UGANDA CHRISTIAN UNIVERSITY

FACULTY OF LAW
MODULE: BANKING AND NEGOTIABLE INSTRUMENTS
LLB IV
Lecture Notes

OTHER LEGAL FRAMEWORK RELEVANT TO BANKING

A. Anti Money Laundering and Counter Terrorism Financing

1) The Anti-Money Laundering Act, Cap 118

Section 1 of the Anti-Money Laundering Act, as amended, defines money laundering as the process by which illegally
obtained funds are made to appear legitimate. Money laundering starts with a criminal act that generates illicit gains for the
offender. The offender then attempts to conceal the criminal origins of these funds through various transactions and
processes, often involving third parties, businesses, or companies. There is no single method for laundering money—
techniques can range from the purchase and resale of luxury items (e.g., cars or jewelry) to using legitimate businesses or
"shell" companies or proceeds from drug trafficking and other serious crimes. The proceeds, often in the form of cash, need
to be introduced into the financial system.
The Anti-Money Laundering Act applies to crimes committed within Uganda, aboard vessels flying the Ugandan flag, or by
nationals or stateless individuals habitually residing in Uganda. It also covers offenses under Section 16 of the Anti-Money
Laundering Amendment Act, 2017.
There are three recognized stages in money laundering:
a) Placement: This is the initial phase where illicit funds are introduced into the financial system. In cases like drug
trafficking or robbery, the proceeds are often in cash form. Common placement methods include depositing cash into bank
accounts, savings with SACCOs, investing in fixed deposits, operating money lending businesses, or purchasing assets. A
frequent technique is "structuring" or "smurfing," where large deposits are broken down into smaller transactions to avoid
suspicion, often involving multiple accounts or third parties.
b) Layering: After the funds have entered the financial system, layering occurs. It involves transferring the money through
a complex network of accounts, companies, or countries to obscure its origin. The objective is to make it difficult for law
enforcement to trace the paper trail and to conceal the criminal source of the funds.
c) Integration: In this final stage, the laundered money re-enters the economy as seemingly legitimate funds. Criminals
use these funds for further illegal activities or personal gains, such as investing in real estate or purchasing luxury items.
Successful money laundering allows criminals to enjoy their illegal profits without raising suspicion, which underscores the
importance of anti-money laundering (AML) and counter-terrorism financing (CTF) laws as crime-fighting tools.
Accountable Persons
Financial institutions are designated as accountable persons under the Second Schedule of the Act, and they are required to
fulfill specific responsibilities to prevent and detect money laundering and the financing of terrorism.
Responsibilities of Financial Institutions
The Act requires financial institutions to perform the following duties:
▪ Maintain customer and beneficial owner accounts in their true names.(Section 6 of the Act)
▪ Conduct due diligence on customer transactions at account opening, when transactions exceed 5,000 currency
points, or prior to any wire transfer, whether domestic or international ( Section 6 of the Act).
▪ Implement risk management systems to verify customers, beneficial owners, and transactions, particularly those
involving Politically Exposed Persons (PEPs).
▪ Conduct due diligence with respondent financial institutions in cross-border transactions and investigate complex,
unusually large, or suspicious transaction patterns that lack an apparent economic or lawful purpose. Records of such
transactions and the parties involved must be maintained as required by law.
▪ Develop and implement programs appropriate to the institution’s risk profile and size to prevent money laundering
and terrorism financing.
▪ Identify, assess, and monitor money laundering and terrorism financing risks (Section 7).
▪ Keep detailed records of all due diligence conducted on customers and their transactions (Section 8).
▪ Record and report cash or monetary transactions exceeding 1,000 currency points to the Financial Intelligence
Authority (FIA) (Section 9).
▪ Report suspicious transactions to the FIA, regardless of the transaction value, if they suspect that the funds are linked
to criminal activity or intended for money laundering or terrorism (Section 10).
▪ Include accurate originator and recipient information in all electronic fund transfers, maintaining this data
throughout the payment chain (Section 15).
It is important to note that the obligation as to bank or professional secrecy, confidentiality, and any other restrictions on
the disclosure of information whether imposed by law or any agreement is not affected by the obligations under this act to
report or furnish information. (Section 16 of the Act) However, this obligation does not apply to privileged communications
between an advocate and their client.
Under the Act, privileged communication includes:
(a) Confidential communications, either oral or written, between advocates in their professional capacity; (b)
Communications made for the purpose of seeking or providing legal advice; and (c) Communications that are not
intended to further illegal or wrongful acts.

