneylife.in/article/banks-need-to-follow-know-your-employees-norms-for-robust-internal-aml-control-systems/44095.html(accessed 15 February 2018).

[13]The Punch (2019), ‘Fraudsters working in banks, aiding corrupt politicians –EFCC’, Available at: https://punchng.com/fraudsters-working-in-banks-aiding-corrupt-politicians-efcc/(accessed 6 April, 2019).

[14]The Central Bank of Nigeria Guidelines for Licensing and Regulation of Payment Service Banks 2018, para. 6.6.

[15]The Punch (2018), ‘Mobile money: CBN requests N5bn capital investment from telcos’, Available at: https://punchng.com/mobile-money-cbn-requests-n5bn-capital-investment-from-telcos/(accessed 5thof April, 2019).

[16]Presently, the major telecommunication companies operating in Nigeria are Airtel, 9mobile, Globacom and MTN. Airtel has 44,970,973 subscribers in Nigeria, 9mobile has 16,385,317 subscribers, Globacom has 45,603,638 subscribers and MTN has 66,665,378 subscribers.

[17]The Central Bank of Nigeria Guidelines for Licensing and Regulation of Payment Service Banks 2018, para. 11.1.

[18]CBN (Anti-Money Laundering and Combating the Financing of Terrorism in Banks and Other Financial Institutions in Nigeria) Regulations, 2013, Regulation 45 (1); Central Bank of Nigeria (2013), ‘Circular to all Banks and other Financial Institutions: Introduction of Three-Tiered Know Your Customer (KYC) Requirements’, Available at: https://www.cbn.gov.ng/out/2013/ccd/3%20tiered%20kyc%20requirements.pdf(accessed 10 April 2018).

[19]CBN (Anti-Money Laundering and Combating the Financing of Terrorism in Banks and Other Financial Institutions in Nigeria) Regulations, 2013, Regulation 45 (1); Central Bank of Nigeria (2013), ‘Circular to all Banks and other Financial Institutions: Introduction of Three-Tiered Know Your Customer (KYC) Requirements’, Available at: https://www.cbn.gov.ng/out/2013/ccd/3%20tiered%20kyc%20requirements.pdf(accessed 10 April 2018).

[20]Central Bank of Nigeria (2013), ‘Circular to all Banks and other Financial Institutions: Introduction of Three-Tiered Know Your Customer (KYC) Requirements’, Available at: https://www.cbn.gov.ng/out/2013/ccd/3%20tiered%20kyc%20requirements.pdf(accessed 10 April 2018).

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