A Review of Third-Party Payments and Merchanting Transactions with regards to the South African Reserve Bank (SARB) Rulings

In the ever-evolving landscape of international trade and finance, South African businesses often find themselves navigating a maze of regulatory requirements imposed by the South African Reserve Bank (SARB), particularly when it comes to cross-border payments. At WauTreasury, we specialize in simplifying and navigating this complexity for our clients This article explores a hypothetical (but entirely plausible) scenario where we assisted a client resolve a critical payments issue, while also shedding light on the regulatory distinctions between third-party payments, merchanting transactions and the South African Reserve Bank (SARB) rulings that govern them.

The Client’s Challenge

Client X, a locally -based importer of high-end electronics, entered into a contract with a European supplier to purchase a large consignment of smart home devices. The goods were to be shipped directly from the manufacturer based in Germany to a warehouse in Kenya, where Client X’s East African distributor would handle regional distribution.

Prior to becoming a client of ours, Client X attempted a payment through its bank, but the transaction was flagged by the Banks’ Exchange Control (Excon) department and ultimately rejected by the bank.

The reason? The payment was being made to a third party not listed on the commercial invoice, and the goods were not being imported into South Africa. This triggered Excon concerns under the Currency and Exchanges Manual for Authorised Dealers.

Our Intervention

Once WauTreasury onboarded the client, we immediately reviewed the transaction documentation and identified the two prevalent issues with the transaction:

1. 1. The payment was structured as a third-party payment, where the beneficiary was not the supplier listed on the invoice.
      – This was evident from the discrepancy between the invoicing party’s name and the beneficiary bank details listed at the bottom of the invoice, which reflected a completely different company.
   2. The goods were not destined for South Africa, raising the possibility that the transaction could be classified as a merchanting transaction.
      – A key indication of this could be listed on the shipping documents – particularly the official waybill, the SAD 500, and other customs documents.

We engaged with the client to clarify the nature of the transaction. Through this engagement, it was determined that a formal application had to be made to the Financial Surveillance Department (FinSurv) of the SARB, including:

• A detailed explanation of the commercial arrangement
• Documentary evidence including the invoice, shipping documents, and the tripartite agreement between the client, supplier, and distributor
• A request for approval under the relevant sections of the Currency and Exchanges Manual

Given that all companies in South Africa are required to understand and follow the SARB rulings, it is important for businesses to understand the SARB’s treatment of third-party payments and merchanting transactions.

Third-Party Payments

According to the SARB Manual, Authorised Dealers must not effect payments to third parties abroad unless prior written approval has been obtained from the Financial Surveillance Department. A third-party payment occurs when the remitter pays a party other than the one listed on the invoice or contract. These transactions are scrutinized to prevent illicit financial flows, tax evasion, and circumvention of exchange controls.

In Client X’s case, the payment was being made to a logistics intermediary in the Netherlands, while the invoice was issued by the German manufacturer. This discrepancy constituted a third-party payment, which required prior approval from the SARB. Such approval may be granted upon submission of a formal application, supported by the necessary documentation, before the transaction can proceed.

Merchanting Transactions

Merchanting transactions are defined as transactions where goods are purchased from a non-resident and sold to another non-resident, without the goods entering South Africa. These are subject to the provisions of Section B.12(A) of the Manual, as well as other updates recently published which can be found on the SARB’s website.

In such cases, the South African entity functions as an intermediary, earning a margin on the transaction. Although merchanting action is permitted, it must be accurately reported. The proceeds must be repatriated to South Africa within the prescribed timeframe. SARB also requires comprehensive supporting documentation to ensure that the transaction is legitimate and that the foreign currency proceeds are accounted for.

Required Documentation typically includes invoices (supplier to intermediary, intermediary to distributor), shipping documentation, and a tripartite agreement clarifying roles and proof of margin returned to South Africa.

In our scenario, because the goods were shipped directly from Germany to Kenya, the transaction qualified as a merchanting transaction. This classification required additional reporting obligations and compliance with Regulation 6 regarding the repatriation of proceeds.

The Resolution

With our assistance, Client X’s application was approved by FinSurv under the following conditions:

• The transaction was classified as a merchanting transaction
• The client was required to repatriate the full proceeds of the sale to Kenya within 30 days of receipt
• The third-party payment was approved based on the tripartite agreement and supporting documentation

In this case, we also worked with the client to ensure that the transaction was correctly reported on the FinSurv Reporting System under the appropriate Balance of Payments (BoP) category.

Lessons Learned

This case between WauTreasury and Client X highlights the critical importance of understanding the nuances of SARB regulations when managing international payments from a South African perspective.

The following key takeaways emerge:

1. Always align payment flows with documentation: Payments must match invoicing and third parties must be supported by clear contractual arrangements and require prior approval.
2. Know when a transaction qualifies as merchanting: If goods do not enter South Africa, the transaction may fall under merchanting rules, triggering specific compliance obligations.
3. Engage early with Authorised Dealers and FinSurv: Proactive communication and submission documentation can prevent costly delays, which could also hamper the relationship between client’s, foreign suppliers, and buyers.
4. The value of a trusted and knowledgeable treasury partner: WauTreasury’s expertise in navigating SARB regulations, preparing applications, and liaising with banks and regulators can save clients time, money, and reputational risk.

In a globalised economy, South African businesses are increasingly required to operate across borders. However, the regulatory framework governing international payments remains complex and often unforgiving. Our strategic focus is to bridge this gap, helping clients remain compliant while executing their global strategies with confidence and efficiency.

Should a client wish to confirm whether a specific transaction aligns with SARB rulings before proceeding, our team will diligently review the details and provide guidance, offering peace of mind before any instruction is given.

Whether it’s a third-party payment, a merchanting transaction, or a more routine foreign exchange requirement, we aim to deliver the clarity, compliance, and confidence businesses need to thrive in the international arena.

Connect with Michelle van Niekerk – mvanniekerk@wauko.com or phone 021 819 7825 – should you have any questions or need help with cross-border related matters that can assist your business.