2) The Registration of Persons Act 2015

One of the primary objectives of this Act is to regulate the registration of individuals in Uganda. It mandates the compulsory
registration of every child born in the country, assigning a National Identification Number (NIN) to citizens and an Alien
Identification Number (AIN) to non-citizens (Section 29).
Additionally, the Act requires the mandatory registration of deaths for every individual in Uganda (Section 42). The
responsibility for notifying the registration officer of a death lies with the next of kin, a relative, or the person in charge of
the premises where the death occurred (Section 43).
Financial institutions are also obliged to verify the identity of individuals seeking to open bank accounts, access consumer
credit, or engage in other financial services by requesting a valid national ID (Section 66). This ensures that financial
institutions maintain accurate records of individuals conducting financial transactions and can update their information in
the event of the customer’s death.
3) The Anti -Terrorism Act 2002 (as amended)
One of the key objectives of the Act is to suppress acts of terrorism and to provide for the punishment of persons who plan
, instigate, support finance, or execute acts of terrorism. Section 12 of the Act imposes a penalty on any person who provides
financial assistance to acts of terrorism. The Act also imposes a penalty to a person who assists in the retention or control
of terrorism funds ( section 14 of the Act). A person may disclose information to the DPP, or any other officer authorized
by the DPP based on his belief or suspicion that such money or other property is or has been derived from terrorist funds
not withstanding any requirements imposed under the contract or law. ( section 15 of the Act)
Case analysis
Refer to the cases on the reading list
 B. Mortgage transactions.

1) Mortgage Act 2009 as Amended

Definitions
A mortgage is defined under the Act as any charge or lien over land or any estate or interest in land in Uganda for
securing the payment of an existing or future or a contingent debt or other money or money is worth or the
performance of an obligation and includes a second or subsequent mortgage, a third-party mortgage and a
sub mortgage. A mortgagee is defined as a person in whose favor a mortgage is created or subsists and includes any person
deriving title under the original mortgagee while a mortgagor is a person who has mortgaged land or an interest in land
and includes any person from time to time deriving title under the original mortgagor or entitled to redeem the mortgage
according tohis or her estate, interest or right in the mortgaged property. Additionally, a third-party mortgage is a
mortgage which is created or subsists to secure the payment of an existing or future or a contingent debt or other money or
money’s worth or the fulfilment of a condition by a person who is not the mortgagor, whether in common with the
mortgagor.
The rights and duties of a Mortgagor and Mortgagee
▪ Both the mortgagor and mortgagee have a duty to act honestly and in good faith and disclose all relevant information
relating to the mortgage. (Section 4 of the Act).

▪ Before executing a mortgage deed, the mortgagee must conduct due diligence to establish the interest of the
mortgagor in the property subject to the mortgage. The mortgagee must establish the marriage status of the
mortgagor and whether the property subject to the mortgage is matrimonial property.(Section 5 of the Act). Where
the property subject to the mortgage is matrimonial property, the Act requires the mortgagee to satisfy themselves
that the spousal consent is informed and genuine and this is through ensuring that the spouse receive independent
advice on the terms and conditions of the mortgage.(Section 6 of the Act). It is important to note that the mortgage
on matrimonial property is only valid where there is evidence that both the mortgagor and their spouse living in the
matrimonial property have signed the mortgage application form.

