E-commerce: The quest for answers commences

In November last year, almost a year-and-a-half after the initial discussion document was released, the Green Paper on Electronic Commerce for South Africa finally saw the light of day.

The Department of Communications (DOC) invited the public to respond to this paper by no later than 31 February 2001. When observant members of the public pointed out that this day may never come, the deadline was confirmed to be 31 March 2001.

It took nine working groups 16 months to identify the main issues and raise no less than 165 specific questions for policy consideration. The public has a mere four months (of which two remain) in which to digest the 131-page document and formulate concrete policy proposals. This will serve as input for the remainder of the process:

• White Paper (the official government policy document): second quarter 2001; and

• specific legislation and regulations: third or fourth quarter 2001.

The Green Paper recognises four primary areas where e-commerce will play a role. The first, and currently by far the biggest in terms of value, is business-to-business e-commerce, in the form of supply chain integration and customer relationship management. The second is business-to-consumer e-commerce, or online shopping. Importantly, the third and fourth areas are government-to-business e-procurement, and government-to-consumer information and service delivery.

The issues that the Green Paper seeks to address aren`t simple. In fact, some are positively daunting. But the answers - whether suggested by the public or decided by the department - will become law in SA, and will have a massive and pervasive impact on life and business in the country. The regulatory environment that results from this process must be conducive to business, to innovation, as well as improving the socio-economic conditions of as many South Africans as possible.

[VIDEO]And it impacts everyone. One of the main goals of the Green Paper is to take e-commerce to the masses, and use it as a driver for socio-economic upliftment and growth.

It affects the rural farm labourer or the busy executive who wants to apply for an identity document without having to travel to a faraway city or leave the office. It is important to retailers who need to remain globally competitive to survive. It will set the parameters within which investors can use the multitude of new online possibilities for managing their wealth. It is key to empowering small businesses to compete on an equal footing with their big business counterparts. And it is crucial to the government itself in delivering efficient services and steering SA`s economy in the direction of global competitiveness.

The significance of the process makes it imperative that the public - and perhaps especially the business and legal communities - apply their minds to suggest solutions and make recommendations to the DOC. A repetition of the process leading to what many consider to be a stifling, restrictive and altogether inadequate Telecommunications Act of 1996 is likely to reduce SA to an outcast in the global e-commerce village.

This is why workshops and conferences, such as the introductory briefing for chief executives hosted on 30 January by the E-Commerce Association of South Africa (ECASA) in conjunction with KPMG, are of such vital importance to the industry. (For details, call KPMG on (011) 647-7063.)

This is the first in a series of four ITWeb features, to match the four overarching themes of the Green Paper. It is hoped that these features will provide a general overview and some insight into relevant issues, as well as highlight some influential opinions on the more thorny questions.

Perhaps the most immediate concern raised by e-commerce from a legal, accounting and business point of view, are the twin issues of identity and veracity.

How can parties to a transaction or a contract be positively identified? And how can an electronic contract or agreement between parties be considered "original" and truthful in an environment where documents can be edited - without trace - at the click of a button?

The simplest answer is to apply the existing legal framework to parallel concepts in cyberspace. This will, however, entail a comprehensive review of a massive body of law that relates - in terminology, if nothing else - to a paper-based economy. Mark Heyink, head of e-legal risk management at KPMG, offers the example that 309 different laws will need to be changed to enable the seemingly simple task of electronically lodging and registering deeds in our Deeds Registries.

The DOC has enlisted the aid of legal firm Edward, Nathan & Friedland for the task of auditing South African law, and identifying areas that "could constitute barriers to the development of e-commerce, and suggest options to eliminate such barriers".

The principles on which the Green Paper bases its questions for policy proposals in this regard are encouraging and ambitious. Among them are:

• a determination to follow accepted international standards;

• the goal to achieve a framework in which transactions and contracts can be either paper-based or electronic, with no uncertainty or prejudice to either medium;

• the desire for laws to be technologically neutral; and

• a commitment to minimise the regulatory burden on business and government, and keep costs and litigation to a minimum.

Lisa Thornton, partner at Thornton & Morris Attorneys, says that while the concepts of offer and acceptance in contract law are perfectly adaptable to e-commerce (as indeed they are even in the case of legally binding verbal contracts), the difficulty lies in proving intent when the "signature", and even the electronic contract itself, might be disputable.

