In-depth

Introduction

In the wake of the Financial Action Task Force's (FATF) greylisting of South Africa, the SARB has intensified its oversight and enforcement of exchange control laws to enhance the effectiveness of anti-money laundering (AML) and counter-terrorist financing (CTF) measures. The SARB has prioritised the safeguarding of the South African 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 South African exchange control regulations to avoid potentially serious consequences of any non-compliance.

On 19 July 2024, the SARB ordered Steinhoff Africa Holdings, Steinhoff International Holdings and Ibex Investment Holdings Limited ("Steinhoff Group") to forfeit over ZAR 6 billion, plus interest, to the State in terms of Exchange Control Regulation 22, which empowers the SARB 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 South African banks.

The Deputy Governor of the Prudential Cluster of the SARB announced in the Government Gazette that she had ordered the Steinhoff Group to forfeit these funds to the National Revenue Fund, the government purse. This marks the largest forfeiture decided by the SARB 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.

The application and enforcement of exchange control regulations

Exchange or currency controls exist to regulate the flow of money in and out of South Africa. Despite being considered outdated, these laws aim to protect the country's macroeconomy and currency from risks such as capital flight and the export of value from South Africa. While many countries have done away with similar regulations due to the liberalisation of government control over payments and cross-border transactions, South Africa continues to enforce its exchange control regime, impacting various cross-border transactions involving South African entities or operations.

Exchange control affects key business operations and cross-border cash flows, including dividends, intragroup 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 SARB begins to probe into historical non-compliance 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 SARB for unwittingly, but negligently failing to comply with exchange control laws, with the potential for serious consequences.

Previously, the SARB focused on material non-compliance, pursuing enforcement measures only for serious transgressions. However, the SARB has now begun probing all instances of non-compliance, regardless of their severity. Over the past months, we have assisted numerous entities that have faced investigations and whose accounts were frozen by the SARB due to non-compliance or failure to adequately respond to queries.

Implications of a contravention

The SARB has the authority to enforce the Exchange Control Regulations, 1961, published in terms of the Currency and Exchange Control Act, 1933 (collectively, "Exchange Control Regulations"). Its enforcement powers range from voiding non-compliant transactions to imposing fines of up to 40% of the transaction value, blocking the non-compliant entity's bank accounts, and even pursuing criminal sanctions.

Furthermore, the SARB is empowered to enforce repatriation of non-compliant amounts held abroad, as well as pursue amounts not voluntarily paid over to it. It is important to remember that the penalties and criminal sanctions may be applied in cases of both intentional breaches and negligent violations.

These are, of course, drastic sanctions. The most common sanction that our clients have experienced is a blocking order issued against all their bank accounts by the SARB. 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 SARB threatening to impose administrative fines against non-compliant companies. The SARB generally imposes administrative fines of up to 40% of the tainted cash flow, which could be disastrous for a business where the amounts are material. For instance, if a company remits a foreign direct investment to another entity within its group, and that remission is found to be non-compliant, the company could face fines of up to 40% of the amount invested. For some companies, the SARB's enforcement action has threatened their continued existence.

It is worth emphasising that the SARB 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 from anyone suspected of committing the offense, or from anyone who benefited from the offense. This means that the SARB'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.

Concluding observations

It is crucial to prioritise compliance with exchange control regulations to avoid serious consequences. Given the SARB's recent focus on investigating historical non-compliance, it is essential for companies to be aware of their exchange control obligations and act to ensure their affairs are in order.

As is often the case with most legal problems, prevention is better than cure. It is best to prevent exchange control complications by obtaining the necessary approvals before moving capital in or out of South Africa, but this is not always possible. In the event that a company does come under scrutiny from the SARB, the company should consider providing a full and frank disclosure of relevant facts to mitigate against the severity of the potential consequences.

Until South Africa successfully removes itself from the FATF greylist, it appears that exchange control requirements must take a far more appreciable role in the affairs of entities that conduct cross-border transactions with or invest in South Africa. We recommend that companies investigate their past and current compliance with exchange control regulations to ensure that they are not upended by the SARB's just crusade.

The Steinhoff forfeiture highlights the extensive enforcement powers of the SARB and underscores the importance for all businesses to promptly obtain the necessary exchange control approvals when engaging in cross-border transactions. Furthermore, if parties have not obtained the necessary exchange control approval, it is recommended to approach the SARB promptly to regularise any potential violations.

*Simon Mateus, Johannesburg trainee, contributed to this note.