PER/PELJ - Pioneer in peer-reviewed, open access online law publications

AuthorLisbeth Letsoalo

Affiliation University of Limpopo, South Africa

Email Lisbeth.letsoalo@ul.ac.za

Date Submitted 21 April 2023

Date Revised 8 April 2024

Date Accepted 8 April 2024

Date Published 10 July 2024

Editor Prof H Chitimira

Journal Editor Prof C Rautenbach

How to cite this contribution

Letsoalo L "Navigating Reputational Risks: Cautionary Considerations for South African Banks in the Unilateral Termination of Bank-Customer Relationships" PER / PELJ 2024(27) - DOI http://dx.doi.org/10.17159/1727-3781/2024/v27i0a16012

Copyright

DOI http://dx.doi.org/10.17159/1727-3781/2024/v27i0a16012

Bredenkamp v Standard Bank of South Africa Ltd

Abstract

Bredenkamp v Standard Bank of South Africa Ltd

Keywords

Bank-customer relationship; contract; termination; reputational risks.

……………………………………………………….

1 Introduction

South African courts consider reputational risks as grounds for the unilateral termination of the bank-customer relationship. 1

 Lisbeth Letsoalo. LLB LLM (UL). Lecturer in the Department of Mercantile and Labour Law, University of Limpopo, South Africa. Email: Lisbeth.letsoalo@ul.ac.za. ORCiD: https://orcid.org/0009-0002-4034-234X

1 See Bredenkamp v Standard Bank of South Africa Ltd 2010 4 SA 468 (SCA) (hereinafter Bredenkamp SCA); Hlongwane v Absa Bank Limited (75782/13) [2016] ZAGPPHC 938 (10 November 2016) (hereinafter Hlongwane); Minister of Finance v Oakbay Investments (Pty) Ltd; Oakbay Investments (Pty) Ltd v Director of the Financial Intelligence Centre 2018 3 SA 515 (GP) (hereinafter Oakbay Investments); Annex Distribution (Pty) Limited v Bank of Baroda 2018 1 SA 562 (GP) (21 September 2017 (hereinafter Annex Distribution (21 September 2017)); Annex Distribution (Pty) Limited v Bank of Baroda (52590/2017) [2017] ZAGPPHC 639 (9 October 2017) (hereinafter Annex Distribution (9 October 2017)); and Annex Distribution (Pty) Limited v Bank of Baroda (52590/2017) [2018] ZAGPPHC 6 (12 March 2018) (hereinafter Annex Distribution (12 March 2018)); Survé v Nedbank Limited (698/2022) [2022] ZAWCHC 19 (14 February 2022) (hereinafter Survé HC); Survé v Nedbank Limited [2022] ZAWCHC 164 (17 June 2022) (hereinafter Survé EC); Survé v Nedbank Ltd 2022 2 CPLR 38 (CT) (hereinafter Survé CT); Nedbank Limited v Survé 2024 1 All SA 615 (SCA) (hereinafter Survé SCA); Mercantile Bank, A Division of Capitec Bank Limited v Survé 2023 3 CPLR 33 (CAC) (hereinafter Survé CAC); Talhado Fishing Enterprises (Pty) Ltd v Firstrand Bank Ltd t/a First National Bank (1104/2022) [2022] ZAECQBHC 15 (19 July 2022) (hereinafter Talhado Fishing Enterprises); Africa Community Media (Pty) Ltd v Standard Bank of SA Ltd (EC08/2023) [2023] ZAWCHC 243 (14 September 2023) (hereinafter Africa Community Media).

This is justified when customers conducts themselves in a manner that presents possible risks to a bank's good name or business. Guided by statutory obligations, 2

2 Legislation such as the Financial Intelligence Centre Act 38 of 2001 (FIC Act), the Prevention of Organised Crime Act 121 of 1998, the Prevention and Combatting of Corrupt Activities Act 2 of 2004, the Banks Act 94 of 1990, and Banking Association of South Africa 2012 https://www.banking.org.za/wp-content/uploads/2019/04/Code-of-Banking-Practice-2012.pdf (hereinafter Code of Banking Practice).

common-law principles 3

3 The common-law right to unilaterally terminate a bank-customer relationship was confirmed in Bredenkamp SCA.

and contractual rules, as will be unpacked below, banks have a right to terminate the relationship with a customer based on reputational risks, and case law suggests that courts should be reluctant to second-guess the decision. 4

4 Annex Distribution (9 October 2017) para 65; Bredenkamp SCA para 65.

This is particularly so because the bank-customer relationship is contractual in nature, and parties can establish or terminate their relationship at will.

Generally, the customer may terminate the contract summarily. 5

5 See Nedbank Limited v Houtbosplaas (Pty) Ltd 2022 6 SA 140 (SCA). The appeal concerned a customer's right to summarily terminate the customer and banker's contractual relationship and close the customer's account (para 2). The court concluded that where the bank refuses to give effect to its erstwhile clients'

However, the bank must give reasonable notice of termination in line with the

instructions to close the relevant bank accounts, it has breached its obligations towards the customer (para 57). Also see Bredenkamp v Standard Bank of South Africa Ltd 2009 6 SA 277 (GSJ) (hereinafter Bredenkamp main application) para 29.

contractual terms, 6

6 Bredenkamp SCA para 32; Ngidi 2020 De Jure 58; Ellinger, Lomnicka and Hare Ellinger's Modern Banking Law 207; the Code of Banking Practice para 7.3.2 (for banks that have adopted the Code of Banking Practice).

or in the absence of a termination clause, reasonable notice will be determined by the nature of the customer's account. 7

7 Ombudsman for Banking Services South Africa 2018 https://www.obssa.co.za/wp-content/uploads/2018/02/Bulletin-3-Closure-of-bank-accounts-Final-30.01.2018.pdf.

The requisite for reasonable notice is also provided in the Code of Banking Practice, which provides that the bank will close its customer's account only after providing the customer with reasonable notice. 8

8 Code of Banking Practice para 7.3.2.

In this context, where a bank opts to terminate the relationship unilaterally, case law suggests that it is within a bank's discretion to decide to what extent it will tolerate its reputation to be tarnished by allegations of illicit activities levelled against its customers, 9

9 Annex Distribution (21 September 2017) para 12.

whether or not the allegations have been proven truthful, and reasonableness does not play a role in exercising this discretion, except regarding the notice of termination.

The Supreme Court of Appeal (SCA) in Bredenkamp v Standard Bank of South Africa Ltd 10

10 Bredenkamp v Standard Bank of South Africa Ltd 2010 4 SA 468 (SCA) (Bredenkamp SCA).

(hereinafter Bredenkamp) set the standard for the unilateral termination of the bank-customer relationship on the grounds of reputational risks. The judgement sets out several principles South African banks have relied on when terminating relationships with their customers. 11

11 See footnote 1 for a list of cases that have pronounced on the principles laid down in Bredenkamp SCA.

Over the years these principles have been challenged in courts, where customers have instituted legal proceedings to prohibit banks from closing their accounts, requiring banks to keep accounts open against the banks' wishes, much of this happening against the backdrop of extensive media coverage and political turmoil. 12

12 Du Toit 2018 Annual Banking Law Update 65.

Recently Dr Mohammed Iqbal Survé and members of the Sekunjalo Group of companies (hereinafter collectively referred to as the Sekunjalo Group) have been subject to litigation in the Equality Court, 13

13 Survé EC; Survé SCA. The main applications are still pending in the High Court and the Equality Court.

the Competition Tribunal, 14

14 Survé CT; Survé CAC.

and the High Court 15

15 Survé HC; Talhado Fishing Enterprises; Africa Community Media.

against several banks in South Africa to prevent them from closing their accounts and further to require the banks to

reinstate accounts that had already been closed at the time of the applications. 16

16 Survé HC para 1; Survé EC paras 1-2; Survé CT para 3; Africa Community Media para 1. For ease of reference, Iqbal Survé and members of the Sekunjalo Group of companies are hereinafter collectively referred to as the "Sekunjalo Group".

