The pillars of the exchange control temple crumbling?

For a long time, exchange controls in South Africa (SA) have been the source of great frustration for people bringing money into the country, and South Africans wishing to take their money and other assets abroad.

The controls are governed by regulations initially issued in 1961 pursuant to the Currency and Exchanges Act, No 9 of 1933 (Act). The regulations are enforced by a department of the SA Reserve Bank (SARB) with the Orwellian name of the Financial Surveillance Department, or FinSurv for short. SARB outsources most of the day to day administration to local retail banks who charge their clients a fee for the privilege of complying with the regulations.

The rules governing exchange controls are opaque. Business people who wish to pay suppliers abroad must sometimes wait days to get approval to remit funds. Even small local internet 'start-ups' are hounded because they ostensibly 'export' intellectual property without permission from FinSurv.

The Minister of Finance regularly announces that exchange controls are being liberalised, but the impenetrable and harsh rules remain.

Enter Mark Shuttleworth, the well-known SA internet billionaire. After making his fortune, Shuttleworth wanted to take some of his money out of the country. Sure, said the SARB, but only if you pay us a 10% 'exit charge'. Shuttleworth paid the levy under protest but wanted the money back. He launched a court application against the SARB, the Minister of Finance and the President. The outcome of the application is reported as Shuttleworth v South African Reserve Bank and Others (30709/2010) [2013] ZAGPPHC 200 (18 July 2013).

The court proceedings, which were closely followed by the media, pitted two of SA's greatest legal minds against each other: Gilbert Marcus SC, for Shuttleworth, and Jeremy Gauntlett SC, for the respondents. As far as I am aware, this was the first time that any person seriously challenged the entire exchange control regime in a court of law.

By his own admission, Shuttleworth is not against the idea of exchange control (view the Shuttleworth judgement at paragraph 27). He really only wanted a refund of the 10% levy. However, while denying the refund, in the process the court struck down chunks of the legislation as being unconstitutional.

Unfortunately, the judgment in the Shuttleworth case contains numerous editing and spelling errors, and the reasoning is often unclear. However, if nothing else, it does provide an interesting insight into the government's philosophy with respect to exchange controls. In the papers provided to the court, the State's deponent said that "[t]he very stability and sustainability of the financial system and economy of [SA] may be, and indeed has often in the past, been at stake…The flexibility, and ability to change the applicable exchange control regime very quickly, are necessary in this particular sphere…[T]his constitutes an important means whereby our country can adequately safeguard itself, its economy and the public against the vicissitudes of the dynamic world market."

In other words, says the State, we need exchange controls to protect you from the big bad global market wolf.

The court appeared to have simply accepted this view. For instance, said Judge Legodi (at paragraph 114 of his judgement), "imagine what will happen to this country if the wealthiest men and women in the country were allowed to take their wealth out of the country without [sic] impunity every time when the country is in economic grief or when there is a change of government or leaders in government. It could have a devastating effect on the country as whole."

And, equally dramatically, advocate Gauntlett is reported to have said in his address to the court, "[h]e [Shuttleworth] quite deliberately decided to attack the heart of the scheme and seeks to bring down the pillars of the temple."

Speaking as a lawyer with little knowledge of economics, my view is that it is time that the exchange control edifice be toppled. The State is bluffing itself if it thinks that it can protect us against "the vicissitudes of the dynamic world market." The market is a different place to that which existed in 1933 or 1961. Events like a financial crisis in the United States or a volcanic eruption in Iceland, for instance, have startling and immediate world-wide effects which governments have very little power to control.

Give us freedom to take and invest our money where we want; we will take our chances in the global economy. Spend your energy instead on creating an economic environment in SA which will encourage us, and foreign investors to keep our money in this country.

Having found that the policy of keeping exchange control is important in principle, the court in the Shuttleworth case held that the manner in which the 10% exit charge was legislated and imposed, was not unconstitutional. However, the court then proceeded to strike down certain of the provisions of the Act and the regulations. In particular, the provisions of s9(3) of the Act, which give the President the sweeping power, simply by regulation, to suspend any law, including an act of Parliament, affecting currency, banking or exchange was found to be inconsistent with the Constitution of South Africa, 1996. Of great importance is the finding of the judge that regulation 3(1)(c), which prohibits payments abroad without approval, offend the constitutional rights of freedom of expression and privacy. The court also held that certain of the other regulations were unconstitutional. However, the declaration of invalidity was suspended for a period of 12 months to enable the government to attend to the cause of the invalidity – or, in the words of the court, to 'panel-beat' the regulations.

In my view, a properly motivated attack on the exchange control rules has been long overdue. Mark Shuttleworth has struck a blow for freedom in SA. Hopefully, the Minister of Finance will use the case as an opportunity to further liberalise – or, even better, scrap – exchange controls.