A natural person who is resident in South Africa can take up to R1 million a year out of the country without requiring prior approval from an authorised dealer or the South African Reserve Bank (Sarb).
This exemption from the Exchange Control Regulations is called the single discretionary allowance (SDA). It can be used for any legal purpose abroad, including when travelling overseas, for making offshore investments, and for generally remitting funds offshore.
The SDA recognises the need for a way to move relatively small amounts of money out of the country without applying to an authorised dealer (a bank authorised by the Sarb to approve exchange control applications) or the Sarb itself for approval. The SDA is provided for in section B.4(A) of the Currency and Exchanges Manual for Authorised Dealers.
The exemption comes with the warning or proviso, in section B.4(A)(xii) of the Manual, that the SDA cannot be used to circumvent the Exchange Control Regulations. In essence, this means the discretionary allowance must be used for the intended purpose – travel or minor offshore investments by individuals – and not to sidestep South Africa’s exchange control regime.
The misuse of the SDA was the central issue in the judgment handed down earlier this year in the case of Singh v South African Reserve Bank, say Nicholas Carroll, an associate in Cliffe Dekker Hofmeyr’s tax and exchange control practice, and Louis Botha, a senior associate at the same practice.
They say each transaction involving the use of the SDA requires the person using his or her SDA to notify the authorised dealer for what it is being used. The transaction is reported to the Sarb using the appropriate Balance of Payment (BOP) code.
The BOP code is a unique identifier that helps the Sarb monitor and regulate cross-border transactions. The code includes a combination of letters and numbers that identify the nature of the transaction and the parties involved.
Where the Sarb suspects a person has contravened the Exchange Control Regulations (including the exceptions and permissions in the Manual), regulations 22A and 22C allow the Sarb to issue a “blocking order”, which prevents that person from withdrawing funds from a bank account, Carroll and Botha say.
Regulation 22A allows for the issuing of a blocking order in respect of funds tainted by the contravention. Regulation 22C applies to a blocking order in respect of funds that are yet untainted.
Background to the case
In 2019, the applicant transferred R80 million from his account at the Johannesburg branch of the State Bank of India to his Absa account. Half of this he transferred to various other bank accounts. Of the funds he had transferred out of his Absa account, the applicant remitted roughly R20m out of South Africa via his Bidvest Bank account, Carroll and Botha say.
Bidvest prepared a report stating that several individuals were transferring money in amounts of R1m into the applicant’s Bank of Baroda account in the United Kingdom. It appeared that the applicant did this by transferring these funds to his Bank of Baroda account in the UK in R1m tranches using other individuals’ single discretionary allowances, Carroll and Botha say.
On suspecting this abuse of section B.4(A), and thus a contravention of section B.4(A)(xii), Bidvest reported this to the Financial Surveillance Department of the Sarb. The Prudential Authority (PA) also reported the initial transfer into the applicant’s Absa account to the Sarb because the source of funds had not been verified. Following this, the Sarb placed a blocking order on the applicant’s Absa account holding the remaining R40m.
The applicant took exception to this and approached the High Court in Pretoria for the blocking order to be set aside. The applicant argued:
- The alleged amount remitted was less than R40m, and thus placing a blocking order on the full R40m was not permitted by the regulations;
- He had not contravened the regulations because the remittance of funds was done with the approval of Bidvest, which is an authorised dealer; and
- The Sarb had instituted the blocking order on the instruction of Bidvest and the PA.
The court’s decision
The High Court found that Regulation 22C allows for untainted funds to be the subject of a blocking order if it is suspected that the amounts involved in a person’s contravention of the regulations exceed the amount of the tainted funds. Therefore, the court decided that the Sarb was permitted to issue a blocking order for the full R40m in the applicant’s Absa account, Carroll and Botha say.
The court rejected the applicant’s argument that the transfers using the SDAs of other individuals were permissible because Bidvest Bank, as an authorised dealer, approved them. This was because an authorised dealer cannot permit the remittance of funds in contravention of the regulations (including the exceptions and permissions in the Manual).
Regarding the applicant’s third argument, the High Court found that the Sarb had not relied on the investigations by Bidvest or the PA when deciding to issue the blocking order. Instead, the Sarb had been prompted by these investigations to examine the flow of funds in and out of the applicant’s various bank accounts, thus making its own decision as to the blocking order, Carroll and Botha say.
Foreign capital allowance for remitting more than R1m
The High Court’s decision is a reminder that if an individual wants to remit more than R1m out of South Africa in a calendar year, he or she should make use of lawful means of doing so.
An individual can remit up to R10m abroad annually using his or her foreign capital allowance (FCA), which is also provided for in the Manual. To do this, a person must first obtain a tax compliance status letter for approval of international transfers (TCS for AIT) from the South African Revenue Service (Sars), Carroll and Botha say.
The letter states the amount a person seeks to transfer abroad and essentially that the person is tax compliant for purposes of the transfer.
If the amount transferred is below the R10m annual limit for the FCA, the individual’s bank will likely authorise the transfer without any problems. However, if the amount exceeds the annual R10m limit, prior Sarb approval will also be required before the transfer can be authorised.
Although the new TCS for AIT has made it more difficult to transfer funds abroad, and Sars has become stricter in considering TCS applications, one should make use of this process, and if necessary, seek professional advice, Carroll and Botha say.
Although the TCS and exchange control application process may appear complex in certain respects, they say well-placed professionals have vast experience dealing with authorised dealers and the Sarb and can ensure this process runs smoothly.
South Africa’s grey-listing by the Financial Action Task Force (FATF) is well documented. Although South Africa’s exchange control rules pre-date the advent of the FATF and its rules aimed at combating money laundering and other financial crimes, the regulations have been used effectively by the Sarb to prevent the unlawful movement of funds into and out of South Africa, Carroll and Botha say.
The High Court’s judgment does not indicate why the applicant moved the funds abroad, but it is understandable that transfers of this nature caught the attention of the Sarb and specifically its Financial Surveillance Department and prompted the issuing of the blocking orders, they say.
Disclaimer: The views expressed in this article are those of the writers and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute legal or tax advice that is appropriate to every individual’s needs and circumstances.