Whereas the banks build their argument on reputational risks, Sekunjalo Group alleges that they are victims of racial discrimination as white-owned companies who are customers of the banks have been subject to extensive media coverage, posing reputational and business risks to the banks, and yet their contracts have not been terminated. 17

17 Survé EC para 21. One could relate this allegation to the fact that Bredenkamp is a white male. However, Sekunjalo Group base their argument on comparison with specific customers who are white-owned entities. The allegation implies that the principle of reputational risks and Bredenkamp are not enforced similarly across customers of different racial groups.

The paper intends to deliberate whether banks, relying on Bredenkamp, correctly enforce the right to terminate the bank-customer relationship unilaterally based on reputational risks. The paper establishes that for any bank, terminating the bank-customer relationship based on reputational risks is a right that falls squarely within the bank's discretion and is a regulatory obligation. The author intends to refrain from determining or arguing the merits of the case regarding the ongoing applications between the Sekunjalo Group and the relevant banking institutions. However, the author uses the issues in the applications to evaluate the principle of reputational risk as pronounced in Bredenkamp and further to demonstrate the extent to which banks apply the principle within the relevant legislative parameters.

2 The bank-customer relationship

2.1 The nature of the bank-customer relationship

The relationship between a bank and its customer, specifically the holder of a current account, must be viewed in terms of the general principles of the law of contract. 18

18 Nagel and Pretorius 2016 THRHR 661.

However, due to the complex nature of the relationship, it is difficult to identify the type of contract under which the relationship may be classified. As a result the bank-customer relationship is often classified as a contract sui generis. 19

19 Sharrock et al Law of Banking and Payment 115.

The various descriptions that assume this characterisation are outlined in judicial authorities and literature. Fundamentally, the nature of the relationship is described as a "multi-faceted" relationship founded in various contracts. 20

20 Sharrock et al Law of Banking and Payment 115. Also see Schulze 2002 SA Merc LJ 440; Ngidi 2020 De Jure 56; Absa Bank Limited v Hanley 2014 2 SA 448 (SCA) (hereinafter Hanley).

De Jager states that it invariably involves various types of contracts such as mandate, loan for

consumption, depositum and deposit-taking, all of which include aspects of private law. 21

21 De Jager 2010 SA Merc LJ 127.

On the one hand the nature of the contract has been pronounced by courts as a paradigm of a debtor-and-creditor relationship. 22

22 See Standard Bank of SA Ltd v Oneanate Investments (Pty) Ltd 1995 4 All SA 128 (C) 144; Spar Group Ltd v Firstrand Bank Ltd 2017 1 SA 449 (GP) paras 47-53; FirstRand Bank Limited v The Spar Group Limited 2021 5 SA 511 (SCA) para 41; Nagel et al Commercial Law 471.

The bank becomes the debtor as soon as the customer opens a bank account and deposits money into the bank account, and remains a debtor to the extent that the customer's bank account reflects a credit balance. 23

23 Ngidi 2020 De Jure 56; Schulze et al General Principles of Commercial Law 476.

However, where the account reflects a debit balance, the roles are reversed. An overdraft facility is but one example where the roles are reversed. 24

24 Nagel et al Commercial Law 471; Sharrock et al Law of Banking and Payment 117; De Jager 2010 SA Merc LJ 131.

The customer then becomes the debtor and the bank assumes the role of a creditor.

On the other hand the bank-customer relationship is based on a mandate in which the bank agrees to conduct one or more banking services on behalf of the customer. 25

25 Schulze et al General Principles of Commercial Law 465.

A correlative description is espoused by Schoeman et al, who opine that in as much as the customer instructs the bank to render certain banking services when required and the bank agrees to carry out such instructions, their ensuing consensus emanates from a contract of mandate. 26

26 Schoeman et al Introduction to South African Banking and Credit Law 4. Also see Di Giulio v First National Bank of South Africa Limited (A1080/2001) [2002] ZAWCHC 33 (19 June 2002); De Jager 2010 SA Merc LJ 131.

26 Schoeman et al Introduction to South African Banking and Credit Law 4; DA Ungaro & Sons (Pty) Limited v Absa Bank Limited 2015 4 All SA 783 (GJ) para 25.

The SCA in Absa Bank Limited v Hanley equally held that whether the relationship relates to one or more of the services a bank performs for its customer, the agreement giving rise to these services is an agreement of mandate, since a bank undertaking to transfer funds on its customer's instructions acts as a mandatary. 27

27 Hanley para 25.

The nature of this relationship creates rights and duties for both parties. For instance, where a bank is mandated to effect a credit transfer, it must perform its mandate timeously, in good faith and without negligence. Under a contract of mandate the bank undertakes to execute all orders by the customer to effect a payment on condition that there are sufficient funds (or overdraft facilities) at the customer's disposal. 28

28 Nagel et al Commercial Law 471.

A reciprocal duty is imposed on a customer not to draw more than the amount standing to his or her credit balance or, where available, an overdraft facility limit. The relationship

further places a duty on the customer to draw his payment instructions with reasonable care to prevent forgery or alteration and to warn the bank of known or suspected fraud arising from this relationship. 29

29 Firstrand Bank Ltd v Kgethile (M370/2018) [2021] ZANWHC 63 (31 August 2021) (hereinafter Kgethile) paras 43-45; Hanley para 24.

However, other salient features of the bank-customer relationship have been subject to concentrated discussions. The one description that has not been accepted is that the contract in the present day resembles that of a depositum, or agency. Authors such as Schulze, 30

30 Schulze 2001 SA Merc LJ 78.

De Jager 31

31 De Jager 2010 SA Merc LJ 127.

and Mthembu 32

32 Mthembu 2014 JICLT 14.

distinguish and depict the possible relations between a contract of depositum, mutuum (a loan for consumption) and deposit-taking. A contract of depositum shares similar features to that of mutuum in that a depositor deposits money with a depository in exchange for an undertaking on the part of the depository that the same sum of money will be returned. 33

33 Schulze 2001 SA Merc LJ 81.

However, these contracts differ in that with depositum, the contract is gratuitous in nature and entails the safe custody of an object in the interest of the depositor. 34

34 Schulze 2001 SA Merc LJ 80; De Jager 2010 SA Merc LJ 131.

With mutuum, the parties agree that when money is deposited with the bank, it is deposited in the bank's interest, and the bank can utilise it. The client exchanges the ownership of the money for a personal right. 35

35 Schulze 2001 SA Merc LJ 82; De Jager 2010 SA Merc LJ 131; Mthembu 2014 JICLT 18.

Although Schulze opines that banks occasionally conclude contracts of depositum with their customers, as of 2019 it appears that prominent South African banks have ceased to offer safe deposit boxes (as a feature of depositum). 36

36 Planting 2019 https://www.dailymaverick.co.za/article/2019-05-21-out-with-the-secure-solution-banks-phasing-out-safety-deposit-boxes//. South Africans use options such as Union Vault or Max Vault to access safety deposit boxes.

It seems therefore that the nature of the bank-customer relationship is predominantly accepted to be that of mutuum and not depositum.

2.2 The unilateral termination of the bank-customer relationship

The ordinary rules relating to the termination of a contract often relate to termination on agreement or consent, by notice of termination, the death or dissolution of the customer, the sequestration of the customer, the insanity of the customer, the dissolution of the bank, and the effluxion of time (in the case of a fixed deposit). 37

37 See Sharrock et al Law of Banking and Payment 162-166.

The focus of this paper is on termination by notice. The bank-customer relationship can be terminated unilaterally by either

party to the contract. The duration and termination of an agreement are primarily determined by establishing whether there are any explicit contractual grounds, including voluntary termination, on which the parties can depend. 38

38 Naidoo Termination of the Bank-Customer Relationship 5.

Their grounds typically lie in the lex commissoria, 39

39 Naidoo Termination of the Bank-Customer Relationship 5. In GPC Developments CC v Uys 2017 4 All SA 14 (WCC) para 35, the court acknowledged the explanation of the phrase lex commissoria as a cancellation clause which affords a contracting party the right to resile from an agreement on the ground of delay, which has also acquired a broader and more general meaning, viz, that of a provision conferring the right to cancel an agreement based on any recognised form of breach.

or in an implied term of the agreement.

An implied term is one implied by law in a contract of a particular nature, 40

40 Schulze 2011 Obiter 220.

unless expressly excluded by the parties. It has the effect that where the parties have not included a cancellation clause in their agreement, the contract can be interpreted to include an implied term. Plaaskem (Pty) Ltd v Nippon Africa Chemicals (Pty) Ltd 41

41 Plaaskem (Pty) Ltd v Nippon Africa Chemicals (Pty) Ltd 2014 5 SA 287 (SCA) (hereinafter Plaaskem).

identifies four notable factors to consider to determine whether the parties wish for either party to terminate the relationship on notice. These include the wording of the contract, 42

42 Plaaskem para 18.

the intention of the parties, 43

43 Plaaskem para 19.

the nature of the contract, 44

44 Plaaskem para 21.

and the surrounding circumstances of the contract. 45

45 Plaaskem para 24.

Notably, in the absence of a cancellation clause the party who wishes to cancel the agreement obtains a right to cancel the contract if the breach of contract is profound in that it goes to the root of the contract or relates to an essential term of the contract. 46

46 Schulze 2010 Annual Survey of South African Law 530; Schulze 2011 Obiter 220; Schulze and Eiselen 2022 TSAR 830.

The prerogative is rooted in the essence of a contract of mandate, which incorporates the duty not to cause damage to the other party. 47

47 Schulze 2011 Obiter 220.

Therefore, where a customer conducts his or her business in a way that poses operational and business risks to the bank, the latter can validly argue that the customer has breached this duty, which conduct would possibly satisfy the test of seriousness and allow the bank to cancel the contract unilaterally, in the absence of a lex commissoria. 48

48 Schulze 2011 Obiter 220.

An implied term can be read into the contract because it cannot be concluded that the parties intend to be bound in perpetuity, especially against the will of either of the parties. 49

49 Plaaksem para 18; Schulze 2010 Annual Survey of South African Law 528; Schulze 2011 Obiter 218.

Therefore, where the parties have not inserted an express cancellation clause in the contractual agreement, the parties are not precluded from unilaterally terminating the agreement. The contractual nature of the agreement between a bank and its customer allows the bank to do so and requires the customer to be served with reasonable notice of termination. On the contrary, a customer may terminate the relationship summarily, 50

50 Nedbank Limited v Houtbosplaas (Pty) Ltd 2022 6 SA 140 (SCA) para 2; Bredenkamp main application para 29.

without serving the bank with notice prior to the termination. 51

51 Ngidi 2020 De Jure 66; Ellinger, Lomnicka and Hare Ellinger's Modern Banking Law 207; Naidoo Termination of the Bank-Customer Relationship 6; Code of Banking Practice para 7.3.2.

Whereas several reasons can inform the unilateral termination of the relationship, the author draws explicit attention to reputational risk as grounds for termination.

2.3 The influence of Bredenkamp on the closure of bank accounts

Bredenkamp confirmed the common-law position on the unilateral termination of the bank-customer relationship. Bredenkamp was listed as a "specially designated national" by the United States Department of Treasury's Office of Foreign Asset Control on 25 November 2008. 52

52 Bredenkamp SCA para 12.

The listing was based on Bredenkamp's relation with the then President of Zimbabwe, President Robert Mugabe, and allegations that he had provided financial and logistical support to the regime that has enabled the former President to pursue policies that undermined democratic processes and institutions in Zimbabwe. 53

53 Bredenkamp SCA para 14.

In addition Bredenkamp was allegedly involved in various illicit business activities, including tobacco trading, grey-market arms trading and trafficking, equity investments, oil distribution and diamond extraction. 54

54 Bredenkamp SCA para 15.

The bank's concern was that if it were to retain Bredenkamp as a customer, domestic and foreign onlookers might reasonably believe that the accounts Bredenkamp held at Standard Bank could be used to facilitate the unlawful activities, and its association might well undermine a bank's hard-won and fragile national and international reputation. 55

55 Bredenkamp SCA para 17.

Upon receiving the notice of termination Bredenkamp lodged an application for an interim interdict to prevent Standard Bank from closing his bank accounts. 56

56 Bredenkamp v Standard Bank of South Africa Ltd 2009 3 All SA 339 (GSJ) (hereinafter Bredenkamp interim application).

The court a quo granted an interim interdict in favour of Bredenkamp despite a lex commissoria regulating the termination of the relationship. 57

57 Bredenkamp interim application para 71.

According to the court Standard Bank's decision to terminate its relationship with Bredenkamp was unreasonable, unfair, not in line with constitutional values and guidelines, and based squarely on perceptions and not on facts, which perceptions might be wrong. 58

58 Bredenkamp interim application para 32.

In the main application the bank held that the lex commissoria was not contrary to any constitutional values and that a bank has the right to terminate the bank-customer relationship unilaterally. 59

59 Bredenkamp main application paras 64, 67 and 68.

This was because a bank has obligations to comply with national and international regulations, failing which there are serious legal consequences for a bank. 60

60 Bredenkamp main application paras 32, 50, 51, and 52.

On appeal the question before the SCA was whether the Bank had good cause to close Bredenkamp's accounts. 61

61 Bredenkamp SCA para 64.

In dismissing the application, the SCA held that the bank had a valid contract that gave it the right to cancel, which right had been exercised in a bona fide manner. 62

62 Bredenkamp SCA para 64; Schulze 2010 Annual Survey of South African Law 527.

The court held that the termination did not offend any identifiable constitutional value and was not contrary to any other public policy consideration. 63

63 Bredenkamp SCA para 64; Schulze 2010 Annual Survey of South African Law 527.

Bredenkamp's cancellation was based purely on the fact of the listing and the possible reputational and commercial consequences of the listing for the Bank. 64

64 Bredenkamp SCA para 61.

Bredenkamp has been applied in the following selected cases wherein customers were allegedly party to illicit activities with potential impact on the reputation of banks.

2.3.1 Annex Distribution v Bank of Baroda 65

65 Annex Distribution (21 September 2017); Annex Distribution (9 October 2017); Annex Distribution (12 March 2018).

Annex Distribution v Bank of Baroda (hereinafter Annex Distribution) consists of three judgements. In the first application for an interim interdict, the court highlighted the dictum from Bredenkamp that the relationship between a bank and its customer is contractual, and therefore a bank is at liberty to terminate its relationship with its customer 66

66 Annex Distribution (21 September 2017) para 15.7.

amid adverse media publicity if the bank believed it to be a risk to and detrimental to its business. 67

67 Annex Distribution (21 September 2017) paras 7 and 18.

However, the second judgement took a different stance.

The court was not convinced that the potential harm to the bank's reputation had been substantiated, and as a result interdicted the bank from closing the account and terminating the bank-customer relationship. 68

68 Annex Distribution (9 October 2017) paras 82-87.

In the final decision 69

69 Annex Distribution (12 March 2018).

the court held that since the bank had terminated its operations in South Africa, the bank could not be expected to service the customer's account. 70

70 Annex Distribution (12 March 2018) para 16.

The court found the bank to have every right to terminate any business contract, including that of Annex Distribution. 71

71 Annex Distribution (12 March 2018) para 16.

The court concluded that the bank's right to trade or not to trade supersedes whatever right, if any, the customer might have, and as a result dismissed the application. 72

72 Annex Distribution (12 March 2018) para 20.

2.3.2 Minister of Finance v Oakbay Investments (Pty) Ltd

The Gauteng High Court in Minister of Finance v Oakbay Investments (Pty) Ltd and Others (hereinafter Oakbay Investments) with reference to Bredenkamp confirmed that the bank may terminate its relationship with a customer at its discretion on reasonable notice to the customer, provided that the reasons for terminating the account do not violate public policy or constitutional values. 73

73 Oakbay Investments para 56.

Except for such acknowledgement by the court, the decision does not provide development in this area. The application was based on the Financial Intelligence Centre Act 74

74 Financial Intelligence Centre Act 38 of 2001.

(FIC Act) and not on the Constitution and sought to enforce a constitutional right to access to information, in respect of which Oakbay Investments 75

75 Oakbay Investments para 49.

sought to access information that formed the basis of the reports submitted by their banks to the Financial Intelligence Centre (FIC) in order to allow Oakbay Investments to rebut the allegations in the reports or to repel the cloud of impropriety the reports cast on them. 76

76 Oakbay Investments para 38.

2.3.2 Hlongwane v Absa Bank Limited

Hlongwane v Absa Bank Limited brought an application to access records relating to ABSA's decision to close Hlongwane’s accounts. 77

77 Hlongwane para 1. The application was brought in terms of the Promotion of Access to Information Act 2 of 2000.

The court dismissed the application and held that the bank's bona fides in closing accounts could not be questioned. 78

78 Hlongwane para 30.

The Court recognised that the bank had no obligation to retain a client whose monitoring in terms of money

laundering measures would be more onerous than the benefit the bank would receive from banking the client. 79

79 Hlongwane para 30.

2.3.4 Survé v Nedbank

This heading encompasses a discussion of the seven applications that have been adjudicated in different courts. At the time of writing, the main applications before the Equality Court and the High Court are still pending. The matter between the Sekunjalo Group and various South African banks involves the application of the Constitution, particularly section 9, due to the nature of the allegations levelled against the banks by the Sekunjalo Group, which alleges that its banks racially discriminated against it since the principle of reputational risk was not being enforced on the Group in the same manner as it had previously been enforced in respect of white-owned customers of the same banks.

The banks used Bredenkamp as authority when terminating their relationship with members of the Sekunjalo Group. Like Bredenkamp, the Sekunjalo Group's reputation has been tarnished by allegations of impropriety in several controversial media reports. Although these allegations have not been proven truthful, the case law discussed herein exhibits that it is insignificant. 80

80 Bredenkamp SCA paras 19 and 63; Oakbay Investments para 39; Annex Distribution (21 September 2017) para 41.

For the sake of brevity, a reflection on the decisions in these applications is provided herein. In Survé v Nedbank an application for an interim interdict was lodged by forty-three members of the Sekunjalo Group of companies. 81

81 Survé HC para 1.

The court dismissed the application based on its lack of jurisdiction. However, the court made an obiter dictum that the SCA's decision in Bredenkamp loomed large in most matters involving the termination of a bank-customer relationship and, as such, should not be used uncritically or applied mechanically to any bank-client relationship. 82

82 Survé HC para 60.

As opined by Schulze and Eiselen, these comments should not be interpreted to mean that the correctness of Bredenkamp is being questioned. 83

83 Schulze and Eiselen 2022 TSAR 830.

They aptly argue that the correctness of the decision in Bredenkamp is beyond reproach. 84

84 Schulze and Eiselen 2022 TSAR 832.

On 17 June 2022 the Western Cape High Court, sitting in Survé v Nedbank Limited 85

85 Survé EC.

as the Equality Court, granted an interdict in favour of Sekunjalo Group, prohibiting Nedbank from closing Sekunjalo Group's accounts pending the finalisation of the main application in the Equality Court.

However, the SCA recently set aside this order in Nedbank v Survé. The SCA held that Sekunjalo Group had not established a prima facie case of racial discrimination, so the Equality Court should not have granted an interim interdict in the first place. 86

86 Survé SCA paras 27, 28 and 29.

The court remarked that if Sekunjalo Group were to breach the terms of the banker-customer contract, the Equality Court order would prohibit Nedbank from exercising its contractual right to terminate the relationship. 87

87 Survé SCA para 13.

On 16 September 2022 the Competition Tribunal granted an interdict in favour of Sekunjalo Group in Survé v Nedbank Ltd, preventing eight banks from closing the accounts of Sekunjalo Group and requiring the banks to reopen accounts already closed. The application before the Tribunal was based on allegations of collusion between the banks. 88

88 Survé CT para 10.

The Tribunal found the banks to have acted in coordination with one another and acted unilaterally as dominant firms to abuse their dominant position. 89

89 Survé CT para 4.

The decision by the Tribunal was set aside by the Competition Appeal Court (CAC) with respect to three of the eight banks in Mercantile Bank, a Division of Capitec Bank Limited v Survé.

The CAC found that the Tribunal had drawn an inference of anticompetitive practice and rejected the banks' regulatory compliance justification. 90

90 Survé CAC para 41.

On 7 August 2023 Sekunjalo Group applied for leave to appeal the CAC order in the Constitutional Court, which proceedings are still pending. 91

91 Africa Community Media para 10.

On 19 July 2022 the court in Talhado Fishing Enterprises (Pty) Ltd v Firstrand Bank Ltd t/a First National Bank 92

92 Talhado Fishing Enterprises is a member of the Sekunjalo Group.

held that it is unfair to impose upon a bank the obligation to retain a customer simply because other banks are not likely to accept that entity as a customer. 93

93 Talhado Fishing Enterprises para 24.5.

In justifying the finding that the bank had good cause to close the accounts, the court held that it had a valid contract that gave it the right to cancel. 94

94 Talhado Fishing Enterprises para 24.7.

Considering that Sekunjalo Group posed reputational and business risks, the bank had exercised this right in a bona fide manner. 95

95 Talhado Fishing Enterprises para 24.7.

For this reason the court dismissed the application for an interdict. 96

96 Talhado Fishing Enterprises para 29.

Lastly, in Africa Community Media (Pty) Ltd v Standard Bank of SA Ltd, members of the Sekunjalo Group lodged an application for an interim

interdict to prevent the bank from closing their accounts pending the finalisation of the main applications in the High Court and the Equality Court. The court held that the interests of justice instead call for an interim interdict of a more limited duration, in respect of which the parties could approach the court again for an extension or discharge upon good cause shown. 97

97 Africa Community Media para 28.

3 Reputational risk as a ground for termination of the bank-customer relationship

Definitions of reputational risk focus primarily on social cognition such as beliefs, impressions, knowledge and perceptions. 98

98 Eckert 2017 Journal of Risk Finance 147.

Eckert describes the most commonly accepted definition of corporate reputation as:

The perceptual representation of a company's past actions and future prospects that describes the firm's overall appeal to all of its key constituents when compared with other leading rivals. 99

99 Eckert 2017 Journal of Risk Finance 147.

The Basel Committee on Banking Supervision (BCBS) 100

100 The Basel Committee on Banking Supervision (BCBS) is a global standard setter for the prudential regulation and supervision of banking institutions. Its mandate is to strengthen banks' regulation, supervision and practices worldwide to enhance financial stability. See Art 1 of the BCBS Basel Committee Charter (updated 2018) (BIS 2018 https://www.bis.org/bcbs/charter.htm).

also defines reputational risk as:

The risk arising from negative perceptions on the part of customers, counterparties, shareholders, investors, debt-holders, market analysts, and other relevant parties or regulators that can adversely affect a bank's ability to maintain existing or establish new business relationships and continued access to sources of funding (e.g. through the interbank or securitisation markets). 101

101 BCBS 2017 https://www.bis.org/bcbs/publ/d423.pdf 4.

According to these definitions, two types of reputational risk can be deduced in the context of this discussion. One attaches to the customer's name and one attaches to the bank. In this context the reputation of the customer, especially one who is engaged or alleged to be engaged in illicit financial activities, can impact on the bank's reputation if it can easily be alleged or proved that the bank was used as a vehicle to conduct such transgressions. Furthermore, failure by the bank to minimise this risk can impact on the bank's reputation if it keeps such a customer and fails to comply with its legislative and regulatory obligations to combat such transgressions.

Likewise Zaby and Pohl 102

102 Zaby and Pohl 2019 SAGE Open 1.

observe that reputation pertains to the bank's competence, integrity and trustworthiness, and that a reputation results from the perception of the group of stakeholders of a bank (i.e. its customers,

shareholders, external creditors, employees, business partners, competitors; members of the financial community such as rating agencies, analysts, and fund managers; government and regulatory authorities; interest groups, e.g., consumer associations; and the social environment). 103

103 Zaby and Pohl 2019 SAGE Open 2.

The reputation of banks is significant because it influences the relationships that banks maintain with their customers and the costs that banks are willing to incur to maintain those relationships. 104

104 Buckley and Nixon 2009 JBFLP 39.

The unilateral termination of the bank-customer relationship based on reputational risks is both a right 105

105 In Bredenkamp the court confirmed a bank's right to terminate the relationship between it and its customer unilaterally, provided that specific requirements are met. See Bredenkamp SCA paras 64, 67 and 68; Schulze 2011 Obiter 213; Annex Distribution (21 September 2017) para 21.

and an obligation. 106

106 The obligation is informed by the fact that assessing a bank's reputation is part of the risk management strategies that individual banks have adopted, as outlined in para 5 below.

