Opinion of Mr Advocate General Sir Gordon Slynn delivered on 31 May 1988. - Criminal proceedings against R. Lambert. - Reference for a preliminary ruling: Cour d'appel - Grand Duchy of Luxembourg. - Liberalization of current payments - Prohibition of reverse documentation - Two-tier foreign exchange markets. - Case 308/86.



European Court reports 1988 Page 04369



Opinion of the Advocate-General

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My Lords,

Since 1955 Belgium and Luxembourg, through the Union Economique Belgo-Luxembourgeoise (" UEBL "), have operated a two-tier foreign currency market . One tier is regulated, the exchange rate being expressed in "convertible" or "commercial" francs, fluctuations in the exchange rate being controlled if necessary, within the limits resulting from the European Monetary System, through intervention by the National Bank of Belgium . The other tier is free and market forces substantially fix the exchange rate .

The Institut Belgo-Luxembourgeois du Change (" IBLC ") has laid down rules for the operation of these two tiers of the exchange market . Import and export transactions are governed by IBLC Regulation I . By paragraph 2 ( b ) of Article 8 of that regulation payment in foreign currency for exports must be made by way of bank transfer or cheque and the funds must be sold on the regulated market within eight days or, in certain conditions, be paid into a regulated foreign currency account with an approved bank . By paragraph 2 ( c ), payment in Belgian or Luxembourg francs must be received by the debit of a "convertible" foreign account held by an approved bank .

The exporter in Belgium or Luxembourg thus cannot, in the ordinary way, be paid in banknotes, the intention of the rule being that all receipts for exports shall be repatriated through the regulated market, though the IBLC is prepared to give special authorization for the receipt of a payment in cash when it considers it appropriate .

Mr René Lambert, a livestock dealer resident in Luxembourg, was found guilty of breaching these regulations by accepting German, Dutch and Belgian banknotes in payment for a large number of exports to the Federal Republic of Germany and the Netherlands in the years 1981 to 1983 . Because the exchange rates on the free market for part of the relevant period were exceptionally favourable compared with the regulated market, he was able to make a profit of over LFR 5 million by selling the foreign currency on the free market .

The tribunal correctionel ( criminal court ) at Diekirch ordered the confiscation of his profit and fined him LFR 50 000 . The Parquet Général ( Public Prosecutor ) appealed against that verdict and Mr Lambert cross-appealed, asserting that the relevant IBLC regulations are incompatible with various provisions of the Treaty . In order to assess these contentions, the Court of Appeal in Luxembourg has referred the following questions under Article 177 .

"1 . Is it contrary to the liberalization of payments connected with intra-Community trade under Article 67 ( 2 ) and Article 106 ( 1 ) of the EEC Treaty for an exporter residing in the territory of the Belgo-Luxembourg Economic Union to be required to sell on the controlled exchange market to approved banks foreign currency received in payment for goods sold in Germany and the Netherlands, it being understood that the amount ultimately received in national currency is some 5 to 10% less than what could have been obtained on the free market?

2 . Is the prohibition on receiving the price of the abovementioned exports in foreign or national banknotes an obstacle to the liberalization of payments?

3 . Does the principle of non-discrimination laid down in Article 7 of the EEC Treaty apply to inverted discrimination, that is to say to national measures which have the practical but unintended effect of penalizing exporters in the Member State concerned vis-à-vis those established in other Member States?

4 . Do the Community principles set out in Article 3 ( a ) and ( f ) of the EEC Treaty, namely the elimination of measures having an effect equivalent to customs duties on exports and the establishment of a system ensuring that competition in the common market is not distorted, preclude such inverted discrimination where, independently of the specific objective pursued by the restrictive rules, their effect is to give a substantial advantage to similar traders in other Member States and they are thereby likely directly or indirectly, in fact or potentially, to form an obstacle to trade between the Member States?

5 . Do the standstill provisions of Article 5, 31, 32 and 34 of the EEC Treaty apply to the measures described in questions 1 and 2 which were adopted before the Treaty entered into force but have since caused appreciable distortion where the differences between the exchange rates obtaining on the controlled and free markets reach some 5 to 10% of the value in national currency of the price charged in foreign currency, as happened in the present case in 1981, 1982 and 1983?"

