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Bank ombud’s report: internet fraud concerns

By Angelique Arde Time of article published Apr 18, 2015

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The Ombudsman for Banking Services is seeking to amend the terms of his office so that he has jurisdiction over cases of internet fraud where money has been withdrawn from a bank that did not take care to ensure it knew who its client was.

When internet banking fraud occurs and money is stolen from an account held at Bank A and siphoned to an account at Bank B, the question is whether Bank B has a duty of care (a common-law principle) to the Bank A customer. The ombudsman, Advocate Clive Pillay, believes it does, but the banks are of the view that Bank B does not have a duty of care to Bank A’s customers, even though Bank B (or the “beneficiary bank”) was used to facilitate the fraud.

All banks must comply with the Financial Intelligence Centre Act (Fica), which carries the “know your client” requirement. This means banks must establish the identity of their clients before allowing them to transact.

Pillay says that his office does not enforce Fica. His mandate is to resolve disputes between banks and their customers.

In internet banking fraud cases, the ombudsman says his office “follows the money” and finds out where it goes. There is, however, a weakness in the “investigative reach of the ombudsman’s powers”, he says. This means that his office is confined to finding in your favour only when your own bank has failed to show a duty of care to you.

Pillay’s office found in favour of banks in 75 percent of complaints relating to internet banking last year. This is according to the ombudsman’s annual report for 2014, which was released yesterday.

The report refers to an “impasse” relating to “an internet banking issue”, which influenced the 2014 statistics. Pillay says the impasse was over whether there is a duty of care on a beneficiary bank when a client opens an account.

As a result of the impasse, Pillay referred a case – arising from a complaint about internet banking fraud where the funds were moved to and withdrawn from a different bank – to retired judge Frans Malan.

Pillay says the judge is of the opinion that there ought to be such a duty of care, but said that in order to make such a finding, oral evidence would have to be heard in a full-blown court case. The court would then issue a declaratory order, which is a judgment that resolves legal uncertainty.

It’s unlikely that the banks will apply for such an order, because it is not in their interests to do so, since any bank is at risk of being the beneficiary bank of fraudulently obtained funds.

The ombudsman is at liberty to apply for the order, but has opted instead to seek an amendment to the terms of reference of his office, Pillay says. He has the power to make changes to the terms of reference provided the directors of the ombudsman’s scheme vote in favour of the changes. (Of the eight directors on his board, six are independent of the banking industry.) These changes would then be forwarded to the Financial Services Ombud Schemes Council for approval, Pillay says.

He says the amended terms of reference would enable his office would to investigate all aspects of the account-opening procedures and any other aspects, to determine whether there was any negligence or maladministration on the part of both the bank where the fraud occurred and the beneficiary bank, “even though the defrauded party was a customer of only the bank where the fraud occurred”.

Last year, the South African Reserve Bank fined the four largest banks R125 million collectively for their failure to comply with Fica, which came into effect more than a decade ago. The fine is mentioned in the ombudsman’s annual report by ombud scheme chairman John Myburgh, who says it will prompt the banks to “follow the letter of the law”.

Complaints about internet banking were the second-largest category of complaints to the ombudsman’s office last year. The office closed 643 cases stemming from internet banking complaints in 2014. This excludes 120 cases that were closed because of the impasse, Pillay says.

The 120 complainants whose cases were closed were advised of other avenues of recourse, the ombudsman says. These include taking the matter to court, or lodging a complaint with the National Consumer Commission or the National Credit Regulator (NCR).

In terms of the National Credit Act, if the NCR receives a complaint that it can’t deal with, the regulator can issue a notice of non-referral, which gives the complainant the option to go to a consumer court or the National Consumer Tribunal.


Most complaints to the banking ombudsman’s office last year were ATM-related. ATM complaints have dominated the office’s case load since 2010, the annual report says.

There was a seven-percent increase in the number of ATM-related complaints compared with the previous year. “In this category, card swopping increased dramatically, from 27 percent of complaints in 2013 to 60 percent of complaints in 2014,” the report says.

There was a massive hike in complaints against Standard Bank last year, the ombudsman’s annual report reveals. In 2013, Pillay’s office dealt with 980 complaints against Standard Bank, whereas last year it received 1 630 complaints against the bank.

All Standard Bank’s competitors had fewer complaints against them compared with the previous year. In 2013, the ombudsman’s office dealt with 970 complaints against Absa, but last year it dealt with 639 complaints against the bank. In 2013, there were 927 complaints against FNB, but last year there were 787. The number of complaints against Nedbank dropped from 688 in 2013 to 635 last year. In 2013, the ombudsman dealt with 867 complaints against Capitec, but 640 last year.

Pillay says the number of files opened per bank is not necessarily indicative of the individual bank’s complaints-handling performance or its performance in general. Banks vary considerably in size, client profile, product mix and liability to the public, he says. “All these factors impact the number of complaints made against a bank,” he says.

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