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[2019] ZAGPPHC 218
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South African Reserve Bank v Bank of Baroda (South Africa) (A267/2018) [2019] ZAGPPHC 218; 2019 (6) SA 174 (GP) (2 April 2019)
IN THE HIGH COURT OF SOUTH
AFRICA
GAUTENG DIVISION, PRETORIA
(1)
REPORTABLE:
YES/
NO
(2)
OF
INTEREST TO OTHER JUDGES: YES/
NO
(3)
REVISED
CASE
NO:
A267/2018
2/4/2019
In
the matter between:
SOUTH
AFRICAN RESERVE BANK
Appellant
and
BANK
OF BARODA (SOUTH AFRICA)
Respondent
JUDGMENT
LOUW, J (LANGA AJ concurring)
[1]
During September and October 2016, the
South African Reserve Bank ("the SARB") conducted an
inspection at the Bank of
Baroda ("the bank") to determine
compliance by the bank with the provisions of the Financial
Intelligence Centre Act
38 of 2001 ("FICA") and the Money
Laundering and Terrorist Financing Control Regulations ("the
regulations")
promulgated in terms of FICA. On 15 December 2016,
the SARB advised the bank by letter that it had made 14 findings of
non-compliance.
The findings which are relevant to the present
matter, are findings 3, 4, 6, 7 and 8.
[2]
In terms of findings 3 and 4, the SARB
found that the bank had failed to comply with the requirement in s 28
of FICA, read with
regulations 22B, 22C and 24(4), that the bank
report all cash transactions exceeding the prescribed threshold of
R24 999.99 within
two business days of the transaction occurring. It
found that the bank had either incorrectly reported or omitted to
report seven
cash transactions in excess of the threshold amount
(finding 3) and had failed to file cash threshold reports (CTR' s)
within the
prescribed time (finding 4).
[3]
In terms of findings 6, 7 and 8, the
SARB found that the bank had failed to formulate and implement
internal rules, processes and
working methods, as required by s 42 of
FICA read with regulation 27, to enable it to detect and report
suspicious and unusual
transactions as required by s 29 of FICA. More
particularly, it firstly found that in cases where the bank's
automated transaction
monitoring system flagged possibly suspicious
and unusual transactions, the bank's process of investigating such
alerts was inadequate
in instances when it decided against reporting
a transaction as it failed to document its reasons for so deciding
(finding 6).
Secondly, the SARB found that the bank's internal rules
were imported from its data centre in India and were not customised
for
the South African environment (finding 7). Thirdly, it was found
that the bank had not applied sufficient scrutiny or care when
processing transactions involving loans and fund transfers among
entities within the same group and had failed to review its system
alerts in respect of inter-group transactions to determine whether
such alerts were reportable under s 29 (finding 8).
[4]
In its letter of 15 December 2016, the SARB required of the bank to
provide the Registrar
of Banks with its comments on the findings by
no later than 15 February 2017; to provide the Registrar with
quarterly update reports
on the progress made in rectifying the
identified issues, the first of which would be due by 31 March 2017;
and to have resolved
all deficiencies by no later than 31 December
2017 . The letter also informed the bank that, following the
completion of the inspection,
an independent internal review of the
inspection findings would be undertaken to determine whether any
administrative sanction,
in terms of s 45C, should be imposed and,
should it be found appropriate to impose an administrative sanction,
the intention thereof
would be communicated to the bank.
[5]
The bank submitted its comments on the findings on 15 February 2017
and submitted
its first quarterly report on 31 March 2017. On 12
April 2017, the SARB informed the bank in writing of its intention to
impose
administrative sanctions in terms of s 45C(S) of FICA and
afforded the bank an opportunity to make representations. The
intended
administrative sanction in respect of findings 3 and 4 was a
fine of R1 million and for findings 6, 7 and 8 a fine of R10 million.
On 19 June 2017, after considering representations filed by the bank
in respect of the intended administrative sanctions, the SARB
imposed
the intended sanctions.
[6]
The bank thereafter appealed, in terms
of s 45D of FICA, against the
SARB's decision to the Appeal Board established in terms of 45E of
FICA. The Appeal Board, chaired
by Hartzenberg J, upheld the appeal
in respect of findings 6, 7 and 8 and set the administrative penalty
of R10 million aside.