On the one hand it affords the contracting parties the right to terminate the agreement where the contractual relationship with either may negatively influence the other party's reputation. This affords a bank the right to choose its customers, to identify the risks the customer exposes it to, and to determine whether these risks justify refusing to offer banking products and services to a potential customer or terminating a relationship with that customer. On the other hand, against the backdrop of exercising the right to terminate the relationship based on reputational risk lies the obligation imposed on banks to implement and apply risk management measures.

Swanepoel et al argue that managing a company's reputation and reputational risk should be part of an effective risk management strategy and process. 107

107 Swanepoel et al 2017 Journal of Economic and Financial Sciences 315.

In terms of international banking standards and domestic laws, banks are ethically and legally bound to prevent financial crimes, which include inter alia illicit transactions, money laundering, terrorism financing and corruption. 108

108 Ngidi 2020 De Jure 57.

Disassociation with a customer whose conduct could harm a bank's reputation is an appropriate tool to comply with these regulatory obligations to the extent set out in paragraph five below. This was observed in Bredenkamp and subsequent cases discussed herein. Reliance on Bredenkamp does not imply that banks cannot be held accountable when they act against the relevant rules and constitutional values. This paper does not focus on such values, but the author briefly considers these in the next section of the paper.

4 The consideration of constitutional values and obligations

South African courts have over the years pronounced on the application of the Constitution of the Republic of South Africa to the law of contracts, 109

109 Bredenkamp SCA; Strydom v Nederduitse Gereformeerde Gemeente Moreleta Park 2009 30 ILJ 868 (EqC); Beadica 231 CC v Trustees for the time being of the Oregon Trust 2020 5 SA 247 (CC); AB v Pridwin Preparatory School 2020 5 SA 327 (CC).

which influence scholars have also explored. 110

110 Mupangavanhu 2023 Speculum Juris 22-35; Coleman 2021 PELJ 1-68; Lubbe 2004 SALJ 395-423.

All laws in South Africa, including the law of contract, are subject to the Constitution, and any law that is found inconsistent with it is invalid. 111

111 Section 2 of the Constitution of the Republic of South Africa, 1996 (hereinafter the Constitution).

Mupangavanhu states that exercising private power in a banking relationship may lead to a clash between private law and the Constitution. 112

112 Mupangavanhu 2023 Speculum Juris 31.

These are instances such as the dispute between the Sekunjalo Group and its various banks.

As stated above, 113

113 See para 2.3.3 above.

in the case of the Sekunjalo Group section 9 of the Constitution comes into play because the banks are accused of discrimination on racial grounds. As pointed out, the Sekunjalo Group alleges that their banks have been selective in the action taken against companies that are "white-dominant businesses", such as the Steinhoff Group, EOH Limited and the Tongaat-Hulett Group, whose accounts have not been terminated despite having been found guilty of fraud and various other offences. 114

114 See para 1 above.

The inference drawn from these allegations is that the banks are infringing on the Group’s constitutional right to equality.

In Bredenkamp the SCA held that the Constitution did not introduce an overarching requirement of fairness into the law of contracts, but fairness and reasonableness play a role when public policy considerations are implicated in the Constitution. 115

115 Rautenbach 2011 THRHR 514.

This means that banks' practices when terminating relationships ought to be measured against constitutional values, especially where constitutional values are implicated. The Constitution prescribes standards such as human dignity, equality and freedom as fundamental values against which the conduct of banks must be measured, including at the termination of a relationship. 116

116 Section 1(a) of the Constitution.

As aptly argued by Mupangavanhu, in instances where the power to terminate the banking relationship infringes on constitutional rights such as the right to equality, public policy considerations will not favour the

termination of the bank–customer relationship. 117

117 Mupangavanhu 2023 Speculum Juris 32.

Needless to say, such consideration is also warranted in respect of other constitutional rights. Without predetermining the merits of the looming Equality Court proceedings, it is argued that constitutional values and principles influence the nature of the bank-customer relationship to the extent that parties have rights afforded to them.

Specific attention is drawn to the right to equality (a right for consideration in the Sekunjalo Group's Equality Court application) and the bank's freedom of association. Section 9 of the Constitution 118

118 Section 9 of the Constitution provides for the right to equality.

plays a critical role in affording everybody, including financial consumers, the right to equality. The Sekunjalo Group's application to the Equality Court is expected to present a development in this area. I wait in anticipation of the outcome of the Equality Court case and the academic deliberations that may follow. It has been established that banks have the right to unilaterally terminate the bank-customer relationship on reputational risks, a principle based on law and fact.

The legal ground for termination is evidenced in Bredenkamp, and the termination must be justified from a factual point of view. The factual analysis determines reputational risk as a lawful ground for termination. Equally, it is necessary to note that banks' contractual autonomy is informed by freedom of association 119

119 Section 19 of the Constitution.

in that banks are free to associate or disassociate with a customer. It would be difficult to force a bank to retain a customer against its will. It is difficult to imagine how the Equality Court would rule in favour of the Sekunjalo Group without impeding a bank’s freedom to contract and freedom of association. Proving discrimination in this context will be challenging for the Sekunjalo group, considering that the legislative requirements as outlined below impose on banks the obligation to enforce risk assessment measures and ultimately to terminate the relationship with the customer where necessary.

5 Legislative and policy considerations

5.1 International standards

South Africa has adopted international standards issued by international bodies such as the BCBS, the Financial Action Task Force (FATF), 120

120 The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog responsible for setting international standards to prevent money laundering and terrorism financing. See FATF date unknown https://www.fatf-gafi.org/en/home.html.

and

the International Monetary Fund (IMF), 121

121 The International Monetary Fund (IMF) is an intergovernmental institutional body that fosters international monetary cooperation, encouraging the expansion of trade and economic growth across member countries. See IMF date unknown https://www.imf.org/en/About/Factsheets/IMF-at-a-Glance.

whose standards play an integral part in combatting financial crimes globally. The BCBS provides that adequate banking supervision entails the employment of controls and systems aimed at preventing, identifying and reporting potential abuses of financial services, including money laundering and terrorism financing. 122

122 BCBS 2012 https://www.bis.org/publ/bcbs230.pdf 65.

This principle is aligned with the bank's obligation to employ sound risk management processes. In line with this principle, the BCBS issued Guidelines on Sound Management of Risks Related to Money Laundering and Terrorism Financing, 123

123 BCBS 2016 https://www.bis.org/bcbs/publ/d353.pdf.

which incorporates money laundering and terrorism as risks within banks' overall risk management purview. 124

124 BCBS 2016 https://www.bis.org/bcbs/publ/d353.pdf 1.

These guidelines should be read and adopted with the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation issued by the FATF. 125

125 FATF 2023 https://www.fatf-gafi.org/content/dam/fatf-gafi/recommendations/FATF %20Recommendations%202012.pdf.coredownload.inline.pdf?ref=the-wave.net.

The FATF is primarily responsible for issuing anti-money laundering and counter-terrorism financing standards aimed at promoting the effective implementation of legal, regulatory and operational measures for combatting money laundering, terrorist financing, the financing of proliferation and other related threats to the integrity of the international financial system. 126

126 FATF 2023 https://www.fatf-gafi.org/content/dam/fatf-gafi/recommendations/FATF %20Recommendations%202012.pdf.coredownload.inline.pdf?ref=the-wave.net 7.

The FATF works closely with the IMF, the United Nations and the World Bank Group to assess countries' compliance with international anti-money laundering and counter-terrorism financing standards. 127

127 IMF date unknown https://www.imf.org/en/About/Factsheets/Sheets/2023/Fight-against-money-laundering-and-terrorism-financing.

