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Exchange Control, 1939-1979: Customs and Excise
From Your Archives
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This memorandum was originally written by Brandon Hugget in March, 1980.
From September 1939 until December 1979 the Exchange Control Branch of the Customs was engaged in agency work on behalf of the Treasury. The following notes are offered as a brief overall picture of the work involved and its development over the years. They have been compiled from personal recollection, supplemented by some inherited historical papers (far from complete, following numerous office moves) and there will almost inevitably be gaps and inaccuracies here and there. This memorandum deals with the Customs and Excise issues and not those of Treasury (who dealt with policy) or the Bank of England.
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[edit] Inception of the Control
In the early days of 1939 discussions took place between the Treasury, the Bank of England, Customs and the Clearing Office about the type of control which would be needed to safeguard the country's financial position if war were to be declared (CUST 115/92-43). Aspects involving investment fell naturally to the Bank of England and the clearing banks but it was agreed that the Valuation Branch of the Customs should take responsibility for the control where the physical movement of goods was concerned and the outline of a system was devised in readiness. This came into operation in September 1939 in respect of payments for imports and in stages during 1940 for exports.
Papers on the introduction of the control on the movement of gold, currency notes and securities are not available but it was in operation in 1941 and was carried out by a section of the Secretaries' Office in the early days.
[edit] Law
Powers were taken initially under the Defence (Finance) Regulations, 1939 and later under the Exchange Control Act, 1947. Statutory Instruments were issued as necessary under both these enactments to define the scope of the various restrictions and the Treasury formally delegated its powers under specified sections of the 1947 Act to the Commissioners of Customs and Excise.
[edit] Fundamentals
The basic purpose of the control was to ensure that when money or goods were sent out of the country full value was received in return within a reasonable time and from the appropriate area (so as to frustrate any who might have sought to get their assets abroad and then to follow them). The Act distinguished between the "Scheduled Territories" (i.e. for practical purposes, the United Kingdom and the Rest of the Sterling Area (RSA), effectively the Commonwealth (except Canada)) and the rest of the world - known as the "Prescribed Territories". Exchange control restrictions applied only to transactions with the latter, as the scheduled territories were regarded as a single monetary unit, and all the countries concerned were supposed to operate an equivalent form of control.
In the early days certain foreign currencies were of greater value than others and it was required that they should be used only to buy goods from the countries concerned and that they must be received in payment for exports to those countries. Later on, however, these requirements were relaxed and foreign currencies became virtually interchangeable.
On 26 June 1972 the scheduled territories were reduced to the United Kingdom, Isle of Man, Channel Islands and Gibraltar. The scope of exchange control was consequently widened considerably, but the restrictions on the newly prescribed territories were introduced in stages with renogotiation of the Sterling Area agreements being made on a country-by-country basis.
[edit] Basic Procedures
[edit] Imports
A trader who wished to purchase goods abroad was required to complete an application form for an allotment of currency or sterling which would be approved by a bank or the Bank of England on the understanding that evidence of the value and importation of the goods would be produced as soon as available. The applications and evidence, when produced, would be sent to the Customs for checking.
The Customs participated in three main areas:
- at the ports - by issuing an exchange control copy of an entry, on request, certifying it as a true copy and ensuring that not more than one such copy was issued for any given entry. The copy served as evidence of importation.
- in headquarters - by marrying up the application forms with the evidence and checking that the allotment had been fully and properly utilised. In complex cases where individual transactions were not self-contained special arrangements were set up whereby periodical statements would be produced with supporting documents. A significant part of HQ's work consisted of chasing up dilatory or uncooperative traders and banks in order to obtain the required evidence. Visits to importer's premises were sometimes made by HQ staff.
- in excise offices - by visiting traders, at the instigation of HQ, to educate them and obtain necessary documents or to carry out routine verifications of apparently satisfactory documents against the firm's records.
[edit] Exports
When exporting to a prescribed territory, a trader had to pre-enter his goods and present, with the normal customs export document, a declaration on a form CD 3 confirming that payment would be received in the proper time and manner. The duplicate of the CD 3 would be returned to him so that it could be certified by his bank when the proceeds had been received and then sent on to Customs.
In practice some classes of goods were exempted from the requirement for a form CD 3 and in certain cases the Bank of England permitted an individual trader to vary the terms of payment, eg. by allowing extended credit or accounting for the goods in an inter-company account. Such permission would be shown by a reference number on the CD 3 form.