The appeal in respect of findings 3 and 4 was
partly upheld and the administrative penalty of R1 million which was
imposed, was
set aside and substituted with an administrative penalty
of R400 000.00.
[7]
The SARB now appeals to this court
against the orders of the Appeal
Board. In terms of s 45D(11)(a) of FICA, a decision of an appeal
board may be taken on appeal
to the High Court as if it were a
decision of a magistrate in a civil matter.
[8]
The first issue raised by the appellant
in this appeal concerns the
manner in which the provisions of FICA and the regulations should be
interpreted. Before the Appeal
Board, it was submitted on behalf of
the SARB, relying on the judgment of the SCA in
Natal
Joint Municipal Pension Fund v Endumeni Municipality
[1]
,
that a purposive interpretation
should be applied. The submission on behalf of the bank, relying,
inter alia,
on
the judgment of the Constitutional Court in
Democratic
Alliance v African National Congress
[2]
and that of the SCA in
Oilwell (Pty)
Ltd v Protec International Ltd
[3]
,
was that it is a well-established
principle that provisions that give rise to criminal and
administrative penalties must be interpreted
restrictively in cases
of doubt and ambiguity. The Appeal Board held that, despite the
valiant effort by the SARB to persuade it
that FICA does not expose
an accountable institution, such as the bank, to a possible criminal
prosecution, it was clear that this
was not so as ss 51, 51A, 52, 53
and 54 of FICA, as well as s 29(8), specifically criminalise not only
the conduct for which the
penalties were imposed on the bank but the
failure of virtually any duty imposed in FICA on accountable
institutions. It found
that it was not possible to distinguish the
matter before it from the
DA v ANC
decision and accordingly held that
the penal provisions in FICA have to be interpreted restrictively.
The following
dicta
which
were quoted from the
DA v ANC
judgment
[4]
by the Appeal Board bear repetition:
"In case of doubt we are
obliged to interpret (penal) prohibitions restrictively. This means
that we must resolve any ambivalence
in them, or uncertainty about
their meaning, against the risk of being penalised.
The restrictive interpretation
of penal provisions is a long-standing principle of our common law.
Beneath it lies considerations
springing from the rule of law. The
subject must know clearly and certainly when he or she is subject to
penalty by the state.
If there is any uncertainty about the ambit of
a penalty provision, it must be resolved in favour of liberty.
This court has endorsed this
approach. And indeed the Bill of Rights gives these considerations
added force. It posits the rule
of law as a founding value of our
constitutional democracy. It entrenches the common law's protections
against arbitrary deprivation
of liberty and imprisonment. The
common-law presumption in favour of interpreting penalty provisions
restrictively therefore applies
with added force under the
Constitution."
[9]
Before us, the argument on behalf of the
SARB was a different one. It
was submitted that FICA was enacted to secure vital national
objectives and that its principal aim
is the combating of money
laundering activities and the financing of terrorist and related
activities.
[5]
Therefore, so it was submitted, even assuming that the restrictive
interpretation principle is applicable in the present context,
it is
merely one interpretive principle which must be applied together with
and mindful of the other interpretive principles, which
are well
established and which include a strong emphasis on the need for
purposive interpretation. In this regard, counsel for
the appellant
relied on the following
dicta
in
the judgment of the Constitutional Court in
Road
Traffic Management Corporation v Waymark (Pty) Limited
[6]
,
with emphasis added by counsel:
"[29] The principles of
statutory interpretation are by now well-settled. In Endumeni, the
Supreme Court of Appeal authoritatively
restated the proper approach
to statutory interpretation. The Supreme Court of Appeal explained
that statutory interpretation is
the objective process of attributing
meaning to words used in legislation. This process, it emphasised,
entails a simultaneous
consideration of
-
(a)
the language used in the light of the
ordinary rules of grammar and syntax;
(b)
the context in which the provision
appears; and
(c)
the apparent purpose to which it
is directed.
