PAUL HOFFMAN: Exacting accountability from banks that coddled state capture

Now that the Zondo state capture commission’s report has been mulled over by those who take an active interest in the governance of their country, the calls for reparations are ringing out loudly from various quarters.

Recovery of the loot of state capture is a relatively simple matter of following, via the international banking system, the movement of the loot, locating it and freezing it preparatory to seizing it.

This banking system is known as Swift, an acronym for Society for Worldwide Interbank Financial Telecommunications. Created in 1973 and based in Belgium, Swift links about 11,000 banks and institutions in more than 200 countries. But Swift is not your traditional high street bank. It is a sort of instant messaging system that informs users when payments have been sent and when they have arrived.

Very often in this type of debt recovery litigation around the world the looter meekly surrenders, making no effort to explain the possession of the loot, because an innocent explanation is patently lacking. The criminals implicated instead move on to their next target of the unbridled greed that informs looting, a far cheaper and easier course than trying to justify their possession of the loot.

The international availability of legal remedies that allow for freezing and seizing of assets illegally acquired, including funds deposited in banks in far-flung jurisdictions, if the remedies are correctly used, is a great disincentive to the corrupt, who are actuated by acquisitiveness and greed. For obvious reasons, they are usually litigation shy too.

The political will to end the impunity of kleptocrats and hold those involved in state capture to account has hitherto been absent in SA. Public enterprises minister Pravin Gordhan explains the passivity thus: in the ANC we have processes, and they must be followed before decisions around recovery are taken.

Presumably the Zondo commission “process” ends when the president announces the response of his government to the findings and recommendations made by the chief justice when he addresses parliament in October. That response ought to focus on recovery of the losses and damages SA has suffered, as exposed by the evidence presented painstakingly to the commission.

Sometimes it happens that the funds moved around in the banking system by the corrupt have been frittered away or cannot be found despite diligent search, often not unlike the looters who spirited the funds away in the first place. That does not have to be the end of the pursuit of reparations in individual cases though. Knowingly or negligently allowing the proceeds of looting to be moved from account to account may involve banks around the world being held liable for turning a blind eye to the money laundering they have become party to in the sense that their accounts are used as the laundry equipment.

Money laundering involves disguising financial assets so they can be used without detection of the illegal activity that produced them. Through money laundering the criminal transforms the monetary proceeds derived from criminal activity into funds with an apparently legal source. Using the banking system to move funds around in a way that puts distance between the corrupt transaction at the root of the possession of the funds is a common way of doing so.

A Ponzi scheme run via two banks that corresponded formed the subject matter of two cases in Ontario, Canada, in which the relevant legal principles were explained. One bank was used for fraudulent activities, the other was innocent of all knowledge of the fraud. The liquidators of the former sought to hold the latter liable for the fraud, but failed on the facts due to the lack of proof of negligence and/or knowledge of the Ponzi scheme.

The plaintiffs in both actions admitted that the defendant bank had no actual knowledge of the fraud perpetrated by a Mr Stanford, the banker running the Ponzi scheme. The key question at issue was instead whether the defendant bank was reckless or wilfully blind to Stanford’s breach of his fiduciary duty to the bank involved directly in the scheme.

The court found that the case law is generally settled that “actual knowledge” includes “wilful blindness and recklessness” under both common law and civil law. (The latter being what we call statute law in SA). However, mere constructive knowledge will not suffice and the defendant must actually know the facts that make its conduct reckless or make its blindness wilful.

On the claim based on the negligence of the defendant bank the court disagreed with the bank’s submission that no duty of care should arise unless the bank had actual knowledge of the fraud. The judge notably made a distinction between the duty of care owed to a customer versus a non-customer. In the matter concerned there was no banker/customer relationship between the two corresponding banks.

The court concluded that there was no duty of care owed by the defendant bank to protect the abused bank from insider abuse by Stanford in these circumstances. Further, even if the defendant bank owed a duty of care to its correspondent bank its conduct did not fall below the standard of care of a reasonable banker in the circumstances.

Where, as in the case of the state capture money laundering in SA, there is a banker-customer relationship the duty of care arises both when the account is opened and when transactions take place. The Treasury, looted state-owned enterprises (SOEs) and the government alike can take full advantage of the banker-customer relationship to hold those banks that ignored, failed to notice or wilfully condoned the extensive money laundering involved in SA state capture activities by holding them liable for all losses incurred as a result of them not acting to prevent or report the money laundering, whether wilfully or negligently.

Knowledge of the skulduggery of state capture has been in the public domain for years; bankers cannot turn a blind eye to public knowledge gleaned from Gupta leaks and earlier reports of malfeasance to avoid liability for the consequences of money laundering. Many suspicious transactions are in evidence.

Banks are particularly vulnerable to reputational damage arising from allegations of implication in money laundering against them. Most banks are insured against claims that SA and its SOEs can now bring against those that have been involved in the money laundering. Lord Peter Hain has been voluble in his condemnation of the role of bankers in the SA state capture disaster.

The banks (and their insurers) that are vulnerable to claims of the kind discussed here may wish to consider settling with SA against cession of its claims, and then recover the funds from those guilty of the money laundering. Or course, they won’t be put to that choice if SA does nothing to recover losses and damages.

• Hoffman, SC, is a director of Accountability Now.