In the past few months there has been a significant increase in the administration and enforcement of exchange control laws, with our clients receiving compliance requests and enforcement demands issued by the SA Reserve Bank.
In the wake of the Financial Action Task Force’s (FATF) greylisting of SA, the SARB has intensified its oversight and enforcement of exchange control laws to enhance the effectiveness of anti-money-laundering and counter-terrorist financing measures.
The Bank has prioritised the safeguarding of the SA balance of payments, fiscus and prevention of unauthorised outflows of funds. Multinational enterprises should therefore ensure their activities and cash flows are in full compliance with SA exchange control regulations to avoid potentially serious consequences of any noncompliance.
On July 19, the Bank ordered Steinhoff Africa Holdings, Steinhoff International Holdings and Ibex Investment Holdings (the Steinhoff Group) to forfeit over R6bn, plus interest, to the state in terms of exchange control regulation 22, which empowers the Bank to confiscate both tainted and untainted assets related to certain exchange control contraventions that had not been regularised. The amounts to be forfeited are held in seven different accounts with various SA banks.
The deputy governor of the prudential cluster of the Reserve Bank announced in the Government Gazette that she had ordered the Steinhoff Group to forfeit those funds to the National Revenue Fund, the government purse. This marks the largest forfeiture decided by the Bank to date and demonstrates the central bank’s firm stance on the violation of exchange control regulations, particularly in relation to significant remittances of funds to foreign accounts.
Enforcement
Exchange or currency controls exist to regulate the flow of money into and out of SA. Despite being considered outdated, these laws aim to protect the country’s macro-economy and currency from risks such as capital flight and the export of value from SA. While many countries have done away with similar regulations due to the liberalisation of government control over payments and cross-border transactions, SA continues to enforce its exchange control regime, affecting various cross-border transactions involving SA entities or operations.
Exchange control affects key business operations and cross-border cash flows, including dividends, intra-group loans, management service fees and guarantees, but compliance often falls by the wayside given the novelty of the form of regulation. Many companies are simply unaware of any exchange control requirements with which they must comply.
Thus, as the Bank begins to probe historical noncompliance with exchange control laws, it often need not probe very far. The effect of this is that many companies are receiving compliance and enforcement directives from the Bank for unwittingly but negligently failing to comply with exchange control laws.
Previously, the Bank focused on material noncompliance, pursuing enforcement measures only for serious transgressions. However, it has now begun probing all instances of noncompliance, regardless of their severity. We have assisted numerous entities that have faced investigations and whose accounts were frozen by the Bank due to noncompliance or failure to adequately respond to queries.
Implications
The Reserve Bank has the authority to enforce the exchange control regulations of 1961, which were published in terms of the Currency & Exchange Control Act of 1933. Its enforcement powers range from voiding noncompliant transactions to imposing fines of up to 40% of the transaction value, blocking the noncompliant entity’s bank accounts, and even pursuing criminal sanctions.
Furthermore, the Bank is empowered to enforce repatriation of noncompliant amounts held abroad, as well as pursue amounts not voluntarily paid over to it. The penalties and criminal sanctions may be applied in cases of both intentional breaches and negligent violations.
These are drastic sanctions. The most common sanction our clients have experienced is a Reserve Bank blocking order issued against their bank accounts. This in effect halts all business operations as the entity can no longer access funds, make payments or receive funds.
We have also witnessed the Bank threatening to impose administrative fines against noncompliant companies. The Bank generally imposes administrative fines of up to 40% of the tainted cash flow, which could be disastrous for a business. For instance, if a company remits a foreign direct investment to another entity within its group and that remission is found to be noncompliant, the company could face fines of up to 40% of the amount invested. For some companies the Bank’s enforcement action has threatened their continued existence.
The Bank has extensive powers when it comes to enforcing compliance with exchange control regulations. For instance, if the Treasury has forfeited money or goods to the state under regulation 22B but the amount recovered is less than what is required, the Treasury may, in terms of regulation 22C, recover the difference from the person who committed the offense, or anyone suspected of committing or who benefited from the offense. The Bank’s powers extend not only to entities directly responsible for exchange control violations but also to other persons actually or potentially involved in or benefiting from the violation.
Given the Bank’s recent focus on investigating historical noncompliance, it is essential for companies to be aware of their exchange control obligations and act to ensure their affairs are in order. It is best to prevent exchange control complications by obtaining the necessary approvals before moving capital in or out of SA, but this is not always possible. If a company does come under scrutiny from the Bank it should consider providing a full disclosure of relevant facts to mitigate against the severity of potential consequences.
Until SA successfully removes itself from the FATF greylist, exchange control requirements should have a far more appreciable role in the affairs of entities transacting in SA. We recommend that companies investigate their past and current compliance with exchange control regulations to ensure they are not upended by the Bank’s just crusade.
The Steinhoff forfeiture highlights the extensive enforcement powers of the Bank and underscores the importance for all businesses to promptly obtain the necessary exchange control approvals when engaging in cross-border transactions. If parties have not obtained the necessary exchange control approval they should approach the Bank promptly to regularise any potential violations.
• Da Silva is director designate specialising in international and domestic corporate tax, Tsanga Mukumba an associate, Gabriel Rybko associate designate, and Mateus candidate attorney, at Baker McKenzie Johannesburg.
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