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[2013] ZAWCHC 92
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Registrar of Banks v Net Income Solutions and Others (3056/13) [2013] ZAWCHC 92 (25 June 2013)
Links to summary
IN THE HIGH COURT OF SOUTH AFRICA
(WESTERN CAPEHIGH COURT, CAPE TOWN)
CASE NO: 3056/13
In the matter between:
THE
REGISTRAR OF BANKS
Applicant
And
NET
INCOME SOLUTIONS CC
CHRISTOPHER
MARK WALKER
THE
STANDARD BANK OF SOUTH AFRICA LTD
NETCASH
(PTY) LIMITED
1
st
Respondent
2
nd
Respondent
3
rd
Respondent
4
th
Respondent
JUDGMENT DELIVERED ON 25 JUNE 2013
YEKISO, J
[1] On 28 February 2013 and by way of
a notice of motion issued out of this court, the applicant sought and
was granted an order,
in the form of a
rule nisi,
directed
against the first, second, third and the fourth respondentsto show
cause on 26 March 2013 why an order in the following
terms should not
be confirmed and made final, the terms of the order being:
[1.1.] an order restraining the first
and the second respondents from conducting the business of a bank
incontravention of section
11(1) of the Banks Act, 94 of 1990 (“the
Banks Act”) by;
[1.1.1.]conducting the activities set
out in paragraphs 2 and 3 of the Government Notice 498 published on
27 March 1997 in Government
Gazette No 17895;
[1.1.2.]accepting deposits from the
general public (including persons in the employ of persons so
accepting deposits) as a regular
feature of the business in question;
and
[1.1.3.]soliciting or advertising for
deposits.
[1.2.] an order that the first and the
second respondents be prohibited from disposing of, or otherwise
dealing with any of their
assets while the contravention suspected of
having been committed is being investigated.
[1.3.] that the inspectors appointed
by the S A Reserve Bank and/or their authorised representatives be
authorised to:
[1.3.1.] serve the order and the
application which constitutes these proceedings (‘the
application”) in terms of the
rules of court on the first and
the second respondents;
[1.3.2.] secure and remove all money
found at the premises of the first and the second respondent’s
premises during a search
performed in terms of section 4 of the
Inspection of Financial Institutions Act, 80 of 1998 (“the
Inspection Act”)
pending the finalisation of the inspection;
and
[1.3.3.] obtain affidavits from the
first and second respondents during the service of the order and the
application and/or search
performed in terms of section 4 of the
Inspections Act of the whereabouts of all their assets.
[1.4.]That the orders in terms of
sub-paragraphs 1.1 and 1.2of the order operate with immediate effect.
[2.] As against the third and fourth
respondents, that the inspectors appointed by the SA Reserve Bank
and/or their authorised representatives
be authorised to serve the
order and the application in terms of the rules of court on the third
and the fourth respondent.
[3.] In terms of paragraph 7 of the
order, thatthe third respondent be ordered to prevent the withdrawal
of funds from the bank
accounts held by the first and the second
respondents at their institutions pending the finalisation of the
investigation.
[4.] As against thefourth respondent,
the order required the fourth respondent to furnish the inspectors
appointed by the S A Reserve
Bank, within 12 hours of service of the
order, with a written summary of all transactions, whether finalised
or pending, involving
the first and the second respondent; and
[4.1.] not to deal with any funds
under its control which relate to the affairs of the first and/or the
second respondents; and
[4.2.] to disclose the full extent of
funds held by it or under its control in any bank account or
otherwise on behalf of the first
and the second respondents.
THE PARTIES
[5.] The applicant is the Registrar of
Banks, appointed as such in terms of the provisions of section 4 read
with section 3 of the
Banks Act and having its principal place of
business at 370 Church Street, Pretoria, Gauteng.
[6.] The first respondent is Net
Income Solutions CC (“NIS”), a close corporation duly
incorporated and registered in
accordance with the Close Corporation
Act, 69 of 1994, bearing registration number 2007/084693/23 with a
registered address at
20 Queens Close, Parklands, Cape Town and
having its principal place of business at Unit 14, the Pavilion on
Esplanade, Central
Park, Century Way, Century City, Cape Town.
[7.] The second respondent is
Christopher Mark Walker, a major male businessman residing at
Atlantic Beach Golf Estate, 4 Mooringview
Close, Melkbosstrand, Cape
Town and having his principal place of business at Unit 14, the
Pavilion on Esplanade, Central Park,
Century Way, Century City, Cape
Town. The second respondent is the sole member of NIS. The first and
the second respondents will,
where appropriate, be jointly referred
to as the NIS respondents.
[8.] The third respondent is the
Standard Bank of South Africa Limited (“Standard Bank”),
a public company with limited
liability duly incorporated and
registered in accordance with the company laws of the Republic of
South Africa and a registered
bank in terms of the Banks Act, with
its registered address at the Standard Bank Centre, 5 Simmonds
Street, Johannesburg.
