When Standard Bank, Nedbank, Absa and FNB took the unusual step in 2016 to close the Gupta accounts, it triggered the end of the family’s operations in South Africa.
Absa and FNB moved to end their relationships last year with the controversial company Bosasa, because it posed a reputational risk.
Although such action from the banking sector makes media headlines, closing personal or corporate accounts is a well-established method of risk management, consistent with internationally accepted standards and guidelines.
In February last year, the Kenyan government closed down African Spirit Limited, an alcohol manufacturer and importer, over tax evasion and smuggling of ethanol from Tanzania. Its bank accounts were frozen for three months after prosecutors sought to preserve the funds, pending investigations.
The same month, Spain’s second-largest bank, BBVA, was forced to apologise to its Chinese customers, after it froze their bank accounts without notice, in compliance with anti-money laundering laws.
Last month, Zimbabwe’s central bank froze the bank accounts of the country’s biggest fuel supplier and largest car dealership, to stabilise the plunging currency.
And on October 15, a federal court in Abuja, Nigeria, ordered that 45 bank accounts linked to three companies accused of smuggling rice into the country, be frozen for 45 days, pending an investigation. (Nigeria routinely freezes accounts for tax-compliance purposes.)
Banks close or freeze accounts, without giving notice or explanation, if there are concerns about compliance issues, or they are being used for fraud, money laundering, terrorism or other financial crimes.
It’s also likely if the account holder is a flight risk, or after death. Banks are required to freeze all accounts that form part of a deceased estate to allow the executor time to assess the estate’s value.
Although some countries routinely employ such methods to counter crime, it’s not commonplace in South Africa.
The Free Market Foundation has questioned the efficacy of freezing bank accounts, saying: “The fact that global money laundering regulations have captured no terrorist or drug money led the authorities to recognise that such money bypasses the international banking system, often using informal financial networks, especially across the Middle East. The regulations are massively costly in relation to their paltry successes. Instead, they provide lavish livelihoods for swathes of bureaucrats globally.”
Due diligence
Ettiene Retief, the chairperson of the national tax and SA Revenue Service committee at the SA Institute of Professional Accountants, says banks need to know with whom they are dealing, but they need to have good reasons for freezing accounts, and the burden of proof is high. It must be to preserve capital or state funds, stop criminal activity, or prevent further money laundering, because there are significant consequences to freezing an account.
“The banks and authorities have to justify that not freezing a bank account is more harmful. We have to consider all the affected parties,” Retief says.
“If there’s a tax compliance issue, nothing prohibits the South African Revenue Service from getting a court order freezing it. Other organisations of state can freeze without a court order, though. If the Reserve Bank is aware of illicit money flows, it could freeze accounts. Police investigating fraud or theft could approach the court. These are extreme circumstances, though.”
Banks choose with whom they want to do business, and in the Gupta case, the sector decided it didn’t want them as clients, so froze them out.
Although the stench of corruption might be pervasive around some companies such as Steinhoff and EOH, they remain only accused.
Retief says businesses need to continue operating, and freezing accounts could have a dire impact on staff and debtors and creditors. Contracts, shareholders, tenders and taxes need to be considered.
Ultimately, it’s about risk. With the Guptas, there was a high likelihood that they would disappear with the money, and the issue was politically driven.
“Companies are accused all the time of fronting. But the accusations against the Guptas were significant. They could - and did - disappear so easily. Not closing those bank accounts would have been reckless.”
Retief says many companies are in trouble “all the time”, but it doesn’t justify freezing an account. Doing so has a significant impact, ending the business, which is why the burden of proof falls on the party that makes the application to court.
* Georgina Crouth is a consumer watchdog with serious bite. Write to her at [email protected], tweet her @georginacrouth and follow her on Facebook.
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