Is the Extension of Exchange Control Regulations to IP Unlawful?

22 June 2012

On 8 June 2012 the President of South Africa gazetted a brief amendment to the Exchange Control Regulations in a purported attempt to extend their application to "any intellectual property right", whether "registered and unregistered". This was done by expanding the meaning of the otherwise undefined term "capital". This amendment was a surprise to practitioners as it was not promulgated after any consultation process, nor did any announcement or explanation accompany it. It was also a surprise in view of Government's stated policy of relaxing exchange controls.

The effect of this purported extension of exchange control restrictions is a freeze on the direct or indirect export of all Intellectual Property from South Africa, without the prior express permission from the South African Reserve Bank ("SARB").

This amendment is clearly an attempt to close the gap created by the Supreme Court of Appeal ("SCA") judgment in Oilwell (Pty) Ltd v Protech International Ltd ("Oilwell Judgment"), which held that exchange control approval is not required when a South African resident transfers ownership of intellectual property to a non-resident. According to the Oilwell Judgment, exchange controls can only apply to cash and currency transfers. Unfortunately, this far-reaching amendment is potentially both unlawful and unconstitutional.

The reason is that the empowering provision to make the Regulations themselves, which is contained in section 9(1)(a) of the Currency and Exchanges Act 9 of 1933, refers to the ability of the President to "make regulations in regard to any matter directly or indirectly relating to or affecting or having any bearing upon currency, banking or exchanges“. This empowering provision does not cover Intellectual Property, making any purported regulation dealing with Intellectual Property potentially unlawful.

Even if one were to accept the proposition that Intellectual Property could be the subject of Regulations under the Currency and Exchanges Act 9 of 1933, then the section 9 power to create this restriction may itself be unconstitutional. This is because the power to legislate is given by the Constitution exclusively to Parliament, which in turn may prescribe circumstances in which secondary or delegated legislation (such as Regulations) may be issued. The potential for the issuing of Regulations does not, however, mean that the President can usurp from Parliament the power to legislate. This Constitutional protection is particularly relevant in respect of amendments that criminalise everyday activities like the creation of IP, as alluded to in the Oilwell Judgment. The result is arguably that the current Exchange Control Regulations unlawfully and unconstitutionally restrict the export of Intellectual Property.

While on the face of it, this amendment is a positive step in that it attempts to create certainty by legislating a partial definition of the term "capital" and of the phrase "exported from the Republic", neither is in fact fully defined. Further, the new phrase "any intellectual property right" is itself not defined. Consequently, this amendment creates substantial uncertainty not only because of its doubtful legality, but also because of the lack of definitional detail.

If the Government wishes to avoid further court action like the Oilwell Judgment, Parliament needs to urgently intervene to rectify this legislative debacle.

For further details please contact Benjamin Cronin at (benjamin.cronin@webberwentzel.com) or alternatively 072 259 9454.