IMF warns CBN that eNaira may lead to new money-laundering and terrorism financing risks

IMF warns CBN that eNaira may lead to new money-laundering and terrorism financing risks

The expansion of the eNaira's use to cross-border cash transfers and agency bank networks could result in additional money-laundering and terrorism-funding risks.

As Nigeria fights insurgency and terrorism in sections of the country, cybercriminals can take advantage of existing gaps in the eNaira to launder money across the border and finance terrorism, according to the IMF.

According to the report, Nigeria became one of the first countries in the world to adopt a Central Bank Digital Currency (CBDC) that is open to the public with the debut of the digital currency on October 25^th in 2021.

This was revealed in the 'Nigeria Staff Report for the 2021 Article IV Consultation' by the International Monetary Fund.

According to the report, Nigeria became one of the first countries in the world to adopt a Central Bank Digital Currency (CBDC) that is open to the public with the launch of eNaira on October 25. Despite the benefits, such as expanding financial inclusion, there are significant hazards associated with the eNaira that the Nigerian Central Bank must address.

The IMF praised the CBDC's progressive implementation and emphasized the importance of regular risk assessment and contingency planning to address multiple risks, such as monetary policy implementation, bank funding, cyber security, operational resilience, and financial integrity and stability.

IMF’s concerns about the Nigerian eNaira

"Prospective expansion of eNaira use to cross-border financial transfers and agency bank networks may pose new money-laundering/terrorist financing problems," the IMF warned.

According to the IMF, the CBDC is vulnerable to cyber security threats, unforeseen legal challenges, and financial integrity threats.

"The eNaira is related to cyber security threats. Unforeseen legal concerns, including private law aspects of its activities (e.g., the actual nature of the legal relationship between wallet providers and CBDC holders), could expose eNaira to litigation and operational hazards, according to the statement.

"There are financial integrity risks that can be reduced by employing a tiered identity verification system and applying more stringent controls to relatively less confirmed individuals," the IMF said.

The Washington-based lender emphasized the importance of being aware of various threats, pushing the CBN to correct existing flaws in anti-money laundering legislation and combat terrorism financing.

"While preventative measures and the planned AML/CFT regulations for eNaira intermediaries are welcome," the IMF said, "a money laundering/terrorist financing risk assessment of domestic and cross-border uses of eNaira, as well as the adoption and implementation of the regulation, as well as risk-sensitive mitigation measures, should be a priority."

In addition, the Fund gave Nigeria a high rating for the possibility of poor progress in combating corruption, tax evasion, and related money laundering, and advised the country to improve its anti-corruption/governance initiatives and strengthen its AML/CFT framework.