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Following similar legislation in several developed countries, the Financial Intelligence Centre Act 38 of 2001 (FICA) created a framework and institutions intended to combat money laundering and the financing of terrorist and related activities.

One of the many requirements of FICA is that the listed accountable institutions (including attorneys, banks, estate agents, financial services providers, and long-term insurers) must keep record of the identity of each client with whom they establish a business relationship or conclude a transaction.

In practice, FICA places a tremendous administrative burden on the innocent, and the extent to which it really hinders the activities of the guilty is not readily apparent. However, clients ought to be distrustful of accountable institutions willing to ignore their FICA obligations.

Absa Bank Limited v Mahomed, a judgment of the Supreme Court of Appeal on 20 January 2014, dealt with a crook cheating money launderers. A duly authorised agent of Absa, trading as Mistry’s Financial Services, facilitated tax evaders in laundering money into the banking system. Mistry accepted cash deposits from the tax evaders, in return for deposit receipts on Absa stationary and issued to fictitious companies. Mistry obviously did not require of the tax evaders to provide record of the identities of the fictitious companies (as required by FICA). The deposit receipts (at least some of them) were fraudulent, and Mistry absconded with (at least much of) the money. The tax evaders sued Absa for failing to honour the deposit receipts. Effectively, they wished to hold Absa responsible for Mistry’s wrongdoing.

In the High Court, Johannesburg, the plaintiffs succeeded. The court held that Mistry was Absa’s duly authorised agent with actual and ostensible authority to take deposits, and the money laundering was irrelevant. Ostensible authority refers to a situation where a person from the factual situation reasonably deduces that an agent has authority to act on behalf of a principal, even though the agent has no actual authority. In such a situation, the principal is bound by the agent’s action.

Absa appealed to the Supreme Court of Appeal, with success. The SCA held that Mistry did not have actual authority from Absa to conduct the money laundering, and also did not have ostensible authority to do so.

“I cannot agree with the view espoused by the court below that the respondents’ underlying unlawful intent to circumvent tax laws has no bearing on the validity of their claims and is a matter to be dealt with by SARS. … A party which knows that a transaction is unlawful or is part of an unlawful scheme and is aware or should reasonably be aware that the principal of the agent with whom it is contracting would not countenance the conclusion of such a transaction, is, in any event, precluded from relying on ostensible authority.”

Please contact Madeleyn Kruger for more information.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

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