Responsible for regulating all cross-border transactions, the South African Reserve Bank (SARB) uses exchange controls to prevent the abuse of our financial system.The penalties of failing to adhere to exchange controls in South Africa are far more dire than one might be aware of and could result in forfeiture of assets or even imprisonment. The importance of understanding exchange controls – or employing someone who does – is therefore a necessity for both individuals and corporations who are active in the foreign exchange market.
Bianca Botes, Director at Citadel Global, experts in exchange control, foreign exchange and treasury, is answering some frequently asked questions regarding this important topic.
QUESTION: WHAT ARE EXCHANGE CONTROLS AND WHICH COUNTRIES IMPOSE THEM?
ANSWER: “Exchange controls are limitations imposed by government on the purchase and/or sale of currencies. They can also be used to restrict non-essential imports, encourage the importation of priority goods, control the outflow of capital, and manage the country’s exchange rate,” explains Botes.
Interestingly, the International Monetary Fund (IMF) allows only those countries with transitional economies, such as South Africa, to apply exchange controls. Such countries generally seek to limit speculation against their currencies by imposing exchange control.
QUESTION: HOW DO EXCHANGE CONTROLS HELP THE SOUTH AFRICAN ECONOMY?
ANSWER: One of the major aims of exchange controls is to manage or avoid an adverse Balance of Payments (BOP) position. If the BOP is being pushed into a deficit position because of imports exceeding exports, it needs to be realigned. The controls mitigate decreasing foreign exchange reserves by limiting imports to essentials and encouraging exports via currency devaluation.
Botes explains that in times of economic or political turbulence, government may opt to limit capital flight as residents increase foreign currency transfers out of the country. “Such controls also regulate the movement of financial and real assets into and out of South Africa. In managing and reporting the total foreign exchange inflows and outflows, government hopes to ensure currency stability and secure the BOP position.”
Exchange controls may also be enacted to protect our domestic industry from competitors on foreign soil whose technology and expertise make them more cost-effective and appealing. In other words, exchange controls protect against negative impacts on the efficient operation of the local commercial, industrial, and financial system.
QUESTION: WHO MUST COMPLY WITH EXCHANGE CONTROLS?
ANSWER: All South African individuals and entities who wish to move money into and out of South Africa need to comply with exchange controls. Foreigners living in South Africa, however, may experience limitations on transferring money out of the country that was previously brought in, however, the SARB assesses these situations on a case-by-case basis so it is recommended that foreigners seek the help of an exchange control expert if they are unsure of their limitations.
QUESTION: HOW AM I SUPPOSED TO KNOW MY ALLOWANCE LIMITATIONS?
ANSWER: Exchange controls can be a complex and daunting topic to get to grips with, however, the SARB does not view ignorance as an excuse – all South Africans doing cross-border transactions are expected to either be familiar with the controls or to employ experts to ensure they are compliant. There is a common misconception that Crypto currencies can bypass exchange control, which is entirely false. All transactions out or into the country must be reported at the risk of unwelcome repercussions.
Says Botes, “If you are not sure, ask someone who is. False information concerning category code, amounts and supporting documents can land one in hot water. Individuals must also be aware of limitations on allowances of R1 million and R10 million. Entities must comply with certain criteria such as foreign dividend receipts that must be converted to South African rand.”
The SARB has published a manual to ease compliance for individuals, companies and authorised dealers, but in the light of the severity of penalties in the case of non-compliance, it is highly recommended that you seek assistance from your treasury partner to avoid investigations, penalties and even the blocking of your bank account.
QUESTION: HOW DO I GET APPROVAL TO DO MY TRANSACTIONS?
ANSWER: One of the SARB’s tasks is to provide the requisite approval for cross-border transactions to ensure that its value is maintained throughout various currency conversions and that the correct interest and taxes are charged. To impose this efficiently, the SARB delegates a large portion of imposing these controls to Authorised Dealers (a registered bank authorised to deal in foreign exchange or an Authorised Dealer in foreign exchange with limited authority).
“Not all cross-border transactions are subject to SARB approval, but all must be declared and reported via the BOP reporting systems. SARB approvals apply to transactions that fall outside the normal scope of day-to-day operations, such as Foreign Direct Investment for companies, or exceeding allowances for individuals. South African courts have held that an agreement which required prior exchange control approval will be null and void if no such approval was obtained,” concludes Botes.
Written by: Bianca Botes, Director at foreign exchange experts, Citadel Global