In early April 2016, various newspapers reported that the top four South Africa commercial banks disowned one of their main clients, The FAMOUS Guptas brother’s business without giving any specific reason to the public.
a) In your opinion, why did the banks react the way they did?
b)What risks do you think they were trying to manage by taking the route that they took? Identify any four major risks and briefly explain them.
a) Two activities that the banks did
1) The banks closed the Guptas business accounts (1)
2) The Banks Gave no reason to the public for their actions (1) Why the banks closed the accounts
Banks were put in a tight corner mainly due to two conflicting interests. Banks in general have a confidentiality clause with their customers under which they cannot disclose customer information to third parties without the consent of their client or a directive from a court of law.
- ii) Banks could have been pushed into the action of disowning their clients, as there could have been compliance issues.
The four main risks that the banks could have been trying to manage are as follows
a) Compliance Risk-
According to Gibson (2017) Compliance risk’ is normally defined as the risk of legal or regulatory sanctions, material financial loss, or loss to the reputation that an organization may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organization standards, and codes of conduct applicable to its activities. Compliance laws, rules, and standards have various sources, including primary legislation, rules and standards issued by legislators and supervisors, market conventions, codes of practice promoted by industry associations, and internal codes of conduct applicable to the organization concerned. Gibson (2017) went on and said that compliance risk falls under the compliance function even if compliance resides in the risk management department. In some company’s ethics is included in the compliance function, while other companies may have a separate ethics department.
Compliance risk is the risk that arises because of banks failing to adhere to legislative requirements. Banks are heavily regulated because of their importance to the developments of an economy and they are duty-bound under FICA to Act on errand accounts. Failure to do this could result in many penalties being imposed on the bank, which can even include the withdrawal of a license. The fact that the banks closed the accounts of this particular customer is good enough to suggest that they complied although we are not privy to the details of what actually took place.
b) Litigation/Legal Risks
Had the banks disclosed to the public the reasons why they closed the accounts to the public they could easily have been taken to court for breach of contractual terms. Banks can only disclose client information to third parties with the client’s full consent and or to an officer of the state. The fact that the banks did not advise the public is proof enough to suggest that they avoided this risk.
c) Reputational Risk.
According to Deutsche Bank (2020), Reputational risk in banking is defined as the risk of possible damage to the bank’s brand and reputation, and the associated risk to earnings, capital, or liquidity arising from any association, action, or inaction which could be perceived by stakeholders to be inappropriate, unethical or inconsistent with the Bank’s values and beliefs. Reputational risk is governed by the Reputational Risk Framework, which was established to provide consistent standards for the identification, assessment, and management of reputational risk issues (Deutsche Bank: 2020). Reputational risk is a risk that arises because of loss of confidence/trust in an institution by the members of the public. There are mixed views from the public but by not disclosing this information to the public the banks acted correctly as far as the issue of reputational risk is concerned.
d) General Governance/Ethical and political risks
The risk of ethics emanates from the unwillingness of the directors to abide by the ethical standards in their control for company activities, which to some extent will be linked to doing shed business deals. Continuous business with the Guptas was going to put a bad ethical risk on the banks, since the greater population of the country was assuming and stating that, the Guptas were committing corruption. From Principles of good corporate governance principles, shareholder activism suggests that institutional investors should make sure that, the organizations they deal, conduct their business in an ethical and responsible manner, and to a larger extent not deal with companies that do not abide by the same principles of good governance. As a result, the local banks were facing the risk of losing local and international business with the clients or lose potential and current investors. The Gupta Family had become a hot political issue of late and the banks were in a very tight corner in the sense that they had to act despite them facing the risk of being labeled as playing politics. The issue of corporate governance and ethical practices have to come into play in such situations.
b) Discuss risks identified in (a) above in the context of the Bank’s responsibilities under FICA and argue whether these risks were fully addressed by what the banks did.
Under FICA, all registered FSPs are expected to report all suspicious transactions especially cash transactions (2)
Banks are also expected to monitor the activities on the accounts of their clients to ensure that there are no issues of money laundering that may be taking place.
The Banks had to be seen as acting professionally all the time. They could not disclose to the public confidential information without the consent of the client concerned or without a directive from a court of law. However, banks have a duty to report on suspicious transactions to the respective regulatory authority they do not have an obligation to report issues to the public without being asked to do so by the courts.
In the main, the keys risks associated with money laundering seem to have been addressed by the banks.
Whether they reported to the authorities or not remains unclear but what is very clear is that they were aware of their obligations under the Act and thus acted accordingly.
However, as registered FSPs under FICA, Banks are expected to report to the authorities any suspicious transactions, which may involve the suspicion of money laundering. Should an account be operated in a suspicious nature, the banks have a right to close the account as not taking action against such clients may be deemed at law as adding to money laundering activities.
Despite the stated arguments above, new revelations from Toyana & Strydom (2016) suggest that South African lender FirstRand said on Monday suspicions of money-laundering lay behind its decision to cut ties with a business family linked to allegations of influence-peddling in President Jacob Zuma’s government. In the article, the two stated that FirstRand, South Africa’s biggest bank by market value, is the first lender to publicly disclose reasons for severing links earlier this year with Oakbay Investments, a company controlled by the Gupta brothers.
In addition to the above, Toyana & Strydom (2016) argued that in an affidavit seen by Reuters, dated Nov. 29, FirstRand Chief Executive Johan Burger said his company had closed Oakbay bank accounts to comply with international regulations. “These practices and standards require us to take steps to prevent FirstRand from being used for money-laundering and other unlawful activities,” Burger says in the court papers (Toyana & Strydom: 2016).
Despite the assertation from First Rand, Gupta’s lawyers stated that BANKS failed to show the real reasons why the banks took this action. However, Nieselow (2018) The banks did not disclose their reasons for cutting ties with the Guptas in 2016, citing the confidential client-bank relationship, but several representatives told the Zondo Commission they took the decision due to reputational and business risks associated with the family’s operations.
Nieselow (2018) went on and said that South Africa’s “big four” banks could have been locked out of the international payments system with “absolutely catastrophic” results if they had kept the Gupta family’s bank accounts open in 2016, according to South African Reserve Bank deputy governor Kuben Naidoo. To cement this, as stated by Nieselow (2018) Reserve Bank governor Lesetja Kganyago echoed this sentiment, explaining that, if South African banks had been banned from the international financial network, large scale job losses would have occurred, WITH DESIRE TO AVOID THIS, DEFINITELY BANKS HAD TO CLOSE THE ACCOUNTS.