Sunday, 20 October 2013

Exchange Control and the Shuttleworth Decision

Background

Mr Shuttleworth realised substantial proceeds on the disposal of his business, having realised approximately R4,2 billion, and decided to emigrate from South Africa on 23 February 2001.  As a result, the assets located in South Africa were blocked.  

In order to remit the funds from South Africa, Shuttleworth was required to pay a 10% levy to the South African Reserve Bank of R250,474,893.50.  This was not the first time that Shuttleworth had to pay a 10% levy for wanting to take assets out of South Africa.  

Under the rules in place governing exchange control, he was required to submit an application to transfer his blocked assets out of South Africa via an authorised dealer, that is, a commercial bank authorised to deal in foreign exchange, and submitted an application via his bank, namely, Standard Bank.  

In submitting the application to remit funds from the country, he requested Standard Bank to place before the South African Reserve Bank a document that he had prepared containing certain representations regarding his application.  Standard Bank omitted to place before the South African Reserve Bank the written representations prepared by Shuttleworth, and, when that was discovered, he instructed Standard Bank to place those representations before the South African Reserve Bank for it to reconsider its position regarding the imposition of the 10% levy.  

Subsequently, the South African Reserve Bank confirmed its earlier decision taken on 13 October 2009, whereby it imposed the 10% levy on the funds Shuttleworth wished to remit from South Africa.

Shuttleworth subsequently requested reasons for the decisions to impose a 10% levy, and the South African Reserve Bank responded to that request by pointing out that the Minister of Finance’s Budget Speech of 26 February 2009 contained details whereby emigrants’ blocked assets were to be unwound and that amounts of up to R750,000.00 will be eligible for removal from South Africa without charge.  

It was indicated that those emigrants who wished to remove more than R750,000.00 from South Africa would have to apply to the Exchange Control Department of the South African Reserve Bank for approval and will be subject to an exiting schedule and an exit charge or levy of 10% of the amount removed from South Africa.  

Shuttleworth sought relief from the Court(MR Shuttleworth v South African Reserve Bank and Others, Case No 307 09/210, North Gauteng High Court, as yet unreported) that the 10% levy paid by him was unlawful and should be returned to him and that certain provisions of the law and the regulations regulating exchange control did not comply with the Constitution of the Republic of South Africa, Act 108 of 1996, as amended, and should, therefore, be found to be unconstitutional.

Currency and Exchanges Act of 1933

It is appropriate to point out that the legal framework regulating exchange control in South Africa flows from the provisions of the Currency and Exchanges Act, No 9 of 1933, and the regulations, rules and orders which have been issued in terms of that statute.  It is thus clear that the Currency and Exchanges Act was enacted long before the dawn of the constitutional democracy in South Africa and the Bill of Rights contained in the Constitution.

The Currency and Exchanges Act was introduced to amend the law relating to legal tender, currency, exchange and banking.  It also creates a framework regulating exchange control and has thus been in place on the statute books for many years, and did not originate, as is often thought, after the aftermath of the Sharpeville massacre in 1961.  The legislation was designed in such a way that it can be amended quickly and easily by way of the issue of regulations in order to address developments in the economy and the currency markets quickly so as to protect the South African currency.

The legal challenge

Shuttleworth sought an order reviewing and setting aside the decision of the South African Reserve Bank taken during 2009 to impose a 10% levy as a condition permitting the transfer of his remaining blocked assets out of the Republic.  Shuttleworth, therefore, sought a refund of the levy paid of R250,474,893.50, together with interest thereon.

Furthermore, he sought an order declaring that the words “and an exit charge of 10% of the amount” used in Exchange Control Circular No D375 of 26 February 2003, and Exchange Control Circular No D380 of 26 February 2003 and section B2(E)(iii)(e) of the exchange control rulings were at all material times inconsistent with the Constitution and, thus, invalid.
In addition, Shuttleworth sought an order declaring that section 9 of the Currency and Exchanges Act is inconsistent with the Constitution and invalid, and in the alternative sought an order declaring that certain specific sub-sections of section 9 of the Currency and Exchanges Act are invalid.

The order requested the Court to declare certain paragraphs of regulation 3(1) of the exchange control regulations to be inconsistent with the Constitution and thus invalid, and that regulation 10(1)(b) of the exchange control regulations was invalid, together with an order declaring that regulations 18 and 19(1) of the Exchange Control Regulations are inconsistent with the Constitution and therefore invalid.

