BANKING AND FINANCE LAW REGULATION OF FOREIGN EXCHANGE TRANSACTIONS IN TANZANIA; INWARD AND OUTWARDS TRANSFERS AND RELATED PORTFOLIO INVESTMENT TRANSACTIONS
- Regulatory control of foreign exchange transactions in Tanzania
- Purchase of securities from abroad
- Receipt of loans from abroad
- Operation and maintenance of foreign accounts by Tanzanian residents
- Related money laundering controls and restrictions
Further to our Article dated 9th June 2017 on regulation of transfer of foreign currency from Tanzania, this article seeks to elaborate on control of various aspects of foreign transactions and the money laundering restrictions applicable to such transactions.
Following liberalization on banking sector in the modern economy, foreign currency Transactions in Tanzania are being regulated in a view of tackling criminal conducts based on money laundering, terrorism financing and tax evasion.
The Banking and Finance and Commercial Department of Breakthrough Attorneys highlights the regulation on operation of foreign accounts by Tanzanian residents and the controls by the Bank of Tanzania (BOT) on the use of foreign currency as well as foreign transactions.
2.0 Transfer of money abroad
Generally, banks and financial institutions in Tanzania are allowed to provide access to foreign currency to residents in respect of all current account transactions and transfers.
Clause 2.1 of the Foreign Exchange Circular regulates current account transactions and states that;
“As a general rule, banks and financial institutions are allowed to provide access to foreign currency facilities to residents in respect of all current account payments and transfers free of any ceilings, the exception being for travel abroad in which case the United States dollars 10,000 ( ten thousand) ceiling for an individual shall continue to apply.”
In that regard, banks and financial institutions availing residents such foreign currency facilities will be required to observe normal prudent banking practices, and comply with the following general requirements;
- Production of relevant documentary evidence in support of the request made at the time of availing the foreign currency facility by the applicant.
- Retention of the aforesaid documents (in original form) by banks and financial institutions for the purpose of examination by BOT in the exercise of its prudential and regulatory functions.
Transfer of money is also allowed under the Banking and Financial Institutions Act, 2006. Section 24 (1) (d) of this Act provides for Transmission services as one of the services to be rendered by a licensed bank or financial institution.
It should be noted that the AML restrictions and red flags raised in Clause 3.0 above would also be a factor in this aspect as well.
3.0 Purchase of securities abroad
Buying securities abroad is permitted as an outward portfolio investment under Clause 3.3 of the Foreign Exchange Circular as shown in Clause 2.0 above. The provisions of Clause 3.3 of the Foreign Exchange Circular provides for buying securities abroad but, as provided, subject to restrictions (such restrictions are not specified however).
Under the new regulations (Foreign Exchange (Amendment) Regulations of 2014), a resident (defined as a person who resides consecutively, or whose Centre of predominant economic interest is in Tanzania for twelve months or more), may now acquire from, sell, or transfer to, a non-resident, any security or coupon if the issuer or buyer of the security or coupon is an EAC resident and the security or coupon to be acquired, sold or transferred is funded exclusively by externally acquired funds (Regulation 9(1) ). This in effect allows Tanzanian residents to deal in any securities freely within the East African region.
Outward portfolio investments by residents beyond East African countries are still restricted by the Regulations unless funded exclusively by externally acquired funds. The exception to this is where the Governor approves usage of internal acquired funds for one to acquire securities abroad. Other than this, Tanzanians are free to invest.
What Approval means
For purposes of reference, the approval from the Governor is referred from Regulation 9A (2) of the Foreign Exchange (Amendment) Regulations of 2014 made under the Foreign Exchange Act which states that;
“Subject to approval of the Bank, and in compliance with sub-regulation (1) (b) and (c), a resident may remit funds for purpose of engaging in outward direct investment … outside the prescribed (East Africa) territory.”
Furthermore, Regulation 9A (1) b) and (C) provides that,
“a resident may remit funds for the purpose of engaging in outward direct investment if – The remittance is affected through a bank or financial institution; and; The supporting documents including certificate of incorporation issued in the host country, business license, certificate compliance (where applicable), tax registration certificate or any applicable permit, in respect of the intended investment are submitted to a bank or financial institution for verification.”
4.0 Receipt of loans from abroad
Receiving loans from abroad is allowed as an inward capital account transaction by the bank. The Bank of Tanzania through the Foreign Exchange Circular mandatorily requires all foreign loans to be registered with the Bank of Tanzania and for a Debt Registration Number (DRN) to be obtained.
Without a DRN, you will not be able to remit the money back to the lender and hence the importance of such registration. This arrangement was introduced by the BOT to monitor the loans that are coming into the country, and to ensure that the loans can be smoothly remitted back to the lender.
The transaction can be processed and approved by the bank as per the provisions of Clause 3.1 Foreign Exchange Circular. For the transaction to be successful, there are requirements to be fulfilled;
- Consideration for application for foreign loans, overdrafts, financial facility, deferred payments or guarantees by the residents individuals or companies tenure of which exceeds 365 days.
