I once stumbled upon an old case against a famous bank in Kenya, filed in the late 80’s, with the subsequent judgment entered against the bank. Although the bank appealed to the Court of Appeal and a judgment entered in its favour, by overturning the decision of the High Court (narrowly I would say), the High Court raised salient issues that presently manifest in the decision by the Central Bank of Kenya to fine five banks, namely KCB Group, Equity Bank, Standard Chartered Bank Kenya, Diamond Trust Bank and Co-operative Bank that were found to have breached CBK guidelines.
The question that was uppermost in the mind of the superior court was “Would a bank in the face of what everyone agrees is an unusual and suspicious transaction, be entitled to make inquiries about that transaction?” From this question, a series of other questions are formulated, such as “What is the extent to which such inquiries can and should be made?’’ and “How far can a bank go in pursuit of finding the ‘truth’?’’ Just where do you draw the line?
The CBK through a Banking circular notice No. 1 of 2016 directed commercial banks, microfinance banks and mortgage finance companies to be more painstaking when depositing or withdrawing large cash transactions from their customers, as such transactions are characterized by informality and anonymity- unequivocally making the banking sector vulnerable to money laundering and terrorism financing.
The circular notice was to be applied in tandem with the Proceeds of Crime and Anti-money Laundering Regulations, 2013, which requires institutions to procure written statements from customers.
Predominant details in the statements would include: the source of the money, the nature of their business, where the money is being taken or its eventual use, what necessitated the large cash deposit et al.
The directive further holds that, where a customer (read account holder) is unable to answer these questions, then the bank should consequently file a suspicious transaction report with the Financial Reporting Centre.
This brings me back to the fiducial duty of confidentiality by banks regarding information on customer’s accounts. Though the duty is qualified, the question of the learned judge in the “mentioned” case still rings deep in my mind like a loud gong. To what extent can a bank inquire before reporting to the relevant authorities (FRC) the transactional affairs of its customers?
It may be clear that a bank may disclose the customer’s account and transactional affairs to an extent that is reasonable and proper for carrying on the banking business, so as to prevent frauds or crimes, and to an extent that is proper for its protection but is this enough justification to inquire and disclose transactional affairs of a customer to a third party?
The CBK argues that the five banks that were under probe not only allowed their clients to withdraw bulk cash without any justification as required under the guidelines, but further aided in the opening of accounts just a matter of days before the NYS money was deposited into those accounts.
The concerns, admittedly, raises great suspicion on the part of the account holders, but is that enough to find the banks negligently liable? Word has it that the CBK has proposed the names of employees and chief executives of those banks for prosecution on the strength that the guidelines require financial institutions and insurance companies to file daily reports on suspicious transactions with the Financial Reporting Centre.
Ordinarily I would endeavor to suggest that a banker, in good faith and without negligence while in the ordinary course of business, should not be liable in relation to the transactional activities of an account holder- if it can show that due diligence was carried on its part.
This is because the relationship is built on trust; a trust which once eroded may make the thriving of banking business a monumental task. To put it clearly, the bank is not entitled to inquire for what purpose the customer opened the account, what monies are paid into that account and for what purpose they are eventually drawn out of that account.
The bank instead has a duty to keep the affairs of its customers private unless compelled by a court order or for its protection, or to prevent a commission of a crime (although this is not the same thing as saying that the Bank can be an investigator of its customer’s affairs).
The CBK’s decision however takes an interesting twist. It plainly places a duty on the part of the banks (as the chief regulator of course), and extends the limit to which a bank can inquire into the affairs of a customer. Whereas some would argue the inquiries breaches fiduciary duties on the part of the banks, some insist that the breach is necessary as it forms part of the exception of that duty. In my view, it would be difficult to hit a formula which defines the extent to which a bank can make necessary inquiries.
But it is safe to say that the obligation not to disclose information is paramount and tests the limits of the bank-customer trust relationship, and that relationship can only be breached when and if reasonably necessary. This therefore infers that there must be compelling reasons for the banks to disclose such transactions to the FRC.
In all fairness, we all want to fight corruption in Kenya, and the guidelines by CBK were issued to prevent money laundering and to enable banks to inquire and report any suspicious transactions to Financial Reporting Centre (FRC).
Baston Woodland, commercial lawyer