Again the Customs were involved at three stages:
- at the ports - in ensuring that a properly completed CD 3 form was presented, where necessary, with the customs pre-entry. The form was stamped, the original sent to HQ, and the duplicate returned to the exporter.
- in HQ - in marrying up the original CD 3s with the certified duplicates and chasing up exporters and banks when submission of the duplicates was delayed. As for imports, complex cases would be dealt with by special arrangements, and branch visits would be made to trader's premises when considered desirable.
- in excise offices - in assisting HQ in educating exporters and hastening the submission of duplicate CD 3 forms, and in carrying out routine verification of superficially satisfactory cases against trader's records.
[edit] Special Controls
Various areas of particular risk were identified and given special attention.
[edit] Diamonds
From the outset it was considered that unmounted diamonds would constitute a ready means of transferring capital abroad, being easily transportable and of high and stable value, and it was clear that, in view of their very specialised nature, normal customs examination would be virtually useless as a check on values.
During the war they were subject to the special control on strategic goods, but when this was dropped in 1945 the Diamond Committee was set up and arrangements made to channel imports and exports through the Customs Postal Depot at King Edward Building (or exceptionally through Vintry House). This enabled packets to be selected for examination by the committee, which consisted of members of the Customs and experienced diamond traders who were able to advise on the proper value of the stones.
The export channelling was achieved by a licensing restriction and resulted in most goods being despatched by registered letter post. Air freight was permitted in certain circumstances, but in view of the risks of diversion or substitution there was a total prohibition on exports on the person until January 1977 when a special concessionary procedure (the PED scheme) was introduced.
There are files which give details of various aspects of the diamond control and its development (e.g. CUST 115/82-84).
[edit] Other
It was soon realised that trade in certain other types of goods could present particular difficulties - for example, the export of machine tools and immature whisky often involved long credit terms and special procedures were devised to monitor it.
The activities of the London fur trade were particularly suspect and a special section was set up to keep a close eye on the denizens of Garlick Hill, while extra attention was also lavished on the works of art and antiques trade further west.
Another source of trouble at one time was the differing strength of certain foreign currencies and some of the earliest exchange control proceedings were directed against operators in the field of 'revolving parcels' and 'cheap sterling'.
[edit] Later Developments
[edit] General
Throughout its history exchange control was subject to fairly frequent modifications of procedure depending on the economic state of the country and the staffing position in the Valuation Branch. From 1950 onwards there was a steady tendency to relax official requirements (generally by increasing the minimum value of transactions falling under control) and to streamline branch procedures and reduce record keeping.
[edit] Currency
At some time prior to 1962 the currency control, previously carried out by section 22 of the Secretaries' Office, was transferred to the Exchange Control Branch, and constituted a significant part of the export work and prolific source of offence cases. These involved attempts, by personal export or through postal channels, to get funds abroad in the form of gold, currency notes, postal orders and securities, in contravention of Section 22 of the Exchange Control Act 1947. This work remained with Exchange Control until 1973 when it was taken over by the branch dealing with revenue smuggling.
[edit] Imports
Progressive internal relaxations during the 1960s failed to cope with the rising tide of paperwork and in September 1967 a completely new reminder system was adopted (CUST 115/100-101) whereby the Bank of England sent enquiries (prepared by Customs) to the branch banks, laying on them the responsibility for ensuring that the necessary documents were sent to the Exchange Control Branch. This proved to be a somewhat clumsy arrangement, involving very tight timetables, and after a couple of years it was decided that the results of the paper chase did not justify the effort involved, and on 1st January 1970 the branch formally relinquished all part in the post facto checking work, which was to be carried out by the Bank of England on a very small test-check basis (CUST 115/104). The only remaining customs function, then then was the control of the issue of exchange control copy entries.
In 1971 the LACES system was introduced at London (Heathrow)Airport and in preparation for this there had been lengthy discussions with the Bank of England about the arrangements for providing an exchange control printout of the computer entry.
At various stages the worth of the Exchange Control copy of the customs entry as evidence of importation (as distinct from proof of entry) had been called in question, and in December 1978 the Bank of England suggested to Treasury that it might be abolished
(CUST 115/107). The Exchange Control Branch supported this, but consideration of alternative arrangements was overtaken by prospects of the election and then by the expectation of more radical changes in exchange control so that, in the event, the EC copy entry survived until the demise of the whole system in October 1979.