[9.] The fourth respondent is Netcash
(Pty) Limited (“Netcash”), a private company with limited
liability duly incorporated
and registered in accordance with the
company laws of the Republic of South Africa and bearing registration
number 2001/019308/07,
with its registered address at Netcash Square,
64 Parklands Main Road, Cape Town.
PURPOSE OF THE APPLICATION
The purpose of the order sought, in
the form of a
rule nisi
, which is still subject to
confirmation, is to seek an interdict against the NISrespondents
from contravening the provisions
of section 11(1) of the Banks Act
and from continuing with the activities complained as contemplated
in section 81 of the Banks
Act.
In the course of its ordinary
business, the applicant had reason to suspect that NISis conducting
the business of a bank as defined
in the Banks Actwithout being duly
registered and authorised to conduct such business.
Arising from the activities referred
to in the preceding paragraph it is contended on behalf of the
applicantthat the business
practice and the activities of NIS,
carried out and executed by Christopher Mark Walker (“Walker”),
constitute the
business of a bank which entitles the applicant to
seek the relief available to it in terms of sections 81(1)(i),
81(1)(ii) and
81(1)(iii) of the Banks Act.
BACKGROUND
[13.] The granting of the interdict,
in the form of a
rule nisi
, was preceded by the following
material facts of the background material:
[13.1.] One of the deputy governors of
the South African Reserve Bank, based on information furnished to
it,had reason to believe
that the NISrespondents and the companies
with which they were associated were conducting the business of a
bank in contravention
of section 11(1) of the Banks Act:
[13.2.] As a result, the deputy
governor of the Reserve Bank directed the Registrar of Banks, in
terms of section 12 of the South
African Reserve Bank Act, 90 of 1989
(“the Reserve Bank Act”), to cause the NIS respondents’
affairs to be inspected.
Inspectors employed by the firm Price
Waterhouse Coopers were appointed to investigate the affairs of the
respondents. As at the
time the order, in the form of
rule nisi,
was granted, such investigations were on-going.
[14.] The material findings of the
inspectors were that:
[14.1.] the business account of Net
Income Solutions had a positive balance of R324,032,787.29
immediately before it was frozen;
[14.2.] an extract from Net Income
Solutions’bank statement showed that the entity was receiving
and holding vast amounts
of money. The investigations further
revealed that an amount of R147,000.00, made up of small cash
amounts, was deposited on a
single day;
[15.] In the course of the
investigation, the inspectors appointed by the Registrar of Banks
discovered that, in essence, the scheme
and business operation of NIS
involves the following:
[15.1.] NISoperates a website called
“EFT For Me”. The acronym EFT, it would appear, stands
for “Emotional Freedom
Techniques” The website ostensibly
provides information about a form of stress relief. However, one of
the headings on the
website’s home page is entitled “Income
Opportunity”. In that section of the website, a detailed
description
is provided of the NIS scheme of business operation. As a
matter of fact, other than a one page description of the purported
stress
relief technique, all of the links within the website are to
pages to do with how NIS’s business operation works –
either how to sign up or explanations of how it works. There is no
product of service available on the website other than participation
in the scheme of business operation.
[15.2.]It appears on the basis of the
investigation that depositors purchase points at a cost of R100.00
per point. Depositors earn
R2.00 per day for a period of upto 75 days
in return for purchasing one point which calculates to an amount of
R150.00. What this,
in effect, means is that each amount of R100.00
paid yields a monetary benefit of R50.00 over a period of 75 days.
There is no
limit to the amount of points that may be purchased.
[15.3.] A depositor (also referred to
as “team leader”) earns a 10% commission on all points
purchased by the depositors
directly referred to the scheme by the
team leader (“direct referrals”); and
[15.4.] A depositor (team leader) also
earns a 5% commission on all points purchased by depositors referred
to by his or her direct
referrals (“indirect referrals”).
THE LEGISLATIVE FRAMEWORK
For a proper determination of the
issues in consideringwhether or not to confirm the
rule nisi,
it is necessary to navigate various provisions of the Banks Act; the
Reserve Bank Act and the
Inspection of Financial Institutions Act.
[17
.] Of importance, in as far as the
Banks Act is concerned, is the definition of the term “the
business of a bank” contained
in section 1 of the Banks Act.
The term “the business of a bank” is defined as follows
in section 1 of the Banks Act:
“
(a)
The acceptance of deposits from the general public (including persons
in the employ of the person so accepting deposits) as
a regular
feature of the business in question;
(b)
The soliciting of or advertising for deposits;
(c)
The utilisation of money, or of the interest or other income earned
on money, accepted by way of deposit as contemplated in
paragraph (a)
-
(i)
for the granting by any person, acting as lender in such person’s
own name or through the medium of a trust or a nominee,
of loans to
other persons;
(ii)
for investment by any person, acting as investor in such person’s
own name or through the medium of a trust or nominee;
or
(iii)
for the financing, wholly or to any material extent, by any person of
any other business activity conducted by such person
in his or her
own name, or through the medium of a trust or nominee;
(d)
the obtaining, as a regular feature of the business in question, of
money through the sale of an asset to any person other than
a bank,
subject to an agreement in terms of which the seller undertakes to
purchase from the buyer at a future date the asset so
sold or any
other assets; or
(e)
any other activity which the Registrar has, after consultation with
the Governor of the Reserve Bank, by notice in the
Gazette
,
declared to be the business of a bank.”