Various technology solutions have already presented themselves. It is possible to encrypt and digitally sign - using private/public key encryption - documents in such a way that their integrity can be assured. This process uses another legally accepted mechanism: that of trusted third-party intermediaries (just as banks and notaries commonly act as intermediaries in traditional forms of contract). It also, however, precludes the possibility of anonymity, since with current digital certificate technology, one`s physical identity has to be asserted before a certification authority will issue a certificate - the prerequisite for a valid digital signature.

Digital signature is already a feature of most e-commerce jurisdictions of any sophistication, according to Heyink.

[VIDEO]However, Michael Silber, an attorney and director of Aurica Legal Advisors, warns against the temptation - recognised by government in the Green Paper - to suggest technology-driven solutions. "That approach happened in 1983 with the Computer Evidence Act, where the admissibility of computer evidence was tied to certain technical conditions prevailing at the time, and the act has proved to be a white elephant and has never been used in a reported judgement," he says. "If new private sector initiatives come up for proving identity, then I would hope that change can happen without another 12 to 18 months being needed for legislative change, because that`s how long it usually takes before even simple amendments to legislation will happen."

There are, of course, further complications. Two examples:

• The legality or otherwise of so-called "click-wrap" agreements, where a purchaser of a product is not at liberty to negotiate the use for which the product is licensed; and

• legal recognition of the authority of an automated process (a computer) to bind a person to a contract, as would happen in the case of an automated inventory management system, or online shopping transaction.

While there are international precedents for the former, and while the latter problem could be circumvented if the parties entered into a separate agreement to be bound by transactions concluded on their behalf by the electronic agent in question, e-commerce in SA would benefit from a clear and consistent law in this regard.

The only certainties in life, the saying goes, are death and taxes. But are they?

A major concern for government - understandably, perhaps - is the impact e-commerce will have on its ability to collect revenue from taxes and enforce exchange control regulations.

[VIDEO]Says Bradley Scop, a director of Aurica Legal Advisors: "An issue that is touched on slightly, but needs to be looked in a bit more detail, is the concept of e-cash and related transactions. The one thing about the Internet is that technology moves very quickly, and the medium of payment has evolved to quite a large extent.

"Historically, what you would have found is that people pay for books and one or two small items over the Internet. Now, asset management companies and stockbrokers have Web sites and major services, with the result that - in some ways it makes a mockery of the exchange control regulations - a number of people in this town sit in front of their PCs and watch their international portfolios on a daily basis, and transact on them. So one would have liked to see some concrete proposals here, either changing what the Reserve Bank`s regulations are in respect of exchange control, or somehow bringing this into the net."

The Green Paper does in fact mention exchange control, and asks these questions:

• What implications does cyber cash electronic money have for foreign exchange control policy?

• What principles should be developed to give access to the records of electronic money issuers and users?

It likewise asks questions concerning SA`s laws on gaming and betting. Aurica`s Silber notes: "The Lotteries Act prohibits the advertising of international lotteries - any lottery that is not licensed in SA. I listened to the radio this morning, and they were promoting the UK lottery, via an Internet Web site. When I last looked at the Act, that is illegal. It`s something that`s going to have to be considered - that the way we advertise, the way we do business is changing."

We have to be sensitive to international legal development or face the possibility of isolation that will make our apartheid isolation pale in comparison

Mark Heyink, head of e-legal risk management, KPMG

With regard to taxation, the Organisation for Economic Co-operation and Development (OECD) has outlined principles that should govern taxation of e-commerce. These include neutrality between electronic and conventional forms of commerce, efficiency, certainty and simplicity, effectiveness and fairness, as well as the flexibility to keep up with technological change.

By contrast, the US Treasury Department notes several hitherto unsolved problems posed by e-commerce. According to a 1996 document, "the major compliance issue posed by e-commerce is the extent to which electronic money is analogous to cash and thus creates the potential for anonymous and untraceable transactions".

This analysis led directly to the famous Internet Tax Freedom Act in the US, which places a moratorium on new taxes on Internet access. The Green Paper points out, however, that it does not preclude, for example, the taxing of Internet sales for income tax or sales tax purposes.

One major obstacle has effectively been pre-empted by the move of the South African Revenue Service (SARS) from source-based to residence-based taxation. This at least solves the problem of where a transaction should be deemed to have taken place. If you live in SA, SARS doesn`t care if you earn your bread on Mars. You`ll pay tax - if the Martians report your income to SARS, of course...

