Are banks using “reputational risk” to attack legitimate customers?
The Supreme Court of Appeal case between John Anorld Bredenkamp and his companies v Standard Bank in 2010 set a fairly high standard for the termination and closure of a customer bank account and for “reputational risk”.
On November 26, 2008, Standard Bank discovered that John Bredenkamp and his companies were on the United States Treasury Department’s Office of Foreign Asset Control (OFAC) list as “Specially Designated
Nationals” (SDN). “OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security objectives.”
Of course, MasterCard, as a US company, does not do business with “Specially Designated Nationals”. Standard Bank had no choice but to cancel Johns MasterCards.
After further investigation by the bank they also discovered that John had also been listed by the United Nations as a ‘sanctions breaker’, accused of cigarette smuggling, fraud in the UK, his name came up during the war in the Congo,
tax evasion investigations, he was literally a persona non grata. When the bank claimed that John posed a “reputational risk” to their business, it was indisputable and they had no choice but to close all of his personal and business accounts and sever their relationship with them.
It is curious now that data from the Office of the Banking Ombudsman, published in 2020, claims that there is a sharp increase in complaints against banks for closing accounts and terminating services, most of the time without even notify customers in advance. Could there be a corresponding increase in high-level criminal activity within the
ordinary bank customers?
According to the Ombud’s report, complaints about customers’ checking accounts accounted for 19% of all complaints to the Ombud in 2020 and most involved closings of checking accounts, complaints about personal loans or credit cards. credit or even internet banking.
WHAT IS INFORMING THE SUDDEN INCREASE IN ACCOUNT CLOSURES BY BANKS?
Ideally, there are supposed to be objective economic reasons for account closures. The closure of Bredenkamp’s accounts and company was supported by evidence and a ban by reputable international institutions such as the
United States Department of Treasury and United Nations. In some cases, however, when banks do not have this objective economic proof, but for political or even religious reasons decide to use the old saying of “reputational risk” to exclude certain customers from the banking system.
It is true that some businessmen, whether for historical reasons or for economic advantage, immerse themselves in the politics of the day, using their accumulated resources and business machines to try to influence political power and, doing so, can sully their reputation and put themselves at odds with the political incumbents of the time.
The Billionaire Koch Brothers (David and Charles) are a classic example. For years, they have spent hundreds of millions of dollars building networks, think tanks, advocacy organizations, media operations and political operatives, all with the clear goal of undermining any Democratic party president or any soft republican party that does not believe that no tax or regulation is socialism.
For some reason I see in them our own Iqbal Survé and his amassed machinery of corporate and media entities which he is now clearly using to support those who claim to advance far left ideology and to support agents politicians who claim black solidarity as a refuge.
Billionaires who fund a particular clique in political factions, especially those who fund factions opposing the incumbents, are never anyone’s favorite and sometimes seem like they are undermining the state.
All billionaires have their preference on who should lead, what ideology those who lead should have and whether under these political leaders they will increase their wealth.
That Survé put all his machinery into supporting a faction of the party within the ANC, paying Carl Niehaus or Tina Joemat-Pettersson because they belong to the faction he loves and prefers, or he uses his empire media to advance the opinions of those he agrees with is something that happens in every other country and whether a sitting president likes it or not (Obama hated the Koch brothers), it does part of the political machination and can only be stopped by the political counter-machine in this battle to win hearts, minds and votes.
None of this justifies banks getting involved and choosing who to exclude from banks’ payment systems and who to treat as deserving of political power and worthy of banking business. Banks cannot invoke “reputational risk” against companies and individuals who support political factions that bank executives dislike. This is actually political interference by the banks.
Any closure of bank accounts must be based on objective economic reasons, otherwise we are heading down a slippery slope where banks abuse the powers they have to punish political and commercial opponents.
When US banks embarked on a process of closing the bank accounts of businesses the Treasury didn’t like, like strip clubs and brothels, without any objective risk assessment, the watchdog – by through the
Chairman of the House of Financial Services – wrote to their Reserve Bank to raise concerns about this recurring and growing habit of regulatory agencies and banks using “reputational risk” to attack legitimate businesses
without normal objective measures.
THE SITUATION IS WORSE FOR ORDINARY PEOPLE
Every customer in the country has had a bad encounter with bank staff or bad service on the phone with a bank and may have reacted with frustration and anger. Since banks have had this discretion to terminate accounts without testing the allegations against customers and without even telling you the reasons, many customers have sometimes reacted violently to be heard.
A good example of this is the story told by consumer watchdog Georgina Crouth about a Mike Cahill who had an encounter with disgruntled branch staff and then received an account termination notice. When Cahill was
later accused of racism, never given a chance to explain his version of the incident, that makes Banks both judge and jury and law for themselves.
In 2019, a Standard Bank customer drove her car to a branch in the East Rand, Johannesburg, in frustration, allegedly over the bank’s poor service and inability to help her withdraw her money.
Last year, another customer stripped naked at a branch of Capitec in Strand Cape Town. Again, there was speculation that some of his trades had been declined although Capitec disputed this.
There is a growing wave of frustration with banks, and individual customers feel powerless to counter banks’ abuses, especially their growing tendency to act unilaterally without considering customers’ interests.
LEGISLATION STILL DOES NOT ADEQUATELY PROTECT CUSTOMERS
Over the years, however, as customer complaints continued to mount against the banks, new, stricter regulations were called for. The Financial Sector Regulation Act 9 of 2017 (FSR Act) is a great addition to the essential task of protecting customers from the daunting pulpit of banks. The FSR law is to legislate on equity.
Section 106(3)(c) of the FSR Act now requires banks to have guidelines and processes for dealing with customers, whether it is a refusal to offer banking service, withdrawal or the closure of these services.
Since many customers complain about banks misrepresenting the qualities of the financial services they offer, and unfair contractual terms or treatment – which is exactly why the FSR law was enacted – the courts can not
no longer leave customers to the whims of the banks, their bank-customer contract and the general loose code of conduct of the banks.
The fact that previously banks could terminate their relationship with a customer, close the customer’s accounts without
considerations of equity, without giving reasons, with only an obligation of notice, opened a plethora of complaints and disputes against the banks before the ombudsmen and the courts.
It is important that the level of bank closures for customers is kept very high due to the immeasurable and costly consequences for customers and their businesses. All decisions to close banks should be based on objective economic reasons and not on any political ideology of the bank and its founders or managers.
Ordinary customers, who do not have the power to challenge the banks when irrational decisions have been made, must be protected by law. The bank’s code of ethics and bank-customer agreements are not enough to guarantee the fairness of such a David-Goliath relationship. With the revolving door between treasuries and commercial banks, treasuries have also proven to be unreliable allies to ordinary people.
The law must be clear, rebalance the bank-customer inequality and seek to protect the customer at all times.