[18.] Of equal importance, in as far
as the Banks Act is concerned, is the definition of the term
“deposit”. The term
“deposit” is defined as
follows in section 1 of the Banks Act:
““
deposit’”
when used as a noun, means an amount of money paid by one person to
another person subject to an agreement
in terms of which –
(a)
an equal amount or any part thereof will be conditionally or
unconditionally repaid, either by the person to whom the money
has
been so paid or by any other person, with or without a premium, on
demand or at specified or unspecified dates or in circumstances
agreed to by or on behalf of the person making the payment and the
person receiving it; and
(b)
no interest will be payable on the amount so paid or interest will be
payable thereon at specified intervals or otherwise, notwithstanding
that payment is limited to a fixed amount or that a transferable or
non-transferable certificate or other instrument providing
for the
payment of such amount
mutatis
mutandis
as
contemplated in paragraph (a) or for the payment of interest on such
amount
mutatis
mutandis
as
contemplated in paragraph (b) is issued in respect of such amount.”
[19.] The other section of the Banks
Act which is equally of importance in considering the issues to be
determined
,
is section 11 of the Banks Act which provides
that, “
Subject to section
18A,no person shall conduct the business of a bank unless such person
is a public company and is registered as
a bank in terms of this
Act.”
Section 11 of the Banks Act also provides that any
person who contravenes section 11 of the Banks Act, shall be guilty
of an offence.
[20.] It would appear that this
application was brought in terms of section 81 of the Banks Act. This
section provides that if the
Registrar has reason to suspect that any
person who is not registered as a bank in terms of the Banks Act:
“
(a)
is likely to conduct the business of a bank in contravention of the
provisions of section 11 (1) or section 18A(6) or
(b)
has so contravened the provisions of section 11(1) or 18A(6)orhas
contravened the provisions of section 22(4) or (5), or that
such a
contravention is likely to be continued or repeated,
the
Registrar may apply to a division of the High Court having
jurisdiction (hereinafter in this section referred to as the court)
for an order –
(i)
prohibiting the anticipated contravention referred to in paragraph
(a);
(ii)
prohibiting the continuation or repetition of a contravention
referred to in paragraph (b) or
(iii)
prohibiting the person concerned from disposing of or otherwise
dealing with any of the assets of that person while the contravention
suspected of having been committed or of being committed is
investigated.”
[21.] And then of course there is
section 12 of the Reserve Bank Act under the heading “Inspection
of affairs of persons,
partnership, close corporation, company or
other juristic person not registered as bank or mutual bank”.
Section 12 of the
Reserve Bank Act reads as follows:
“
(1)
If the Governor or a Deputy Governor has reason to suspect that any
person, partnership, close corporation, company or other
juristic
person who or which is not registered in terms of the Banks Act 1990
(Act No 94 of 1990), as a bank or in terms of the
Mutual Banks Act,
1993 (Act No 124 of 1993), as a mutual bank, is carrying on the
business of a bank or a mutual bank, he or she
may direct the
Registrar of Banks referred to in section 4 of the Banks Act, 1990,
to cause the affairs or any part of the affairs
of such person,
partnership, close corporation, company or other juristic person to
be inspected by an inspector appointed under
section 11(1), in order
to establish whether or not the business of a bank or mutual bank, as
the case may be, is being carried
on by that person, partnership,
close corporation, company or other juristic person.”
[22.] The Reserve Bank Act provides
that sections 4, 5, 8 and 9 of the Inspection of Financial
Institutions Act, 38 of 1984 apply
to an inspection in terms of
section 12(1) of the Reserve Bank Act. The 1984 version of the
Inspection of Financial Institutions
Act has since been repealed. The
repealed act was succeeded by the current Inspection of Financial
Institutions Act, 80 of 1998
(“the Inspection Act”).
[23.] Section 4 of the Inspection Act
deals with the power of inspectors relating to institutions. These
powers are wide and include
powers such as the power to administer an
oath and examine certain persons; the power, without notice, to
search premises and require
the production of documents; and the
right to retain seized documents for as long as they may be required
for criminal or other
proceedings.
[24.] There are, in essence, two forms
of conduct which fall under the meaning of the term “the
business of a bank”.
There is
[24.1.] conduct which falls within the
definition of “the business of a bank”, read with the
definition of “deposit”
in the Banks Act; and
[24.2.] any other activity which the
Registrar has, after consultation with the governor of the Reserve
Bank, by notice in the
Gazette
, declared to be the business of
a bank.
[25.] The Registrar of the Reserve
Bank has made the declaration referred to in the preceding paragraph.
That declaration is in
the form of Government Notice 498 of 27 March
1997 (“the 1997 Notice”). In terms of this government
notice the Registrar
of Banks declared the following activities to
constitute the business of a bank, the activities referred to in the
noticebeing:
[25.1.] the acceptance or obtaining of
money, directly or indirectly, from members of the public, as a
regular feature of a business
practice, with prospect of such members
(referred to as “participating members”) receiving
payments or other money
related benefits directly or indirectly;
[25.2.] on or after the introduction
of other members of the public (referred to as “the new
participating members”)
to the business practice from which new
participating members, in their turn, money is accepted or obtained,
directly or indirectly,
as a regular feature of the business
practice;
[25.3.] the soliciting of, or
advertising for, directly or indirectly, money and/or persons for
introduction into or participation
in a business practice as defined
in the preceding two sub-paragraphs.
