SUBMISSION TO THE PORTFOLIO COMMITTEE ON POLICE ON THE PRIVATE SECURITY INDUSTRY REGULATION AMENDMENT BILL, B27-2012, November 1 2012

on behalf of Control Risks SA (Proprietary) Limited

Peter Leon, Head, Africa Mining and Energy Projects
Webber Wentzel, Johannesburg

Jonathan Veeran

Partner, Africa Mining and Energy Projects
Webber Wentzel, Johannesburg

OVERVIEW

Our presentation focuses on the following key areas:

The business of Control Risks SA (Proprietary) Limited ("Control Risks SA") and other similarly placed businesses within the South African private security industry

Problematic clauses of the Private Security Industry Regulation Amendment Bill, 2012 ("the Bill"):

• the potential detrimental impact of clause 9 of the Bill:
• the potential breach of section 25 of the Constitution of the Republic of South Africa, 1996 ("the Constitution") (the property clause)
• the potential breach of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of South Africa for the Promotion and Protection of Investments of 27 May 1998 ("the SA-UK BIT")
• the potential detrimental impact of clause 11 of the Bill:
• the potential breach of section 9 of the Constitution (the equality clause)
• vague, ambiguous and overly-broad provisions in the Bill:
• the degree of control to be given to South African citizens under clause 9
• the lack of a transitional provision relating to the amendments in clause 11
• the over-broad discretion afforded to the Minister of Police ("the Minister")

THE BUSINESS OF CONTROL RISKS SA

Control Risks SA is a wholly-owned subsidiary of Control Risks Group Holdings Limited ("Control Risks Group"), a United Kingdom company ("the UK").

Control Risks Group is a global risk and strategic consulting firm specialising in political, security and integrity risk. It aims to help its clients to understand and manage the risks of operating in complex environments.

Control Risks Group brings together the expertise of regional political risk analysts, business intelligence and corporate investigation experts, as well as security consultants, to offer fully integrated, information-led risk management services.

Control Risks Group currently provides strategic advice and crisis management assistance and wishes to offer these services through its South African ("SA") office.

Control Risk Group wishes to provide a high value added service to its SA clients both domestically and across Africa.

In light of this, Control Risks SA is in the process of registering as a security services provider under the Private Security Industry Regulation Act, 2001 ("PSIRA") as some of the services it wishes to offer through its SA office fall under the Act's definition of "security services".  

In order to register under the PSIRA, Control Risks SA is in the process of appointing both executive and non-executive directors who are South African citizens or permanently resident in South Africa.

Certain of its key staff are, however, foreign nationals.

Currently, under section 23 (read with section 20(1)(a) and 20(2)) of PSIRA, directors and persons performing an executive or managerial function on behalf of a security services provider must be, among other things, either a citizen of or permanently resident in South Africa.

The foreign nationals on the staff who fulfill an executive or a managerial function at Control Risks SA are in the process of applying for permanent residence in South Africa in order to comply with the current provisions of PSIRA.

PROBLEMATIC CLAUSES OF THE BILL

Clause 9 of the Bill amends section 20 of PSIRA to include:

• an additional requirement for the registration of a security business: that at least fifty-one per cent of the business must be owned and controlled by South African citizens;
• a provision empowering the Minister to prescribe different percentages of local ownership for certain categories of security services. No time frame is specified for security services providers to restructure their businesses to comply with ownership percentages prescribed by the Minister; and
• a transitional provision which requires that companies which are registered as security services providers when the Bill is enacted must divest of at least fifty-one per cent of their equity to South African citizens within five years.

Clause 11 of the Bill amends section 23 of PSIRA to require:

• that every natural person who wishes to register as a security services provider under PSIRA must be a South African citizen (as opposed to being a South African citizen or permanently resident in South Africa, as PSIRA currently permits); and
• that a security services provider which is incorporated as a company must be fifty-one percent (or such percentage prescribed by the Minister for certain categories of security services) owned and controlled by South African citizens.

Clause 11 of the Bill does not stipulate a transitional period to allow security businesses to make the necessary arrangements to comply with the amended registration requirements regarding natural persons under section 23(1).

If the Bill is enacted, Control Risks SA, as currently structured, will not be able to register as a security services provider as:

• it would not meet the fifty-one per cent South African ownership and control requirement, or any alternative South African ownership and control percentages unless that percentage is zero;
• certain of its executive and managerial staff are in the process of applying for permanent residence status in South Africa, and would now need to become South African citizens if the amendment to clause 11(a) were to come into force.

