Keeping Control of Exchanges

In this age of ever-increasing legal compliance, any attempt by an individual or a corporation to transact across national jurisdictions has its share of rules, regulations and restrictions. In the case of permanent residents of the Common Monetary Area (CMA), which incorporates South Africa, Lesotho, Swaziland and Namibia, a significant obstacle to overcome is that of the exchange control regulations, which in SA are administered by the Financial Surveillance Department (FSD) of the South African Reserve Bank.

As a starting point to any exchange control inquiry, it is often taken for granted that a person is not a CMA resident, when according to the FSD regulations, they are. A resident is defined as any person who has taken up permanent residence or is domiciled or registered in the CMA.

In the case of an individual, this is usually considered to be where a person maintains a permanent home. However, in my experience, the department puts much reliance on a person’s domicile of origin (where they were born and grew up).

It should be noted that a permanent resident who leaves the CMA informally (that is, without making any declarations to an authorised dealer relinquishing their CMA domicile in terms of a formal emigration) is still considered by the department to be ‘a resident temporarily abroad’, even if continuously abroad for a long period of time, and is therefore still subject to many restrictions imposed on CMA residents in terms of the regulations.

Once a person’s CMA resident status has been established, the starting point is always to assume that a CMA resident is prohibited from having an interest in any non-CMA assets. Nor are they allowed to be in possession or control of any non-CMA currency, unless such foreign asset or currency falls within a specific exemption granted by the department or in terms of a particular permission granted to such person.

The exemptions that apply are, generally speaking, limited to the following:

• An amount of R2m per CMA resident over the age of 18 years that may be exported from the CMA for the purposes of foreign investment, including any and all growth thereon (the personal allowance).
• Foreign assets or foreign currency which accrued to a CMA resident prior to becoming a permanent resident of the area for the first time, provided that appropriate declarations to the department have been made at the time of taking up permanent residency in the CMA.
• Foreign earnings derived by a CMA resident for rendering services outside the CMA received after 1 July 1997.
• Foreign inheritances received by a CMA resident after 1 March 1998.
• Foreign assets that were regularised by a CMA resident either under exchange control circular D405 or in terms of the 2003 exchange control and tax amnesty.

As a general rule, the foreign assets of the CMA resident outlined in the exemptions above are not considered to be South African assets for the purposes of the regulations, and CMA residents are at liberty to apply these foreign assets as they so choose, with the following notable exceptions:

• A CMA resident may not make available their foreign assets to another person who is ordinarily resident in the CMA.
• CMA resident may not use their authorised foreign assets in such a manner whereby capital or any right to capital is directly or indirectly exported from the CMA.

The latter restriction is most problematic. CMA residents seem to like to take out approved assets (or hold authorised assets outside the CMA), and through foreign resident trust and company structures either invest such foreign assets back into the area, or to start foreign businesses, whereby the revenue accruing to such businesses comes from the CMA.

All such activities are considered to be so-called loop structures and are aggressively investigated by the Reserve Bank, which views such activities as a serious contravention of the regulations. It is incredible how often I come across proposed structures from reputable advisors where, possibly inadvertently, insufficient care and attention has been placed on the exchange control consequences, resulting in grave contraventions of the regulations.

Worse still, those advisors who do appreciate the exchange control consequences and propose structures that attempt to disguise the true ownership or function of foreign legal structures (usually based in confidential and tax-free jurisdictions) whereby ultimately CMA residents will one day benefit, constitutes nothing less than money laundering, which in terms of South African law, exposes not only the participants, but also the advisors, of such schemes to imprisonment for up to 30 years or a fine not exceeding R100m.

Needless to say, when CMA residents venture cross-border, budgeting for the costs of high level legal, tax and exchange control advice is absolutely essential.