[30]
What this Court said in Cool Ideas in the context of statutory
interpretation is particularly
apposite. It said:
"A fundamental tenet of
statutory interpretation is that the words in a statute must be given
their ordinary grammatical meaning,
unless to do
so
would result in
an absurdity. There are three important interrelated riders to this
general principle, namely:
(a)
that statutory provisions should
always be interpreted purposively;
(b)
the relevant statutory provision must
be properly contextualised; and
(c)
all statutes must be construed
consistently with the Constitution, that is, where reasonably
possible, legislative provisions ought
to be interpreted to preserve
their constitutional validity. This proviso to the general principle
is closely related to the purposive
approach referred to in (a).
[31]
Where a provision is ambiguous, its
possible meanings must be weighed against each other given these
factors.
For example, a
meaning that frustrates the apparent purpose of the statute or leads
to unbusinesslike results is not to be preferred.
Neither is one that
unduly strains the ordinary meaning of words. That text, context and
purpose must always be considered at the
same time when interpreting
legislation has been affirmed on various occasions by this Court."
[32]
Allied to these factors, courts must
also interpret legislation to promote the spirit, purport an object
of the Bill of Rights.
Again, courts should not unduly strain the
reasonable meaning of words when doing
so.
But this obligation entails
understanding statutes to single but laid the foundations for a
democratic and open society, improve
the quality of life for all and
build a united and democratic South Africa'."
[10] It was
submitted that, when one deals with a provision which imposes
administrative or
criminal penalties, this strong emphasis on
purposive interpretation cannot be discarded. I disagree with the
submission. The Constitutional
Court in
Waymark
was dealing with the general
principles of statutory interpretation. It was not dealing with
statutes which contain administrative
or criminal penalties, which is
what was dealt with in
DA v ANC.
If
counsel's argument were accepted, it would result in the judgment in
DA v ANC
being
ignored or being regarded as wrong. In my view, the Appeal Board
correctly held that the present matter could not be distinguished
from the decision in
DA v ANC
and
that the penal provisions in FICA had to be interpreted
restrictively. That will obviously also apply to the regulations.
[11] I
proceed to deal with the Appeal Board's findings in respect of the
penalties which were
imposed by the SARB. The penalty of R1 million
related to findings 3 and 4. Section 28 of FICA provides as follows:
An accountable institution and
a reporting institution must, within the prescribed period, report to
the Centre
[7]
the prescribed
particulars concerning a transaction concluded with a client if in
terms of the transaction an amount of cash in
excess of the
prescribed amount
-
(a)
is paid by the accountable
institution or reporting institution to the client, or to a person
acting on behalf of the client, or
to a person on whose behalf the
client is acting; or
(b)
is received by the accountable
institution or the reporting institution from the client, or from a
person on behalf of the client,
or from a person on whose behalf the
client is acting. "
Regulation
228 reads as follows:
The prescribed amount of cash
above which a transaction must be reported to the Centre under
section 28 of the Act is R24
999.
99
or an
aggregate of smaller amounts which combine to come to this amount if
it appears to the accountable institution or reporting
institution
concerned that the transactions involving those smaller amounts are
linked to be considered fractions of one transaction.
[12] In
regard to finding 3, the bank's alleged non- compliance consisted of
various deposits
by the Consulate General of India which have been
conveniently summarised as follows in the judgment of the Appeal
Board:
"5.1
On 15 April 2014 the Consulate made two deposits namely the amounts
of R49 745 .
00
and of R10
670
. 00 .
However,
only the former deposit of R49 745.
00
was reported. The
respondent's contention remained that the aggregate amount of R60
415.
00
should
have been reported and that the failure to report the amount of R10
670.00 constitutes non-compliance with FICA.
5.2
On
29
April 2014 two deposits were made
namely R31 405 .00 and R275.
00.
Only
the first deposit was reported and not the aggregate of the two
transactions.
5.3
On 20 April 2015 there were two
deposits, R52 023.00 and R7 200.00. Only the first deposit was
reported and not the aggregate of
the two deposits.
5.4
A deposit of R25
000.00
made on 16 July 2015, was not
reported.
5.5
On 4 August 2015 the deposits made
were R24
700.00
and
R840.00. Neither one of the two transactions were reported.