The starting point is whether Community law prohibits the existence per se of a two-tier market . It does not seem to me that the provisions of the Treaty impose such a prohibition and by and large Member States are free to fix their exchange rates . Moreover the possibility of a two-tier market existing is recognized by the Council' s two Capital Directives of 11 May 1960 and 18 December 1962 ( Official Journal English Special Edition 1960, p . 49, and 1963, p . 5 respectively ) according to which, when transfers are made on a foreign exchange market on which the fluctuations of exchange rates are not officially restricted, the exchange rates applied must not show any "appreciable and lasting" differences from those ruling for payments for current transactions ( e.g . Article 1 of the first directive ). A two-tier market is not in my view prohibited per se . It must thus be asked whether the restriction imposed by the particular system referred to in the questions conflicts with Treaty provisions .

The national court mentions first Article 67 . Payment to an exporter in Belgium or Luxembourg for goods exported elsewhere in the Community is not, however, a movement of capital within Article 67 of the Treaty as was made clear in paragraphs 21 and 22 of the Court' s judgment in Joined Cases 286/82 and 26/83 Luisi and Carbone v Ministero del Tesoro (( 1984 )) ECR 377, at p . 404 : "... current payments are transfers of foreign exchange which constitute the consideration within the context of an underlying transaction, whilst movements of capital are financial operations essentially concerned with the investment of the funds in question rather than remuneration for a service ... the physical transfer of banknotes may not therefore be classified as a movement of capital where the transfer in question corresponds to an obligation to pay arising from a transaction involving the movement of goods or services ".

There is accordingly no breach of that Article in the rules in issue .

Next the national court refers to Article 106 ( 1 ) which provides :

"Each Member State undertakes to authorize, in the currency of the Member State in which the creditor or the beneficiary resides, any payments connected with the movement of goods, services or capital, and any transfer of capital and earnings, to the extent that the movement of goods, services, capital and persons between Member States has been liberalized pursuant to this Treaty ."

It can be said on one reading that Article 106 ( 1 ) is addressed to the Member State of import rather than to that from which the goods are exported . It is directed to payments rather than to receipt of payments . That seems to me to be too narrow an approach . The necessary corollary of the freedom to pay is the freedom of the recipient to remit the payment - an interpretation borne out by Article 106 ( 2 ) which provides :

"In so far as the movements of goods, services and capital are limited only by restrictions on payments connected therewith, these restrictions shall be progressively abolished by applying, mutatis mutandis, the provisions of the chapters relating to the abolition of quantitative restrictions, to the liberalization of services and to the free movement of capital ."

Accordingly, since Article 34, prohibiting quantitative restrictions on exports and measures of equivalent effect, is fully applicable, Article 106 prohibits measures restricting payments for exports .

Mr Lambert contends that the rules in issue wholly negate the concept of a common market and are clearly in breach of Article 106 .

On the other hand, as the first question makes clear, the restriction in issue is not imposed on the basis that payment cannot be received in a foreign currency, but that once received the foreign currency must be sold on the controlled market to an approved bank . Although the first subparagraph of Article 106 ( 1 ) requires Member States to authorize payments only in the "currency of the Member State in which the creditor or the beneficiary resides" it seems to me that having regard to the second paragraph of Article 106 ( 1 ) and to Article 106 ( 2 ), Article 106 imposes an obligation on Member States, in so far as their economic situation in general and the state of their balance of payments in particular permit, to authorize payments in the currencies of other Member States .

The question is thus whether the obligation to sell such currency when received to an authorized bank is in breach of Article 106 .

In this respect it is to be noted that in Luisi and Carbone the Court said :

"Member States have retained the power to impose controls on transfers of foreign currency in order to verify that transfers do not in fact constitute movements of capital, which have not been liberalized ... Member States are empowered to verify that transfers of foreign currency purportedly intended for liberalized payments are not diverted from that purpose and used for unauthorized movements of capital . In that connection, Member States are entitled to verify the nature and genuineness of the transactions or transfers in question" ( paragraphs 31 and 33 ).

To the same effect are Article 5 ( 1 ) of the first Capital Directive which provides that the Directive shall not "restrict the right of Member States to verify the nature and genuineness of transactions or transfers, or to take all requisite measures to prevent infringements of their laws and regulations" and the Court' s statement in Case 203/80 Criminal proceedings against Guerrino Casati (( 1981 )) ECR 2595 that the first two paragraphs of Article 106 "do not require the Member States to authorize the importation and exportation of banknotes for the performance of commercial transactions, if such transfers are not necessary for the free movement of goods" and that "in connection with commercial transactions, that method of transfer which, moreover, is not in conformity with standard practice, cannot be regarded as necessary to ensure such free movements" ( paragraph 24, p . 2617 ).

