Multinational enterprises (MNEs) doing business in South Africa should take note of an aspect of the country's Exchange Control Regulations, 1961, that is frequently overlooked – settling cross-border obligations by way of set-off without prior regulatory approval is prohibited in the country.
 
In terms of Regulation 3(1), Regulation 10(1)(c) and Regulation 22 of the SA Exchange Control Regulations, cross?border set?off is considered a form of capital export. Prior approval is required from the South African Reserve Bank's Financial Surveillance Department (FinSurv).
 
Per the country's Exchange Control Regulations, all cross-border payments, receipts and settlements involving South African residents are subject to oversight by the Finsurv and must be processed through an Authorised Dealer (typically a South African-registered commercial bank).
 
The general rule is that where a South African resident owes an amount to a non-resident, this obligation must be settled via an authorised cross-border payment, which must be processed by an Authorised Dealer. Unless FinSurv has granted prior approval, simply netting or setting off mutual obligations across borders is not permitted, even if it is the commercially logical approach.
 
This issue can often come as a surprise to MNEs because, globally, intra-group transactions, intercompany loans, management fees, royalties, dividends or supply arrangements are often structured on a net or set-off basis.  These entries are causally journaled through the accounting records of the MNE. 
 
While acceptable in other jurisdictions, implementing these practices in South Africa without prior approval will constitute a direct contravention of Exchange Control Regulations, regardless of whether there was any intent to circumvent the rules.
 
Non-compliance with South Africa's Exchange Control Regulations can be severe. FinSurv has extensive powers to investigate suspected exchange control contraventions and take enforcement action. Such powers include the ability to declare transactions to be in contravention of the regulations (with potential sanctions set out below).
 
If a transaction is found to be in contravention of the regulations, FinSurv may direct parties to unwind or regularise unlawful transactions, impose substantial administrative penalties (possibly as high as the value of the transaction) and may require the forfeiture of amounts involved in the contravention. Directives may also be issued to Authorised Dealers and affected parties, resulting in ongoing operational and reputational consequences.
 
In an environment of increasing regulatory scrutiny, fully considering country-specific regulations before implementing cross-border transactions will be much less costly than remedial action. For MNEs transacting in South Africa, compliance with the country's exchange control regime is essential to managing the legal, financial and reputational risks.