/ 26 February 2004

Coming clean

Small online merchants have been finding loopholes in exchange control for years, but as the laws become clearer and international accountability frameworks are finally restricting their movements, the merchants are going to have to come clean. But how do they do it?

The problem with Internet trading is that it has managed to break down the traditional geographies, cross digital barriers and made a headache of a paper trail for the Reserve Bank, financial institutions and to some extent the merchants themselves. What some merchants have been doing up until now is finding safe havens internationally in which to deposit their Internet revenues, sidestepping the local authorities.

The simple fact of the matter is that countries have foreign exchange laws in place so that they can monitor the flow of currency — in and out. Companies are required to register as exporters to ensure that governments can track domestic product, explore favourable trading options and assist where necessary.

So why do our online merchants see themselves as a law unto themselves? It would appear that smaller merchants are in the position where they feel that they should be able to transact in dollars and keep their money in dollars, transactions should be instantaneous and they should not fall prey to exorbitant bank charges.

Barry Coetzee, CEO of local online payment gateway software house Iveri, says: ”We deal with this issue on a daily basis and there are two viewpoints surrounding it. Firstly, there is a very colonial and illogical idea in merchants’ heads that they need to charge in dollars. Would it be such a bad idea to sell your products in rands?

”The other side is that South Africa does have exchange control laws, it has nothing to do with the banks. What merchants don’t seem to understand is that these are the laws of the country, and there is nothing the banks can do about that.”

Coetzee suggests that merchants take a mature approach on how they structure the sale of their products and make the transactional side appear seamless to the client. So instead of quoting in dollars and making this a hard and fast figure, they should quote in estimates and tell the buyer that the transaction is dependent on currency fluctuations.

They should run their businesses as businesses, and build risk into their profit margins. Multinational organisations have been doing this for decades, but it would appear that online businesses have left this critical element of a business model out of their forecasts.

So how have online merchants managed to find this loophole — and where are they putting their money? The reality is that many e-tailers (as they are known) are individuals or very small operations. Some have been able to get money in through their personal accounts and others have managed to find multi-currency traders offshore who are willing to take the risk.

One such company is WorldPay, a worldwide payment gateway for online merchants based in the United Kingdom. The company offers services extending from online store building and online payment processing solutions right through to more intrinsic multi-currency transaction processing.

But is what these companies are doing legal? The local banks are all in agreement that there are loopholes and grey areas when it comes to online transacting, but when it comes to exchange control things are becoming increasingly black and white.

Trying to partner with offshore organisations that do not specialise in understanding the exchange controls of a given country may land the individual in very hot water.

When asked about this, WorldPay insisted on corresponding via e-mail and did not comment on key issues pertaining to South African exchange laws. The company also avoided questions relating to market allegations that it would be pulling out from some African countries. The company did, however, stress that it wanted to quell fears that it would be pulling out of South Africa and said it would remain active in the local market

While many believe that our exchange laws are damaging to tourism and, in some ways, hamper free trade, the banks are in no position to alter or change these laws.

Steve Meintjes, assistant general manager of corporate banking specialising in global trade at Nedbank, advises customers to get in touch with their bank and find out the right way in which to pursue trading both online and offshore.

”My advice to any business starting up is to consult a financial consultant, your banker or even your accountant, but get solid advice before you head off and land up doing something illegal. The Reserve Bank is very strict about exchange control, but there are always legal ways of doing things,” he said.

He added that the answer is not to address your queries to a teller or a call centre agent.

Meintjes said export is not illegal —it is encouraged by the government — but the way in which you do it has to be monitored for other reasons. These reasons might include the financial welfare of the country. But what with the volatility of world currencies, who can blame governments that take an active interest in ensuring that a sense of normality is instilled.

Exchange control laws can be a minefield because of the grey areas. A simple example is when you book a plane ticket on British Airways’s website. Once you have booked your flight you are given a reference number, but unfortunately this number is not good enough if you want to secure foreign exchange before your flight — you have to be in possession of a valid and certified airline ticket.

According to the banks, some of the biggest frustrations facing online merchants at this stage is the time it takes for money transacted offshore to be made available and the bank charges associated with these transactions. While some might only equate to $1, you might have to start investigating the validity of this when your bank charges rise as high as $30, depending on the fee charged by the offshore bank.

The banks are hesitant to comment on issues directly relating to exchange control. They are willing to offer individuals advice within the parameters of the laws in which they operate, but the gospel is what the Reserve Bank has laid down.

So what do small e-tailers need to do to ensure survival? Firstly, stop trying to get dollars in through the back door and start doing things by the book.

Meintjes says that registered exporters are allowed to hold foreign currency for a specified period of time. So get registered. The people at the revenue service are a lot friendlier than you might expect — they want you to bring in your money so that they can help you part with it.

After you have registered and have a better understanding of the export laws, then head off to the revenue service or even your local bank and find out what the exchange control laws are all about. The South African Revenue Service’s website, www.sars.co.za, has an entire section devoted to these laws.

Exchange laws have been put in place that could land you in a heap of trouble if you don’t follow them.

And while the Internet has been viewed as a law unto itself, the truth is that with the implementation of tighter control laws, and centralised government databases on the status of individuals and their work dealings, people aren’t going to be able to get away with bucking the system no matter how hard they try.