Frozen Accounts and Fraudulent Funds: Navigating the Rights of Banks, Customers and SARS

A recent judgment of the High Court has affirmed the right of a bank to freeze a customer’s account without prior notice where it reasonably suspects that the account has received the proceeds of fraud. The judgment also confirmed the validity of a third-party notice issued by the South African Revenue Service (“SARS”) under section 179 of the Tax Administration Act 28 of 2011 (“TAA”) to recover funds paid out pursuant to a fraudulent VAT refund claim.

The facts

A close corporation filed VAT returns with SARS claiming a refund of approximately R3.28 million. SARS paid the refund, and the close corporation thereafter transferred R900 000 into the personal bank account of the applicant held with the respondent bank. The bank at which the close corporation held its account then notified several financial institutions, including the respondent bank, that the close corporation had been implicated in fraud involving SARS. The respondent bank immediately froze the applicant’s account.

SARS subsequently investigated and established that the invoices submitted in support of the close corporation’s VAT claim were fraudulent — the alleged suppliers confirmed in affidavits that the invoices were not authentic and that they had never conducted business with the close corporation. SARS issued a third-party notice under section 179 of the TAA to the respondent bank, directing it to pay the funds it held to SARS in satisfaction of the close corporation’s tax debt, and criminal charges were laid against the close corporation.

The applicant launched an application seeking an order directing the respondent bank to unfreeze and release the funds, amounting to approximately R449 000, and declaring the continued freezing of his account to be unlawful and unreasonable.

The issues

The court was called upon to determine three principal issues: (i) whether the respondent bank had acted lawfully in freezing the account without prior notice based on information from another financial institution ; (ii) whether SARS was entitled to issue a third-party notice under section 179 of the TAA where the applicant was not the tax debtor and no final demand had been issued ; and (iii) whether the applicant had established the requirements for a final interdict, particularly a clear right to the frozen funds.

The court’s decision and reasoning

On the first issue, the court held that the bank-customer relationship is contractual and that the respondent bank’s terms and conditions expressly entitled it to suspend an account immediately and without notice where it suspected fraud or unlawful activity. The court rejected the argument that the email from the other financial institution was mere hearsay, holding that the respondent bank was entitled to rely on information from a fellow bank without a confirmatory affidavit. Applying established case law — that a suspicion must rest on objective facts such that a reasonable person would have considered there to be good and sufficient grounds — the court found that the information was grounded in objective facts, not mere conjecture.

On the second issue, the court held that the notice was not directed at the applicant but at the respondent bank, which held funds belonging to the close corporation as the tax debtor. As to the absence of a final demand, the court relied on section 179(6) of the TAA, which permits SARS to dispense with a final demand where a senior official is satisfied that issuing one would prejudice collection. Given that the close corporation had committed fraud and the funds were at risk of dissipation, the court accepted that the statutory exception applied. Drawing on authority from the Supreme Court of Appeal, the court confirmed that section 179 permits recovery from a third party holding money due to a taxpayer, even where the underlying indebtedness is subject to challenge.

On the third issue, the court held that the applicant had failed to establish a clear right to the frozen funds — the first requirement for a final interdict. The applicant could not demonstrate any legitimate business dealings with the close corporation justifying the payment. Significantly, the money had been paid into a personal account that had been inactive and dormant, rather than a business account, and the applicant was unable to produce any supporting documentation such as invoices, delivery notes, or contracts. Moreover, shortly after the deposit, the applicant attempted to withdraw significant sums in cash and make purchases at various retailers — conduct consistent with dissipation rather than legitimate business. The court concluded that the funds were proceeds of unlawful activity and were not the property of the applicant merely because they were held in his bank account. The application was dismissed with costs.

Conclusion

This judgment is significant for several reasons. It endorses the right of banks to act swiftly in freezing accounts upon receiving credible information from fellow financial institutions regarding suspected fraud, without awaiting independent verification or confirmatory affidavits. It confirms that contractual clauses authorising account suspension in cases of suspected unlawful activity will be upheld. The judgment also restates the scope of section 179 of the TAA, affirming SARS’s broad powers to issue third-party notices to recover tax debts from persons holding funds on behalf of a tax debtor — including the dispensation from a prior final demand under section 179(6) where circumstances such as fraud and risk of dissipation warrant it. Finally, the decision serves as a reminder that an account holder who receives funds derived from fraudulent activity does not acquire a clear right to those funds simply by virtue of holding them in a bank account.