Supreme Court of Appeal provides clarity on FICA

​​​​​​A recent Supreme Court ruling has clarified the duties of an accountable institution under the Financial Intelligence Centre Act (FICA) in a case of a bank customer wishing to close its account.

The Supreme Court of Appeal (SCA) recently handed down a decision on the interpretation of the Financial Intelligence Centre Act, 2001 (FICA), in Nedbank Limited v Houtbosplaas (Pty) Ltd and Another (Case no 164/2021) [2022] ZASCA 69 (19 May 2022).

The appeal examined the right of a bank customer to summarily terminate its customer and banker contractual relationship and close its account. The SCA interpreted section 21 of FICA and the now-deleted regulation 7 of the Money Laundering and Terrorist Financing Control Regulations, 2002 (the Regulations).

A brief summary of the facts are that Houtbosplaas and TBS Alpha, both limited liability private companies, were clients of Nedbank. Retired Judge van Dijkhorst (to whom we shall refer as the companies' representative or trustee as context requires) is and has been the sole director of Houtbosplaas and TBS Alpha since their incorporation. The companies' representative holds one preference share in each of the companies. In addition, four trusts each holds one preference and ordinary shares in the two companies. The companies' representative is the sole trustee of the four trusts and represents them – and himself – at shareholders' meetings of the companies.

In 2016 Nedbank requested the companies' representative to provide certain information about the companies, ostensibly pursuant to the provisions of the FICA. Nedbank requested copies of the trust deeds of the four trusts, together with copies of the letters issued by the Master of the High Court appointing the companies' representative as the sole trustee of the four trusts. Nedbank was provided with three of the four trust deeds. The company representative declined to provide a copy of the outstanding trust deed, asserting that Nedbank's request constituted an unjustifiable intrusion into the trusts' right to privacy.

Nedbank based its request on its opinion that each of the four trusts held 25% of the issued shares in the two companies. It said the companies were obliged under FICA to provide the requested documentation. However, the two companies insisted that each one of the trusts holds less than 25% of the issued shares in the two companies and, more specifically, each holds 22% of the issued shares. The trusts said they were not Nedbank's clients and were consequently under no statutory obligation to provide the trust documents required by Nedbank.

There was an impasse. On 20 January 2017, the companies' representative, acting on behalf of the companies, gave written notice to Nedbank to close the companies' bank accounts and transfer all funds held in those accounts to Absa Bank to be credited to various accounts. On 8 February 2017, Nedbank responded that it would not comply with the request to close the accounts and transfer the funds to Absa Bank because the companies had failed to comply with Nedbank's request. As a result, the accounts were restricted in accordance with FICA. On 7 June 2017, the trustee provided the final outstanding trust deed for the fourth trust to Nedbank.

On 7 July 2017 Nedbank finally closed the companies' accounts and transferred all the funds held in those accounts to Absa Bank. In October 2017 the companies instituted motion proceedings against Nedbank for mora​ ​interest. The two companies were granted relief in the High Court. The High Court held that Nedbank was not justified in law to require a copy of the outstanding trust deed because none of the trusts, including the outstanding trust in particular, exercised 25% of the voting rights at the companies' general meetings. Further, the High Court held that nowhere does FICA require bank clients to provide verification documents to a bank when requested to do so.

SCA decision

Nedbank's basis for appeal was based on two arguments. Its first argument was that the four trusts would be able to exercise 25% of the voting rights. It argued that the High Court erred because it overlooked the terms of the memoranda of incorporation (MOI) of the companies concerned. The MOI stated that preference shareholders were not eligible to vote in relation to certain matters at general meetings of the companies. The second argument was that the High Court was guided by the amended version of section 21(2) of FICA that was not applicable, ignoring the pre-amended version that was in operation at the relevant time.

The SCA examined an accountable institution’s obligations under FICA and the associated regulations. In particular, it examined Regulation 7, which details the information that should be submitted by companies to accountable institutions. Regulation 7 reads:

"An accountable institution must obtain from the natural person acting or purporting to act on behalf of a close corporation or South African company with which it is establishing a business relationship or concluding a single transaction –

. . .

The SCA noted that an accountable institution is authorised and obliged to obtain certain information from the natural person acting or purporting to act, inter alia, on behalf of a South African company – in this instance Houtbosplaas and TBS Alpha – with which it (that is, the accountable institution) is establishing a business relationship or concluding a single transaction. It was common cause between the parties that the the trusts were not Nedbank clients as they did not have bank accounts with Nedbank.

Regulation 7(f)(ii) sets out the information that should be submitted by a company. For the provisions of regulation 7(f)(ii) to be triggered, the trust involved must '. . . [hold] 25% or more of the voting rights at a general meeting of the company concerned' but not otherwise'.

The SCA found that section 21(2) of FICA presents no controversy. It is clear and unambiguous. Section 21(2) of FICA, before it was amended, read as follows:

"if an accountable institution had established a business relationship with a client before the Act took effect, the accountable institution may not conclude a transaction in the course of that business relationship, unless the accountable institution has taken the prescribed steps–(a) to establish and verify the identity of the client"

The SCA noted two elements in section 21(2) were relevant. First, Section 21(2) applies to current bank clients who had already formed a business relationship with the accountable institution, such as the two businesses in this case. Second, an accountable institution 'may not finalize a transaction in the course of that business relationship...' unless the institution 'has taken procedures... to establish and verify the identification of the customer,' among other things.

The SCA held that the most important requirement of section 21(2) relates to the conclusion of a transaction with a client – whether it is a single transaction or one that occurs during the course of a business relationship between an accountable institution and a client.

The SCA noted that Nedbank is required to comply with FICA's requirements at the beginning of the relationship before concluding any future transaction. There would be no need for Nedbank to verify the companies in respect of every transaction to be completed within the parties' existing business relationship once this had occurred. Therefore, on the facts of this case, section 21(2), properly construed in line with its apparent objective, did not apply when Nedbank attempted to invoke it.

Petse DP ruled that the provisions of the relevant sub-paragraph of the MOI of the two companies were clear and unambiguous. It stated that preference shareholders have every right to vote at general meetings of the companies concerned – just like ordinary shareholders – on any matters within the normal scope of the powers of the companies. The SCA found that the voting rights of the trusts fell below the prescribed threshold and in actual fact constituted 22%. Therefore, regulation 7(f)(ii) was not triggered.

The first part of Regulation 7 states that it only applies when an accountable institution is 'forming a business relationship or concluding a single transaction.' It is undeniable that when FICA was implemented on February 1, 2002, both corporations had long since established business agreements with Nedbank. Consequently, regulation 7(f)(ii) is not applicable where, (as in this case), a business relationship existed prior to the implementation of FICA. The SCA found Nedbank's reliance on Regulation 7(f)(ii) to be erroneous.

In light of the SCA's conclusion regarding the interpretation of the MOI and the text of Regulation 7, it declined to consider the issue of whether closing a bank account constitutes 'a single transaction' as contemplated in s 21(1) of FICA.

The SCA found that Nedbank was not legally justified in restricting access to the bank accounts and refusing to give effect to its client’s instructions to close the relevant bank accounts.

The SCA dismissed the appeal with costs.

It should be noted that the Regulations promulgated under FICA were amended in 2017 by Government Notice R1595 in Government Gazette 24176. The current version of the Regulations does not contain Regulation 7. Regulation 7 was deleted in its entirety. According to the amended Regulations, if an accountable institution cannot obtain information on beneficial ownership of a client who is a juristic entity, this does not necessarily entitle the accountable institution to terminate the business relationship. FICA obligates accountable institutions to adopt a risk-based approach when complying with its obligations under the legislation.