The modernisation of Exchange Control Regulations in South Africa

The new regulations are meant to repealthe current Exchange Control Regulations of 1961 (current regulations).

The purpose of the draft regulations is to modernise and streamline the regulatory framework for capital flows, reflecting changes in the financial system, technology, and international best practice. The focus shifts towards risk-based management and transparency, while still protecting the financial system.

 The draft regulations aim to address gaps in the current regulations, with a particular focus on cross-border crypto asset transactions. The draft regulations proposes changes to the applicable administrative sanctions which can be imposed on regulated entities, and increased penalties which can be levied for non-compliance with any provision therein. Further, the draft regulations includes reference to The Promotion of Administrative Justice Act, 2000 (PAJA) for the first time. Consequently, the amendments required changes to existing definitions or inclusion of new ones.

In this article, we discuss some of the major changes we have noted.

Crypto assets

The draft regulations introduce crypto assets as part of the ambit of exchange control for the first time in South Africa. Crypto assets are already regulated in the financial industry through legislation and regulations by the Financial Sector Conduct Authority (FSCA) and Financial Intelligence Centre.

The draft regulations introduce new exchange control agents, referred to as ‘authorised crypto asset services providers’ (CASPs), whose role is to facilitate crypto asset transactions which are deemed as an import or export of capital which directly or indirectly uses crypto assets as a medium of exchange. CASPs already existed under the Financial Intelligence Centre Act No.38 of 2001(FICA), but their mandate is now extended to the South African Reserve Bank (SARB) through the reference of FICA in the definition of a CASPs in the draft regulations. The FSCA has published a list of CAPs which is available at the FSCA website.

Our understanding is that CASPs will have similar reporting requirements to the current Authorised Dealers who were appointed under the current regulations. They will however only be authorised agents in respect of crypto assets and the transactions related thereto. A separate manual for CASPs has not yet been published but should be published once the draft regulations are finalised and enacted.

It may be expected that reporting systems will exist for CASPs. However, there is no indication yet on what that will look like, or whether it will be similar to, for example, the loan reporting system which is used by Authorised Dealers for the reporting of loans.

Determination of thresholds

The draft regulations introduces a threshold for certain transactions, the exact value of which will be determined by the Minister of Finance and published in the Gazette. Transactions which exceed the determined threshold may require reporting or approval.

The determined threshold will be applicable for certain transactions including, but not limited to the:

• purchase, sale, and loan of foreign currency, gold and crypto assets, including those acquired by the National Treasury;
• import and export of goods and capital to and/or from South Africa; and
• issuing of capital.

A transaction may not be prohibited where it does not exceed the determined threshold.

Administrative sanctions and penalties

The draft regulations set out various administrative sanctions for Authorised Dealers and CASPs who fail to comply with any provisions or conditions of the draft regulations. A person commits an offence if they break any rule, fail to comply with any official notice or condition, obstruct someone carrying out their duties under the draft regulations, or make a false or incorrect statement, whether negligently or intentionally, in any required declaration or return.

The sanctions under the draft regulations include financial penalties, public reprimands, suspension or revocation of authorisation, disqualification of key personnel, transaction restrictions, and requirements for remedial actions. Some sanctions may be suspended under certain conditions, and early settlement is possible before formal proceedings begin. Additionally, the maximum fine for offences is proposed to be increased from R250,000 to R1,000,000.

The maximum period of imprisonment for committing an offence in the draft regulations remains five years as it is in the current regulations.

PAJA introduced into the Draft Exchange Control Regulations

PAJA is directly referred to in the draft regulations and plays a crucial role to see that decisions affecting people’s assets are fair, transparent, and open to challenge.

In the draft regulations, PAJA is directly applicable wherever the National Treasury or an authorised person such as an Authorised Dealers or CASP decides on the forfeiture, seizure, or attachment of assets. It provides procedural fairness, transparency, and provides affected persons with the right to judicial review of administrative actions.

Other notable provisions and changes

The draft regulations provide transitional provisions since the current regulations will be repealed. It indicates that any investigations, prosecutions, court cases, or other legal processes that started under the current regulations can continue and be completed under those old rules.

Any decisions, exemptions, permissions, authorisations, manuals, circulars, directives, or guidance notes issued under the current regulations and still in force when the draft regulations commences, will remain valid. However, these can be changed, withdrawn, or replaced under the new regulations

The draft regulations also proposes the deletion of the restriction on the export of goods from South Africa which were originally imported from outside the “sterling area”.