PNG tightens foreign exchange control

The Bank of Papua New Guinea (BPNG) has announced new restrictions on foreign currency holdings for both in-country and offshore accounts. The Foreign Exchange Control Directive effective from 5 March 2015 (Directive) potentially has implications for foreign banks and money transfer operators with Vostro accounts in Papua New Guinea (PNG) and those more broadly dealing in foreign currency. Use of Kina denominated Vostro Accounts BPNG is concerned that foreign banks are doing banking business through their Vostro accounts[1] (a domestic bank account held for the benefit of a foreign bank). The Directive provides that Kina deposits into Vostro accounts in PNG must be converted only through use of an authorised foreign exchange dealer (Authorised Dealer); PNG residents can no longer deposit directly into these Vostro accounts without engaging the services of an Authorised Dealer.[2] Furthermore, all outward remittances from PNG (telegraphic transfers and drafts) must also be in foreign currency converted using an Authorised Dealer. Freeze on new Onshore Accounts The Directive prohibits any new foreign exchange accounts from being established in the name of, or on behalf of PNG residents. All existing accounts will also soon be audited. Limitations on use of Offshore Foreign Currency Accounts Currently BPNG approves two categories of offshore foreign currency accounts (where the sole purpose of the account is to pay offshore liabilities): (a) those established under a Project Development Agreement; and (b) those without a Project Development Agreement. BPNG has now introduced a three month repatriation requirement (from the day of shipment of exports) for approved offshore foreign currency accounts held by PNG resident exporters. Exporters must use these accounts only for payment of foreign liabilities; surplus balances in these accounts are to be repatriated to PNG and either deposited into their PNG foreign currency accounts or converted to Kina through an Authorised Dealer. Again, BPNG has commissioned an audit of offshore foreign currency accounts and will not approve the opening of any new offshore foreign currency accounts until completion of the audit. What is the potential liability? A breach of this new directive will be dealt with using the penalty provisions in the Central Banking (Foreign Exchange and Gold) Regulation. What’s next? Foreign Banks (and Authorised Dealers) with Vostro accounts in PNG will need to assess their current practices and ensure that their accounts and conversion procedures comply with the Directive. Look out for the new Foreign Exchange Manual to be released by BPNG and, where applicable, prepare for any upcoming audit. If you are a foreign bank or Authorised Exchange Dealer operating in PNG and would like to know more, please contact Keith Iduhu of Fairfax Legal.

[1] Foreign Exchange Control Directive, page 1. [2] The six authorised dealers are BSP, ANZ, Westpac, Maybank, Moniplus Ltd and First Investment Finance Ltd.