THEME
Audit of Forex Forex Transactions n terms of the ‘Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity for April 2004’, published by Bank for International Settlements (BIS) in September 2004, the average daily turnover in traditional forex markets is USD 1.880 trillion. Out of the total turnover, 1.5% represents trade related transactions, 0.5% represents miscellaneous transfers and 8% represents Capital transfers. Remaining 90% transactions represent trading. Considering the volume of turnover under trading, any country’s foreign exchange reserve can be traded in the foreign exchange market within few minutes. This is the only market, which never sleeps, shifting to different centres through out. Under such situations, the
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responsibility of any Central Bank will be to regulate the inflows and outflows of foreign exchange through proper l e g i s l a t i o n s . K. Parameswaran FEMA 1999 was introduced in our country for the purpose of ‘facilitating external trade and payment and for promoting the orderly development and management of foreign exchange market in India.’ Features of FEMA 1999 are: Freeing of current account transactions, permitting identified capital account transactions and delegating more powers to Authorised Dealers (ADs) for independently handling transactions on verifying proper documents. Under such liberalised liberalised environment an efficient audit system will help the Central Bank and the Authorised Dealers to ascertain the impact of liberalisation and also to monitor compliance of prescribed regulations.
Role of an Auditor in forex audit will be to— ●
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Ensure that regulatory provisions are complied with Detect revenue
The author is Asst. Ass t. Professor, Professor, S P Jain Institute of Management Man agement and Research. He can be reached at
[email protected] THE CHARTERED ACCOUNTANT
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Forex transactions, if not monitored properly, may lead to drainage of the scarce forex reserves of a country which will have a direct impact on the economy econo my.. Forex market is one of the most volatile markets where banking institutions can incur heavy losses if they d’not have a ‘Risk Management Policy’. Audit of Forex transactions can establish as to whether regulatory aspects are properly complied with, credit facilities at concessional rate of interest are not misused and the forex dealings are conducted in a disciplined manner. This will help the economy to build up healthy forex reserve, prevent illegal money transfers and robust industrial growth.
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leakages wherever credit facilities are extended Ensure compliance of bank specific policies/gu policies/guidelines idelines Prevent recurrence of frauds by checking the existing systems so that the top management is able to capture the details of frauds in time and will be in a position to review their corporate policy for introducing appropriate preventive measures.
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R e g u l a t i o n s / g u i d e l i n e s Section 7 of FEMA 1999 and related to Forex transactions Notification No.23 prescribe that
Section 7 of FEMA 1999 and Notification No. 23 prescribe that exporter should realise full payment for his exports within the prescribed time limit in the prescribed manner.
exporter should realise full payFEMA 1999 – Notifications ment for his exports within the preissued by Reserve Bank & scribed time limit in the prescribed Rules framed by Government of manner. Delay in realisation, realIndia. ising reduced value or ‘write off’ of ● Guidelines issued by export receivables can now be perIECD/DBOD/DBOS/FED of mitted/approved by the authorised the Reserve Bank. dealer under their delegated pow● Foreign Trade (Development ers. In case of overdue export bills and Regulation) Act, 1992. beyond the prescribed time limit, ● Foreign Trade Policy 2004-09. AD is advised to report such trans- external commercial borrowings ● Foreign Contribution actions to Reserve Bank. Audit will from recognised overseas sources. Regulation Act, 1976. ensure whether AD properly moni- Importers are also allowed to remit ● The Conservation of Foreign tors the export realisations and/or advance payments. While simpliExchange and Prevention of exercising the delegated authority fying the procedures and relaxing Smuggling Activities Act, with due diligence and reports the most of the regulations, Reserve 1974. overdue export bills in time to Bank has prescribed certain condi● Uniform Customs and Practice tions to ensure end use. Audit will Reserve Bank. for Documentary Credits The audit, therefore, has to ensure whether the conditions spec(UCPDC ICC 500). cover cases where the appraisal, ified by Reserve Bank for undertak● FEDAI Rules sanction, documentation, disburse- ing such transactions are properly ● SEBI guidelines ment and the operations in the complied with by the importers and Export Credit/non fund based the ADs. For example, trade credForex audit will cover the transactions to ensure the objec- its from overseas source can be following areas tives of audit referred to earlier are availed for import of capital goods, fully complied with. The auditor, in provided the maturity of the loan is ● Trade Services particular, has to evaluate the sys- less than three years and the rate of ● Export transactions tem and procedure prescribed by interest should not exceed LIBOR (1) Fund based facilities the bank and whether they are plus 1.25% subject to a monetary (2) Pre and Post shipment updated and