What are Exchange Controls and what purpose do they serve?

Simply put, exchange controls are controls put in place by governments (through legislation and regulations or directives by their central banks) to regulate the flow of foreign currencies, cross-border movement of capital, inward and outward foreign investments and international trade. While such controls defy the free-market enterprise economic model, they are exceptionally permitted under international law for countries with transitional economies (particularly Article 14 of the IMF and implied in various World Trade Organization Agreements). The purposes of enforcing exchange controls among others are:

1. for a country to ensure receipt of fair value for exported goods and services,

2. for a country or an economy to curb externalization of local resources by verifying reason for all offshore payments and movement of capital assets,

3. to control the adverse effects of ad hoc disinvestment by foreign businesses on the economy and

4. generally, to promote a healthy balance of payments position through policy interventions.

The role of Banks as Exchange Control Practitioners

One of the reasons why many lawyers may not be so conversant with the Exchange Control function is the fact that it is usually carried out by and through bankers. Being at the crossroad for all financial and trade exchanges in the international context, banks occupy a very convenient space which allows them to be key players in the Exchange Control function. It is for this reason that the Exchange Control function while being a legal one has tended to be more familiar among Bankers than Lawyers. That as it may be, the function remains a legal one and requires to be understood and treated as such. The world over banks are legislatively empowered to enforce exchange controls on behalf of their nations. In the Zimbabwean context, banks are issued with an authorised dealership license by the RBZ which permits them to deal as exchange control practitioners. The issuance of such a license is based on the results of offsite and onsite inspections done by the Reserve Bank of Zimbabwe (RBZ) on a bank to determine its level of exchange control compliance. Upon issuance of a license, a bank’s role is to ensure compliance and advise clients on exchange control issues as directed by legislation and directives periodically given by the RBZ. As already highlighted, while transacted through banks, the Exchange Control function remains a legal one and it therefore is incumbent upon any client who seeks to engage in cross- border trade to seek legal advice as relates to Exchange Control compliance both in the domicile country and the country or countries within which trade transactions should take place.

Conclusion

Without the exchange control function, global trade would be very difficult as nations would be vulnerable to each other and to illicit global trade practices bent on prejudicing economies. Economies would not have mechanisms to control both the inward and outward flow of capital resources. It therefore becomes imperative and incumbent upon any client wishing to engage in global trade to familiarize with the requisite exchange control compliance requirements governing their trade transactions lest they lose out to various non-compliance sanctions administered by various Exchange Control functionaries and authorities globally.