South Africa: Exchange Control And The Shuttleworth Decision

Last Updated: 19 November 2013
Article by Beric Croome

Most Read Contributor in South Africa, September 2018

Billionaire Mark Shuttleworth certainly did well when he disposed of his business – he realised approximately R4,2bn.

He decided to emigrate from South Africa on February 23 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 of R250 474 893 to the South African Reserve Bank.

This wasn't the first time Shuttleworth had to pay a 10% levy of for wanting to take assets out of the country. 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 , he asked Standard Bank to forward the Reserve Bank a document that he had prepared containing certain written representations regarding his application. Standard Bank omitted to to do so. When that was discovered, Shuttleworth instructed Standard Bank to place those representations before the Reserve Bank to enable it to reconsider its position regarding the imposition of the 10% levy. Subsequently, the Reserve Bank confirmed its earlier decision, taken in October 2009, to imposed the 10% levy on the funds.

Shuttleworth wanted to know what lay behind the decision to impose a 10% levy and the Reserve Bank responded by pointing to the Minister of Finance's Budget Speech of February 26 2009 which contained details whereby emigrants' blocked assets were to be unwound and amounts of up to R750 000 would be eligible for removal from South Africa without charge.

It was indicated that those emigrants who wished to take out more than this would have to apply to the Reserve Bank's Exchange Control department for approval and would be subject to an exiting schedule and an exit charge or levy of 10% of the amount.. 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 ( 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 (9 of 1933), and the regulations, rules and orders which have been issued in terms of that statute. It is thus clear that the Act was enacted long before the dawn of the constitutional democracy in South Africa and the Bill of Rights.

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. It did not originate, as is often thought, as a consequence of the Sharpeville massacre of 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 so as to protect the South African currency.

The legal challenge

Shuttleworth sought an order reviewing and setting aside the Reserve Bank's 2009 decision to impose a 10% levy as a condition permitting the transfer of his remaining blocked assets out of the country. In other words, he sought a refund of the R250 474 893.50 levy paid together with interest.

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 (February 262003), and Exchange Control Circular No D380 ( February 26 2003) and sB2(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 s9 of the Currency and Exchanges Act is inconsistent with the Constitution and invalid and, in the alternative, an order declaring that certain specific sub-sections of s9 of the Currency and Exchanges Act are invalid.

Furthermore, 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) was invalid, together with an order declaring regulations 18 and 19(1) inconsistent with the Constitution and therefore invalid.

He also sought an order directing that parts of regulation 22 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 Reserve Bank regarding transactions dealing with foreign exchange are required to communicate with the Reserve Bank via authorised dealers. Shuttleworth sought an order that this policy of refusing to deal with members of the public directly in the exercise of its delegated powers under the regulations was inconsistent with the Constitution and invalid.

In the judgement, 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 Reserve Bank raised the question whether the proceedings before the court were 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 of the exchange control system and pointed out that it is important that authorities are able to react quickly and without delay to changes in the international monetary system. This is achieved through the current structure in place of empowering an official to issue regulations and has been a central feature of exchange control in South Africa since 1933.

The Exchange Control Department 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 Reserve Bank is to regulate the inflow and outflow of capital in terms of the powers granted to it by the legislature. The Department also comprises an investigations division, which is required to investigate alleged contraventions of the exchange control regulations and to recoup losses on the country's foreign currency reserves.

The judgement contains a useful summary of the inception of exchange control in South Africa and the refinements made over the past number of years.

The court held that the issues raised by Shuttleworth were neither academic nor moot, that he had an interest in the court ruling on those issues and, in addition, 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.

The regulations, orders and rules governing exchange control

The primary legislation regulating exchange control is the Currency and Exchanges Act of 1933, and any regulations that may be promulgated. Furthermore, the Minister of Finance is empowered to issue various orders, rules, exemptions, forms and procedural arrangements. Regulations may be issued by the Minister in terms of s9 and, furthermore, he may 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 Reserve Bank via their bankers was contrary to the obligations imposed on the public administration by s195 of the Constitution, as well the foundational values of accountability, responsiveness and openness of Section 1 of the Constitution. The Reserve Bank pointed out that the exchange control rulings are amended from time to time by way of exchange control circulars made available to all authorised dealers; the contents thereof may be made available to the public. In addition, the Exchange Control Manual is published by the 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 received only approximately 54 000 applications from all recognised authorised dealers. It was therefore argued that the authorised dealer system allows for the sifting of applications so the 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 Reserve Bank itself, but by the Minister of Finance, who had the authority to make that decision. Shuttleworth sought to argue that the regulation imposing the 10% levy had not been approved by parliament but this argument was rejected 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 s9(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 was valid under the Constitution.

Court's decision on the other challenges made by Shuttleworth

The judgement 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:

Cost Order

The court concluded that the issues raised are important from a constitutional point of view. Its decision was not only of importance for Shuttleworth but also for the Reserve Bank and the Minister of Finance. Ordinarily, the court directs that the costs shall follow the outcome of the decision, 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 August 2 2013, the Financial Surveillance Department of the South African Reserve Bank issued a circular in response to the judgement. 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 comprise the system, are unconstitutional. The circular informed authorised dealers that the effect of the judgement of the court is that the exchange control system and its administration remains unchanged.

The circular refers to the court's conclusion that s9(3) of the Currency and Exchanges Act is constitutional but is is subject to confirmation by the Constitutional Court. The court also declared certain regulations unconstitutional, a finding which has been suspended for twelve months. The 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.

It has been reported in the media that 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 wanting and that sections of the Currency and Exchanges Act must be refined 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, long before the Bill of Rights and the dawn of the democratic era of constitutional supremacy.

On September 17 the North Gauteng High Court granted Mr Shuttleworth leave to appeal and granted the Reserve Bank leave to cross-appeal.

Originally published in without.prejudice, October 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions