Earlier this year, several banks closed the accounts of a certain investment company. At the time, it was alleged that the owners of the company in question exercised considerable influence over the President of South Africa and used their influence to secure favours.
In response, there was speculation in the media about the decision taken by the banks. To address such speculation, the Banking Association of South Africa issued a statement noting, among other things, that banks have to comply with regulations relating to the Financial Intelligence Centre Act (Fica) and money laundering.
The office of the Ombudsman for Banking Services would like to highlight other relevant legislation and conventions with which financial institutions must comply.
The office of the ombudsman is impartial and independent. This article is not a defence, or criticism, of the business practices of any company, the conduct of any individual, or the action taken by any bank.
What is money laundering?
Criminal activity generates substantial profits. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, because it enables criminals to enjoy these profits without jeopardising their source.
The United Nations Office on Drugs and Crime estimates that between US$800 billion and US$2 trillion, or two to five percent of global GDP, is laundered worldwide annually.
Laws and conventions
Some features of the more immediate laws and conventions with which financial institutions have to comply include:
* United Nations Convention against Corruption – Article 68(1) of United Nations resolution 58/4 of October 31, 2003
South Africa is a signatory to the United Nations Convention against Corruption, which came into effect on December 14, 2005. It is a legally binding international anti-corruption instrument that requires states to implement several anti-corruption measures that may affect their laws, institutions and practices. These measures are aimed at preventing corruption, including domestic and foreign bribery, embezzlement, trading in influence and money laundering.
* Financial Action Task Force (FATF) on money laundering
In response to concerns about money laundering and the threat posed to the banking system and to financial institutions, the FATF was established in 1989 by the ministers of its member jurisdictions. The inter-governmental body has policy-making powers only and no investigative authority.
The objectives of the FATF are to set standards and promote the implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
Fica came into being as result of pressure from the FATF to implement money laundering legislation. South Africa’s commitment to the implementation of the FATF recommendations codified in Fica made it the first African country to become a fully fledged member of the FATF.
South Africa was accepted as a member of the FATF in June 2003 and a month later Fica came into effect.
* Politically Exposed Person (PEP)
In financial regulation, a PEP is a term describing someone who has been entrusted with a prominent public function. A PEP generally presents a higher risk for potential involvement in bribery and corruption by virtue of his or her position and the influence that he or she may hold.
* Financial Intelligence Centre Amendment Bill of 2015
The bill introduces the concept of a domestic prominent influential person (PIP). Section 21G(c) obliges a bank to conduct enhanced ongoing monitoring of any business relationship with a PIP.
Parliament has passed the amendment bill and it is with the president for signature.
If the president does not sign it, South Africa will be non-compliant with the FATF recommendations. The FATF will then issue a statement identifying the Republic as a jurisdiction with strategic deficiencies in its anti-money-laundering laws.
* Prevention and Combating of Corrupt Activities Act (Act 12 of 2004)
The Prevention and Combating of Corrupt Activities Act imposes a duty on banks to report knowledge of corrupt activities.
In terms of the Act, any person who holds a position of authority and knows or ought to reasonably have known or suspected that any other person has committed an act of corruption involving R100 000 or more must report such knowledge or suspicion to a police official.
Failure to comply could result in a fine and/or a term of imprisonment and/or a further fine equal to five times the value of the gratification involved in the offence.
* Banks Act (Act 94 of 1990)
In terms of the section 6(2) of the Banks Act, as amended by section 3(b) of the Banks Amendment Act of 2003, banks are obliged to submit to the supervision and control of the Registrar of Banks and must meet and maintain various standards imposed upon it by the Act including details of the funds held and their business practices. Failure on the part of a bank to meet these standards may result in a bank being liable for losses and even criminal sanction.
* Inspection of Financial Institutions Act (Act 80 of 1998)
In terms of section five of the Inspection of Financial Institutions Act, banks are subject to the investigation and inspection of their affairs. Failure to co-operate on the part of banks could render them liable to the payment of a fine or to imprisonment, or both.
* Prevention of Organised Crime Act (Act 121 of 1998)
Banks have to comply with the measures spelt out in the Prevention of Organised Crime Act, particularly sections four to six, to combat money laundering. Failure to comply with these measures could attract a fine of R100 million or 30 years’ imprisonment.
* Code of Banking Practice
The Code of Banking Practice states that a bank will not close an account without giving reasonable prior notice. However, a bank reserves the right to protect its interests in its discretion, and this might include closing an account without giving prior notice: if a bank is compelled to do so by law (or by international best practice); if an account has not been used for a significant period of time; or the bank has reason to believe an account is being used for any illegal purposes.
* A bank’s contractual right
Our courts have upheld a bank’s right to close accounts on the basis that the agreement that establishes the banker-customer relationship constitutes a contract like any other and that the general rules of contractual interpretation apply.
A term within that contract that allows the bank at will, subject only to giving reasonable notice to terminate the contract, provided the termination is procedurally fair and does not offend constitutional values, is not unusual, onerous or unconscionable.
So, not only are banks entitled to close an account in terms of the contract that establishes the banker-customer relationship, subject to certain conditions, they are obliged to do so in terms of domestic and international law and international convention.
Banks must take care to ensure that they comply with their statutory and common law obligations, because a failure to do so could attract huge penalties.