The Bangladesh Bank, by issuing a circular on November 24, 2019 has withdrawn its earlier move to introduce wholesale restrictions on cross-border online credit card transactions. While the initial worries about filing online transaction authorisation form (OTAF) for each transaction by international credit card holders have been "waived", one can only question the necessity of imposing such requirement in the first place.
The Foreign Exchange Transaction Regulations Act, 1947 regulates remittance of funds outside Bangladesh and requires every such transaction to be made only under general or special permission from the central bank. General permissions issued by the Bangladesh Bank are contained in the Guidelines for Foreign Exchange Transactions and circulars issued by the Bangladesh Bank from time to time.
In relation to online payments using international credit cards, the central bank had issued Circular No. 5 dated 25.02.2016, which allowed holders of international credit cards to make online payment of up to US$ 300 or its equivalent for a single transaction against legitimate purchases of items of goods and services (such as downloadable application software and e-books) from reputed and reliable sources abroad. Under the circular, credit card holders or commercial banks had no requirement to seek permission or carry out due diligence on a case-to-case basis with regard to transactions. A customer could keep the foreign payment option open for a credit card and keep transacting within the BB-set single transaction limit of US$300 without the need for additional formalities.
By a sudden change in policy, the central bank issued a circular dated 14.11.2019, asking commercial banks to take OTAF from clients for every foreign payment in order to tackle illegitimate online transaction. Once the commercial banks receive the OTAF, the credit card would be activated after due diligence to enable the credit card holder to make the transaction. Once the transaction is complete, the foreign payment option would be deactivated.
According to news reports, the circular dated 14.11.2019 was issued to tackle illegal transaction, especially money laundering. It was issued to address the concern that credit cards were being used to buy shares in foreign companies, lotteries, used for gambling and other illegal activities that were not permitted under the general permission.
This requirement was widely criticised by the industry and the banks expressed inability to comply with this directive due to the volume of transactions which are carried out using international credit cards. The move also drew flak from the BASIS (Bangladesh Association of Software and Information Services) and stakeholders in the outsourcing industry.
Therefore, the circular dated 24.11.2019 came as a big relief for credit card users who would be "waived" from OTAF requirements.
However, some issues remained unaddressed by the circular. According to it, banks shall take "necessary arrangements to guard against illegitimate online payments abroad through international credit cards from Bangladesh like payments for participating in online casino/gambling, trading in forex/stock exchanges, purchase of crypto currencies/lottery ticket, purchase of goods/services originated in Bangladesh, etc". The circular does not clarify how the banks are supposed to meet the above requirement. It also does make it clear whether the banks' obligations are to prevent such transactions or to merely report it to the Bangladesh Bank for necessary action.
The latest circular relaxing the credit card payment restrictions has only partially addressed the concerns expressed about the previous one. It is not clear why the Bangladesh Bank addressed this issue in the first place by issuing a circular, presumably in reaction to some allegations of misuse of online payment systems by use of credit cards.
Firstly, no study is said to have been conducted by the Bangladesh Bank to find out how significant these alleged illegal transactions by use of credit cards were in terms of volume and number. In a recent report by the Bangladesh Institute of Bank Management (BIBM), trade-based money laundering was identified as one of the major routes by which money is being siphoned off from Bangladesh. The workshop did not identify credit cards as one of the significant ways of laundering money out of Bangladesh. The central bank issued the circular dated 14.11.2019 only in relation to credit cards while nothing was done to address trade-based money laundering.
Secondly, even if some illegal online transactions were carried out using credit cards, the Bangladesh Bank could track down the illegal transactions since credit card transactions leave behind a transparent digital payment trail. The central bank has no reports of any inquiries or legal proceedings in relation to illegal online transactions carried out using credit cards.
Thirdly, the Bangladesh Bank could have directed commercial banks to block relevant Merchant Category Codes (MCC) for the services which it considers to be illegal. This would not require banks to monitor and conduct due diligence of every transaction made using international credit cards as was required by the circular dated 14.11.2019.
The overall effect of addressing the issue of money laundering using credit cards has disturbed the regulatory ecosystem of credit cards and has rendered the regulations dealing with online payments ambiguous.
The central bank should conduct studies regarding potential implications of such directives and hold discussions with stakeholders before taking drastic steps, as contained in circular of 14.11.2019. It should also take urgent steps to clarify the banks' obligations under the circular dated 24.11.2019. An advance study and consultations could have saved everyone a lot of time and energy regarding this issue.
Ahmed Zaker Chowdhury is an advocate at the Supreme Court of Bangladesh.