Shuttleworth also sought an order directing that parts of regulation 22 of the exchange control regulations were inconsistent with the Constitution and thus invalid, as well as the orders and rules issued under the exchange control regulations were inconsistent with the Constitution and thus invalid.

“Closed-door Policy”

Currently, under existing policy, persons wishing to seek approval from the South African Reserve Bank regarding transactions dealing with foreign exchange are required to communicate with the South African Reserve Bank via authorised dealers.  

Shuttleworth sought an order that the policy of the South African Reserve Bank to refuse dealing with members of the public directly in the exercise of its delegated powers under the exchange control regulations was inconsistent with the Constitution and therefore invalid.  

It is therefore not possible for a person seeking approval under the exchange control regulations to engage with the South African Reserve Bank directly, but is required, under the regulations, to approach the South African Reserve Bank via their own commercial bank.  In the judgment, this was referred to as “a closed-door policy” and the Court had to determine whether that process was procedurally right and fair.

Mootness of proceedings

The South African Reserve Bank raised the question whether the proceedings before the Court are academic or moot, in light of the decision by the Minister to do away with the 10% levy on blocked assets or funds.  

In considering this question, the Court looked at the merits and historical background to the exchange control system in South Africa, and pointed out that it is important that the authorities are able to react quickly and without delay to changes in the international monetary system, which is achieved via the current structure in place of empowering an official to issue regulations, which has been a central feature of exchange control in South Africa since 1933.

The Exchange Control Department of the South African Reserve Bank was subsequently replaced by the Financial Surveillance Department and exists in order to protect the value of the Rand in the interests of a balanced and sustainable economy in South Africa.  

The purpose of the Financial Surveillance Department within the South African Reserve Bank exists in order to regulate the inflow and outflow of capital in terms of the powers granted to it by the legislature.  The Financial Surveillance Department also comprises an investigations division, which is required to investigate alleged contraventions of the exchange control regulations and to recoup losses suffered insofar as the country’s foreign currency reserves are concerned.

The judgment contains a useful summary of the inception of exchange control in South Africa and the refinements made thereto over the last number of years.
 
The Court held that the issues raised by Shuttleworth were not academic or moot and that he had an interest in the Court ruling on those issues and, in addition thereto, it was in the public interest that the issues raised in his challenge on the various regulations and sections of the statute regulating exchange control should be considered by the Court.

The regulations, orders and rules governing exchange control

The primary legislation regulating exchange control is, therefore, contained in the Currency and Exchanges Act of 1933, and, in accordance
Mark Shuttleworth
with that statute, regulations governing exchange control may be promulgated.  

Furthermore, the Minister of Finance is empowered to issue orders and rules under the exchange control regulations which contain various orders, rules, exemptions, forms and procedural arrangements.  Regulations may be issued by the Minister in terms of section 9 of the Currency and Exchanges Act and, furthermore, the Minister of Finance can further delegate such duties or powers to any person in terms of regulation 22E of the exchange control regulations.  

Thus, the furnishing of information or advice on exchange control or currency matters are matters governed by the regulations and, similarly, the approval or permission in respect of exchange, currency or gold transactions are also governed by the regulations.  

Shuttleworth sought to argue that the requirement that members of the public must approach the South African Reserve Bank via their bankers was contrary to the obligations imposed on the public administration by section 195 of the Constitution, as well the foundational values of accountability, responsiveness and openness of section 1 of the Constitution.  

The South African Reserve Bank pointed out that the exchange control rulings are amended from time to time by way of exchange control circulars and are made available to all authorised dealers and that the contents thereof may be made available to the public.  

In addition, the Exchange Control Manual is published by the South African Reserve Bank on its website as a general guideline for the public in an attempt to provide a general understanding of the purpose, scope and operation of the exchange control system.  

It was pointed out that the majority of applications for permission to carry out transactions fall within the scope of rulings and are dealt with by the authorised dealers.  In the judgement, it was indicated that in 2010, a total of 10,147,090 foreign exchange transactions took place, of which the Exchange Control Department only received approximately 54,000 applications from all recognised authorised dealers.  

It was therefore argued that the authorised dealer system allows for the sifting of applications such that the South African Reserve Bank is only required to deal with those applications which fall beyond the scope of authority granted to authorised dealers.

In the result, the Court found that the so-called “closed door policy” was lawful and complied with the Constitution.  

In addition, the Court declined Shuttleworth’s request to direct that the 10% exit levy paid by him be refunded on the basis that the exchange control circulars issued were valid and did not violate the Constitution.  