The impact of the problematic clauses in the Bill would require that:

• Control Risks Group divest fifty-one per cent of its shareholding in Control Risks SA to South African citizens;
• Control Risks Group forfeit its right to control its South African subsidiary to South African citizens which may affect the service rendered to it clients; and
• Control Risks SA dismiss any non-South African director or any non-citizen fulfilling a position which involves executive or managerial functions.

THE POTENTIALLY DETRIMENTAL IMPACT OF CLAUSE 9 OF THE BILL

Section 25 of the Constitution: property

Clause 9 of the Bill imposes a severe limitation on the rights of affected persons under section 25 of the Constitution, which provides that:

• no one may be deprived of property except under a law of general application, and no law may permit the arbitrary deprivation of property;
• property may be expropriated only for a public purpose or in the public interest, and subject to compensation.

Property under section 25 includes shares in a company.

An expropriation has been described as the forced transfer of a right in property.The requirements for a lawful expropriation are:

• a deprivation of property, which has been broadly interpreted by the Constitutional Court to include "any interference" with property rights;
• it must take place under a law of general application;
• it must not be arbitrary, i.e. there must be "sufficient reason" for the deprivation;
• it must be for a public purpose or in the public interest; and
• the expropriation must be subject to the payment of compensation.

The deprivation in the Bill appears to be arbitrary, in that there is no sufficiently reasonable or rational connection between the deprivation and the Bill's purpose:

Paragraph 1 of the Memorandum on the Objects of the Bill ("the Memorandum") lists the "increased threat to national security posed by the participation of foreign nationals in the industry" as one of the challenges to the industry. However:

• it does not explain how foreign nationals pose a threat;
• it fails to draw a link between permanent residents and the threat to national security;
• neither the Bill nor the Memorandum explains how the compulsory equity divestiture or change in control of security businesses will diminish the threat, bearing in mind that forty-nine per cent of a business could still vest in foreign hands.

Section 198 of the Constitution provides, among other things, that national security must reflect the resolve of South Africans to live as equals, and that it must be pursued in compliance with the law, including international law.

Our courts have, in a number of cases, refused to allow the state to rely on national security interests to justify the infringements of other Constitutionally protected rights, including the right to a fair dismissal, the right to freedom of expression and open justice.

In the Constitutional Court judgment of Masetlha v President of the Republic of South Africa 2008 (5) SA 31 (CC), Sachs J observed that "[e]xemptions, including those set out in favour of national security, are presented as exceptions, and not as the norm". (para 157)

The Bill fails to provide for compensation as required by section 25(2) of the Constitution.

Clause 9 of the Bill cannot be justified under section 36 of the Constitution, as there is no cogent relationship between the limitation and its purpose, and there may be less restrictive means by which the government can manage any perceived threat to national security.

Possible claims under the SA-UK BIT

The SA-UK BIT is a bilateral investment treaty between SA and the UK establishing the terms and conditions for foreign direct investment by nationals and companies of one state in the other.

If clause 9 of the Bill is enacted, South Africa will be in breach of its international law obligations and Control Risks Group may have a claim against the South African government under Articles 2, 3 and 5 of the SA-UK BIT by way of international arbitration.

Control Risks SA, which was registered in March 2010, will qualify as an "investment" under the SA- UK BIT.

Article 2 of the SA-UK BIT: Fair and equitable treatment

Article 2.2 requires that SA accord investments of nationals or companies of the UK fair and equitable treatment, and shall not impair the management, maintenance, use, enjoyment or disposal of their investments by unreasonable or discriminatory measures.

This includes an obligation on SA to act in good faith, without ambiguity and in a manner which is not arbitrary or discriminatory.

The enactment of clause 9 of the Bill would, however:

• be unreasonable, as there is no apparent relationship between the Bill's compulsory equity divestiture provisions and its purpose; and
• be discriminatory, as it requires unjustifiably differential treatment of UK investors and investments in SA on the basis of nationality.

Article 3 of the SA-UK BIT: National treatment

Article 3.1 requires that SA shall not subject the investments and returns of nationals or companies to treatment less favourable than that which it accords to its own nationals or companies.