[edit] Exports
Again the years saw progressive relaxations and in 1963, under pressure to facilitate exports and reduce official requirements to a minimum, a major change was made. The CD 3 form and the necessity for pre-entry were dropped and a single page form CD 6 was introduced which could be presented with the export specification - i.e. up to six days after exportation (CUST 115/27). In order to get over the legal problems attendant on this relaxation the Treasury issued the General Permission to export, under the provisions of Section 23 of the Exchange Control Act (CUST 115/18-22). The new CD 6 form was the basis of a reduced type of check which was carried out on a proportion of the forms received, i.e. 1% during 1964, 5% from January 1965 until August 1969, and 1% thereafter until April 1970.
In November 1969 a form of in-depth verification of the total export activities of selected firms was started (CUST 115/46), and this continued, with minor variations, until the abolition of exchange control in December 1979. Between 5000 and 6000 traders were covered in that time.
In 1973, following interdepartmental discussions (CUST 115/63), a special team was set up in HQ to pursue enquiries into the export practices of UK members of multinational companies. The team based its enquiries on various sources of information and, in particular, followed up suspect cases brought to light by the main Exchange Control Branch. it visited over 100 firms in the course of its 6 years work, covering the activities of some 60 groups, and maintained high-level liaison with other government departments.
In the later years of the control further problem areas were identified. One concerned the exportation by shipping agents of goods collected in the UK by visiting business men. It was clearly impossible to insist that the agents should check that the goods they were asked to despatch had all been paid for from external funds and after consideration at some length it was accepted that this loophole would have to remain.
It was also found that members of the immigrant community were abusing the concessions in respect of cash gifts and support for dependents, but investigations into what seemed likely to be major cases were overtaken by the dismantling of exchange control.
In 1978 the Delegation Review Team recommended that more responsibility should be taken by the Outfield in dealing with the verification work. HQ had some doubts about the viability of the idea but as a first step collectors were asked for names and addresses of firms in their areas which might repay investigation. The resulting lists were used for the selection of cases for enquiry at various times.
[edit] Interaction with Other Bodies and Disciplines
[edit] Treasury and Bank of England
Close liaison and good working relations were always maintained with the Treasury and the Bank but in the case of the latter the Export Control Branch's patience was sometimes sorely strained by the Treasury and Bank's tendency to trespass on Customs' preserves and to aid and abet their customers in what were regarded as unsatisfactory practices - for example, by approving discounted prices to foreign subsidiaries as a means of capitalising them.
[edit] Channel Island Authorities
The Channel Islands operated their own exchange control, under the same legislation, and there was interchange of information as necessary.
[edit] Rhodesian Sanctions
In November 1965, following the unilateral declaration of independence by Southern Rhodesia, stringent exchange control restrictions were imposed alongside the licensing requirements.
[edit] Common Market
The impact of EEC requirements on exchange control practice was considered at some length between 1972 and 1976 but the only relaxations found necessary concerned investment (CUST 115/62).
[edit] Other Customs Work
- Export Values Verification Group
An O & M enquiry into Statistical Office work recommended, in August 1969, that consideration should be given to the possible overlap of the proposed new values check with existing exchange control procedure. It was decided, however, not to attempt to integrate the two systems. Later on, some of the documents used by the EVV Group were supplied the Exchange Control Branch as a basis for its enquiries, but the two verification procedures remained entirely separate.
- Value Added Tax
The introduction of VAT in April 1973 was not expected to have any practical effect on exchange control, but it was found that confusion arose about the operation of the Retail Export Scheme in relation to diamonds, and instructions had to be amended to clarify the position. In general, the zero-rating of exports was regarded as a deterrent to those who might have been tempted to under-value their exports as a means of getting funds abroad. There was ad-hoc liaison on individual cases as necessary.
- General
The interchange of information with other Customs' disciplines was always encouraged, to mutual advantage, and some of the more notable exchange control offence cases developed from enquiries by the Investigation Division into other areas of Customs' work.
[edit] Sanctions
From the inception of the control it was accepted that it could not be too rigid without putting unreasonable obstacles in the way of trade and it was not expected to produce spectacular results.
Over the years quite a number of proceedings were taken, but these mostly arose from specialised areas, e.g. diamonds, cheap sterling transactions, and currency smuggling; or from information obtained and passed on by other parts of Customs in the course of their work.