[26.] The term “business
practice” is defined in the 1997 Government Notice to include:
[26.1.] any agreement, arrangement or
understanding whether legally enforceable or not, between two or more
persons; or
[26.2.] any scheme, practice or method
of trading, including any method of marketing or distribution.
[27.] It therefore follows logically
that the term “business practice” as defined in the 1997
Notice should be read
together with the definition of the “business
of a bank” in the Banks Act. If either one of them is
established, then
section 11(1) of the Banks Act must be found to
have been contravened.
THE ISSUES ARISING
[28.] Having thus navigated the
relevant legislative framework in order to establish whether or not
the provisions of section 11(1)
of the Banks Act have been
contravened, the following issues arise for determination, these
being:
[28.1.] consideration of the test
applicable in proceedings such as these;
[28.2.] the proper meaning of the term
“the business of a bank”;
[28.3.] the question as to whether, on
the facts of this case, the NIS respondents have conducted the
business of a bank by operating
a scheme; and
[28.4.] whether a proper case has been
made out for the relief sought in the notice of motion.
[29.] In addition to the issues
highlighted in the preceding paragraph, the following matters arise
from the defences put up by
the NIS respondents in their answering
affidavits, these being:
[29.1.] whether Walker’s
personal account ought to be frozen; and
[29.2.] whether the conduct of the NIS
respondents in operating the scheme falls within the ambit of
government notice 1176 of 1
December 2006 (“the 2006 notice”)
which excludes certain conduct from the definition of “the
business of a bank”.
Paragraph 2 of the 2006 Notice contains a
list of activities which have been designated by the Registrar of
Banks as not falling
within the meaning of “the business of a
bank”.
TEST APPLICABLE TO THESE
PROCEEDINGS
What the
rule nisi
envisages,
should it be confirmed, in the first instance, is an order
prohibiting the NIS respondents from conducting the business
of a
bank and, in the second instance, an order prohibiting the NIS
respondents from disposing of or otherwise dealing with their
assets
while the contravention suspected of having been committed is being
investigated.
Section 81 of the Banks Act, in order
for a court to grant an order prohibiting the NIS respondents from
conducting the business
of a bank, requires proof that there is a
reasonable likelihood that there will be a continuation or a
repetition of a contravention
of section 11(1) of the Banks Act.
Furthermore, section 81, in order for a court to grant an order
prohibiting the NIS respondents
from disposing of or otherwise
dealing with the assets while the contravention suspected of having
been committed is being investigated,
requires proof that there is a
reasonable likelihood that a contravention of section 11(1) of the
Banks Act has been committed
or is being continued.
The applicant makes a point in its
submissions that the notion of a “reasonable likelihood”
should be distinguished
from the precise prediction of a future
outcome. The submission is that the test is of a less stringent
standard. The point being
made in this submission is that to require
a test which effectively establishes a precise prediction of a
future outcome is not
what section 81(1) contemplates. Thus, the
question is whether the NIS respondents
might
commit the
conduct in question, not
will
commit the conduct in question.
Put differently, the question is whether there is a reasonable
prospect, which is not too remote,
that the conduct in question
might be committed.
[33.] All that must be shown in these
proceedings is that there is a reasonable prospect that section 11(1)
has been contravened
and might be contravened again by the NIS
respondents if the relief sought in the notice of motion is not
granted.
APPLICATION
FOR A POSTPONEMENT
[34.] Now that I have dealt with the
test applicable in these proceedings, I might as well deal with the
matter of an application
for a postponement launched before the
hearing of the matter on 5 June 2013. The purpose of the application
was to seek an indulgence
to afford the NIS respondents an
opportunity to expand their defence to include a challenge on the
constitutionality of the threshold
“reasonable likelihood”
as a test for granting the relief contemplated in section 81 of the
Banks Act. The application
for a postponement was based on a
contention that the threshold for the relief contemplated in section
81 of the Banks Act is markedly
different to the onus of proof
required in the ordinary course of litigation between the contesting
parties. The contention goes
further to suggest that the threshold of
an onus as provided for in section 81 makes it much easier for the
applicant, and, in
the instance of this matter, the Registrar of
Banks, to obtain the interdictory relief contemplated in section 81
thus placing
litigants in the position of the NIS respondents at a
distinct disadvantage as the minimum threshold facing the applicant
is less
stringent than the ordinary proof on a balance of
probabilities.
The NIS respondents finally made a
point in their endeavour to have the proceedings postponed that the
standard of proof based
on the “reasonable likelihood”
impacts negatively on their rights to trade; their rights to
property; and their right
of access to courts as contemplated in
sections 22, 25 and 34 of the Constitution of the Republic of South
Africa, 1996. The
NIS respondents’ contention boils down
thereto that there is no proper basis, in the interpretation and the
application
of the provisions of section 81, to depart from the
ordinary approach to civil litigation in which a case must be made
out on
the balance of probabilities.
The application for a postponement
was opposed. After hearing argument I dismissed the application. I
did not then give reasons
for the order I gave but I did indicate to
the parties that my reasons for dismissing the application would be
included in my
main judgment in the matter. In the paragraph which
follows is my reason for having refused the application for a
postponement.
