The Nigerian Stock exchange is proposing amendments to the Rules and Regulations Governing Dealing Members (The Rules) to bring it in line with global best practices and achieve a balance between promoting investment and deterring wrongful behaviour in the market. One of the key amendments proposed is to effect the prohibition of money laundering activities in the market by proper identification of clients of dealing member firms. This is in view of the fact that the stock market is an effective vehicle for ‘washing’ of ‘dirty’ money which is an aspect of the money laundering process. A draft copy of the amendments to the rules is currently available for comments from stakeholders. Relevant elements of this amendment will be considered below.
Substantive amendments proposed to Article 102 (b) and (f)
Every dealing member firm is expected to have an anti-money laundering policy and train its staff on the prevention and detection of money laundering and other related activities as may be prescribed by the Stock Exchange from time to time. Dealing member firms are also expected to disclose to the Exchange every quarter, in a manner to be prescribed by the exchange, all proprietary accounts held by it directly or indirectly and with other stock broking firms. With regards to Know-Your-Customer (KYC) indices, the proposed rules require that all dealing member firms shall obtain biometric data of all their individual clients and continuously update the record of all their clients in that regard. For corporate clients, the corporate information shall be obtained in addition to the biometrics of all authorised signatories to the entity’s share trading account. The proposed amendment to the rules prohibits the opening, acceptance, operation or otherwise dealing in any share trading account of any person or entity without capturing the biometric data of such individual or corporate entity. The biometric data to be captured shall include fingerprints and iris recognition according to the proposed rules. Failure to comply with the KYC requirements will attract suspension from trading activities until compliance is effected by the errant dealing member firm.
In furtherance of its KYC requirements for dealing member firms, the Exchange is proposing a client’s points system with points awarded according to the predetermined system provided by the proposed rules. Each client is required to score a minimum of ten (10) points to qualify as an account holder with any dealing member firm. According to the proposed system, various forms of identification would attract points stated by the rules as follows: international passport –five (5) points, national identity card – four (4) points, drivers’ licence – two (2) points, utility bill – two (2) points, voters card – one (1) point and employees photo identification card issued by a recognised employer with employer’s tax identification from Federal Inland Revenue Service – two (2) points. This means that every account holder would require at least three forms of identification to be able to operate an account with a dealing member firm of the Nigerian Stock Exchange. Stockbrokers are also expected to obtain each client’s investment objectives and classify them in any of the stated categories i.e. foreign, local retail or institutional.
Whilst the effort to position the Nigerian Stock Exchange as a leading exchange in Africa is to be commended, it would be useful to carefully examine the proposed amendments because of the far-reaching implications it will have on the activities of the market. The issue of biometric data capture as a necessary prerequisite for trading is, in my view, taking the KYC procedure a tad too far. The feasibility and cost implication of this procedure must be considered before the NSE adopts such a procedure. Several questions about the implementation of this proposed procedure come to mind. Would the dealing member firms be required to foot the cost of the biometric equipment to capture the data of their clients or would they be allowed to accept biometric data of their clients from other sources? If the dealing member firms are to bear the cost of the equipment, it would certainly add to their operating cost. How then would they be able to manage this cost and make profits? Also, considering the fact that children could be beneficiaries of stock trading accounts, would they also be required to provide their biometric information? If yes, what would be the baseline age?
In terms of feasibility, how would foreign investors or even those in diaspora be included in this sort of arrangement? It means that if this procedure is implemented, it will cut off every investor in diaspora who is not physically present to carry out the biometric data capture. This will certainly have negative impact on the market which ironically seeks to attract foreign investors. There will be a decline in trading activities because of the onerous procedure and this will ultimately dampen investors’ interest in the stock market. Invariably, the economy would feel the negative impact of a poorly patronised capital market in the long run as investors would look to alternative markets where procedures are favourable. On the clients’ point system, it is not clear what useful purpose is to be served by the requirement for multiple forms of identification for each client of dealing member firms. The requirement would only work hardship on investors and the dealing member firms that would stand to lose where they fail to comply.
To conclude, it is not necessary to obtain biometric data in order to verify the identity of clients. Completing the requisite forms and providing original documents for identification purposes should suffice for customer due diligence. The issuing authorities of the various forms of identification could be contacted for further verification of the identity of the individual where any doubts or suspicions arise. It is counter-productive to put investors and dealing member firms through a hard time trying to comply with biometrics and multiple means of identification and as such, this provision should be eliminated from the new rules.