Non-compliance with these standards has consequences such as greylisting, with implications such as a loss of investments, international relations and increased costs in international transactions. 128

128 Bissett, Steenkamp and Aslett 2023 JFC 1542-1543.

5.2 Domestic laws

5.2.1 Banks Act

Section 60B of the Banks Act obliges banks to establish and maintain an adequate and effective corporate governance process consistent with the nature, complexity and risks inherent in the activities and the business of the bank. Banks do this to ensure compliance with all applicable laws and

regulations. 129

129 Section 60B(2)(i) of the Banks Act 94 of 1990.

Risk management and compliance are among the essential elements of corporate governance. Empowered by section 90 of the Banks Act, the Minister has promulgated Regulations Relating to Banks that oblige banks to consider reputational risk in their risk management strategies. 130

130 Regulation 39 in GN R1029 in GG 35950 of 12 December 2012 (Regulations Relating to Banks).

Regulation 39(3) provides explicitly that the conduct of the business of a bank entails the ongoing management of risks, which may arise from the bank's on-balance sheet or off-balance sheet activities and which may include, among other things, risks such as the detection and prevention of criminal activities, 131

131 Regulation 39(3)(h) of the Regulations Relating to Banks.

reputational risk, 132

132 Regulation 39(3)(n) of the Regulations Relating to Banks.

risk arising from exposure to a related person, 133

133 Regulation 39(3)(o) of the Regulations Relating to Banks.

and any other risk regarded as material by the bank. 134

134 Regulation 39(3)(aa) of the Regulations Relating to Banks.

Regulation 50 of the Regulations Relating to Banks further requires that every bank must have in place robust structures, policies, processes and procedures to guard against the bank’s being used for the purposes of market abuse such as insider trading, market manipulation, and financial crimes such as fraud, the financing of terrorist activities and money laundering. 135

135 Regulation 50(1) of the Regulations Relating to Banks.

These structures, policies, processes, and procedures must ensure continued compliance with all relevant legislation, must be capable of recognising suspicious customers and transactions, and must lead to reporting such suspicions. 136

136 Regulation 50(2) of the Regulations Relating to Banks.

5.2.2 Financial Intelligence Centre Act

The cases discussed herein show that banks consider their obligations under the FIC Act when terminating relationships with customers based on reputational risks. The FIC Act obliges banks as "accountable institutions" to employ measures to detect and combat financial crimes, specifically money laundering, and to report suspicious and unusual transactions. 137

137 Section 29 of the FIC Act.

These measures are employed through various means, including continuous vigilance through the "customer due diligence" programme, which extends to the protection of the financial sector. 138

138 BCBS 2001 https://www.bis.org/publ/bcbs85.pdf 4.

Through this programme, banks are obliged to establish and verify the identities of their customers, 139

139 Section 21 of the FIC Act.

to obtain additional information to establish the nature of the customer's business, the intended purpose of the business and the ownership structure of the business, to verify the source of the funds

deposited in the customer's account, and to identify the risks associated with the customer. 140

140 Sections 21A-21C of the FIC Act.

Banks do this to prevent or minimise the risks of being used as a vehicle for financial crimes. Upon determining that the customer's misconduct poses a reputational risk to the bank, amongst other measures such as reporting the conduct to the FIC, banks are obliged in certain circumstances to terminate the bank-customer relationship. 141

141 Section 21E of the FIC Act.

Where a financial institution fails to comply with the provisions of the FIC Act or the risk management and compliance programme, the FIC may impose administrative sanctions on the institution or in some instances may find the relevant person guilty of an offence 142

142 See ss 45C, 46, 46A, 47, 48, 51 and 52 of the FIC Act.

and liable to imprisonment for a period not exceeding 15 years or a fine not exceeding R100 million. 143

143 Section 68 of the FIC Act.

5.2.3 Financial Sector Regulation Act

With the Twin Peaks model of regulation in place since the enactment of the Financial Sector Regulation Act (FSR Act), 144

144 Financial Sector Regulation Act 9 of 2017 (FSR Act).

the Financial Sector Conduct Authority (FSCA) 145

145 The Financial Sector Conduct Authority (FSCA) is a market conduct regulatory authority established under s 56 of the FSR Act.

has been given the explicit mandate under the FSR Act to regulate and supervise the conduct of financial institutions such as banks and cooperate with other entities such as the Prudential Authority and the FIC. 146

146 Section 58(1)(a) of the FSR Act.

The powers and functions of the FSCA extend beyond those regulated under the FSR Act. The FIC Act establishes the FSCA as a supervisory body in terms of item 1 of Schedule 2 to the FIC Act. 147

147 Section 45(1) of the FIC Act; FSCA 2022 https://www.fsca.co.za/Regulatory%20Frameworks/Temp/FSCA%20AML%20CFT%20Body%20of%20Knowledge%20-%20April%202022.pdf.

The FSCA supervises accountable institutions listed in items 4, 5 and 12 of Schedule 1 to the FIC Act for FIC Act compliance. 148

148 FSCA 2022 https://www.fsca.co.za/Regulatory%20Frameworks/Temp/FSCA% 20AML%20CFT%20Body%20of%20Knowledge%20-%20April%202022.pdf 1.

The FSCA performs onsite and offsite inspections and engages in supervisory activities at accountable institutions to test compliance with the obligations of the FIC Act, and takes enforcement measures against accountable institutions that fail to comply with the FIC Act. 149

149 FSCA 2022 https://www.fsca.co.za/Regulatory%20Frameworks/Temp/FSCA %20AML%20CFT%20Body%20of%20Knowledge%20-%20April%202022.pdf 1.

The other objective of the FSCA is to promote the fair treatment of financial customers by financial institutions, 150

150 Section 57(b)(i) of the FSR Act.

and to issue conduct standards that are aimed at ensuring that this objective is achieved. 151

151 Conduct Standards are issued in terms of s 106 of the FSR Act.

The Conduct Standard issued by the FSCA in 2020 152

152 FSCA 2020 https://www.banking.org.za/wp-content/uploads/2020/07/Conduct-Standard-3-of-2020-BANKS-Annexure-A.pdf (hereinafter the Conduct Standard).

prescribes how banks must conduct their business. It provides in the relevant part that a bank must conduct its business in a manner that prioritises the fair treatment of financial customers. 153

153 Section 2(4) of the Conduct Standard.

Fair treatment should be apparent in other areas of the bank-customer relationship, such as the bank's refusal, withdrawal, or closure of financial products or services.

Section 9 of the Conduct Standard requires banks to, subject to applicable requirements, document, adapt and implement processes and procedures relating to the withdrawal, termination or closure of a financial product or service, amongst other things, in respect of one or more financial customers. 154

154 Section 9(1)(b) of the Conduct Standard.

This induces a bank to issue a policy document outlining the circumstances in which it will refuse to deal with a customer or terminate its relationship with the customer and the process it will follow in deciding to refuse to deal with a customer or to terminate its relationship with the customer. 155

155 Section 9 of the Conduct Standard.

Against this backdrop, the contract would contain a lex commissoria establishing the circumstances in which the contract would be terminated. This subjects banks to regulatory oversight to ensure that when they terminate the bank-customer relationship, they do so in a manner that conforms to the contractual terms and its regulatory obligations.

5.2.4 Conduct of Financial Institutions Bill

The National Treasury has also tabled the second draft of the Conduct of Financial Institutions Bill 156

156 GN 519 in GG 43741 of 29 September 2020 (Draft Conduct of Financial Institutions Bill, 2020) (hereinafter CoFI Bill).

