Two recent court cases have highlighted the fact that banks have a duty to do certain "safety checks" when a customer opens an account. Banks are also obligated to exercise more caution when opening an account for a new customer than in the case of an existing customer.
In their latest newsletter, Anthony Paizes and Christeleen van der Walt, of attorneys Webber Wentzel Bowens, say when opening an account at a bank for the first time, the bank has a duty to obtain evidence from independent sources of your trust- or creditworthiness. The bank can do this, for example, by following up on information provided by you about your identity, residence or employment.
But if the applicant is an existing client of the bank and requests further facilities or another account, the situation is quite different. In this case, the bank is more informed about the applicant and personal details can easily be verified.
So, unless an inquiry is specifically called for, the bank need not repeat the inquiry process .
However, the bank has to be discreet in making its inquiries and must in no way offend the applicant or invade their privacy .
Essentially, the bank has to investigate when suspicion is aroused in any way or when a transaction is deemed "out of the ordinary". But it is not incumbent on a bank to cross-examine the applicant in order to determine whether or not they are being truthful about the information they have provided.
So, unless the circumstances call for it, a bank does not have to ask an existing customer about their previous employment or about the source of their funds when they open a new account.
The court case which resulted in this finding involved a former group legal adviser - called Mr B - of the firm Columbus Joint Venture, who opened an account at Absa in the name of Stanbrooke and Hooper. At the time he opened the account, he produced a typed document which stated he had a franchise agreement with Stanbrooke and Hooper, a firm of solicitors in Brussels.
Mr B already had a personal cheque account and a bond account with Absa, although at a different branch. The bank obtained a copy of his identity book and noted his existing personal cheque account number on the application form.
The problem was, however, that Stanbrooke and Hooper had never entered into a franchise agreement with Mr B, who operated the account for his own benefit.
Over the following three years, Mr B, as group legal adviser at Columbus Joint Venture, authorised the payment of 39 cheques in favour of Stanbrooke and Hooper, supposedly for legal services. The amount involved was R821 000.
Columbus Joint Venture then sued Absa, as the collecting bank, in order to recover the R821 000.
Absa could not be blamed for collecting the cheques and paying the money into the Stanbrooke and Hooper account, because the name of the account and the names on the cheques matched exactly. What was at issue was whether the bank was negligent in opening an account in the name of Stanbrooke and Hooper - and the court found that this was not the case.
In another court case, First National Bank was found to have failed in its duty to prevent the owners of cheques from sustaining losses and was also negligent in opening an account for a company called Tradefast 8.
FNB was presented with a certified copy of a Eugene Wayne's identity document, an application form to open a business in the name of Tradefast 8, trading as Energy Measurements, as well as other documents. Attached to the application form was a note that no banking details were available because Wayne was not in the country.
The court found that white-collar crime, and in particular cheque fraud, is on the increase in South Africa and banks are aware of the fact that an ever-increasing risk exists that accounts are opened simply with the intention of serving as a conduit for stolen cheques.
In the Tradefast 8 case, the court pointed out that the potential risk was even greater. The account was opened on behalf of a company, and by a person, who were not known to the bank, as neither had a previous banking history with FNB.
According to the court, the reasonable steps required by a bank when opening an account include:
* The bank, at least, has a duty to establish the identity of a prospective client and to obtain information to establish the bona fides of such a client;
* The bank's argument was that fraudsters would in any case put elaborate measures in place which will make it pointless for the bank to make inquiries about a person's identity, but the court said the bank is still obliged to check - even if it does not uncover the truth;
* Prospective clients with no previous banking history should expect a more thorough probe into their financial affairs than someone with a previous banking history at the same bank. Also, if great care is taken to conduct inquiries in a discreet manner, then a legitimate client is unlikely to be offended;
* Merely establishing the identity of a prospective customer by looking at official company documents and identity documents is not enough. Banks need to make inquiries at independent sources to verify the references; and
* Credit checks only serve to protect the bank's interests and do not help reduce the risk to cheque-owners.
In short, the court found that banks are required to take concrete and effective steps in order to comply with their duty to guard against the true owner of a cheque incurring any losses.