South Africa: Exchange Control And The Shuttleworth Decision

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.