are fully applied to ceiling of USD 20 mn equivalent Finance each case. Deviations are to be per transaction. Audit will ensure (3) Non Fund based facilities compliance of the prescribed conhighlighted in the Audit report with (4)Export Guarantees necessary sample of irregularities ditions by the importer and the ADs ● Import transactions for an effective follow up and recti- in handling such transactions. (1) Non Fund based facilities There is a possibility of illegal fication by the controlling office. (2) Issuing Letters of Credit, money transfers routed through Guarantees and Standby Trade transactions. Further cusFEMA 1999 on import of goods Credits – arranging for trade tomers can use the trade route to and services: credits and external comValue of forex outflow for import of effect capital transfer. In order to mercial borrowings. goods and services should be cov- avoid such misutilisation of trade (3) Handling Import collections ered equally with matching physi- transactions Reserve Bank has ● Remittances cal import of goods or services. The advised ADs to implement ‘Know ● Inward remittances time limit within which import pay- Your Customer’ (KYC) norms and ● Outward remittances ments should be remitted is also also due diligence on the overseas ● Dealing / Treasury operations. prescribed by Reserve Bank. To seller. Role of audit will ensure enable the importers for availing Regulatory issues cheaper credit facilities at interna- whether AD has complied with the FEMA 1999 on export of goods tional market rates, importers are guidelines issued by Reserve Bank and services: allowed to raise trade credits or while undertaking such import ●
THE CHARTERED ACCOUNTANT
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THEME
transactions so that genuine transactions are alone carried out.
the flow may have a direct impact on the forex market. Audit can examine whether only registered FIIs are routing their investments and repatriaFEMA on Remittances: Remittances can be for: tions through the branch authorized to handle such transactions and the ● Resident Individuals reporting is done by the bank to Res● Resident organizations ● Resident corporate erve Bank promptly on daily basis. ● Transfer of funds under various Since Non Resident Indians schemes meant for FDI/FII/NRIs (NRI) are enjoying full convertibilWhile handling inward remit- ity in certain schemes there are postances, Reserve Bank wants to sibilities for ineligible funds getting ensure that such remittances are for repatriated out of India through genuine purposes only. such schemes. NRIs are also enjoyFor instance, foreign inward ing the facilities of repatriating curremittances for organizations if not rent income, sale proceeds of monitored properly may be diverted immovable assets subject to comfor purposes other than for what it is pliance of tax liabilities and certain meant for. AD is advised to ensure conditions. Audit may bring out that the organisation, which receives whether the prescribed conditions foreign inward remittance is regis- are fulfilled before handling such tered under FCRA, 1976 with remittances since such unauthoMinistry of Home Affairs and such rized remittances not only are ineliremittances should be handled only gible but also will have an impact on by the identified branch of a bank. AD our country’s balance of payment. has also fixed with the responsibility Regarding outward remittances of reporting operations in such relating to Travel, Higher Studies, accounts to Government of India. Medical Treatment, Emigration etc., Audit can check whether organiza- Reserve Bank has simplified the procedures. Audit can bring out With the deregulation of interest rates whether such and free pricing of products, banks are relaxations and having their own guidelines on such simplification issues. Most of the banks are following of procedures their own rating system on their borroware extended to ers and such ratings are used as the base residents by the for fixing the interest rates and pricing of ADs. their products. Audit may check whether
the parameters fixed for rating of the borrower is properly arrived at.
Revenue Leakages
tions, which are receiving foreign With the deregulation of interest inward remittances are properly reg- rates and free pricing of products, istered with Government of India and banks are having their own guidethe AD is regular in reporting to lines on such issues. Most of the Government of India. banks are following their own ratIn case of remittances by FIIs for ing system on their borrowers and investments in securities and stocks such ratings are used as the base for it will be of short term in nature and fixing the interest rates and pricing
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of their products. Audit may check whether the parameters fixed for rating of the borrower is properly arrived at. To enable the exporters to quote their price more competitively in the International market, Reserve Bank has allowed more flexibility for the banks to offer export credit facilities at comparatively cheaper interest rates. Export finance is a purpose-oriented advance and ultimately export should take place to enable the exporter to avail credit facilities at concessional rate of interest. If the exporter could not complete his export obligation the entire credit facility looses concessional rate of interest and will be treated as commercial advance. If the advance becomes overdue, such overdue advances are not eligible for concessional rate of interest for the overdue period. All such guidelines are for promoting exports and also to fulfil the export obligations by the exporter in time.
Audit should check the following The credit rating system and the relevant parameters fixed by the bank for rating a customer; ● The maximum period of advance eligible for concessional rate of interest; ● The mode of liquidation of such advances either with export documents or with local funds; ● Recovery of overdue interest/ commercial interest wherever the advance becomes overdue / liquidated with local funds; ● In case of export bills purchased/discounted/negotiated by the bank, if the payment is not realized on the notional due date, AD should crystallize exporters foreign exchange liability on the ●
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THEME
● Operations Risk 30 th day after the expiry of The impact of irregulari Normal Transit Period in case of Some of the issues that should be ties in forex transactions unpaid DP bills and 30 th day looked into while auditing such can have greater conseafter notional due date in case of transactions are: quences affecting iniDA bills at market TT Selling ● Limit fixed for ‘intra day’ tradtially the bank’s financial Rate ruling on the day of crystaling and ‘over night’ exposures – position and later on lization or the original bills buycurrency wise for the dealer country’s reserve and ing rate whichever is higher; ● Fixing review standards, indieconomic growth. An ● Scrutiny of such transaction may cating methodology for calculaefficient audit system enable the Auditor to identify tion and validating market risk Bank will be in a position any diversification of funds for models to take corrective mealocal commercial operations; ● Exceptions sures at an appropriate ● In case of import bills drawn ● Fixing limits for counter party time and also will be able under letter of credit transactions, exposures to contribute to establish AD should recover interest from ● Monitoring the gaps and funding a robust economy. the importer from the date of plans debit in their nostro account; the default of the exporter at pre and ● Operations risk consisting of pro● In case of import bills drawn at cedures, reporting system, captursight under letter of credit, if not post shipment stage with ECGC ing transactions, reconciliation, paid by the importer within 10 through a guarantee scheme. If a valuation, payment of brokerage days from date of receipt of the bank has not opted for such guaranand disaster recovery system. tee scheme with ECGC, bank may bill (DP bills) the forex exposure to be crystallised. And in case of advise their exporters to cover them- ● Compliance of Accounting Standards (AS 11, IAS 39, usance bills if not paid on due selves with ECGC under appropriFASB, GAAP norms). date the forex exposure should ate specific buyer wise policy. be crystallised on the due date. Dealing room operations are Preventive Vigilance exposed to highly volatile, vibrant Bank Specific Issues Audit can bring out the deficienforex market movements. Reported cies, if any, in the systems, the time Each bank will have their own corincident of a dealer who has taken a interval in capturing the occurrence porate credit and forex policy huge exposure resulting in liquidaof a fraud and the time taken for the approved by their board. This poltion of an established 125 years old reviewing authority / board in geticy will specify the thrust areas for bank is on record. In this referred ting the report and examining the credit deployment and guidelines case, it was pointed out that the bank fraud and the remedial measures to for risk management. For example, was not having a proper ‘Risk avoid such recurrence in future. certain banks will be more cautious Management Policy’. Auditing of in extending credit facilities to diadealing room and treasury opera- Conclusion mond exports, software exports etc. tions are of different nature. In this Some of the issues that will be regard Reserve Bank has issued an To conclude, the impact of irreguaddressed in the policy are: ‘Internal Control Guidelines’ speci- larities in forex transactions can (i) Organization chart and line fying certain general check points. have greater consequences affectof command On the basis of broad guidelines ing initially the bank’s financial (ii) Limits fixed at different levissued by Reserve Bank and also position and later on country’s els for faster credit decisions with the present changes, bank’s reserve and destabilize the eco(iii)Pricing ‘Risk Management Policy’ should nomic growth. With the help of an (iv) Reporting system efficient audit system Bank will be cover the following areas: (v) Review process in a position to take corrective mea● Market Risk (vi) Exceptions sures at the appropriate time and ● Credit Risk To quote certain illustrations, also will be able to contribute to ● Liquidity Risk bank at its own discretion may cover ■ establish a robust economy.
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