To start with, this is no ordinary
application in motion proceedings. The office of the Registrar is
afforded certain powers set
out in sections 81 to 84 of the Banks
Act.Those powers are designed to protect the general public when
deposits are taken from
general members of the public by unregulated
and unsupervised persons and entities. These proceedings should be
seen in the context
of the Registrar of Banks being empowered to
take action against unregistered persons in order to prevent the
kind of mischief
which the provisions of section 81 were designed to
prevent.
Section 81 of the Banks Act is an
instrument available to the Registrar of Banks which may be used as
a precursor to enforcing
repayment in terms of section 83 and 84 of
the Banks Act relating to repayment of money unlawfully obtained
and, management and
control of repayment of money unlawfully
obtained, respectively. It is an enforcement mechanism for the
recovery of funds acquired
in schemes designed to contravene the
provisions of section 11(1) of the Banks Act. The test based on
“reasonable likelihood”
is the jurisdictional fact for
granting relief of the kind contemplated in section 81. At the time
the application for the relief
sought was made the Registrar had
been furnished with the information which excited suspicion that
section 11(1) of the Banks
Act was being contravened and that there
was a likelihood that there would be a repetition of such
contravention. It is on the
basis of an objective assessment of such
facts as may have been placed before the Registrar, in circumstances
where investigations
for the conduct complained of are on-going,
that such a relief can be granted. Thus, in my view, the
contemplated constitutional
challenge absolutely had no merit and
that is precisely the reason I dismissed the application for a
postponement. Having thus
determined the test applicable in these
proceedings, the next question to determine is the meaning of the
term “the business
of a bank” and to what extent the
activities of the NIS respondents constitute “the business of
a bank” in
contravention of the provisions of section 11(1) of
the Banks Act..
THE BUSINESS OF A BANK
[39] A reference has already been made
in paragraph [17] of this judgment to the definition of the term “the
business of a
bank” contained in the definitions section of the
Banks Act. A reference has also been made to the definition of that
term
in the 1997 Notice. In paragraph 13 of the replying affidavit
the deputy Registrar of Banks states that for a proper formulation
of
the definition of “the business of a bank” regard must
also be had to Government Notice 1134 of 1999. Having regard
to the
definition of the term “the business of a bank” in the
definition section of the Banks Act, the 1997 Notice
as well as the
1999 Notice, a definition of the term “the business of a bank”
emerges which contains the following
elements, the elements being:
[39.1.] the acceptance or obtaining of
money, directly or indirectly, from members of the public;
[39.2.] as a regular feature of a
business practice;
[39.3.] with the prospect of such
members receiving payments or other money related benefits, directly
or indirectly;
[39.4.] on or after the introduction
of other members of the public to the business practice; and
[39.5.] from funds accepted or
obtained from participating members or new participating members in
terms of the business practice.
[40] Evidence tends to suggest that
all the elements of the term “the business of a bank”
referred to in the preceding
paragraph have been satisfied. As a
starting point Mr Walker, in paragraph 15 of his supplementary
answering affidavit, sets out
the total number of usernames
registered in the scheme. That figure, according to the supplementary
affidavit of Mr Walker, is
195233. On the other hand, the inspectors
have ascertained that there have been a total number of 218 391
individual deposits
with a total value of R815,973,697.33 into the
NIS’s business bank account pursuant to the scheme. In simple
terms, members
of the public have deposited amounts slightly in
excess of R800m into NIS’s bank account in order to participate
in the scheme.
It therefore would appear that the first component of
the definition of “the business of a bank” being the
acceptance
or obtaining of money directly or indirectly from members
of the public has been satisfied.
The acceptance of money from members
of the public must be a regular feature of a business practice
conducted by the entity concerned.
In this regard not only was the
acceptance of money from the public a “regular feature”
of NIS’s business,
it was the core feature of the business.
This is amply demonstrated by an analysis of NIS’s business
account conducted
by the inspectors. The inspectors discovered that
a total amount of R812,345,892.49 flowed into NIS’s account.
Of that
amount, deposits received from participants in the scheme
constituted R805,973,697.33. Based on this analysis, deposits
received
from participants in the scheme constituted 92,2% of all
money received by NIS in its business account. Based on this
evidence,
there can thus be no doubt that acceptance of money from
the public was the very purpose of the scheme and, therefore, a
regular
feature of its business practice.
[42.] Based on the supplementary
affidavit of Mr Walker, a person who participates in the scheme stand
to receive up to an amount
of R150.00 in exchange for having
deposited an amount of R100.00. This clearly constitutes a payment or
other money related benefit.
Evidence tends to suggest that payments
were made to members of the public participating in the scheme as has
been established
by the inspectors during the course of their
investigation. Evidence tends to suggest the following:
[42.1.] between April and December
2012, a total number of 11 510 payments were made to members of
the public participating
in the scheme from NIS’s own bank
account. In rand value, this amounted to a total of R15,163,096.82.
