SOUTH Africa’s major financial institutions risk having the country’s entire financial sector grey-listed internationally if they continue to rely on contract law and the Supreme Court of Appeal (SCA) judgment – Bredenkamp and Others vs Standard Bank – to arbitrarily unbank clients without first involving law enforcement agencies.
Instead of acting unilaterally against organisations and individuals accused of unlawful financial activity, banks should follow the FATF’s rules.
The Financial Intelligence Centre’s (FIC’s) executive manager for legal and policy, Pieter Smit, said earlier this year that it was unacceptable for banks to prematurely close bank accounts since that jeopardised FIC’s ability to act.
“This is, in fact, not a behaviour that the FIC encourages. We are very clear when we speak to the banks that we do not accept a bank’s explanation that they cannot keep that account for an account holder because it jeopardises the FIC’s own work,” he said.
Several local banks have been fined more than R100 million for violating local and international standards. If the country’s banks are grey-listed, they might be punished, restricted, or shut out of financial markets where they raise capital if the country fails to meet FATF’s recommendations by early next year.
Lesetja Kganyago, governor of the South African Reserve Bank (SARB), confirmed to Parliament’s Standing Committee on Finance (SCoF) last week that failing to adopt the report’s recommendations could result in grey-listing.
“Technical compliance and efficacy were low in the mutual evaluation report.”
Kganyago promised the committee that the SARB would show development and compliance by year’s end.
“However, avoiding grey-listing includes law enforcement and prosecutors beyond what we’re doing. We started a programme in 2020. We’ve created a work stream and are convinced we can comply based on our analyses.”
In its Mutual Evaluation Report, FATF found South Africa’s significant deficiencies in anti-money laundering/combating the financing of terrorism (AML/CFT) systems, which could result in a grey-listing.
Instead of complying with international standards, local banks have unilaterally terminated client ties based on a 2010 SCA ruling against Bedenkamp, who sued Standard Bank for cancelling his business accounts.
The court ruled in favour of Standard Bank, saying that when warranted, a bank’s account termination is a contractual right that does not affect public policy or constitutional values.
Several banks have shut down the bank accounts of persons and corporations, including Sekunjalo Investment Holdings and its subsidiaries, without contacting the FIC, as per regulations.
Section 29 of the FIC Act requires banks to report suspicious transactions. Failure to meet these responsibilities could lead to SARB fines. The FIC Act states that local and international law enforcement partners and SARS can request this information.
FATF began evaluating the country’s banks three years ago and released its final assessment on October 7. All regulatory agencies should subject beneficiary owners to fit and appropriate conduct and check that their directors, senior managers, extra owners, or affiliates are not involved in criminal activity.
It also urged bank supervisors to better comprehend money laundering and terrorism risk. All supervisors would employ monetary personalities and other law enforcement procedures.
Kganyago stated: “Our concern is not just that FATF would impose this on us, but that other countries, like the EU, will step up their activities on South African-based institutions.”
He said international financial institutions would conduct more due diligence on South African financial institutions and borrowers. International entities may be hesitant to do business with the country.
“In which case they will increase South Africa’s borrowing costs or say it’s not worth it, in which case they won’t provide resources, in which case we won’t have access to some money we would have otherwise needed.
“The cost of borrowing in this economy will rise, he warned. The SARB must move quickly to avert grey-listing and show meaningful progress. If we’re grey-listed, we should be removed within a year,” Kganyago said.