This does, however, establish the need for reliable accounting and disclosure procedures for online transactions, and determining whether suppliers, customers or payment intermediaries should account for taxation. Furthermore, issues like double taxation, the risk of a shrinking tax base, and customs and excise duties remain up for discussion.

It`s become a hackneyed phrase, but when discussing e-commerce, one can`t help thinking of the world as a global village. Anyone can purchase a computer or a book or a stock portfolio online, and have it shipped (in the case of tangible goods) within days to their home - wherever home may be.

The one thing about the Internet is that technology moves very quickly, and the medium of payment has evolved to quite a large extent

Bradley Scop, director,Aurica Legal Advisors

And this global village has numerous "elders". In the previous section, OECD and US Treasury policies were mentioned. The World Trade Organisation, the United Nations Commission of International Trade Law, the World Intellectual Property Organisation, and the International Telecommunications Union are just some of the "elders" that are hard at work pondering the exact same issues raised in the Green Paper on Electronic Commerce.

These deliberations and the policies adopted by these bodies are relevant to SA`s own policy-making efforts in three ways.

First, SA is a signatory to a multitude of international agreements, and as such, will be bound to abide by policies arrived at in certain forums.

Second, if SA is to take its rightful place in the global economic community, it should take into consideration the policies adopted by other countries, and, as far as possible, adopt policies of its own that don`t conflict with, but complement, those of its trading partners. To quote KPMG`s Heyink: "We have to be very sensitive to international legal development or face the possibility of isolation that will make our apartheid isolation pale in comparison."

Third, as the Green Paper points out, SA is in a position where it can pick the best international practices and adopt or reformulate them for the local conditions and requirements.

Consideration for the village elders is not a simple matter. Remember the interminable rounds of GATT negotiations? Where were you when the US and Europe almost came to blows over the weighty issue of the precise length and curvature of bananas? Now that there finally is agreement on what precisely constitutes a healthy, well-formed banana, imagine the purple faces if the carefully negotiated trade and tariff concessions were simply flouted by selling bananas electronically...

The comments from several people in a sidebar to this feature suggest that the South African government should not dawdle on the way to a clear and consistent legal framework for e-commerce. Yet, the negotiations of the village elders take time. At the December 1999 Seattle Ministerial Conference of the WTO - its highest decision-making body - consensus could not be reached on a new round of trade negotiations.

Should SA, the Green Paper asks, domestically regulate e-commerce? The existence of the paper itself seems to suggest so, but this could pre-empt decisions of the WTO, of which SA is a founding member. Should SA become a signatory to the Declaration on Trade in Information Technology Products, which requires participating countries to reduce to zero tariffs on a range of IT products - including most of the hardware and software necessary for the conduct of e-commerce? How can SA contribute and articulate the views of local business, labour, NGOs and civil society to the village elders?

These are weighty questions - far beyond the scope of this feature to address. And this strengthens the call from KPMG`s Heyink for companies to invest time and assign senior representatives to properly consider and respond to the Green Paper.

The final chapter in the first - and most substantial - theme of the Green Paper considers issues revolving around intellectual property rights.

The time it has taken to get to a Green Paper stage is inordinate.

Lisa Thornton,partner,Thornton & Morris Attorneys

Intellectual property issues have become headline news in recent years, with Napster taking on the might of the music industry, an academic breaking the encryption that was meant to prevent unauthorised reproduction of DVDs, and US companies taking out patents on everything from "one-click checkout" (how revolutionary!) to the bits and pieces of genes that you or I may have foolishly considered our own.

The Green Paper follows the definitions of the World Intellectual Property Organisation (WIPO) of intellectual property into two distinct categories: industrial property, such as inventions, trademarks and industrial designs; and copyright literature, which encompasses writings, music, art and photography.

The Internet presents obvious challenges to traditional intellectual property laws. If you were to photocopy a book, it wouldn`t be a difficult procedure to determine that in fact your copy is not the original, and that you are therefore in breach of copyright, unless the copy was made for what is called "fair use".

But technology has presented us with a means to cheaply and easily reproduce existing material. It has also made it difficult - and in some cases impossible - to ascertain the original owner of intellectual property.

In addition, the Green Paper recognises that SA has a limited capacity for monitoring and protecting intellectual property rights, even if they could confidently be asserted.

Legally, SA has gone some way in addressing the problem, in the form of the Intellectual Property Laws Amendment Act 38 of 1997 - promulgated in order to comply with the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS), which in turn is part and parcel of the WTO.