The day to day work of the branch, however, had a useful preventive and corrective function and various lesser sanctions were applied. These took the form of;
for imports:
- a stop on allotments, unless the goods had already arrived in the UK;
- insistence on the surrender of funds which had not been fully utilised
for exports:
- a stop on exports, unless paid for in advance;
- the issue of a compulsory sale order if it was claimed that goods sent on consignment were failing to find a buyer;
- a request to increase prices. This was the normal action latterly and applied particularly to UK members of international groups.
In the early days, if a particular person was suspected of trying to get funds abroad, either by way of unrequited payments or withheld proceeds of exports, a ban would be put on the issue of an exit permit until the position had been rectified.
As regards diamonds, goods could be detained or payments prohibited if the declared values appeared to be unreasonable and, where attempts to smuggle were detected, the stones would usually be forfeited even if proceedings were not taken in addition.
[edit] Administrative Aspects
The exchange control operation was allocated to the Valuation Branch largely because of an affinity in the concepts involved, but during the war, as the volume of imports decreased, it provided convenient alternative work for staff from the contracting import duty sections.
In the early years it occupied some six or more executive sections and several large sub-clerical sections dealing with indexing and sorting of forms and handling of files. At one stage there were over 250 people involved and for many years the total exceeded 150.
In course of time, as procedures were streamlined and record keeping reduced, staff numbers decreased until, by approximately 1960, the remaining import and export sections were combined under one SEO and one HCO. By that time, also, currency control work had been transferred from the Secretaries' Office and assimilated to the exports side of exchange control. In 1970, with the loss of the imports checking work, the HCO and the sub-clerical staff were dispersed and the executive section shrank considerably.
In October 1968 oversight of exchange control passed from the Valuation Division to General Customs Division but the staff, now numbering about 30, were still accountable to the Controller of the Valuation Branch for administrative purposes. In November 1971 the branch, though still known as the Exchange Control Branch, became, in effect, Unit 5 of General Customs Division C. In October 1973 it became GCC4 and lost the currency control work to GCF1, and November 1977 saw its final redesignation as GCB4.
In spite of these changes of allegiance and title the branch always retained its own registry and file storage arrangements.
[edit] Location
Starting life in Vintry House, Exchange Control became a partial evacuee when the Custom House was bombed in January 1941 and the import staff (except for a small liaison unit) moved to Blackpool. They returned to London after some years and rejoined the exports sections, together occupying a considerable portion of Vintry House.
Later on, staff numbers were greatly reduced, but the branch remained a self-contained entity. It was probably because of this that it became a favoured candidate for removal whenever space was needed for other work, and in 1965 embarked on a series of migrations which must have set up a departmental record. Thus in January 1965 it went to Equitable House, ostensibly for 6 months; in August 1968 it returned to Vintry House; in December 1971 it moved to New Fetter Lane; in October 1972 it went to Atlantic House; and in August 1974 it moved to Kent House, on the 18th floor. For good measure, in November 1977, it sank to the 17th floor, where it finally expired in early 1980, although work did carry on in Lytham St Annes, alongside the GO 12/30 Deposits section, until the late 1980s.
[edit] Last Days
With the advent of the Conservative government in 1979 it became apparent that exchange control's days were numbered but initially the liberalisation was confined to the field of investment, and on 12th June and 19th July restrictions in that area were progressively relaxed. A trader's obligation to repatriate full and proper proceeds in respect of his exports remained and the Customs' verification work continued, but with the front door flung wide open the incentive to use the back door to get assets out of the country was obviously removed and the work of patrolling that exit lost its purpose. After September 1979 no further corrective measures were attempted and the coup de grace was received on 24th October when all remaining exchange control requirements, other than those applying to Rhodesia, were withdrawn and the Exchange Control Act 1947 was removed from the Statute Book.
This was sudden and more far-reaching than had been foreseen and it took a few more weeks to bring the supplementary legislation into line (i.e. to repeal that part of the Export of Goods (Control) Order 1978 which provided for the Customs to issue licences for, and control the method of despatch of, unmounted diamonds). This was done on 19th November, and on 13th December, with the improvement in the Rhodesian prospects, sanctions were lifted and the last residual exchange control activity ceased.
By that time the work of dismantling the forty-year-old operation was under way, and by the end of January 1980 the basic sorting and disposal of documents has been virtually completed.
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