Article 3.2 requires that SA shall not subject UK nationals or companies, as regards their management, maintenance, use, enjoyment or disposal of their investments, to treatment less favourable than that which it accords to its own nationals or companies.

Clause 9 of the Bill clearly imposes differential treatment on security businesses which are majority owned and controlled by SA citizens, and those which are not. This is directly attributable to the nationality or citizenship of the particular investor.

It constrains the freedom of non-citizens to own and control their security businesses, and UK citizens face treatment less favourable than that of SA citizens.

SA citizens who own and control security businesses already comply with such requirements, and thus would not be prejudiced by the enactment of the Bill. However, Control Risks Group, a UK company, would face treatment less favourable than that accorded to SA citizens who own and control a business comparable to Control Risks SA.

Article 5 of the SA-UK BIT: Expropriation

Article 5.1  requires that SA shall not nationalise or expropriate the investments of UK nationals or companies except for a public purpose related to the internal needs of SA on a non-discriminatory basis, and against prompt, adequate and effective compensation.

Control Risks Group's shares in Control Risks SA would be subject to indirect expropriation as a result of the substantial interference in the rights of ownership to its shares in Control Risks SA.

Any expropriation brought about by clause 9 of the Bill would violate the SA-UK BIT as:

• the Bill fails to provide for compensation as required under article 5.2; and
• the operation of the Bill's compulsory equity divestiture discriminates against foreign nationals on the basis of their citizenship.

THE POTENTIALLY DETRIMENTAL IMPACT OF CLAUSE 11 OF THE BILL

Section 9 of the Constitution: Equality

Control Risks SA employs foreign nationals in executive and managerial positions owing to their extensive qualifications, expertise and experience.  As a result of clause 11, Control Risks would need to demote or dismiss such persons from its employ. This would be detrimental to the business of Control Risks SA.

Clause 11 may violate the right to equality of a non-citizen who is a director or performs an executive or managerial function in a security business at the time of the Bill's enactment.

Clause 11 amounts to prohibited differentiation in that its enactment would accord differential treatment to different categories of persons. This amounts to discrimination if it falls under one of the grounds under section 9(3) of the Constitution, or an analogous ground.  Discrimination on the basis of citizenship has been accepted as an analogous ground by the Constitutional Court.

 Section 25(1) of the Immigration Act, 2002, ("the Immigration Act") provides that permanent residents "have all the rights, privileges, duties and obligations of a citizen, save for those rights, privileges, duties and obligations which a law or the Constitution explicitly ascribes to citizenship".

The Immigration Act does not specifically exclude permanent residents from certain employment positions. In fact, section 27(a) provides for the granting of permanent resident status to persons on the basis that they have received an offer for permanent employment in South Africa, and that, among other things, they have proven to the satisfaction of the Director-General of Home Affairs that no suitably qualified citizen or permanent resident was available to fill the relevant position.

In Larbi-Odam v Member of the Executive Council for Education (North-West Province) 1997 (12) BCLR 1655 (CC), Mokgoro J, on behalf of a unanimous Constitutional Court , held as follows as regards permanent residents:

"In my view, the regulations clearly constitute unfair discrimination as regards permanent residents of South Africa.  They have been selected for residence in this country by the Immigrants Selection Board, some of them on the basis of recruitment to specific posts.  Permanent residents are generally entitled to citizenship within a few years of gaining permanent residency, and can be said to have made a conscious commitment to South Africa.  Moreover, permanent residents are entitled to compete with South Africans in the employment market.  As emphasised by the appellants, it makes little sense to permit people to stay permanently in a country, but then to exclude them from a job they are qualified to perform." (para 24)

If challenged, the government would be unlikely to prove that the discrimination between citizens and permanent residents is fair, given that:

• non-citizens, including permanent residents, are considered a vulnerable group;
• the Bill and the Memorandum fail to provide any link between diminishing the threat to national security and a change in control of security businesses from permanent residents to SA citizens; and
• the severe adverse impact on the interests permanent residents who will no longer be able to be employed as registered security services providers.  The Constitutional Court has held that a person's profession is an important part of his or her life and that the denial of security of tenure affects a person's capacity to build a life. In addition, in Khosa v Minister of Social Development 2004 (6) BCLR 569 (CC), the Constitutional Court held, in considering discrimination against permanent residents,  that the "intentional, statutorily sanctioned unequal treatment of part of the South African community" has "a strong stigmatising effect". (at para 74)

The infringement of section 9 of the Constitution cannot be justified under section 36  given:

• the fundamental importance of the right to equality;
• that the discriminatory measures have no apparent legitimate governmental purpose;
• that the discriminatory measures impose a severe limitation on the rights of affected persons; and
• that there are arguably less restrictive means by which the government can ensure that foreign nationals in the private security industry do not present a national security risk.

