Afghanistan Deployment: Success of Taliban’s New Financial Laws Requires More International Engagement – JURIST

Law students and young lawyers in Afghanistan write for JURIST about the situation there since the Taliban took over. For privacy and security reasons, we are not disclosing the name of our correspondent who filed this dispatch.

The recent enactment by the Taliban government of the first-ever law regulating the activities of foreign exchange dealers (FXD) and money service providers (MSPs) in Afghanistan marks a seismic shift in the country’s financial landscape. Before the law, Afghanistan’s foreign exchange and money services markets operated largely in a decentralized and informal manner. However, the Taliban’s new regulations aim to place these key financial sectors under the strict supervision of the Central Bank of Afghanistan. The law grants the central bank broad powers to license, monitor and enforce compliance among all FXDs and MSPs in the country.

A key aspect of the new law is the stringent licensing and registration requirements. All FXDs and SMEs must now obtain a valid operating license from the central bank, which involves rigorous know-your-customer (KYC) checks and investigations into the backgrounds of operators and their beneficial owners. This centralization of control marks a significant departure from the previous fragmented nature of the industry.

In addition, the Taliban’s new regulations introduce strict transaction limits and comprehensive reporting obligations for FXD and MSPs. These entities must now adhere to daily transaction limits and submit detailed data on their operations to the central bank. The law’s implementing provisions are equally robust, granting the central bank broad investigative and criminal powers. This includes the ability to conduct on-site inspections and audits, as well as suspend or revoke licenses and even initiate criminal proceedings for violations.

The Taliban’s goals behind the broad regulatory framework are multifaceted, from combating money laundering and terrorism financing to ensuring greater control over the country’s financial system. However, the restrictive nature of the new laws has raised concerns about their potential impact on financial inclusion, cross-border remittances and the overall competitiveness of the Afghan economy.

Adjusting to this new regulatory environment will undoubtedly be a significant challenge for FXD and SMEs in Afghanistan. Compliance with the tightened capital, liquidity and reporting requirements will require significant investment in technology, capacity building and operational restructuring. The ability of the central bank to effectively implement and enforce these regulations in a consistent and transparent manner will be critical to the success of this new financial framework.

The main challenges facing the Afghan financial sector in adapting to the new Taliban regulations on foreign exchange dealers (FXD) and money service providers (MSPs) include:

Compliance costs: The Taliban’s new regulations on foreign exchange dealers (FXD) and money service providers (MSPs) in Afghanistan will undoubtedly impose a significant financial burden on these entities, especially smaller players in the market. Meeting the stricter capital, liquidity and reporting requirements required by the law will lead to a significant increase in operating costs for these businesses.

Technological limitations: Many FXDs and SMEs in Afghanistan lack advanced IT systems and data management capabilities. Upgrading their infrastructure to meet new reporting and recordkeeping requirements will require significant investment.

Regulatory uncertainty: There are concerns about the central bank’s ability to effectively implement and enforce the new rules in a consistent manner. Lack of clarity around some provisions of the law also creates compliance challenges.

Geopolitical risk: The Taliban’s new regulatory framework for Foreign Exchange Dealers (FXD) and Money Service Providers (MSPs) in Afghanistan could also have significant implications for the country’s access to global financial networks and cross-border payment channels. Some international financial institutions may be hesitant to maintain links with Afghan FXDs and MSPs due to potential sanctions and reputational risks associated with doing business in the country.

The international community has maintained a complex web of economic sanctions and restrictions against Afghanistan since the Taliban took power in 2021. These sanctions target various individuals and entities associated with the Taliban, as well as certain industries and financial flows. As a result, many global banks and financial institutions have become increasingly cautious in dealing with Afghan counterparts, fearing potential regulatory penalties or damage to their corporate reputations. The Taliban’s new FXD and MSP regulations, while intended to strengthen financial oversight and stability in Afghanistan, may be viewed with skepticism by international partners. There may be concerns that the tightened regulatory requirements, combined with the central bank’s broad enforcement powers, could be used to further consolidate the Taliban’s control over the financial sector and potentially facilitate illicit activities.

This hesitation by global financial institutions could disrupt the ability of Afghan FXD and SMEs to access key cross-border payment channels and maintain seamless connections with international banking networks. Without these key connections, the ability of Afghan individuals and businesses to engage in international trade, receive remittances, and participate in the global financial system will be severely hampered.

Lack of access to global financial infrastructure could also limit the ability of Afghan FXD and SMEs to facilitate currency transactions that are essential for trade, investment, and the country’s overall economic stability. This disruption could further exacerbate Afghanistan’s economic problems, potentially leading to currency devaluations, liquidity shortages, and increased financial exclusion.

To mitigate these risks, the Taliban government may need extensive diplomacy and confidence-building measures with the international community to demonstrate the legitimacy and effectiveness of its new regulatory framework. Fostering greater transparency, implementing robust anti-money laundering and counter-terrorism financing controls, and working to address global concerns about Afghanistan’s financial sector could be critical to keeping the country connected to global financial networks.

The views expressed in JURIST newsletters are solely those of our correspondents in the field and do not necessarily reflect the views of the editors, staff, donors or the University of Pittsburgh.