IMF: Using eNaira for cross-border payments may boost money laundering, terrorism financing

The International Monetary Fund (IMF) says the expansion of eNaira for cross-border transfers and agency banking may boost money-laundering/financing of terrorism.

The Bretton Woods institution said this in its recently released staff country report titled ‘Nigeria: 2021 Article IV Consultation’.

In October 2021, the Central Bank of Nigeria (CBN) unveiled the country’s first Central Bank Digital Currency (CBDC) known as the eNaira.

The IMF said the digital currency is envisaged to bring multiple benefits, including increased financial inclusion, facilitation of remittances, reduced informality and illegal activities as eNaira transactions are in principle fully traceable.

It, however, said the eNaira carries macro-financial, cyber security, operational, financial integrity and stability, and legal risks.

“Unforeseen legal issues, including for private law aspects of its operations (e.g., the exact nature of legal relationship between the wallet providers and CBDC holders), may subject eNaira to litigation and operational risks,” the report reads.

“There are financial integrity risks which are mitigated by using a tiered identity verification system and applying more stringent controls to relatively less verified users.

“Prospective expansion of eNaira use to cross-border fund transfers and agency bank networks may cause new money laundering/financing of terrorism (ML/FT) risks.”

The IMF emphasised the need to fix existing deficiencies in the anti-money laundering and combating the financing of terrorism (AML/CFT) framework.

It also recommended that the apex bank prioritise risk-sensitive mitigation measures.

“Staff welcomed the gradual rollout of the CBDC and highlighted the need for vigilance to various risks, including for monetary policy implementation, bank funding, cyber security, operational resilience, and financial integrity and stability, through regular risk assessment and contingency planning,” the report adds.

“The eNaira offers low-cost and phone-enabled financial transactions outside established channels. This could potentially increase financial inclusion over time in rural areas and help meet the authorities’ ambitious target to increase the share of financially included adults to 95 percent.

“While preventive measures and the planned AML/CFT regulations for eNaira intermediaries are welcome, a money laundering/terrorist financing risk assessment of domestic and cross-border uses of eNaira and the adoption and implementation of the regulation along with putting in place risk-sensitive mitigation measures should be a priority.

“Staff noted that a dynamic digital lending ecosystem dominated by fintech implies greater competition with traditional service providers but also raises consumer protection issues.”