(CoFI Bill), which is set to enhance market conduct regulation and ensure that consumers are treated fairly in the financial sector. 157

157 Section 17(1)(a) of the CoFI Bill. The FSCA has published a three-year plan which indicates the following progress: phase1 (overall design of the new framework) has been finalised; phase 2 (targeted consultation) was set to commence during the second half of 2023; and phase 3 (transitioned work) was set to continue throughout 2023 with the intention of having initial formal proposals ready in the first half of 2024. See FSCA 2022 https://www.fsca.co.za/Regulatory%20Frameworks/Regulatory

The Bill states that banks should, "after" the point of

%20Frameworks%20Documents/2023%20fsca%203-year%20regulation%20plan[v2].pdf.

contracting a customer, continue to promote the fair treatment of the customer, including when the contract is terminated and after the contract has been terminated. 158

158 Section 32(2) of the CoFI Bill.

Furthermore, a financial institution may terminate the contractual relationship between the financial institution and a financial customer only in a fair manner and in accordance with any procedures and requirements that may be prescribed. 159

159 Section 34(1) of the CoFI Bill.

5.2.5 Code of Banking Practice

The Code of Banking Practice also influences the bank-customer relationship for those banks that have adopted the Code in their business practices. Although the Code is voluntary and not applicable to all banks in South Africa or enforced in a court of law, it was issued due to the perception that banks in South Africa have taken advantage of smaller customers. This is not to suggest that members of the Bredenkamp, Annex Distribution, Oakbay Investments, Hlongwane and Sekunjalo Group are small customers. Of significance is the fact that the Code requires that banks who have agreed to be bound by the Code undertake to act fairly, reasonably and ethically towards customers. 160

160 Schoeman et al Introduction to South African Banking and Credit Law 9.

Fair, reasonable and ethical conduct could be demonstrated even when banks terminate the bank-customer relationship. Under the Code, banks undertake to provide customers with reasonable notice of the termination. 161

161 Code of Banking Practice para 7.3.2.

Additionally, banks reserve the right to unilaterally terminate the relationship where they are compelled to do so by law (or by international best practice), if customers have not used their accounts for a significant period of time, or if the bank has reasons to believe that the account is being used for any illegal purposes. 162

162 Code of Banking Practice para 7.3.3.

6 Analysis

It is evident from this discussion that the bank-customer relationship is not only informed by the private contract between the bank and its customer but is also subject to the international standards and domestic laws discussed above. These regulatory instruments impose the obligation on banks to prevent inter alia financial crimes, including fraud, theft, money laundering and corruption. 163

163 Kgethile para 41.

These instruments exhibit that banks are under an obligation not to engage in or permit unlawful transactions under their

watch. 164

164 Kgethile para 41.

This means that banks must take steps to monitor and report on the conduct of their customers, failing which there are sanctions to be imposed.

Banks do indeed have the freedom to contract, which allows them to choose with whom to contract, under which terms and when to end the relationship. Legislative measures and other measures, including the common law and soft law, determine the extent to which this freedom may be exercised. Furthermore case law as discussed above clearly depicts the circumstances under which banks are justified in exercising their freedom to contract, specifically when terminating the relationship with customers based on reputational risks. Economic reasons (including regulatory obligations) generally influence the closure of bank accounts based on reputational risks. The circumstances in Bredenkamp and subsequent cases are typical of such reasons, as banks cannot be seen as tools enabling money laundering or as financing terrorism.

Mechanisms to assess reputational risk include, amongst others, assessing who the customers are, their source of funds, and the possible risks they pose to a bank's business. The likelihood that a client's misconduct can be detrimental to a bank's business, particularly where the customer is alleged to be engaged in a publicly known financial misconduct in which the bank may be suspected to be implicit, is enough to give rise to the assumption that the bank's reputation is at risk. It is also enough to lead to the conclusion that the customer has breached the contract. AGAIN Bredenkamp, Annex Distributions, Oakbay Investments, Hlongwane and the Sekunjalo Group were not convicted of any financial crimes. Their accounts were closed on the basis of their banks' assessment of their reputation.

Furthermore, a customer's conduct is not the only factor to consider during risk assessments, although the literature and case law have focussed on customers' conduct as the main risk to a bank's reputation in combatting financial crimes. The BCBS correctly defined reputational risk as encompassing negative perception not only on the part of customers but also on the part of shareholders and other relevant parties or regulators. 165

165 BCBS 2017 https://www.bis.org/bcbs/publ/d423.pdf 4.

Banks should also assess the practices of their clients and their possible influence and impact on their business, particularly in regard to compliance with the banking laws. There are regulatory sanctions for non-compliance. However, non-compliance with regulatory requirements can also pose a risk to a bank's good name and business.

Nonetheless, there should be constitutional considerations. The law of contract is concerned with individual autonomy, the freedom and sanctity of

a contract, and public policy, which are also central to the Constitution. 166

166 Mupangavanhu 2023 Speculum Juris 23.

If a constitutional right is infringed, a bank would be wrong to terminate the relationship irrespective of its freedom to contract.

A good reputation is central to a bank's business. Reputation helps customers to decide in situations where they cannot assess the quality of what they are buying before buying it. 167

167 Babiu-Hodoviu, Mehiu and Arslanagiu 2011 Procedia Social and Behavioral Sciences 352.

Eckert identifies reputational risk (from an insurance perspective) as the risk that adverse that will most readily cause a loss of confidence in an institution's integrity. 168

168 Eckert 2017 Journal of Risk Finance 150.

Therefore, banks should be cautious not to be associated with allegations of racial discrimination or the infringement of any other constitutional rights; otherwise, efforts to protect their reputation will be futile. The termination of a banking relationship must be on reasonable notice, not contrary to public policy, and must not offend constitutional values.

7 Conclusion

To sum up, the terms of a contract establishing the bank-customer relationship usually determine how the relationship can be terminated. However, where a contract does not contain a termination clause, common law provides that the relationship can be terminated on reasonable notice. Bredenkamp developed an important rule regarding the termination of the bank-customer relationship. Subsequent cases that have relied on Bredenkamp upheld a bank's right to close accounts on the basis that the agreement that establishes the relationship constitutes a contract like any other and that the general rules of contractual interpretation apply. 169

169 Ombudsman for Banking Services South Africa 2018 https://www.obssa.co.za/wp-content/uploads/2018/02/CIN-14-Closure-of-Bank-Accounts-Final-February-2018.pdf.

This means that banks have a right to choose with whom to contract, and a contract cannot continue against the will of either of the contracting parties.

Although the contract between a bank and its customer is private, the conduct of banks is publicly monitored locally and internationally. Protecting banks’ reputations entails severing ties with customers whose reputations pose a risk to the business of the banks, and ensuring that the conduct of banks conforms to legislative and regulatory instruments, as highlighted above.

Whereas it is accepted that the ordinary rules of contract govern the relationship between a bank and its customer, the relationship is also governed by constitutional law in that compliance with the Constitution is a

prerequisite. The court in Oakbay Investments expressed an opinion on the influence of the Constitution on the termination of a bank-customer relationship, stating that the termination should not infringe on public policy or constitutional values. However, one can only wait in anticipation of the development once the main applications involving the Sekunjalo Group that are pending before the Equality Court and the High Court are adjudicated.

Whereas Bredenkamp states that banks have a right to terminate their relationship with customers, emerging legal disputes argue that banks apply these principles loosely. Therefore, guidance must be provided, not just in the decisions in the pending cases but also with the introduction of the CoFI Bill, to ensure that the rights and obligations of banks are promoted and that consumers' rights are protected at all stages of the bank-customer relationship.

To achieve this end, "reputational risks" should be clearly defined in contracts between banks and their customers, and the procedures relating to the termination on these grounds should be clearly outlined. This could induce banks to enforce this right equally against their customers and curb “unintended” infringements of constitutional rights. Therefore, banks must be cautious in their practices.

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Bredenkamp v Standard Bank of South Africa Ltd 2009 6 SA 277 (GSJ)

Bredenkamp v Standard Bank of South Africa Ltd 2009 3 All SA 339 (GSJ)

DA Ungaro & Sons (Pty) Limited v Absa Bank Limited 2015 4 All SA 783 (GJ)

Di Giulio v First National Bank of South Africa Limited (A1080/2001) [2002] ZAWCHC 33 (19 June 2002)

FirstRand Bank Limited v The Spar Group Limited 2021 5 SA 511 (SCA)

Firstrand Bank Ltd v Kgethile (M370/2018) [2021] ZANWHC 63 (31 August 2021)

GPC Developments CC v Uys 2017 4 All SA 14 (WCC)

Hlongwane v Absa Bank Limited (75782/13) [2016] ZAGPPHC 938 (10 November 2016)

Mercantile Bank, A Division of Capitec Bank Limited v Survé 2023 3 CPLR 33 (CAC)

Minister of Finance v Oakbay Investments (Pty) Ltd; Oakbay Investments (Pty) Ltd v Director of the Financial Intelligence Centre 2018 3 SA 515 (GP)

Nedbank Limited v Survé 2024 1 All SA 615 (SCA)

Nedbank Limited v Houtbosplaas (Pty) Ltd 2022 6 SA 140 (SCA)

Plaaskem (Pty) Ltd v Nippon Africa Chemicals (Pty) Ltd 2014 5 SA 287 (SCA)