The decision to impose the 10% exit levy was not made by the South African Reserve Bank itself, but by the Minister of Finance, who had the authority to make such decision. 

Shuttleworth sought to argue that the regulation imposing the 10% levy had not been approved by Parliament, but this argument was rejected by the Court on the basis that the regulation did not constitute the making or promulgation of a regulation intended to raise revenue or tax as envisaged in section 9(4) of the Currency and Exchanges Act but was, rather, a measure to protect the currency of South Africa.

The Court accepted that the 10% exit levy was imposed as a means of restricting the export of capital from South Africa and that the levy was valid under the Constitution, and, therefore, refrained from directing that the levy paid by Shuttleworth be refunded.

Court’s decision on the other challenged made by Shuttleworth

The judgment deals with the various challenges made by Shuttleworth insofar as various regulations and sections of the Currency and Exchanges Act are concerned and these are summarised in the table set out below:
Section of Currency and Exchanges Act or Regulation challenged by Shuttleworth
Court Decision
1
Section 9
Dismissed
2
Sections 9(2)(a),(c) and (f)
Dismissed
3
Section 9(3)
Granted – subject to confirmation by Constitutional Court
4
Section 9(5)
Dismissed
5
Exchange Control Regulations in their entirety
Dismissed
6
Regulation 3(1)
Granted – subject to rectification within twelve months
7
Regulation 3(1)(a) to (c)
Granted – subject to rectification within twelve months
8
Regulation 3(3) and 3(5)
Granted – subject to rectification within twelve months
9
Regulation 10(1)(b)
Granted – subject to rectification within twelve months
10
Regulation 18
Dismissed
11
Regulation 19(1)
Granted – subject to rectification within twelve months
12
The wording in Regulation 22 “unless he proves that he did not know, and could not by exercise of reasonable degree of care have ascertained that the statement was incorrect”
Granted and words in issue struck down
13
Orders and rules under exchange control regulations
Dismissed

Cost Order

The Court pointed out that the issues raised in the proceedings are important from a constitutional point of view.  The decision of the Court was not only of importance for Shuttleworth, but also for the South African Reserve Bank and the Minister of Finance.  Ordinarily, the Court directs that the costs shall follow the outcome of the decision, and, in the Shuttleworth case, the Court ordered that each party must each pay his or her own costs.

Exchange Control Circular No 19/2013

On 2 August 2013, the Financial Surveillance Department of the South African Reserve Bank issued the abovementioned circular in response to the judgement handed down in the North Gauteng High Court in the matter between Mr Shuttleworth and the South African Reserve Bank and others.  

The circular summarises the decision of the Court, and points out that the Court rejected Mr Shuttleworth’s contention that the exchange control system as a whole and the legislation and regulations which comprises the system are unconstitutional.  

The exchange control circular issued on 2 August 2013, therefore, informs authorised dealers that the effect of the judgment of the Court is that the exchange control system and the administration thereof remains unchanged.

The circular confirms that the Court declared section 9(3) of the Currency and Exchanges Act constitutional, and that that declaration is subject to confirmation by the Constitutional Court.  

Furthermore, as pointed out above, the Court also declared certain regulations unconstitutional, which declaration of invalidity has been suspended for twelve months.  

The South African Reserve Bank advised all authorised dealers to note that the provisions in question remain of full force and effect until the matter has been finally adjudicated by the Constitutional Court in terms of section 172 of the Constitution.

Conclusion

It has been reported in the media that Mr Shuttleworth has decided to seek leave to appeal the decision handed down by Legodi J, and it is therefore likely that the case will proceed to a full bench of the North Gauteng High Court and, ultimately, to the Constitutional Court for final adjudication.

It is clear that certain regulations governing exchange control have been found to be wanting and that sections of the Currency and Exchanges Act must be refined in order to comply with the Constitution.  

This does not come as a surprise, taking account of the fact that the Currency and Exchanges Act was enacted in 1933, that is, long before the Bill of Rights and the dawn of the democratic era of constitutional supremacy in South Africa.

(NOTE in Without Prejudice: On September 17, 2013, the North Gauteng High Court granted Mr Shuttleworth leave to appeal and granted the Reserve Bank leave to cross-appeal)

This article by Dr Beric Croome was first published in Without Prejudice, Vol 13, No 9, October 2013. Photograph of Mark Shuttleworth from his personal blog http://www.markshuttleworth.com

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