Talking Point March 2014

A succinct discussion of selected topical, legal matters

I take great pleasure in submitting the second 2014 edition of Talking Point to you.

George Santayana, an American/Spanish essayist, philosopher, and poet, died in 1952, but also lives on, as so many of his famous sayings are embedded in international culture. I provide a few examples:

The bohemian American author Anaïs Nin made short shrift of New Year resolutions in a rather solemn manner:

To be brief is almost a condition of being
inspired
.

To know what people really think, pay regard
to what they do, rather than what they say
.”

The wisest mind hath something yet to learn.”

As always, I would greatly appreciate your feedback on Talking Point. Please email me at charlt@walkers.co.za.

Regards
Charl Theron

In this issue:

 

LEGAL MATTERS

A crook cheats money launderers

Amien Hoosain

Amien Hoosain
by Matt van Eden and Nox Malumbete

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.”

The plaintiffs may have had some success against Absa, had they conducted a proper audit of the money trail. Instead they gave untrue evidence, embarked on an intimidation campaign against Absa, including vexatious liquidation proceedings and unfounded criminal charges, and even attempted intimidatory tactics against the judges in the SCA. All to no avail.

The legal risk of buying and selling a pre-owned vehicle

by Amien Hoosain

Van der Molen v Fagan, a judgment of the Supreme Court of Appeal on 2 November 2013, was a tussle between the equally determined and innocent:

• purchaser and possessor of a pre-owned vehicle, and
• the actual owner who had been defrauded out of possession.

 

Fagan sold her Mercedes Benz C63 AMG to one Amod for R650 000. Fagan gave Amod immediate possession of the vehicle, although the latter was to pay the purchase price a month later. Fagan also relinquished the registration documents, as Amod allegedly required the documents to obtain finance. At least, Fagan specifically reserved ownership of the vehicle until payment of the purchase price.

Fagan’s trust in Amod was misplaced. He quickly transferred the Mercedes Benz to a co-conspirator. The latter summarily traded the vehicle in to a car dealership. Van der Molen then purchased the vehicle from the car dealership for R630 000.

Of course, Amod never paid Fagan. She traced the Mercedes Benz to Van der Molen, and sued him in the High Court, Johannesburg for return of the vehicle. Fagan won. Van der Molen appealed to a full bench (three judges), but lost again. He then appealed to the Supreme Court of Appeal.

Fagan argued that she was still the owner of the vehicle, and entitled to possession thereof. Van der Molen argued that the case fell within an exception to an owner vindicating her property from an innocent purchaser thereof. The exception (called estoppel) is that if an owner places someone in a possession of an asset, and represents that such person may dispose of the asset, the owner cannot vindicate her property from the innocent purchaser thereof. Van der Molen stressed that Fagan had ‘facilitated’ his loss, by handing over the vehicle’s ‘trappings of ownership’ to Amod. His argument was good, but not good enough. The Court held that it was the car dealership’s representations to Van der Molen that had induced him to purchase the vehicle to his prejudice; and not any representation by Fagan to him.

Fagan eventually succeeded, but her victory was diluted by its price, in money and time, and depreciation of the value of the vehicle.

For Van der Molen, the loss was exacerbated by the hefty legal bill (his and part of Fagan’s). He could have succeeded with a claim against the car dealership, and it is not disclosed why he did not pursue such avenue.

New and draft legislation affecting the long-term insurance industry

Jerome Veldsman

by Jerome Veldsman

Financial Sector Regulation Bill

National Treasury published the draft Financial Sector Regulation Bill, 2013 on 11 December 2013. The Bill, if/once it becomes an Act, will be the first phase (of two) to provide a twin peaks regulatory framework for regulating the financial sector (including the long-term insurance industry). The ‘twin peaks’ to be established in the first phase are:

• a new Prudential Authority within SARB, responsible for the oversight of the safety and soundness (financial stability) of banks, insurers, and financial conglomerates; and

• a new Market Conduct Authority (the current FSB) to protect customers of financial services firms (fair treatment of financial customers) and to improve the way financial service providers conduct their business.

In the second phase, the existing legislation currently administered by the FSB and SARB will be amended by or replaced with laws more aligned with the twin peaks framework.

It is unknown whether the Bill will become an Act during 2014.

Financial Services Laws General Amendment Act

The President assented to the Financial Services Laws General Amendment Act 45 of 2013 on 14 January 2014. The General Amendment Act will come into operation on a staggered basis. The majority of the provisions become operational on 28 February 2014, with certain others to become operational on 30 May 2014 and 29 August 2014.

The General Amendment Act affects thirteen pieces of financial sector legislation, including the Long-term Insurance Act. The General Amendment Act includes (belatedly) aligning the LTIA with the new Companies Act, making the FSB the lead regulator where there is concurrent jurisdiction under the Competition Commission Act or the Consumer Protection Act, and strengthening the regulatory framework and the enforcement powers of the FSB.