Spar Group Ltd v Firstrand Bank Ltd 2017 1 SA 449 (GP)

Standard Bank of SA Ltd v Oneanate Investments (Pty) Ltd 1995 4 All SA 128 (C)

Strydom v Nederduitse Gereformeerde Gemeente Moreleta Park 2009 30 ILJ 868 (EqC)

Survé v Nedbank Limited (698/2022) [2022] ZAWCHC 19 (14 February 2022)

Survé v Nedbank Limited [2022] ZAWCHC 164 (17 June 2022)

Survé v Nedbank Ltd 2022 2 CPLR 38 (CT)

Talhado Fishing Enterprises (Pty) Ltd v Firstrand Bank Ltd t/a First National Bank (1104/2022) [2022] ZAECQBHC 15 (19 July 2022)

Legislation

Banks Act 94 of 1990

Constitution of the Republic of South Africa, 1996

Financial Intelligence Centre Act 38 of 2001

Financial Sector Regulation Act 9 of 2017

Prevention and Combatting of Corrupt Activities Act 2 of 2004

Prevention of Organised Crime Act 121 of 1998

Promotion of Access to Information Act 2 of 2000

Government publications

GN 519 in GG 43741 of 29 September 2020 (Draft Conduct of Financial Institutions Bill, 2020)

GN R1029 in GG 35950 of 12 December 2012 (Regulations Relating to Banks)

Internet sources

Banking Association of South Africa 2012 https://www.banking.org.za/wp-content/uploads/2019/04/Code-of-Banking-Practice-2012.pdf

Banking Association of South Africa 2012 The Code of Banking Practice https://www.banking.org.za/wp-content/uploads/2019/04/Code-of-Banking-Practice-2012.pdf accessed 28 March 2023

BCBS 2001 https://www.bis.org/publ/bcbs85.pdf

Basel Committee on Banking Supervision 2001 Customer Due Diligence for Banks https://www.bis.org/publ/bcbs85.pdf accessed 31 March 2024

BCBS 2012 https://www.bis.org/publ/bcbs230.pdf

Basel Committee on Banking Supervision 2012 Core Principles for Effective Banking Supervision https://www.bis.org/publ/bcbs230.pdf accessed 31 March 2024

BCBS 2016 https://www.bis.org/bcbs/publ/d353.pdf

Basel Committee on Banking Supervision 2016 Guidelines on Sound Management of Risks Related to Money Laundering and Terrorism Financing https://www.bis.org/bcbs/publ/d353.pdf accessed 31 March 2024

BCBS 2017 https://www.bis.org/bcbs/publ/d423.pdf

Basel Committee on Banking Supervision 2017 Guidelines: Identification and Management of Step-in Risk https://www.bis.org/bcbs/publ/d423.pdf accessed 31 March 2024

BIS 2018 https://www.bis.org/bcbs/charter.htm

Bank for International Settlements 2018 Basel Committee Charter (Updated 2018) https://www.bis.org/bcbs/charter.htm accessed 31 March 2024

FATF date unknown https://www.fatf-gafi.org/en/home.html

Financial Action Task Force date unknown Home https://www.fatf-gafi.org/en/home.html accessed 12 April 2023

FATF 2023 https://www.fatf-gafi.org/content/dam/fatf-gafi/recommen-dations/FATF%20Recommendations%202012.pdf.coredownload.inline.pdf?ref=the-wave.net

Financial Action Task Force 2023 International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation: The FATF Recommendations (updated February 2023) https://www.fatf-gafi.org/content/dam/fatf-gafi/recommendations/FATF%20Recommendations%202012.pdf.coredownload.inline.pdf?ref=the-wave.net accessed 31 March 2024

FSCA 2020 https://www.banking.org.za/wp-content/uploads/2020/07/

Conduct-Standard-3-of-2020-BANKS-Annexure-A.pdf

Financial Sector Conduct Authority 2020 Conduct Standard 3 of 2020 (Banks) https://www.banking.org.za/wp-content/uploads/2020/07/Conduct-Standard-3-of-2020-BANKS-Annexure-A.pdf accessed 10 March 2023

FSCA 2022 https://www.fsca.co.za/Regulatory%20Frameworks/Regulatory %20Frameworks%20Documents/2023%20fsca%203-year%20regulation%

20plan[v2].pdf

Financial Sector Conduct Authority 2022 2023 FSCA 3-Year Regulation Plan https://www.fsca.co.za/Regulatory%20Frameworks/Regulatory%20 Frameworks%20Documents/2023%20fsca%203-year%20regulation%20plan[v2].pdf accessed 2 February 2024

FSCA 2022 https://www.fsca.co.za/Regulatory%20Frameworks/Temp/ FSCA%20AML%20CFT%20Body%20of%20Knowledge%20-%20April%202022.pdf

Financial Sector Conduct Authority 2022 Financial Sector Conduct Authority Anti-Money Laundering/Counter Financing of Terrorism Body of Knowledge https://www.fsca.co.za/Regulatory%20Frameworks/Temp/FSCA%20AML%20CFT%20Body%20of%20Knowledge%20-%20April%202022.pdf accessed 2 February 2024

IMF date unknown https://www.imf.org/en/About/Factsheets/IMF-at-a-Glance

International Monetary Fund date unknown IMF at a Glance https://www.imf.org/en/About/Factsheets/IMF-at-a-Glance accessed 13 April 2023

IMF date unknown https://www.imf.org/en/About/Factsheets/Sheets/ 2023/Fight-against-money-laundering-and-terrorism-financing

International Monetary Fund date unknown The IMF and the Fight against Money Laundering and Terrorism Financing https://www.imf.org/ en/About/Factsheets/Sheets/2023/Fight-against-money-laundering-and-terrorism-financing accessed 13 April 2023

Ombudsman for Banking Services South Africa 2018 https://www.obssa.co.za/wp-content/uploads/2018/02/Bulletin-3-Closure-of-bank-accounts-Final-30.01.2018.pdf

Ombudsman for Banking Services South Africa 2018 Bulletin 3: Closure of Bank Accounts https://www.obssa.co.za/wp-content/uploads/2018/02/ Bulletin-3-Closure-of-bank-accounts-Final-30.01.2018.pdf accessed 28 March 2023

Ombudsman for Banking Services South Africa 2018 https://www.obssa.co.za/wp-content/uploads/2018/02/CIN-14-Closure-of-Bank-Accounts-Final-February-2018.pdf

Ombudsman for Banking Services South Africa 2018 Consumer Note 14: Closure of Bank Accounts – Circumstances under which Banks Close Customers' Account https://www.obssa.co.za/wp-content/uploads/2018/02/ CIN-14-Closure-of-Bank-Accounts-Final-February-2018.pdf accessed 28 March 2023

Planting 2019 https://www.dailymaverick.co.za/article/2019-05-21-out-with-the-secure-solution-banks-phasing-out-safety-deposit-boxes/

Planting S 2019 Out with the Secure Solution: Banks Phasing out Safety Deposit Boxes https://www.dailymaverick.co.za/article/2019-05-21-out-with-the-secure-solution-banks-phasing-out-safety-deposit-boxes/ accessed 24 January 2024

List of Abbreviations

BCBS

Basel Committee on Banking Supervision

BIS

Bank for International Settlements

CAC

Competition Appeal Court

CoFI Bill

Conduct of Financial Institutions Bill

CT

Competition Tribunal

EC

Equality Court

FATF

Financial Action Task Force

FIC

Financial Intelligence Centre

FIC Act

Financial Intelligence Centre Act 38 of 2001

FSCA

Financial Sector Conduct Authority

FSR Act

Financial Sector Regulation Act 9 of 2017

HC

High Court

JBFLP

Journal of Banking and Finance Law and Practice

JFC

Journal of Financial Crime

JICLT

Journal of International Commercial Law and Technology

IMF

International Monetary Fund

PELJ

Potchefstroom Electronic Law Journal

SA Merc LJ

South African Mercantile Law Journal

SALJ

South African Law Journal

SCA

Supreme Court of Appeal

THRHR

Tydskrif vir Hedendaagse Romeins-Hollandse Reg

TSAR

Tydskrif vir die Suid-Afrikaanse Reg / Journal of South African Law