How effective will the South African tax amnesty be?

Amanda Vermeulen reports that South Africans are being offered an amnesty on cash they may have stashed outside the country

The South African Government took the unusual step of announcing in its annual budget speech to the nation in February this year that it would extend an unconditional amnesty to citizens who had illegally secreted funds outside the country during the nation's pariah years under apartheid, providing they declared the full details of the money to the relevant authorities.

The amnesty, which covers both tax and foreign exchange, is the second such 'pardon' that the new political administration has extended to its citizens since the first democratic elections in 1994. The first amnesty was to certain perpetrators of political crimes, both against the previous regime and victims of apartheid under the Truth and Reconciliation Commission (TRC).

A key element of this latest amnesty is that the applicants must be able to prove that their offshore funds are not the product of illegal activities and, secondly, that they are in possession of their tax returns for 28 February 2003. The amnesty is therefore as much about foreign exchange as it is about normalising South Africa's tax regime.

According to a variety of government and private sector economists, between R10bn (£900m) and R100bn (£9bn) is believed to have been illegally sent out of South Africa to evade the country's draconian exchange control legislation.

Political uncertainty in South Africa in the last five decades undermined the stability of the economy, especially after the international community imposed sanctions and the South African Government imposed exchange controls prohibiting its citizens and companies freely investing abroad.

In addition, the turmoil in the rest of the continent, especially in neighbouring states such as Zimbabwe and Mozambique, prompted many South Africans to send money abroad in the event of a rapid, politically-inspired emigration, or if their funds were frozen by Government, as happened in those countries after political upheaval.

The latest amnesty - applications can be made up to 30 November this year - will offer individuals, close corporations and trusts the opportunity to declare this money, apply for exemption from prosecution, and choose between paying a 5% levy (in the currency of the country where the funds are currently domiciled) if they choose to repatriate the funds to South Africa or a stiffer 10% charge if they opt to keep their funds abroad.

Although some might see this a high price to pay, it is the lesser of two evils. Earlier this year, the South African Parliament enacted the Financial Intelligence Centre Act (Fica), following on the heels of the Prevention of Organised Crime Act (Poca), which was enacted in 1999. The two pieces of legislation work hand in glove to assist the global movement against money laundering and organised crime.

South Africans who choose not to apply for amnesty risk prosecution under both Fica and Poca, and the penalties are severe. In terms of Fica - which places extremely onerous responsibilities on both banks and especially financial advisers such as accountants and auditors - any person who is aware of any suspicious or unusual transactions (such as the movement of illegal foreign exchange or tax evasion) must report this to the Financial Intelligence Centre. Maximum penalties include 15 years in jail and a R10m (£900,000) fine. Poca is even more draconian - 30 years in jail and R100m fine (£9m). And this does not take into account the penalties for not declaring foreign exchange, which in itself carries a maximum five-year jail term.

However, in terms of the amnesty, which is created by a special temporary amendment to South Africa's Tax Act (and will fall away on 30 November), financial advisers were not initially immune from prosecution in terms of the money laundering legislation.

In other words, any accountants and auditors giving advice to clients regarding their 'grey money', i.e. illegal foreign exchange and applications to amnesty, could have been liable to prosecution under both Poca and Fica. As a result, there were reports that a number of the auditing and consulting firms were reluctant to stay removed from the issue until the matter was resolved, which in turn had an effect on the number of people who applied for the amnesty.

Some advisers believe that the solution - a temporary moratorium for brokers and advisers from Fica's section 29 (which forces them to disclose knowledge of suspicious transactions related to foreign exchange or tax) - is insufficient protection but, fortunately for them, amnesty applicants are not obliged to disclose the identities of their brokers or advisers.

Witch hunt

The amnesty unit says that about 600 applications had been received by August, and that this was expected to increase up to the deadline date of 30 November. But concerns have been voiced that the entire amnesty process would be used as an identification process to launch a witch hunt against those who had acted illegally and perhaps 'unpatriotically' against the country. One current advertising campaign for a large fund manager sums up the sentiment towards the amnesty, and the scepticism in which it is seen. The pay-off line is: 'If you have a friend who has a friend who wants to know about the amnesty, give us a call.'

A further complication regarding the amnesty is that it only applies to individuals, close corporations and trusts. Yet it is believed that a number of people who sent money abroad used their employers or companies to facilitate the process. Applying for amnesty would implicate and compromise their corporate employers who would not be immune from prosecution.

The amnesty issue does have a number of benefits though. In addition to the inflows to the country, if indeed it is embraced by South Africans who see that the domestic investment opportunities are better now than foreign opportunities, there is also the boon to the domestic fund management industry, which has been suffering from a slump in the last 18 months, and a less than glittering performance in its funds.

In addition, many commentators believe that a strong and positive response on the amnesty will allow the South African Government to continue relaxing exchange controls, as it has done in the last few years, as part of a larger plan to normalise the domestic economy.

Amanda Vermeulen is the deputy editor of South African magazine, Finance Week.