Insurance Laws Amendment Bill

National Treasury published the draft Insurance Laws Amendment Bill, 2013 on 24 June 2013. The Bill, if/once it becomes an Act, in addition to being an interim measure pending the implementation of the Solvency Assessment and Management (SAM) Project Framework, is intended to strengthen the regulatory framework and the enforcement powers of the FSB.

Of the innovations will be financial aspects required of Insurance Groups, the requirements imposed on directors, senior management, and heads of departments in Insurance Groups, and general powers and functions of the FSB as concerns Insurance Groups.

The general view is that the Bill may become an Act during 2014.

Taxation

In 2012 National Treasury announced that it is considering wholesale changes to South African insurance tax laws.

What and when this will be is an imponderable.

Discussion

The steps intended to ensure a top-end well-regulated insurance sector, fair treatment of policyholders, accountability, and the like, are meant well and in line with steps in developed economies. However, we have a history of well-meant steps having unintended consequences.

The steps are contained in a variety of statutes in various stages of progress, and it is virtually impossible for a long-term insurer (or Insurance Group) to develop a coordinated and systematic approach to compliance.

The cost and effort of due compliance with the tsunami of legislation is likely to increase the cost of doing insurance business to such an extent that consolidation (meaning the demise of smaller insurers) and premium increases (in practice funded by policyholders) may become inevitable. The fallout from structural changes brought about other than by market related forces often hurt the persons ostensibly being protected.

It may be that National Treasury can’t see the forest for the trees when it comes to the actual effects, as opposed to the intended effects, of the legislative initiatives affecting the long-term insurance industry (and the financial sector as a whole).

Confusion enforcing maintenance orders in the Western Cape

Amien Hoosain Amien Hoosain

by Roxanne Ker & Nox Malumebete

Meiring v Meiring, a judgment of the High Court, Cape Town on 20 November 2013, was an episode in on-going acrimonious divorce proceedings. The wife had previously obtained an order in the High Court for the husband to pay interim monthly maintenance. He defaulted, and she obtained a writ of execution from the High Court for the arrear amount, as well as an emoluments attachment order from the Magistrate’s Court ordering her husband’s employer to deduct both arrear and future payments from his salary.

The episode here discussed concerned the husband’s urgent application to have the High Court writ of execution set aside. The issue of a writ of execution in the High Court is an administrative function by the Registrar of the High Court (a bureaucrat), and does not involve a court appearance.

The Maintenance Act 99 of 1998 provides for the enforcement of any maintenance order made by any South African court (including orders made by the High Court) in the Magistrate’s Court (sitting as a maintenance court).

In an unrelated judgment of the High Court, Cape Town, on 15 November 2011, reported as PT v LT (to protect the identities of those involved), Judge Binns-Ward ruled that, in terms of the Maintenance Act, all maintenance orders could be enforced only in the Magistrate’s Court, to the exclusion of enforcement in the High Court.

In the Meiring case, the wife challenged the correctness of the PT v LT judgment, with success. Acting Judge Savage held that the previous judgment was wrong; and, in respect of a High Court maintenance order, an applicant could enforce the order in the High Court or the Magistrate’s Court, or in both simultaneously.

This leaves the Registrar of the High Court in a quandary. Which of the two judgments must he follow? Apparently, he follows a hybrid approach. If an interim maintenance order granted by the High Court has been breached (the facts in the Meiring case) he will issue a writ of execution. If any other High Court maintenance order (for instance, a final divorce order) has been breached, he declines to do so. Such approach is pragmatic, but not sound in law.

In practice, an applicant derives procedural benefit from enforcing a maintenance order in the High Court; of course to the detriment of the respondent. It is regrettable that the Maintenance Act does not deal with the matter in explicit terms, thus providing scope for conflicting interpretations. The legal system requires clarity on this point.

VAT Rules to apply to foreign e-commerce suppliers

Jerome Veldsman

by Jerome Veldsman

The Value-Added Tax Act was drafted in 1991, with a focus on physical goods and in-person services. However, local e-commerce suppliers are required to register and collect VAT from local customers. At present, foreign e-commerce suppliers are in general not so required.

In terms of the VAT Act, subject to a low threshold, a local customer who purchases goods or services from a foreign e-commerce supplier is required to self-declare, and then to pay the VAT to SARS. Predictably, few if any do so.

The VAT Act is being expanded also to focus on the digital economy, and to require foreign e-commerce suppliers to register and collect VAT from local customers. On 20 January 2014 National Treasury published draft regulations to embellish the rules for foreign e-commerce suppliers. The draft regulations are likely to be amended to refine their scope of application, as the present version seems unworkable.

It is unclear when the new regime will become operative. The level of compliance by foreign e-commerce suppliers will be interesting.