Friday, 10 October 2014

Why South Africans are being held to ransom

Why South Africans are being held to ransom
Author: Magnus Heystek|
08 October 2014
(www.moneyweb.co.za)

ne of the most enduring deceptions inflicted upon South Africans is the widely held description of the South African Reserve Bank (Sarb) as being an "independent entity," over which the government of the day has no say or control.

Sarb is as much under the control and direction of the ruling ANC today as it was under the National Party before 1994. The ANC decides who to appoint as the Sarb governor and the bank dances to the tune of the ruling party, as we saw in the court papers in the Mark Shuttleworth case last week.

The SCA ruling says the following in this regard: " In the present case, as will be discussed in greater detail, the policy has its genesis in a speech made in Parliament by the Minister (of Finance), which was then recast as policy and found its way into the circulars and rulings referred to earlier."

So here we have what was always suspected: the Minister speaks and the Reserve Bank jumps.

This elaborate deception was practiced by the Nationalist Party government for many decades, especially after the introduction of foreign exchange controls in 1961 following on the Sharpeville massacre, in an attempt to stem the outflow of capital.

Control over money flows

The apartheid regime essentially had one objective initially, namely the control of (black, coloured and Indian) people in order to protect white privilege. It was meant to separate people of different races. It was universally condemned as evil.

When exchange controls were introduced in 1961 this control was extended to the flow of money. People who wished to move their money out of the country, for whatever reason, were now considered to be criminals.

And thus was born the system of exchange controls that, in essence, hasn't changed much in over fifty years.

The control over the flow of money is probably the most powerful weapon any government can exercise over its people. South African citizens who disagreed with the apartheid regime could not move their money and assets out of their country, if they so wished. They either had to break the law and smuggle the money out, in a myriad of forms, or emigrate.

Both of these options cost the country billions of rands.

The ruse

I am always astounded when normally clear-headed newspapers or journalists fall into the trap of 'SA cannot do without its forex exchange controls.'

Foreign exchange controls, regardless of which party they're under, remain one of the more insidious and evil control mechanisms known to man.

It bestows enormous powers on the mandarins who have been given this power and they exercise it with glee as many South Africans, who have fallen foul of these arcane regulations will attest to, including this writer.

The big banks and financial institutions in SA will not publicly criticise foreign exchange controls or the Bank itself. Why should they, as they all make huge amounts of profits as a result of forex controls?

Foreign exchange deals have to be done via permitted banks and anyone buying or selling foreign currency via this system will have experienced the huge mark ups between the bid and offer of a currency. It can be as high as 4% per transaction just to move money out or into the country.

The big investment companies, likewise, just love foreign exchange controls as it ensures that most of the hot money in SA cannot leave and needs to be invested here, again at great fat margins. If money can be invested abroad via asset swaps, the margins are even fatter.

So why would anyone kill the golden goose by calling for the scrapping of foreign exchange controls?

Foreign exchange amnesty

The foreign exchange control amnesty of 2004 uncovered an amount of R65 billion hidden offshore that has now been legalised and sanitised. This, in my opinion, was probably a drop in the ocean compared with the huge amounts of money that was dissipated offshore into foreign tax havens in the preceding forty years.

During the amnesty period I assisted about 200 South Africans in declaring and legalising their ill-begotten stash of money, in most cases held in tax havens earning very little interest. But the real big players who moved substantial fortunes offshore were not swayed by the sweet siren calls of "forgive and forget". That money stayed offshore and will never come back to SA.

Why? Because we still have foreign exchange controls, even in a watered down format and these players will not run the risk of declaring the full extent of their worldwide assets. These assets are held in a variety of formats all over the world in the shape of trusts, companies and other offshore vehicles to hide the true identity of ownership.

You can be sure, dear reader, that most of the business moguls who appear on this website and other media outlets have the bulk of their assets outside of the country. Foreign exchange controls are for the "little people." Although, in fairness, one must add that the R4 million annual offshore allowance has improved matters a lot.

David and Goliath

Many years ago, in 2001, I inadvertently transgressed foreign exchange control regulations by repaying a local business debt of R340 000 by means of a payment of $65 000 from a foreign bank account. This is one of the problems for foreign exchange controls: it is not a law that you break, but an internal ruling made by Sarb which is circulated to the banks but not to the public.

Far worse and evil was the consequences when my transgression was uncovered: all of my bank accounts and credit cards were frozen by FNB on instructions from Sarb, without prior consultation. It also happened to be on January 2, with the holiday season still in full swing.

My dilemma was only discovered when I was sent to buy food for a one-year old baby and my credit card was declined.

Several frantic phone calls later, I discovered that Sarb had ordered my accounts closed, which saw me facing two of the mandarins from this august institution two days later. Imagine yourself in the same situation: all your bank accounts frozen and your lawyer, or any lawyer for that matter, still on holiday.

In the end, it was agreed that R186 000 would remain frozen in one account, while Sarb investigated the matter further. Three years later, to the day, I received an email from the bank saying that on further investigation I was found guilty of transgressing some obscure forex ruling and that my money, still in the frozen account, was forfeited to the state.

No judge, no legal representation, no justice.

I took on Sarb, purely on principle - a little David against a Goliath. I realised I had brought a pea-shooter to a gun fight when, on the first day of the trial, Sarb/Treasury appeared in court with no less than nine advocates. This all for an amount of R186 000 that I wanted returned.

I realised on that day that this government and the Bank would do everything in its power to protect the system of foreign exchange controls. In the end I won my case against Sarb in the high court but lost in the appeal case on very technical grounds.

It seems (my initial attorney didn't know this) that when you bring any constitutional case to court, it needs to be done in terms of a rule 16, meaning you have to put the case on public notice boards outside the courts for all to see.

As my attorney had failed to do so, my legal attempt to have foreign exchange controls ruled unconstitutional failed.

It therefore remained for a very smart and very rich man to take on the full combined might of Sarb, Treasury and the President to change the system. His name is Mark Shuttleworth.

Shuttleworth

The crux of the Shuttleworth-case was similar, just on a much larger scale: a R250 million penalty he had to pay to take his money offshore.

The irony is that when Shuttleworth sold his company Thawte in 1998 to Verizon for a humungous amount of money ($575 million), he willingly brought the money back into the country!

He could have quite easily left on a jet plane never to return again, yet he chose to do the right thing.  But when he requested permission to take money offshore, he found he had to pay the exit penalty of R250 million. How ironic is that?

Shuttleworth needs the moral support of every financial freedom-loving South African.

*Magnus Heystek is investment strategist at Brenturst Wealth. He can be reached at magnus@heystek.co.za for ideas and suggestions.
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