5.6
On 11 August 2015 three deposits were
made namely R16 625.00, R10 250.00 and R14.60 respectively. None of
these transactions were
reported. The three amounts add up to R26
889.
60.
5.7
On
26
October 2015 again three deposits
were not reported. The amounts were R24 718 .00, R16 725.00 and R1
885.00. The aggregate of the
three amounts is R49 328.00"
[13]
In the first three instances, two deposits were made on the same day,
one being above and
the other below the threshold. The one above was
reported, but not the one below. In the last three instances, more
than one deposit
of less than R24 999.99 was made on the same day but
the aggregate of the amounts was more than R24 999.99 .
[14] The
deposits were all made by the Consulate. The SARB required that all
deposits by one
client on one day that are in excess of the threshold
have to be reported irrespective of what the underlying transactions
were
or whether the cash was received from one client of the
Consulate or from various of its clients. The evidence of the bank
before
the Appeal Board was that the Consulate receives cash for
services rendered to different clients and that it was under the
impression
that the transactions were not linked. It did not believe
that the multiple deposits were fractions of a single deposit. The
Appeal
Board found that there was no reason to regard the bank's
attitude as unreasonable and that the requirement of the SARB negated
the clear wording of the regulation that the aggregate of smaller
transactions have to be reported only
"
if it appears to an accountable institution"
that
the transactions are linked, to be considered fractions of one
transaction. The Appeal Board accordingly found that the SARB
erred
when it took the six transactions into account when it imposed the R1
million penalty.
[15] The
submission on behalf of the SARB in this appeal was that the bank had
to apply its
mind to whether the transactions are linked, and could
not simply presume, without more, that they are not and that this
duty is
particularly acute when understood in the light of if FICA's
purposes. The submission is
contra
the bank's evidence in its founding
affidavit before the Appeal Board. The evidence of Mr. Jha, the banks
acting chief executive,
in his founding affidavit was that the bank
was aware that the Consulate collects cash from various sources, such
as fees paid
by the public for visas and related services. It was
also aware that the consular office prefers, for security reasons,
not to
accumulate large amounts of cash and, depending on the cash
flow on any particular day, may make several cash deposits daily.
This
was not an unusual occurrence. He stated that there was
absolutely no basis on which it could reasonably be concluded that
such
multiple deposits might be linked so as to be considered
fractions of one transaction. This evidence was uncontradicted. The
SARB
contended in its answering affidavit that the bank's allegations
were irrelevant as FICA's requirements govern the obligations of
an
accountable institution, and not the relationship that the client of
that institution has with its customers.
[16] The
difficulty with the SARB's contention is that, on a plain reading of
regulation 22B,
it only requires of an accountable institution to
report multiple transactions of amounts less than R24 999.99
"if
it appears'' to
the accountable
institution that the transactions are linked and to be considered
fractions of one transaction. Mr. Jha's evidence
of the bank's
knowledge of the manner in which the Consulate conducted its
transactions with the bank, was undisputed. It follows
that the
Appeal Board correctly held that the SARB erred when it took the six
transactions into account when it imposed the R1
million penalty.
[17] In
regard to finding 4, the bank's non-compliance related to the late
reporting of three
cash deposits. In terms of regulation 24(4), a
cash transaction report (CTR) must be sent to the Centre within two
business days
after any employee of an accountable institution has
become aware of such transaction. The instances of late reporting of
cash
threshold transactions related to the following deposits:
• A
deposit of R52 023.00 made on 24 April 2015 which was only reported
on 31
December 2015, eight months late.
• A
deposit of R30 650.00 made on 8 May 2015 which was only reported on
31 December
2015, seven months late.
• A
deposit of R39 500.00 made on 16 November 2015 which was only
reported on
21 April 2016, five months late.
[18]
The bank in its founding affidavit before the Appeal Board conceded
its non-compliance
in this regard. It does not appear from the
judgment of the Appeal Board that it took these non-compliances into
account when it
reduced the penalty of R1 million to R400 000.00. My
understanding of the judgment is that the penalty of R400 000.00
which the
Appeal Board found would be fair, related only to the
non-reporting of the R25 000.00 deposit on 16 July 2015, referred to
in paragraph
5.1 of the judgment of the Appeal Board quoted in
paragraph 12 above. The finding in respect of that non reporting
by the
SARB was not contested by the bank.
