2.3 Authorized Dealers & Exchange Companies: Licensing, Operations & Accountability

Authorized Dealer: the Chapter 1 definition you must quote

Manual Chapter 1’s definitions clause is the exam sentence: Authorized Dealer means a person for the time being authorized under Section 3 of the Act to deal in foreign exchange. That is a legal status, not a marketing name on a branch fascia. A scheduled bank that has not been granted the FX licence is not an AD merely because it has a USD nostro. A branch of an AD that has not been designated as an authorized branch is not a mini-AD merely because the core system can open an LC screen.

Chapter 2 then operationalises section 3. SBP may authorise dealings in all foreign currencies or restrict currencies, and may authorise all descriptions of transactions or restrict them. The licence to deal in approved FX transactions of all descriptions is issued to scheduled banks. Application goes from the Head Office (or the Principal Office in Pakistan of a foreign bank) to the Director, Exchange Policy Department. The application must state the nature of transactions sought and confirm trained staff, systems and equipment. SBP may refuse a licence without assigning a reason. It may also withdraw an authorization already granted, or prohibit dealings by any authorized branch, under section 3B.

Branch authorizations: licence first, code second, business third

Once the bank is an AD, it may designate branches to undertake permissible FX business. The Head / Principal Office communicates the name and address of a new authorized branch to the Director, Statistics & Data Warehouse Department, who allocates a code number for statistical reporting. Only thereafter may the authorized branch start conducting FX business. Every authorized branch may deal in foreign currency notes, coins, deposits, credits, drafts, travellers cheques, letters of credit and bills of exchange expressed or drawn in Pakistan currency but payable in any foreign currency. Head / Principal Office reports those transactions to SBP after consolidation through prescribed returns.

The failure mode is familiar. A Gujranwala AD opens a new commercial branch, prints “Import LC available,” and books a small CAD payment on day one while Head Office “will write to Statistics next week.” Chapter 2 does not allow that sequence. No code, no start. The statistical code is not a clerical courtesy; it is the condition that makes the branch an authorized branch for reporting and therefore for lawful dealing.

Operating duties that 23K will later quote

Chapter 2 piles personal and institutional duties onto that licence:

• Stay inside the authorization and SBP’s general or special instructions (this is also FERA section 3(3)).
• Collect section 3(4) / Chapter 2 paragraph 6 declarations; refuse unsatisfactory files; report contemplated evasion.
• Bring FE regulations to customers’ notice and report every case of evasion or attempted evasion as soon as it comes to notice.
• Submit returns on due dates on the prescribed forms (Appendix V specimens).
• Keep the fifty-paisa-per-dollar public spread cap (inter-bank excepted).
• Run Board-approved FX training, including remote branches, and use NIBAF, IBP and others as training resources—not as a substitute for the bank’s own duty.
• Offer travel, education and medical FX efficiently at all authorized branches, with a Head Office focal person and trained call-centre staff.

A private-banking suite in DHA Karachi that “does not do medical remittances, send the customer to Main Branch” is failing Chapter 2 paragraph 4, not offering a premium service model.

Hotels with restricted authorization: still in the current Manual

Chapter 3 of the current Foreign Exchange Manual is not a historical curiosity. It is titled Restricted Authorization to Deal in Foreign Exchange and it is still how 3-, 4- and 5-star hotels buy FX from guests. SBP uses section 3 to issue a restricted authorization so foreign travellers can meet local-currency needs (boarding, lodging, transport, other local spending). Hotels apply through Pakistan Hotels Association, which verifies star rating and papers and forwards the file to the Director, EPD. Authorization is initially for three years, renewable. The fee is Rs 50,000 per location by DD/PO in favour of SBP. Renewal applications should reach SBP at least one month before expiry. Changes in constitution, ownership or directorship go immediately to EPD. SBP may grant or refuse without assigning a reason.

The activity is narrow. Hotels may purchase foreign currency notes, coins and travellers cheques from their customers. They must:

• sell those currencies to an Authorized Dealer or an exchange company within one week;
• keep the AD/EC sale receipts;
• not deposit the FX into the hotel’s own foreign-currency accounts, if any, and not use it for any other purpose;
• issue computer-generated receipts showing hotel name, date, currency, rate and signature, using an electronic cash register or similar device;
• display purchase rates and tell guests to take receipts;
• keep books and give SBP full inspection access;
• file a monthly purchase statement by the 8th of the following month to Statistics & Data Warehouse Department (hotels.sdwd@sbp.org.pk) on the Chapter 3 format.

Islamabad hotel scenario

A 5-star hotel buys USD notes from a guest on Saturday and, because its AD branch is closed until Monday, the treasurer credits the hotel’s FE-25 account “temporarily” and uses part of the USD to pay an overseas booking engine. That file already contains three Chapter 3 breaches: using FX for another purpose, placing it in the hotel FC account, and failing to surrender to an AD or EC within a week. Chapter 3 paragraph 4 points punitive action to section 23K. Paragraph 5 lists suspend/cancel triggers: failure to file monthly statements, failure to sell FX within the stipulated time, or failure to follow SBP regulations. Paragraph 6 inspections require full cooperation; obstruction, or false information to inspectors, can end in revocation and permanent disqualification of sponsors and directors from FX business in any capacity.

