FX forward contracts: CBN reviews legal actions against defaulters

By Elizabeth Adegbesan 

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

The apex bank disclosed this in its website segment titled ‘Frequently Asked Questions and Answers’ on settlement of undelivered forward contracts.  

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.

The apex bank stated: “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.”

CBN noted that 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,” the apex bank further stated.

The apex bank added that the forensic audit uncovered significant irregularities in the execution of some of the FX  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.

It stated: “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.  

“The Naira previously received from counterparties in respect of these invalid contracts has been returned.  CBN is currently engaging with law enforcement authorities to determine appropriate action in cases involving potential fraud, misrepresentation, or abuse of the FX system”.

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 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 stated.

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