[42.2.] between January and the end of
February 2013, a total number of 122 payments were made to members of
the public participating
in the scheme from NIS’s own bank
account. In the same period a total number of 187 747 payments
were made by NIS via
Netcash’s banking account. In rand value
this amounted to a total of R291,261,605.00. Arising from this
evidence there clearly
is no doubt that deposits made by members
participating in the scheme yielded benefits, by way of payments from
the NIS respondents
or other money related benefits directly or
indirectly,which satisfies the third element of the definition of the
term “the
business of a bank”.
[43].] In paragraph 32(d) of his first
answering affidavit Mr Walker explained that should a participant
ensure the participation
by others in the plan, he or she would be
rewarded therefor by means of the earning of commission. This then
satisfies the element
of the definition “on or after the
introduction of other members of the public to the business practice
(referred to in the
definition as the “new participating
members”) from which new participating members, in their turn,
money is accepted
or obtained, directly or indirectly, as a regular
feature of the business practice”.
In their investigations, the
inspectors have been able to determine, by analysing the bank
accounts of NIS respondents, that there
was no re-investment of
funds deposited by participants in the scheme. The funds simply
remained in the bank account of NIS.
Therefore the business did not
earn any revenue by re-investing the money. It is thus quite clear,
on the basis of this evidence,
that the only way that the NIS
respondents could pay to members the amounts to which they were
entitled in terms of the scheme
rules, was with the funds deposited
by new members.
THE SCHEME OPERATED BY THE NIS
RESPONDENTS
As can be seen from the portion of
this judgment which deals with the activities of the NIS respondents
constituting “the
business of a bank”, the scheme being
run by the NIS respondents is open to any member of the public. In
order to join
the scheme, a member of the public has to create a
user profile on NIS’s website after inserting the name of his
or her
sponsor. The sponsor is the person who referred the new user
to the scheme.
During the registration process, the
new user provides a username and cellphone number. This combination
of information is described
as a “unique identifier”.
Once this process has been completed, the new user is then able to
deposit money into NIS’s
bank account, using the “unique
identifier” as a reference. After three days, the funds
deposited by the user will
be allocated to that user’s
e-wallet, which is a virtual bank account within the system.
Once funds reflect in the e-wallet,
they can be used to purchase what the system describes as “points”.
Each point
costs R100.00. According to the website points can be
used to earn a profit or to book a place at workshops or seminars.
Insofar
as profit is concerned, each point earns R2.00 or 2% per
earning day for 75 earning days. These earnings are paid back into
the
e-wallet on a daily basis. The earnings may then either be used
to purchase more points or may be withdrawn from the e-wallet and
deposited into the user’s bank account.
It is also possible for existing
members of the scheme to earn commission by sponsoring new
point-buying members to the scheme.
Existing members receive 10% of
the value of the new member’s contribution. They also receive
5% of the value of the contribution
of any subsequent members
introduced by that member. This then is how the scheme operates
NIS RESPONDENTS’ DEFENCES
The NIS respondents proffer certain
defences to an allegation that they are conducting a business of a
bank in contravention of
section 11(1) of the Banks Act and/or that
NIS’s business practice constitutes the business of a bank
contemplated in the
1997 Notice. In this regard, the NIS respondents
seek to suggest that the purchasing of points to attend workshops
was a core
feature of the scheme. The workshops in question related
to some emotional freedom technique mentioned in the NIS website. In
his interview with the inspectors during a search in his home on 28
February 2013 Mr Walker described NIS as a referral marketing
company and that, amongst others, its products comprised of
“Emotional Freedom Technique”. He referred to this
product as EFT workshops. By way of points purchased, the
participants can access these workshops and thus benefit from this
product.
The defence then appears to boil down
thereto that the participants in the scheme were not making cash
deposits in expectation
of earning high rates of interest. Rather,
they were making cash deposits in order to buy points. The points,
in turn, would
be used either to accumulate rewards or to buy access
to workshops. This attitude on the part of the NIS respondents is
reflected
in a disclaimer which was placed on the NIS website which
provided that “If you make a purchase from Net Income
Solutions
you are purchasing our products or services. You are not
making any form of investment.”
The disclaimer referred to in the
preceding paragraph, in my view, is an attempt to convert an illegal
scheme into a legal scheme.
To do so would be to place form over
substance rather than to focus on the way in which the scheme has
been described by its
operators. The proper focus of the scheme must
be on the true nature of the scheme operated by the NIS respondents
as set out
in paragraphs [45] to [48] of this judgment.
The Registrar has shown that, in the
months of September and November 2012, between only 0,3% and 0,7% of
all participants in
the scheme attended workshops. Furthermore, all
of the workshops (i.e., 3, attended by 150 people in total) were
held in September
and November. There was none after that. Between
the end of November 2012 and 28 February 2013 participation in the
scheme grew
from 31 816 to approximately 195 000. During that
time, no workshop was held and, therefore, not one of the members
attended
one.
It is quite clear, therefore, that
the workshops did not form a significant feature of the business of
the NIS respondents. They
were part of what the Registrar describes
as the “veneer of legitimacy” in his founding affidavit.
They were provided
to make the scheme appear to be a legitimate
business when in fact it was an illegal deposit-taking scheme.
