High Court Rejects Challenge of Exchange Control Ruling

Billionaire entrepreneur Mark Shuttleworth emigrated from the Republic in February 2001. Following his emigration, he made applications to transfer portions of his blocked funds from the Republic. In the second of these (in 2008) he was permitted to remit funds subject to a levy equal 10% of the amount remitted. He then made a further application to the South African Reserve Bank on 31 August 2009 to remit the balance of his blocked funds abroad. He requested the authorised dealer to include a request for remission of the 10%  levy, which he considered unconstitutional.

The authorised dealer submitted the application, but did not include his requested submission. The transfer of the funds was duly approved on 13 October 2009 subject to the payment of the 10% levy. When he learned that the request for remission had not been submitted with the original application, Mr Shuttleworth instructed the dealer to resubmit the application together with his request. He was informed on 1 December 2009 that his request for remission of the levy had been refused.

The issue was then referred to the High Court by way of an application to declare the imposition of the 10% levy invalid and to declare section 9 of the Currency and Exchanges Act, 9 of 1933 invalid by reason that it is inconsistent with the Constitution (Shuttleworth v South African Reserve Bank and Others [2013] ZAGPPHC 200, judgment handed down 18 July 2013). As an alternative, the application sought a declaration that elements of section 9 of the Currency and Exchanges Act (the Act) were unconstitutional or that elements of the regulations made under that Act were unconstitutional.

In view of the numerous prayers in the application, the judgment is lengthy. In summary, the Court (Legodi J) found that the imposition of the 10% levy was not invalid, but that certain provisions contained in section 9 of the Act were inconsistent with the Constitution.

The “closed door policy”

The structure of exchange control administration is such that certain powers are delegated to authorised dealers who may, as agents of the South African Reserve Bank (SARB), authorise certain transactions. All applications for exchange control approval must be submitted to an authorised dealer. If the application relates to a matter that is outside the authority of the authorised dealer, it must be submitted to the SARB by the authorised dealer on behalf of the applicant. This procedure is laid down in Rule 10(a) issued in terms of the Exchange Control Regulations.

The denial of direct access to the SARB was challenged as unconstitutional.

The Court found that the legislation gave power to the Minister to make rules and regulations and that he had the power to delegate this function without divesting himself of his power. Authorised dealers therefore derived their power from a lawful authority.

It was urged that the authorised dealers were a barrier to the general public’s right to be fair and reasonable administrative action. This arose because they were delegated to administer the exchange control regulations and their interests as delegated authority was therefore placed ahead of their duty to their client. The Court found firstly that the authorised dealers were necessary to provide capacity to deal with the volume of applications that are required to be made, and that they operate effectively and efficiently in that capacity by virtue of their expertise and experience. Further, there was no evidence to suggest that the authorised dealer did not act impartially. Thus, the administrative action was found to be both fair and reasonable.

The levy and related policy issues

The judgment examined the history of exchange control in South Africa and traced the liberalisation that had taken place on a phased basis since 1994. The sixth stage of the liberalisation involved the release of emigrants’ blocked funds, when the Minister of Finance announced in the Budget Speech on 26 February 2003 that emigrants wishing to export more than R750 000 from the Republic may apply to the SARB for permission to do so, subject to the submission of an exiting schedule and payment of an amount equal to 10% of the amount sought to be remitted.

Pursuant to the Minister’s announcement, the SARB issued Exchange Control Circulars D375 and  D380 announcing the policy and the levy. The SARB applied the circulars when considering the application (both in its original form and as resubmitted) and imposed the levy. The imposition of the levy was challenged on the basis that it was unlawful.

The first leg of the challenge related to procedural failure. In essence it was argued that the levy was calculated to raise revenue, and that the provisions of section 9(4) of the Act had not been complied with. This would require that the Minister submit to Parliament a statement of the estimated revenue that would be derived from the measure in the 12 months following its implementation.

The Court found that the regulation under which the levy was imposed was directed to restricting the export of capital and not to the raising of revenue. Legodi J agreed with the SARB analogy that a speeding fine is designed to discourage reckless behaviour and not to raise revenue; similarly, a levy was imposed to deter persons from exporting their capital and not as a means of raising revenue for the state. It is the purpose of the regulation and not the application of the amounts that may arise that is critical to the inquiry.

The second aspect of the challenge related to the lack of statutory guidelines in the regulations to direct how applications should be determined. It had been held in earlier matters before the Constitutional Court that a lack of guidelines relating to the exercise of a discretion may be offensive to the Constitution. However, the Court analysed these judgments and concluded that the requirement to provide guidelines was dependent on the facts of the case. Legodi J concluded that exchange control requires a flexible, speedy and expert approach to ensure proper financial governance. The variety of circumstances that may arise militates against laying down rules or factors in advance. The administration has therefore been delegated to the SARB and, through the SARB, to authorised dealers, because they have the necessary experience and expertise to analyse applications and apply their discretion appropriately without the need for guidelines. Thus, a failure to specify guidelines in these circumstances was justifiable.

The third element was that there had been no consultation on the measure and that this is required in terms of the Constitutional framework for legislation. This argument relied on it being held that the power to impose the levy was founded in the circulars or rulings of the SARB. This, the Court rejected. The power to impose the levy was founded on the Minister’s decision as announced on 26 February 2003. The application did not seek to declare the Minister’s decision invalid.

In any event it is questionable whether the SARB had a discretion to impose the levy. If it did, it was argued, it had failed to exercise it. The Court found that the SARB had  a discretion to grant permission to export funds, but once it had done so it had no discretion whether or not to impose the 10% levy. The levy was mandatory.

Procedural fairness

The decision was also attacked on the basis that the applicant (Mr Shuttleworth) had not been given the opportunity to be heard on his submission that the 10% levy was unlawful. This was due partially to the “closed door policy” of exchange control by which all applications are filtered through an authorised dealer, and to the fact that the application form FA1 did not contain a reference to the levy. Here, the Court found that the applicant had previously been subjected to the levy and was therefore fully aware of it. Furthermore, he had been given the opportunity to make submissions in respect of the levy when the SARB accepted and deliberated on the resubmitted application. The process was therefore considered not to have been procedurally unfair.

Constitutional validity of other aspects of the Act

Application was made to have certain aspects of the Act declared unconstitutional and many of these issues were favourably determined. The final order dismissed the application to declare the levy unconstitutional, but ancillary orders declared elements of the Act and regulations unconstitutional. The decision will still require the ratification of the Constitutional Court.