There are two more treaties, known as the "Internet Treaties" (their full names aren`t much more revealing). One relates to copyright, the other to performances and phonograms. SA has signed the first, but has yet to implement it.

The questions raised in this chapter of the Green Paper are exceedingly complicated - if not from a legal point of view, then from the practical perspective of enforceability.

In asking these questions, the Green Paper recognises that over-regulation will stifle innovation and restrict the growth and use of e-commerce, but at the same time that under-regulation will lead to abuse and unethical business practices.

The fact that the Green Paper was delayed does not indicate the sense of urgency necessary to achieve the promise that e-commerce holds for SA

Mark Heyink, head of e-legal risk management, KPMG

Heyink summarises the responsibility of those affected by these questions: "I would submit that given the dynamism of the revolution at present and the enormity of the task, that government will recognise the need to concentrate on establishing a broad framework that has the flexibility to allow its citizens to, within that framework, work out the minutiae of how this revolution affects their lives. Wise citizens should... recognise that while they may act within the framework of a new technology being utilised in an old governance structure, that responsible responses to the Green Paper is one of the steps they need to take in modelling how they wish to live and interact in the knowledge age."

Concern about delays, fear of over-regulation, and outright paranoia featured in the comments ITWeb obtained from experts and interested parties. This was, however, offset by a consensus that the Green Paper, in raising a great many relevant and important considerations, is very ambitious.

[VIDEO]Some people involved in the industry view the process with extreme suspicion. "What does government really want to achieve with this?" asks one libertarian expert on security and networking from an Internet service provider, suggesting ulterior motives he leaves unspecified. "Government trying to regulate anything is mostly a cause for concern."

Legal practitioners interviewed by ITWeb are less paranoid, but raise valid concerns nonetheless.

Lisa Thornton, partner at Thornton & Morris Attorneys and a well-known figure in telecommunications-related legal circles, expressed her disappointment with the process. "The time it has taken to get to a Green Paper stage is inordinate. Also, there seems to be a sense that this is a once-off thing, when in fact, with an area like this, policy reformulation must be an ongoing process."

Mark Heyink, head of e-legal risk management at KPMG, concurs, saying: "It has to be recognised that a great deal of work has to be done to provide commerce with the framework necessary for e-commerce (and I include e-government) to reach its potential. The fact that the Green Paper was delayed to the extent that it has been does not indicate the sense of urgency necessary to achieve the promise that e-commerce holds for SA and Africa as a whole."

The fear of a regulatory environment that is too restrictive and shortsighted is a theme that echoes in the responses of several people who spoke to ITWeb.

Bradley Scop, a director at Aurica Legal Advisors, which acts on behalf of clients in many IT-related regulatory issues, says that a regulatory position consistent with international practice and convention on the Internet would lead one to suggest as low as possible a level of intervention. "However," he continues, "there are certain specific areas of regulation that impact not only on the development of e-commerce but on the platform for this development. It`s at that level that one needs to have a look at regulatory issues. The Green Paper has an important role to play in that it identifies areas of telecommunications regulation that will have to be looked at. I think the fact that it points to regulation as a hindrance is a very strong point in its favour."

Another director at the firm, Michael Silber, likewise believes that regulation can either help or hinder the growth of the Internet and e-commerce. "The issue to my mind is the creation of a framework in which the Internet can grow and e-commerce can progress, but without regulating to such an extent that innovation cannot occur," he says.

[VIDEO]Prevalent among IT and legal experts is the realisation that e-commerce cannot be considered in isolation. "At the moment, the Internet as a medium is being hampered by telecommunications regulation," says Scop. Others agree that telecommunications regulation as a whole needs to be reconsidered, and welcome the parallel ongoing processes in this regard.

But despite the (very relevant) concerns, provisos and occasional paranoia, Heyink pretty much sums up the general opinion when he says: "This is a very important step in the right direction. Government and commerce need to concentrate on increasing and maintaining the momentum."

Related links:
Department of Communications - the official government Web site
The E-Commerce Debate - background information and discussion forum

Featured companies:
KPMG - international business advisory firm
Aurica Legal Advisors - a department of Aurica Financial Services Group
Edward, Nathan & Friedland - commercial law firm
Thornton & Morris Attorneys - law firm specialising in telecommunications

ECASA - E-Commerce Association of South Africa
SARS - South African Revenue Services