There are other defences proffered by
the NIS respondents, these relating to earning days not falling on
consecutive calendar
days; the setting up of computer literacy
training courses; a denial on the part of the NIS respondents that
they solicited or
advertised for deposits from the members of the
public; and, the suggestion by the NIS respondents that money
deposited into
the scheme could not be withdrawn. I have considered
the merits of these defences individually and, in my view, there is
absolutely
no merit in such defences. They are merely an attempt on
the part of the NIS respondents to circumvent the clear provisions
of
section 11 (1) of the Banks Act. Having considered the true facts
of this matter, together with all other facts that are largely
common cause, the defences and the version as proffered by the NIS
respondents are implausible and so far-fetched that they fall
to be
rejected.
[55] On 28 February 2013 this court
granted a
rule nisi
in terms of paragraph 3 and 4 of the
notice of motion. In order for the
rule nisi
to be confirmed
the Registrar has to surmount two hurdles and these are:
[55.1.] that there is a reasonable
likelihood that a contravention of section 11(1) of the Banks Act
will be continued or repeated
by the NIS respondents if prayer 3 of
the notice of motion is not granted; and
[55.2.] that there is a reasonable
likelihood that a contravention of section 11(1) of the Banks Act has
been committed or is being
continued.
[56] On the basis of the evidence
before me, I am satisfied that there is overwhelming evidence that
the NIS respondents have contravened
section 11(1) of the Banks Act
and for that reasons, prayer 4 of the notice of motion ought to be
confirmed and made final.
[57] The NIS
respondents have filed two answering affidavits vigorously opposing
the order sought. As has already been stated elsewhere
in this
judgment, on their version the NIS scheme is lawful. This is a
clearest indication that the NIS respondents have every
intention of
resuming the operations of the NIS scheme if the Registrar is not
successful in this application. In my view, there
is thus a proper
basis for granting the relief sought in prayer 3 of the notice of
motion.
MR WALKER’S PERSONAL
ACCOUNT
[58] In paragraph 12b of his first
answering affidavit Mr Walker takes issue with the fact that the
Registrar seeks confirmation
of an order freezing his personal
account. Mr Walker asserts that there is absolutely no case made out
on the papers as to why
his personal bank account had to be frozen
and that the aspect of the order that freezes his personal banking
account falls outside
the relief contemplated in section 81 of the
Banks Act. In advancing this contention Mr Walker avers in paragraph
53 of his first
answering affidavit that the deponent of the founding
affidavit does not aver anywhere in paragraphs 9 to 12 of the
founding affidavit
or in any of the remainder of the affidavit why,
in his personal capacity, is he being suspected of conducting the
business of
a bank.
[59] In support of this contention Mr
Walker asserts that he has never sought participation or deposit into
the scheme in his personal
capacity; that his personal bank account
is evidence that no purchases occurred via deposits made into his
personal account; that
whenever he addressed meetings he did so as a
representative of NIS; had the Registrar considered the information
provided by the
investigators, there would have been no doubt that Mr
Walker acted on behalf of NIS; that he was not involved in any
decision regarding
whether the funds paid by depositors would be
re-invested since the account belonged to NIS and not to him; that he
has never acted
personally or entered into a deposit-taking scheme
with anyone; and, that he did not accept any deposits into his
personal account.
[60] But the evidence discovered by
the inspectors establishes that Mr Walker is, effectively, NIS. He is
the sole member of the
CC and the person running the scheme. All
decisions by NIS were taken by him. Because he is the sole member of
NIS any profits
which NIS makes are to his benefit. Based on the
evidence contained in paragraphs 24 and 25 of the replying affidavit,
it is clear
that Mr Walker utilised the bank account of NIS as his
personal bank account. The investigators have cited several instances
where
funds were transferred from the NIS bank account into Mr
Walker’s personal bank account. The investigations have
revealed
that Mr Walker has diverted amounts in excess of R20m from
NIS’s account into his personal account for his personal
benefit.
Based on this evidence, Mr Walker has demonstrated an
inclination to treat NIS’s money as his own.
[61] What was discovered by the
inspectors on the eve of the launch of these proceedings is of
considerable significance: until
February 2013, and, as has already
been pointed out, on the eve of the launch of these proceedings, all
of the accounts of NIS
belonged to Mr Walker in his personal
capacity. Thus, from April 2012 to the end of January 2013, when a
significant portion of
the operations of the NIS scheme was
conducted, the scheme was run through Mr Walker’s personal bank
accounts. Based on this
evidence, the relief sought against Mr
Walker, in his personal capacity, appears to be appropriate. NIS was
nothing other than
an alter ego of Christopher Mark Walker.
THE 2006 NOTICE
[62] A reference has already been made
in paragraph [29.2] of this judgment to Government Notice No 1176 of
1 December 2006 (“the
2006 Notice”). As has already been
pointed out on that part of this judgment, the 2006 Notice contains a
list of activities
which have been designated by the Registrar of
Banks as not falling within the meaning of “the business of a
bank”.
[63] In their supplementary answering
affidavit, the NIS respondents make a point that the NIS scheme,
which is a subject of dispute
in these proceedings, is similar to
activity which has been defined as not falling within “the
business of a bank”
by virtue of the 2006 Notice. In order to
drive this point home, the NIS respondents make a point that there is
absolutely no indication
in the founding affidavit that the Registrar
considered the 2006 Notice in considering whether or not the activity
which constitute
the NIS scheme fall within the business of a bank.