It seems to me that, if a two-tier system is in principle acceptable, it is essential to its operation that particular types of transaction are allocated to, and can be operated only on, one of the alternative tiers of the market . Rules necessary to ensure that the market is properly used and to allow adequate supervision for fiscal and statistical purposes have to be accepted . If this were not so it would only be too easy to conceal movements of capital which have not been liberalized as current payments or movements of capital which have been liberalized . It seems to me, accordingly, that a requirement that payment for goods sold should be made through the normal exchange market for such purposes ( here the controlled market ) is not in itself a restriction contrary to Article 106 of the Treaty . Even though the judgment in Luisi and Carbone was dealing with services, it seems to me that the principle stated there applies to restrictions on payments for the supply of goods . As Casati shows Member States are not required by Community law to tolerate current payments in cash if cash payments are not necessary to achieve the liberalized movements of goods, particularly if cash is not the normal commercial method of payment . Nor can it be said that a "free" exchange market is a necessary corollary or precondition of a free market in goods . If indeed there were one exchange market in Belgium and Luxembourg it would be the regulated market on which the central bank could intervene .

Whether a single exchange rate must be adopted for all liberalized movements of capital and current payments, as the Commission has forcibly contended, is a question not necessary to decide in this case .

The view to which I have come is not, as I see it, affected by the apparent fact that during the relevant period there was a disparity between the free and the regulated markets which was both appreciable and lasting and thus beyond the limits tolerated by the first Capital directive . That may have been incompatible with the Capital Directives; it does not in itself constitute a breach of Article 106 of the Treaty with which this case is concerned .

Nor do I consider that the rules in question restricted the movements of goods as constituting a disincentive to export . If exporters were given a free choice of exchange rates, the rates would be likely to align and the two-tier market become effectively one market .

Mr Lambert further argued that the dual exchange market was contrary to Community law, not for the technical reasons already considered but on the grounds that its operation hampered his competitiveness as against livestock traders based in other Member States . In so far as that constitutes an argument that the IBLC rules acted as a measure of equivalent effect to a quantitative restriction, I have already rejected it . However, he observed that he was in competition with German traders and sold his cattle at the same market in Trier . He was subject to the IBLC rules, whereas his German competitors were not, which constituted discrimination on nationality grounds contrary to Article 7 .

The IBLC and the Commission cite decisions of the Court holding that there is no discrimination when the legislation in question affects all persons falling within its scope according to objective criteria and irrespective of nationality, as is the case with the IBLC rules which are based, not on nationality, but on residence within the UEBL . In particular, as the Commission observes, unlawful discrimination must be found in the legislation or practice of one State and not as between Member States . In Case 126/82 D . J . Smit Transport BV v . Commissie Grensoverschrijdend Beroepsgoederenvervoer (( 1983 )) ECR 73, at p . 92, it is said :

"The application of national legislation cannot be regarded as discrimination contrary to the Treaty on the ground that other Member States may apply less severe restrictions to ... undertakings established in their territory . The aim of Article 7 of the Treaty is to eliminate any discrimination on the ground of nationality resulting from the legislation or administrative practices of a given Member State rather than any disparity in the way in which undertakings of different Member States are treated as a result of differences between the legislation of the Member States ..."

In my view, it is manifest that the IBLC rules do not discriminate, even indirectly, on nationality grounds : a German national resident in Luxembourg exporting as does a Luxembourg national would be subject to the same rules .

As to the fourth and fifth questions, I adopt the Commission' s approach . It observes first that the provisions of Articles 3 and 5 are general statements of more specific principles developed in other Treaty articles and cannot be relied on in isolation and second that Articles 30 to 32, dealing with imports, are not relevant here . It also observes that, since on the basis which I have accepted, the IBLC rules do not restrict either trade or current payments, the question whether they infringe the standstill provision does not arise .

There is thus no incompatibility with the Treaty rules on current payments on which Mr Lambert can rely to overturn his conviction .

In my opinion the questions referred by the Court of Appeal in Luxembourg fall to be answered along the following lines .

Questions 1 and 2

It is not contrary to Article 106 of the EEC Treaty for an exporter to be required to remit sale proceeds in the currency of his Member State of residence or of other Member States by way of a regulated exchange market through which all liberalized current payments are required to pass and to be prohibited ( except with express permission ) from receiving such proceeds in banknotes .

Question 3

Article 7 of the Treaty applies only to discrimination on nationality grounds practised within a single Member State, and not to differences of treatment as between Member States .

Questions 4 and 5 do not require independent answers given these proposed replies to Question 3 and Questions 1 and 2 respectively .

The costs of the parties to the national proceedings, Mr Lambert and the Public Prosecutor, are a matter for the referring court . Those of the Belgian, French, Italian and Luxembourg Governments and of the Commission are not recoverable .