Can FICA "freeze" banks accounts?
South Africa’s courts were recently asked to rule on whether a financial institution, a bank, can freeze or restrict a client’s access to an account because they did not properly identify themselves.
In an analysis of the case, Tracy Janse van Rensburg, director at Werksmans Attorneys, said that the court relied on the Financial Intelligence Centre Act (FICA) which places an obligation on accountable institutions to identify clients, to keep a record of transactions, to report various transactions and to take measures to promote compliance.
“In the matter of Houtbosplaas (Pty) Ltd v Nedbank Ltd, the applicant companies had a complex shareholding structure. In essence, the shares were held by four registered trusts,” said Janse van Rensburg
“For purposes of updating the Know Your Client (KYC) status, the respondent (Nedbank) requested the applicants to provide them with copies of the trust deeds of the four respective trusts.
The applicants were however of the view that for purposes of the verification of the identities of the shareholders of the applicant companies, the trust deeds were confidential and that they were not obliged to disclose same to the respondent. Consequently, Nedbank restricted access to both applicants’ bank accounts.
“The court was required to consider whether the restriction and/or the freezing of the applicants’ accounts by the respondent was lawful, whether the Respondent’s interpretation of the provisions relating to the determination of the shareholding in the applicants was correct and whether the closure of the Applicants’ accounts was a transaction as envisaged in the FIC Act,” said van Rensburg.
The court was of the view that a business relationship between an accountable institution and a client does not entitle such institution to restrict access to or freeze an account of a client, even where there is a suspicion that a transaction involves unlawful activity as contemplated in section 29 of the FICA.
Similarly, the FICA does not allow financial institutions to demand, from existing clients, that they submit identity documents on pain of the restriction of access to, or the freezing of, their accounts.
“In this regard, the court considered the fact that the applicants had been conducting business with the respondent for a number of years. In fact, their business relationship with the respondent dated back to prior the enactment of the FICA. The applicant companies were accordingly well known to the respondent and there was no evidence whatsoever which would have caused suspicion that either of the applicants were involved in any money laundering or unlawful activities, which is the mischief that the FICA primarily intends to address.”
The court further found that Nedbank’s interpretation of the regulations was incorrect in that it provides that financial institutions must obtain particulars concerning persons representing legal persons like companies.
In the instance of trusts, the regulation obliges financial institutions to obtain the said particulars of trusts holding 25% or more of the voting rights at the general meeting of the company concerned, said Janse van Rensburg.
“However, the applicants contended that the individual trusts do not have a 25% shareholding in the companies, which was the threshold at and above which the respondent was entitled to probe the shareholders.”
The court found in favour of the applicants, confirming that the individual trusts in fact had a 22% shareholding in each company and, as such, the regulation does not apply to the applicants. Therefore, Nedbank was not lawfully entitled to demand access to the trust deeds of the respective trusts.
Know Your Customer
In light of the above, it is evident that accountable institutions should carefully inspect the founding documents of their respective corporate clients and may not simply proceed to freeze or restrict their clients’ access to an account for the mere reason that the client did not satisfactorily identify itself or its stakeholders to such accountable institution, on-demand, said van Rensburg.
“There is nothing within the confines of the FICA which prohibits a financial institution from using alternative sources to identify and verify a client, including through accessing the records of CIPC, the Department of Home Affairs and/or the offices of the Master of the High Court for purposes of obtaining relevant documentation and/or information,” she said.
“Furthermore, insofar as an accountable institution has an ongoing relationship with an existing client, such accountable institution should very well be able to utilise available alternative sources for purposes of undertaking the identification and verification requirements in relation to such clients and cannot summarily freeze an account due to a client failing to provide it with documents required for purposes of an accountable institution undertaking its requisite KYC checks.”