The NIS respondents may have had a stokvel in mind as a designated
activity.
But the scheme of the NIS respondents is clearly not a
stokvel.
[64] The 2006 Notice referred to in
the supplementary answering affidavit of the NIS respondents is
annexed to the Registrar’s
replying affidavit as annexure
“MSB30” at page 496 of the record. Paragraph 2 of the
2006 Notice contains a list of
activities which have been designated
by the Minister of Finance as not falling within “the business
of a bank”. The
preamble to the list of designated activities
makes it clear that the 2006 Notice applies to the acceptance by or
on behalf of
a group, between the members of which there exists a
common bond, of money from such members, the pooling of such money,
and the
utilisation thereof for one or more of certain listed
objectives.
[65] The emphasis on the designated
activities in respect of which the 2006 Notice apply is a common bond
between members of the
relevant groups, as far an example, members of
a specific group of employees of the same employer who are members of
the same savings
and credit scheme that is operated or administered
on behalf of that group of employees in accordance with set rules;
members of
a stokvel; members of a specific group, governed in terms
of rules, “exclusively established for the purpose of raising
funds
and applying or holding available such funds for housing
advances to member” and there is a whole list of these
designated
activities none of which apply to the NIS respondents. I
have considered the whole list of such designated activities. The
2006
Notice does not apply to this application. It is of no
assistance to the NIS respondents.
CONCLUSION
[66] Based on the evidence as a whole
it is quite clear that the NIS scheme involves the acceptance of
deposits from the general
public as a regular feature of the scheme.
The NIS respondents, at paragraph 32 of the first answering affidavit
at page 172 of
the record, do explain that, as part of the scheme,
any person may purchase points from NIS. More so, the NIS respondents
do not
deny a specific allegation in the founding affidavit that
payments received from the public were a regular, if not dominant,
feature
of the NIS respondents.
[67] Evidence before me clearly shows
that none of the activities of the NIS respondents falls within any
one of those listed activities
designated by the Minister of Finance
in paragraph 2 of the 2006 Notice as not falling within the meaning
of “the business
of a bank”. On the other hand, there is
overwhelming evidence to show that the activities of the NIS
respondents fall squarely
within the definition of “the
business of a bank” as defined in section 1 of the Banks Act
or, within the meaning of
that term as declared in the 1997 Notice as
well as the 1999 Notice. Thus, the
rule nisi
stands to be
confirmed.
[68] Prayers 2, 5 and 7 relating to
the return date of the
rule nisi
; service of order by the
inspectors and to obtain affidavits from the NIS respondents; and
service of the order on the third and
the fourth respondent are
effectively academic at this stage of the proceedings and there is no
need to confirm those aspects of
the order. However, prayers 5.2
should be confirmed as it relates to the power of the inspectors to
retain all money found at the
premises of the NIS respondents pending
finalisation of the investigation. As for an application for a
postponement launched before
the commencement of the proceedings on 5
June 2013, I did not make a costs order once that application was
disposed of. A cost
order therefor, which follows the result, will be
included in the order I am about to give.
[69] In the result, I make the
following order:
[69.1] The first and the second
respondents are prohibited from conducting “the business of a
bank”, in contravention
of section 11(1) of the Banks Act, 1990
(Act No 94 of 1990 – Banks Act), by:
[69.1.1.] conducting the activities
set out in paragraphs 2 and 3 of Government Notice 498 that was
published on 27 March 1997 in
the Government Gazette 17895;
[69.1.2.] accepting deposits from the
general public (including persons in the employ of the person so
accepting deposits) as a
regular feature of the business in question;
and
[69.1.3.] soliciting or advertising
for deposits.
[69.2.] The first and the second
respondents are prohibited from disposing of, or otherwise dealing
with any of their assets while
the contravention suspected of having
been committed is investigated.
[69.3.] The inspectors appointed by
the South African Reserve Bank and/or their authorised
representatives are authorised to retain
under their control all
money found at the premises of the first and the second respondents’
premises during a search performed
in terms of section 4 of the
Inspection of Financial Institutions Act, 1998 (Act No 80 of 1998 –
Inspection Act) pending
the finalisation of the inspection.
[69.4.] The third respondent is
ordered to prevent the withdrawal of funds from the bank accounts
held by the first and the second
respondents at their institutions
pending the finalisation of the investigation.
[69.5.] The fourth respondent is
ordered:
[69.5.1.] not to deal with any funds
under its control which relates to the affairs of the first and/or
second respondents;
[69.5.1.2.] to disclose the full
extent of funds held by it or under its control in any bank account
or otherwise on behalf of the
first and/or second respondents.
[69.6.] The first and the second
respondent are ordered to pay the applicant’s costs, jointly
and severally, the one paying
the other to be absolved, duly taxed or
as agreed, which costs shall include the following:
[69.6.1.] Costs arising from the
postponement of the matter on 26 March 2013;
[69.6.2.] Costs of application for a
postponement of the matter on 5 June 2013;
[69.6.3.] Costs consequent upon
employment of two counsel.
____________________
N J Yekiso, J