FX forward contracts: CBN reviewing legal actions against defaulters

By Elizabeth Adegbesan

The Central Bank of Nigeria, CBN, said it is still reviewing legal actions against violators of rules and regulations binding foreign exchange (FX) forward contracts.

The apex Bank disclosed this today in a Frequently Asked Questions and Answers on settlement of undelivered forward contracts.

“Is any legal action being taken against those parties deemed to have breached rules?

“The CBN is reviewing appropriate legal action against parties found to have violated applicable rules and regulations, based on the findings of the forensic audit.

“The Bank will collaborate with law enforcement and regulatory agencies to pursue civil, administrative, or criminal sanctions, as necessary.”

According to the Bank , a FX forward contract is an agreement between two parties to exchange a specified amount of one currency for another at a predetermined exchange rate on a future date.

CBN noted that a FX contracts can be nullified or cancelled under conditions like

Fraud or misrepresentation, lack of proper documentation, illegality or breach of law, and regulatory non-compliance or violation of applicable CBN circulars or FX guidelines, which render the contract void or unenforceable.

These are discovered by a forensic audit assigned to review contract documentation and trade confirmations; verifying underlying trade transactions (e.g., import/export documentation, Form M, shipping and Customs records); confirm that contracts complied with applicable CBN circulars and FX market guidelines; and Ensure that beneficiaries were genuine and eligible counterparties.

CBN also noted that the forensic audit uncovered significant irregularities in the execution of some of the foreign exchange forward contracts based on objective and verifiable data, and that all affected counterparties were given an opportunity to respond before final decisions invalidating these contracts

were made.

“Invalid contracts were cancelled in line with audit findings.

“ No FX payments were made on these contracts, as they did not meet the required standards for settlement, as noted in point 8 above.

“The Naira previously received from counterparties in respect of these invalid contracts has been returned.

“The CBN is currently engaging with law enforcement authorities to determine appropriate action in cases involving potential fraud, misrepresentation, or abuse of the FX system”, CBN added.

The regulator explained that paying invalid contracts would have rewarded non-compliance, encouraged abuse of the FX system, and unnecessarily depleted the nation’s FX reserves noting that the CBN’s mandate is to maintain market integrity and protect Nigeria’s financial stability.

“Moreover, settling contracts that were legally void or irregular would have contravened the CBN’s statutory responsibilities and potentially exposed it to legal liability and loss of public trust,” It added.

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