ADs that buy hotel-surrendered notes should still run their own section 3(4) brain. A hotel that regularly surrenders volumes out of line with occupancy, or always just after a cash-intensive weekend with no receipts trail, is not a “good correspondent”; it is a 23K and 3B problem sitting on the AD’s doorstep.

Exchange Companies: verify the current framework before saying Category A & B

Older NIBAF notes and pre-2025 circulars spoke of Exchange Companies and Exchange Companies of ‘B’ Category as two populations. That split was real under the Exchange Companies Manual. FE Circular No. 06 of 2004 created the B-category vehicle. FE Circular No. 08 of 2021 still addressed “All Exchange Companies” and “All Exchange Companies of ‘B’ Category” as separate addressees, with parallel KYC and per-person USD 10,000 per day / USD 100,000 per calendar year sale limits. SBP’s FY25 annual report still described closure of some B-category exchange companies as part of the FY24 reform story.

That dual-manual world is not the current licensing architecture. Opened for this chapter:

• FE Circular No. 02 of 2024 (27 December 2024) issued the Regulatory Framework for Exchange Companies (RFEC). RFEC replaced the Exchange Companies Manual with effect from 1 January 2025. ECs were to bring policies, procedures and systems into full conformity by 30 June 2025.
• The RFEC table of contents is a single-company rulebook: authorization (including NOC, in-principle approval, and commencement authorization under FERA section 3AA), capital and a 15 percent Regulatory Reserve, governance, internal controls/IT/CCTV, outlet network (branch, currency exchange booth, payment booth, and other types SBP allows), operations, supervision and enforcement, and reporting. It does not republish a Category A chapter and a Category B chapter.
• EPD Circular Letter No. 10 of 2025 (14 November 2025) and EPD Circular Letter No. 02 of 2026 (15 January 2026) address “All Exchange Companies” and amend RFEC Chapter 7 (account-to-account FCY sales into resident FCY accounts; Raast disbursement of home remittances after EPD approval and onboarding). They do not revive a B-category addressee line.
• SBP’s public list of regulated exchange companies labels the firms as Exchange Company, not as Category A or B outlets.

Exam trap: a stem that asks for “current Category B cash-sale rules under the Exchange Companies Manual” is testing whether you know the Manual was replaced. Teach the history so you can read an old circular. Do not state Category A and Category B as the live SBP licensing split.

RFEC operations an AD counterpart must actually know

RFEC Chapter 7 scope matches FERA 3AA: notes, coins, postal notes, money orders, bank drafts, travellers cheques, transfers/remittances and similar business through counters or digital means, plus arrangements with ADs and other parties as specifically allowed. Franchisee deposits still appear in RFEC reporting codes, so franchise outlets remain a network fact, but they are RFEC outlets, not a second statute. Capital: RFEC requires paid-up capital in cash against ordinary shares and a Regulatory Reserve of fifteen (15) percent of paid-up capital with SBP as cash and/or unencumbered approved government securities (SBP-BSC current account and SGLA as needed). Do not recite a superseded ECM million-rupee figure as if it were the 2026 number; open the current RFEC PDF when a numeric paid-up floor is required. Capital increases go to SECP, then SBP is informed with evidence, differential RR, and source-of-funds papers. Shareholders may not divest without SBP approval. ECs may not take business finance (other than vehicle leases) without SBP approval.

RFEC Chapter 8 is supervision and enforcement: assessment and monitoring, enforcement actions, execution, and appeals. RFEC restates the FERA 23K-style appeal: a person aggrieved may appeal to the Deputy Governor within thirty days; the DG hears and decides within ninety days; the DG’s decision is final. SBP may suspend, cancel, or limit the company or any outlet, including for obstruction of inspection or threat to customer interests, and may put a time-bound action plan on a suspension.

23K exposure: AD, hotel, and EC in one penalty grammar

Section 23K expressly lists sections 3, 3A, 3AA and 3B. That is why the same rupee caps apply in grammar to ADs, money changers (where still relevant), exchange companies, and, by Manual Chapter 1, hotels with restricted authorization. A Lahore AD that buys a suitcase of notes from an EC without asking whether the EC’s authorization is suspended is not “helping the market”; it is dealing with a person who may no longer be a lawful 3AA company. Check SBP’s cancellation press and the regulated-institutions list. SBP has continued to cancel EC authorizations into 2026; the press page is part of an AD’s pre-deal check, not optional news.

Inspections are not limited to ECs. Chapter 3 hotels face on-site inspection. ADs face on-site and off-site review of Chapter 22 records. Obstruction is its own offence path (including FERA 19A). The accountable people are named: directors, managers, officers, agents—if they knew, consented, or skipped due diligence.