VAGUE, AMBIGUOUS AND OVERLY-BROAD PROVISIONS

The degree of control to be given to South African citizens under clause 9(a) of the Bill

Both clauses 9(a) and 11 of the Bill affect the directors or persons performing executive or managerial functions in a security business:

clause 9(a) requires that no security business may register as a security services provider unless fifty-one per cent of that business is owned and controlled by SA citizens. Control most likely refers to the directors or persons performing executive or managerial functions; and

section 23(2)(a) of PSIRA, read with section 23(1)(a) as amended by clause 11 of the Bill, stipulates that no person may perform executive or managerial functions in or be a director of a security services provider unless they are a South African citizen.

However, there appears to be a patent ambiguity between the amendments under clause 9(a) and clause 11 of the Bill:

• on the one hand, clause 9(a) requires that only fifty-one per cent of the control of a security services provider must be exercised by SA citizens;
• on the other hand, section 23(2)(a) of PSIRA, read with section 23(1)(a) as amended by clause 11, may effectively require one hundred per cent of the business to be controlled by SA citizens.

This patent ambiguity cannot be reconciled with the rule of law principle that legislation must be stated in a clear, accessible and reasonably concise manner, and thus could well be declared unconstitutional and invalid.

The uncertain effects of amendments proposed and the lack of a transitional provision in clause 11 of the Bill

The Bill amends the requirements for a natural person to register as a security service provider so that only South African citizens may register.  This also affects the registration of businesses which are security services providers as it requires that every natural person performing managerial or executive functions for such a business or every director, if the business is a company, must be a South African citizen.

It is not clear whether the Bill intends this provision to apply retrospectively to persons and businesses already registered before its enactment.

If the amendments do apply retrospectively, there is no transitional provision in the Bill regulating the operation of these provisions. This would leave security businesses with executive or managerial staff who are not citizens in contravention of the Act and would constitute an offence under section 38(3)(a) of PSIRA.

The discretion afforded to the Ministers under clause 9(b) of the Bill

The enactment of clause 9(b) would give the Minister a broad discretion to prescribe different percentages of ownership and control requirements in respect of different categories of security businesses.

In exercising this discretion, the Minister must, rather vaguely, be guided by "the security interests of the Republic".

In Affordable Medicines Trust v Minister of Health RSA 2005 (6) BCLR 529 (CC), the Constitutional Court stated that the discretion conferred on an official must "not be so broad or vague that the authority to whom the power is delegated is unable to determine the nature and the scope of the powers conferred... [f]or this may well lead to the arbitrary exercise of the delegated power." (at para  34)

The proposed amendment under clause (9) arguably runs contrary to the rule of law as it is vague and ambiguous, and affords the Minister too broad a discretion.

The uncertainty that this will create in the event that the Bill is enacted in its present form will undermine both local and foreign investor confidence. Foreign direct investment has already declined by 43.6 per cent in the first half of 2012 compared to the same period last year.

CONCLUSION

The amendments proposed in clauses 9 and 11 of the Bill are likely to have a negative impact on the business of Control Risks SA and similarly placed security service providers.

The amendments are arguably irrational as there is no rational connection between the measures proposed and a legitimate governmental purpose.

Clause 9 of the Bill may infringe upon the rights of Control Risks SA, Control Risks Group, and other similarly placed companies under section 25 of the Constitution.

Clause 9 of the Bill may place the South Africa in breach of the SA-UK BIT, as well as other bilateral investment treaties depending on the shareholding in, and corporate structure of, a particular security service provider.

Clause 11 of the Bill may violate the right to equality under section 9 of the Constitution of any non-citizen who is a director or who performs an executive or managerial function in a security business at the time of the Bill's enactment.

Clauses 9 and 11 of the Bill contain vague, ambiguous and overly-broad language which may render these clauses unconstitutional owing to their inability to meet the requirements  of the rule of law principle enshrined in the Constitution.

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