- A copy of executed Agreement, and disbursement and debt servicing schedules related thereto must be submitted to the approving bank.
- Interest rate and other changes should reflect the prevailing market conditions for relevant currency of borrowing
- Payment period should be tied to the ability of the project to generate enough funds to service the loan in progressive manner.
- Approved loan should not include condition precedents which require opening of the foreign currency accounts with banks not registered in Tanzania.
- All loan agreements with terms and conditions which are not compatible with this requirements are should be referred to the Bank of Tanzania (Debt department) for further guidance.
Additionally, due to a burgeoning Private Sector External Debt (PSED), BOT has put in place a monitoring mechanism which requires Commercial Banks, on behalf of their borrowing clients to report to the BOT in line with section 57 of the Bank of Tanzania Act which empowers the Bank to;
“Request public offices, banks and financial institutions as well as private enterprises or any organization to provide any information the Bank considers necessary for compilation of any monetary, financial or other statistics on the financial sector.”
In this aspect, the Bank issued a newer guideline September 14th 2010 providing a list of the following matters in relation to borrowing from abroad:-
- “Duly signed loan agreements containing at a minimum the following information:
- Name of lender and borrower;
- Contact details such as postal address, fax number, telephone number and physical address of lender and borrower;
- Loan amount and currency of transaction;
- Purpose of the loan;
- The applicable interest rate;
- Loan maturity period;
- Loan repayment schedule with clearly indicated dates;
- Clauses on events of defaults and consequences thereof;
- A clause indicating applicable law;
- Company’s seal affixed on the loan document;
- Attestation by a notary public and commissioner for oaths; and
- The party responsible for paying withholding tax
- Related loan information (updated periodically):
(i) Disbursements indicating amount, disbursement date and currency;
- Debt service payments indicating principal and interest paid and value dates;
- Other charges paid, i.e. commitment fee, management fees etc.
- Details on loan enhancements or cancellations; and
- Details on loan restructuring or refinancing.”
5.0 Operation of foreign accounts
Tanzanian residents are allowed to open and operate offshore foreign accounts save for certain administrative restrictions. The operation of the foreign accounts is subjected to restrictions which are provided for by the Bank of Tanzania by virtue the provision under Clause 3.3 of the Foreign Exchange Circular dated 24th September, 1998 which states that;
“It should be noted that outward portfolio investments, foreign lending operations in favour of non-residents, acquisition of real estate, outward direct investment, operation of offshore foreign currency accounts by residents and participation of non-residents in domestic money and capital markets are still subject of restrictions”
In this regard, the operation of offshore accounts by Tanzanian residents is susceptible to close regulation by BOT. The circular however, does not indicate the respective restrictions imposed with specificity.
The implication is that the restrictions shall be assessed on a case to case basis by evaluating the source and destination of the funds especially where large sums of money are transacted. Banks and financial institutions are therefore required to deal with foreign accounts (and transactions to those accounts) with caution bearing Anti-Money Laundering (AML) flags in mind.
Clause 4.0 of the Foreign Exchange Circular reiterates that compliance with the requirements stated in the circular is mandatory and shall be subject of examination and monitoring by BOT and infringement shall attract penal sanctions in accordance with the Foreign Exchange Act of 1992.
6.0 Money Laundering Controls
6.1 The Money Laundering Control Circular No.8 of 2000 establishes the requirement for development of procedures and policies for combatting money laundering. This includes:
- Development and communication on anti-money laundering policies with staff
- Cooperation with law enforcement agencies in combating money laundering
- Conduct regular inspection/audit on compliance with anti-money launderings policies and procedures
- Conduct due diligence on potential customers
- Retention of records
- Provide training and guidance to staff on operation procedures and controls relating to money laundering
- Develop a reporting chain of suspicious transaction to law enforcement agencies
6.2 The Item 4 of the Second Schedule of the circular outlines examples of Money Laundering by Off-shore International Activities and they include:
- Customers introduced by an overseas bank from a country where drug trafficking is prevalent
- Use of letters of credit or methods of trade finance which are inconsistent with the customer’s usual business
- Customers who make regular and large payments tat cannot be clearly identified as bona fide transactions
- Buiding up of large balances not consistent with the known turnover of the customer’s business
- Unexplained electronic transfers by customers on an in and out basis or without passing through an account
- Frequent requests for travellers cheques, foreign currency drafts or other negotiable instruments to be issued
- Frequent paying in of travellers cheques or foreign currency drafts particularly originating from overseas.
It is evident that foreign transactions and maintenance of foreign accounts is closely regulated by BOT. This is due to the nature of foreign transactions that are prone to money laundering activities and financing of terrorism. Though the new law has permitted foreign investments, the restrictions have not been entirely lifted.
There are still restrictions on inward and outward investments which remain in place, including restrictions on the acquisition of Government securities by non-EAC residents (and ceilings applicable to EAC residents), restrictions on outward investments beyond the EAC region, and restrictions on investments in Collective Investment Schemes (which require CMSA authorization) and stringent procedural requirements.
This publication has been prepared for information purposes only, and it does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.