[19] The
evidence of Mr. Jha in the bank 's founding affidavit in regard to
these instances
of late reporting was the following:
" 27.
As
SARB is aware, the Appellant does not itself conduct 'front office'
operations where it directly receives cash deposits from
its
customers. Such cash deposits are made at the Appellant's
correspondent banks (First National Bank and Nedbank) and the
Appellant
is therefore limited to the bank statements it receives
from its correspondent banks in order to review and report cash
transactions
in excess of the threshold. As such, the basis of the
Appellant's cash reporting functions is a 'line by line' review of
the bank
statements from the two correspondent banks. That review is
conducted by the Appellant's compliance department.
28.
The internal rules in this regard
have been improved and the directive originally proposed to be issued
by SARB (as appears from
Appendix 4) had in fact already been
implemented during 2016.
29.
That enhanced methodology currently
works well and the Appellant is now in all respects compliant. No
doubt this has greatly contributed
to the deletion of the proposed
directive from the sanction."
[20] If the
appeal board had taken the instances of late reporting into account
when deciding
to reduce the penalty of R1 million, it may or may not
have imposed a penalty of more than R400 000.00. We were, however,
informed
that this appeal has not been brought on the basis that the
amounts of the sanctions which were imposed by the Appeal Board were
wrong. It is therefore not necessary to consider whether or not the
penalty of R400 000.00 should be increased.
[21] I
proceed to deal with the SARB's appeal against the Appeal Board's
setting aside of the
administrative penalty of R10 million which was
imposed in respect of findings 6, 7 and 8. Section 29 of FICA imposed
a duty on
the bank to report suspicious or unusual transactions to
the Centre. Section 42, as it read at the time, provided that an
accountable
institution must formulate and implement internal rules,
including rules concerning
"the
steps to be taken to determine when a transaction is reportable to
ensure the institution complies with its duties under
this Act”
[8]
[22]
Finding 6
was
that the SARB was of the view:
a.
that the bank's investigation comments
and reasons for not reporting FCRM alerts to the FIC were not
sufficiently documented; and
b.
that the bank's alert review procedure
was not documented to include details such as the management of
recurring alerts.
[23] The
Appeal Board said in its judgment that it was the SARB's view that it
could request
an institution to develop a system that would make it
easy for it to conduct an inspection. The Appeal Board found that
this was
not correct as SARB could only request an institution to
develop its system in accordance with what FICA and the regulations
require
it to do. Regulation 27 provides that the internal rules of
an accountable institution concerning reporting of suspicious and
unusual
transactions must:
"(a)
provide for the necessary processes and working methods which will
cause suspicious and
unusual transactions to be reported without
undue delay;
(b)
provide for the necessary processes
and working methods to enable staff to recognise potentially
suspicious and unusual transactions
or series of transactions;
(c)
provide for the responsibility of the
management of the institution in respect of compliance with the Act,
these regulations and
the internal rules;
(d)
allocate responsibilities and
accountability to ensure that staff duties concerning the reporting
of suspicious and unusual transactions
are complied with;
(e)
provide for disciplinary steps
against the relevant staff members for non-compliance with the Act,
these regulations and the internal
rules; and
(f)
take into account any guidance notes
concerning the reporting of suspicious or unusual transactions which
may apply to that institution."
[24]
The Appeal Board found that if FICA has to be interpreted
restrictively, as it should, no duty
has been created for the bank to
document reasons for decisions and alert review procedures. It
accordingly found that, insofar
as the R10 million penalty was based
on the non-compliance of this alleged duty, the decision to impose
the penalty was wrong.
[25] In the
present appeal, the argument on behalf of SARB in respect of finding
6 centred around
the bank's failure to document its reasons for
deciding against reporting transactions that had been flagged as
possibly suspicious
or unusual. It was contended that the Appeal
Board erred in concluding that the regulatory regime does not require
the internal
rules of the bank to provide for this. The argument was
that regulation 27(a), quoted above, requires that an accountable
institution's
internal rules must provide for the
"necessary"
processes and working methods and
that the regulation should, therefore, be interpreted to necessarily
include an obligation to
document reasons for deciding not to report
a transaction which was flagged as suspicious or unusual by the
bank's automated system.
