US Banking Regulations May Affect South African Banks Over Reputational Risk Closures

A legal expert has warned that new US banking regulations could have significant consequences for South African banks, particularly regarding the closure of bank accounts due to reputational risk.

The warning follows the US Banking Committee’s announcement that the Federal Deposit Insurance Corporation (FDIC) will eliminate reputational risk as a factor in bank supervision. This change comes as part of Senator Tim Scott’s Financial Integrity and Regulation Management (FIRM) Act, which aims to prevent financial institutions from terminating accounts based on reputational concerns alone.

What Does This Mean for South African Banks?

South African banks have relied on reputational risk as a reason for closing customer accounts, particularly in high-risk industries or for politically exposed persons (PEPs).

However, under the FIRM Act, South African banks could face sanctions if they close accounts of businesses in which US individuals or companies are invested.

A legal expert, speaking to Business Report, criticized banks for arbitrarily using reputational risk without clear parameters. He argued that financial institutions act as accuser, judge, and executioner, often making decisions without independent corroboration or legal processes.

Legal Precedent in South Africa

The Bredenkamp v Standard Bank case set a precedent for South African banks terminating customer relationships over reputational risks. John Bredenkamp, a Zimbabwean businessman linked to alleged illicit activities, had his accounts closed, and the Supreme Court of Appeal ruled in the bank’s favor.

Despite this precedent, customers have increasingly challenged such closures in court, seeking to force banks to keep their accounts open.

Regulatory Uncertainty and South Africa’s Response

Neither the South African Reserve Bank (SARB) nor the Banking Association South Africa has commented on potential regulatory changes. The Banking Association only stated that account closures are a matter between banks and customers.

However, experts believe that South Africa’s Financial Intelligence Centre (FIC) may soon play a bigger role in monitoring financial regulations, potentially aligning with US banking laws to avoid conflicts.

The Risk of US Fines on South African Banks

The legal expert warned that if South African banks fail to comply, they could face heavy US penalties.

“If South Africa agrees that there shall be no reputational risk, we avoid violating US banking laws and potential billion-dollar fines from regulators like the Attorney General of New York,” he said.

Given the financial strain on South African banks, experts caution that they cannot afford massive US-imposed fines.

What’s Next?

• South African banks may need to revise their policies on account closures to align with the FIRM Act.

• Regulators like SARB and the FIC may face pressure to clarify their stance on reputational risk.

• Potential legal battles could arise as customers challenge bank decisions under the new global banking framework.

The coming months will be critical as South Africa navigates the shifting global financial regulatory landscape.

{Source IOL}

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