Foreign exchange companies are struggling as forex regulations become more demanding and opportunities for high profit-making no longer abound.

A terse two-liner notification from the finance ministry had informed forex firms late last November that their requests for setting up business franchises or third-party networks would not be entertained in 2015. This was because the authorities wanted to scan the operations of existing franchise and third-party networks to see if they were involved in any illegal activity or associated with any banned outfit or individual.

The notification had also directed exchange companies to ensure that their affiliates are operating in ‘meticulous compliance’ of all rules and regulations.

Currently, more than four dozen forex companies are in operation — half of them can transact overseas forex deals and interact with banks, and the remaining half deal in foreign cash currencies only locally.

Executives of forex firms say that by distancing them from franchising and third-party network arrangements, the government is further squeezing the already shrinking business opportunities. And, in so doing, it is making undue favours to banks.

In remote parts of Balochistan and KP where there are no bank branches but from where people need to remit foreign exchange abroad for legitimate purposes, no direct or indirect presence of forex companies means the people would turn to the informal forex market.

“This would defeat the government’s objective of checking the activities of hawala operators,” says the head of a local forex company.

The main purpose behind the renewed regulatory focus is to ensure that the services of forex companies are not misused in any way to facilitate terror financing, tax evasion, money laundering, capital flight and speculative attacks on the rupee

Finance ministry officials, however, say they have stopped forex firms from applying for fresh business franchises and sought stricter compliance of rules in case of existing ones to block the spread of ‘terror finance’.

Last month, the ministry had also directed exchange companies to report all transactions equaling Rs200,000, or a little less than $2,000, to the SBP’s financial monitoring unit. Here again, the purpose was to ensure fuller compliance of the rules laid down earlier to check money laundering.

Executives of exchange companies say reporting all transactions worth Rs200,000 or more has increased their workload unnecessarily, because money launderers don’t split the amounts intended for laundering into such small sums.

But the catch here is that this rule also makes under-reporting of overall forex transactions more difficult. And this deprives some unscrupulous exchange companies of one way of evading taxes and avoiding forex selling to banks, occasionally on the pretext of not having enough of it.

Many forex firms, especially the smaller ones, now find it difficult to survive as the tighter rules of business are made more effective.

Since 2013 when volatility in exchange rates — driven in large part by speculation — had hit financial markets, the central bank has taken several measures to make forex firms’ activities more transparent.

The main purpose behind the renewed regulatory focus “is to ensure that the services of forex companies are not misused in any way to facilitate terror financing, tax evasion, money laundering, capital flight and speculative attacks on the rupee,” says a source close to the SBP.

But central bankers insist that they listen to the genuine grievances of exchange companies and even make amendments in rules when called for. In August 2013, for example, they increased the limit for conducting outward transfers from these companies via crossed cheque/demand draft or pay order to $35,000 from $25,000 that had been fixed just a fortnight ago.

Executives of major exchange companies say they don’t mind the introduction of new, firmer rules and regulations or stricter compliance with those already in place. But what really bothers them is that they are not treated at par with banks when it comes to sharing the incentives available under the Pakistan Remittances Initiative.

Forex companies had played a key role in building the country’s forex reserves after the imposition of sanctions in response to nuclear tests conducted in May 1998.

And their most important contribution was the dent they had made in the network of hawala operators, which, later on, set the stage for a consistent increase in mobilisation of home remittances through official channels.

But now these companies feel neglected because, unlike banks, they don’t get any incentive for handling remittances. Their executives say if this discrimination is eliminated, remittances will rise from the current $16bn at present to $20bn per annum within 2-3 years.

Despite this limitation, leading exchange companies still make some decent profits, mainly due to low operational expenses. In 2013, half a dozen companies (excluding those run by banks) earned net profits in the range of Rs12m to Rs3m. But most of them made very little or no profit at all. The 2014 results should be no better, going by the reduced volumes of transactions, fear the managers of these companies.

Published in Dawn, Economic & Business, February 23rd , 2015

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