This argument will, obviously, require a
purposive interpretation of regulation 27(a). I have already
indicated that I agree with
the finding of the Appeal Board that the
Act and the regulations must be restrictively interpreted. But even
if purposely interpreted,
regulation 27(a) cannot be interpreted to
require of an accountable institution to document its reasons for
deciding against reporting
transactions that had been flagged as
possibly suspicious or unusual. What it requires, is that the
internal rules must provide
for the necessary processes and working
methods which will cause transactions which have been found to be
suspicious and unusual
to be reported without undue delay. That does
not permit of an interpretation that if a transaction has been
flagged by the bank's
automated system as suspicious or unusual, but
is found by the bank's employees not to be such, that the bank has an
obligation
to document the reasons for such finding. If that is what
SARB requires, it would have been an easy matter for the legislature
to include that as a further requirement of regulation 27.
[26]
Findings 7 and 8 were the following:
Finding 7
a.
The rules in question were deployed and
managed from the Data Centre in India and were not customised for the
South African environment;
and
b.
The FCRM
[9]
system was not configured or did not enable the bank to monitor
individual customer transactions against the customer's own profile.
Finding
8
The bank had not:
a.
applied sufficient scrutiny or care when
processing transactions involving loans and fund transfers among
entities within the same
group; and
b.
reviewed FCRM system alerts in respect
of inter-group transactions to determine whether such alerts were
reportable under section
29.
[28] The
Appeal Board referred in its judgment to paragraphs 34 - 38 of the
founding affidavit
of Mr. Jha in which he said that, due to the
bank's global reach, its operations are subject to the global
supervision of top banking
regulators and that its anti
money-laundering and terrorist control measures are robust and
stringent to meet with the standards
of various regulators. He also
stated that the bank's internal rules create a large range of alerts
in respect of the identification
of possible suspicious and unusual
transactions and that, over the course of approximately the last two
years, the bank's internal
rules which regulate the investigation of
alerts, had led to the investigation and reporting of some 40
transactions as suspicious
and unusual. The Appeal Board points out
that the SARB did not find any fault in the bank's handling of all
those matters and did
not find any contravention of, or
non-compliance with the provisions of s 29 of FICA. In respect of
finding 7, the Appeal Board
said in its judgment that it was
significant that no specific aspects in which the system should be
changed had been given by SARB.
In respect of finding 8, the Appeal
Board says in its judgment that it was difficult to understand
exactly what the SARB had in
mind, especially in view of the fact
that not a single failure to report a suspicious and unusual
transaction could be found and
that cogniscance should be taken of
the fact that the bank regarded the Gupta group of clients as
"high
risk"
and scrutinised their
transactions with enhanced due diligence.
[29]
Counsel for SARB made no submissions in respect of the conclusions of
the Appeal Board
in respect of findings 7 and 8 but did not abandon
its appeal in that regard . I need say no more than that, in my view,
the Appeal
Board correctly found that findings 7 and 8 could not be
sustained for the reasons set out in its judgment.
[30] In the
result, the appeal is dismissed wit h costs, including the costs of
two counsel.
J
W LOUW
JUDGE
OF THE HIGH COURT
Counsel for appellant: Adv . S
Budlender; Adv. M Finn
Instructed by: Gildenhuys Maltaji
Inc, Pretoria
Counsel for respondent: Adv. G
Marcus SC; Adv C McConnachie
Instructed by: Mervyn Taback Inc,
Johannesburg.
[1]
2012 (4) SA 593 (A)
[2]
2015 (2) SA 232 (CC)
[3]
2011 (4) SA 394 (SCA)
[4]
Paras 12 9 -1 3 1
[5]
See s 3 of FICA.
[6]
[2019] ZACC 12
(12 April 2019)
[7]
The Financial Intelligence Centre established by s 2 of FICA
[8]
Section 42(1)(d)
[9]
Financial Crime Risk Manager system