From time to time, inadvertent exchange control contraventions crop up and it is important for the relevant parties to assess the implications and the potentially serious consequences of the contravention.

The legislative framework in this regard can be found in the Exchange Control Regulations, 1961 ("Regulations") which were issued in terms of the Currency and Exchanges Act, 1933. Although it does not have the force of law, the Currency and Exchanges Manual for Authorised Dealers, published by the South African Reserve Bank ("SARB"), provides the practical framework and significantly more detail in terms of which Authorised Dealers (ie most commercial banks) should apply the Regulations.

Impact on the validity of historic transactions

The first question is whether a transaction that contravenes the Regulations would be void ab initio for illegality or voidable or whether it would merely be penalised. There findings of the courts in the cases which have addressed these aspects differ and have not been consistent, as the facts and circumstances of each case were different.

In our view, although the Act and the Regulations do not deal with this issue, considering pertinent provisions may assist in determining whether it was intended that the underlying agreements should be void or voidable when the legislation is contravened. In our view, the penal provisions against a party for contravening the Regulations seem to indicate that the intention is not for a transaction that contravenes the Regulations to also be void. In particular, in our experience, it seems that the SARB generally prefers an approach whereby such a transaction is recognised and is dealt with by unwinding or dismantling the transaction in a manner which satisfactorily addresses the contravention and/or imposing an appropriate financial penalty, if appropriate.

Penalties and criminal sanctions

The Manual contains the following statement:

"The Financial Surveillance Department views contraventions of the Exchange Control Regulations, as well as any actions to circumvent the permissions and conditions contained in the Authorised Dealer Manual, in a very serious light."

Broadly speaking, Regulation 22 of the Regulations provides that every person who contravenes or fails to comply with any provision of these regulations, or contravenes or fails to comply with the terms of, inter alia, any notice permission or condition made, conferred or imposed thereunder, shall be guilty of an offence.

Regulation 22 also applies to any person who makes any incorrect statement in any declaration made or return rendered for the purposes of these regulations, unless they prove that they did not know, and could not by the exercise of a reasonable degree of care have ascertained, that the statement was incorrect, or a person that refuses or neglects to furnish any information which they are required to furnish under the Regulations.

In terms of Regulation 22, should a person be convicted of such an offence they will be liable to a fine not exceeding ZAR250 000 and/or to imprisonment for a period not exceeding five years. If such person is convicted of an offence against any Regulation in relation to inter alia any "goods", they shall be liable to a fine not exceeding ZAR250 000, or a sum equal to the value of the goods, whichever is greater. Accordingly, in terms of Regulation 22, a penalty equal to the market value of the asset in question may be imposed.

Liability of directors

If a person has contravened the Regulations acting in their capacity as a director of a company, not only can the company itself be prosecuted (in terms of section 332 of the Criminal Procedure Act, 1977) but the director may be held criminally responsible in their personal capacity. In particular, taking into account the broad ambit of the wording used in Regulation 22, ie, that "every person" who fails to comply with the exchange control regulations is guilty of an offence, in our view, it is possible that the relevant director may be personally guilty of an offence in respect of the contravention of the Regulations.

Regularisation of a contravention

Given the potentially severe and far reaching implications set out above, where an inadvertent exchange control contravention is discovered after the fact, steps should be taken to regularise the contravention with the SARB.

Regulation 24 makes provision for this process. In particular, it enables Treasury, or a person authorised by the Treasury, to authorise the regularisation of any contravention of the Regulations by allowing a person who has contravened same to disclose the contravention to the Treasury, or such authorised person, in accordance with the provisions in Regulation 24.

Notably, the provisions of Regulation 24 will not apply to a person where there is a pending investigation or where an investigation against that person has already commenced. This is why a person that discovers a contravention should approach the SARB with full details of the contravention without delay.

A regularisation in accordance with Regulation 24 must be made on application and by following the procedure set out therein which includes, inter alia, that the market value of the foreign asset acquired in contravention of the Regulations must be disclosed in the foreign currency of the country in which the foreign asset is situated.

Furthermore, in accordance with Regulation 24(13) and (14), a person whose application in terms of Regulation 24 has been approved, may be required to pay a levy, as prescribed, on the market value, as at the prescribed date, of the foreign asset disclosed or the amount involved in the contravention of the Regulations. It is understood that in terms of current practice, in theory, a penalty of between 20% and 40% may be levied by the SARB.

In terms of Regulation 24(7), if an application is lodged in terms of Regulation 24 (and the exclusions do not apply), the Treasury, or any person authorised by the Treasury, shall:

  • in respect of such person and in respect of the specific contravention set out in such application, not pursue any criminal prosecution, but may:
    • grant to such person 100% relief in respect of any levy payable by such person resulting from the contravention of the provisions of these Regulations; and/or
    • impose a levy in respect of contraventions of the provisions of these Regulations as provided for in Regulation 24(13).

Based on our experience, where the SARB does not refer a matter to its prosecutions department and/or the prosecuting authorities, financial penalties are not typically imposed in cases where a contravention is fully disclosed to SARB on a voluntary basis. However, the law in this regard is not entirely clear due to a dearth of authority on the Regulations and the possibility of the imposition of financial penalties can never be excluded due to the wide discretion of SARB.

It has however come to our attention that the process around regularisation applications is currently under consideration. In particular, it seems that the delegation of powers to the SARB in terms of Regulation 24 is being revisited. We understand that this may impact the timing of the processing of regularisation applications currently before the SARB. However, be that as it may, until Regulation 24 is amended or policy decisions are communicated by the SARB, it remains critically important to approach the SARB immediately when an exchange control contravention comes to light.

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.