▪ The mortgagor has a duty to repay the loan installments to the mortgagee and upon default, the mortgagee has right
to demand for the payment of the loan amount due.( Section 19 of the Act). Where the Mortgagor remains in default
the mortgagee has a right to exercise remedial action to recover his or her money which include the requirement by
 the mortgagor to pay all the monies owed, appointment of a receiver, leasing of the mortgaged land, entering
possession of the mortgaged land and selling of the mortgaged land. (Section 20)
▪ When exercising the power to sale the mortgaged land, the mortgagee has a duty to take reasonable steps to obtain
the best price (Section 27 of the Act).

▪ The mortgagor has a right to discharge the mortgage on payment of the sum due before the mortgagee and any
purchaser of the mortgaged land reach an agreement for sale ( Section 32 of the Act)

Other key aspects under the mortgage Act

▪ The mortgage of the land only takes effect as security. Where a mortgagor signs a transfer of title as a condition for
grant of the mortgage such a transfer has no effect and in that case the mortgagee commits an offence and is liable
on conviction to a fine not exceeding four thousand currency points. ( Section 8 of the Act)

▪ The priority of the mortgage interest under the Act is dependent on the type of interest held in the mortgaged
property. Where the mortgage is on registered land under the registration of Title Act, then the mortgages rank
according to the order in which they were registered. Where the mortgaged land is held under customary tenure, then
the priority will follow the order registered by the recorder. For informal mortgages, the order ranks according to the
date and time they were made. In circumstances where a subsequent mortgagee lends money to a mortgagor based
on the misrepresentations or fraud of the prior mortgagee, the prior mortgagee’s right to repayment under the
mortgage shall be postponed to the right of the subsequent mortgagee ( Section 9 of the Act)

▪ A mortgagee may give a further advance or credit to the mortgagor on a current or continuing account as provided
for under section 10 of the Act. This does not rank in priority of any subsequent mortgages unless the provision for
further advances in noted in register on which the mortgage is registered, or the subsequent mortgagee has consented
in writing to the priority of the further advance. (section 10)

▪ The interest payable or the amount secured by the mortgage may be varied through effective communication and
documentation between the mortgagee and mortgagor. Section 12 of the Act.

2) The Security interest in Movable Property Act

This Act was enacted to provide for the use of movable property as collateral for credit. It also provides guidance on the
enforcement of such security interests, the perfection and provides for rules to determine priority of claims among
competing claimants. This Act unlocks access to credit to SMEs and individuals who do not have real estate as a form of
security. This Act covers both tangible assets such as chattels and intangible assets such as account receivables, deposit
accounts, electronic securities, and intellectual property rights. The mandate to establish and maintain the register for
security interest in movable property was bestowed on URSB. This register maintains records of security interest and
particulars of property which is subject to the security.
As highlighted above, movable property is classified as tangible property or intangible property. Some of the tangible
movable assets under the Act include accession, chattel, collateral, inventory, commercial consignment. Intangible assets
include accounts receivable, deposit accounts, electronic securities, and intellectual property
Definition of a security interest.
A security interest is defined under section 2 of the Act as a property right in movable property that is created by agreement
to secure payment or other performance of an obligation, any type of charge over movable property, chattel mortgage and
consensual lien.
Creation of security interest
A security interest may be created in (a)any type or combination of movable property; (b) in a part of or an undivided interest
in movable property; (c) in a generic category of movable property; or (d) in all of the movable property of the grantor. This
security interest is created by a transaction that secures payment or performance of an obligation without regard to the
form of the transaction.
An agreement executed to create security interest is enforceable where the following factors are present
(a) The grantor of the security interest should have a right in the collateral or must have the power to encumber the
collateral.
(b) The agreement must be signed by the grantor, it should identify the secured creditor and the grantor, be witnessed
by a third party, adequately describe the collateral and the secured obligation and should indicate the maximum
amount for which the security interest in enforceable.
(c) The secured creditor should give the collateral a monetary value ( Section 4 of the Act)
Perfection of security interest.
Perfection of a security interest means protecting such an interest from third party claims. The Act provides several ways in
which a secured creditor can perfect his security interest in a collateral, and they include registering the security interest in
the collateral in the register, taking possession of the collateral or having control over the collateral in case of a deposit
account ( Section 12 of the Act)
Priority of security interests and competing claims
The priority between security interests in the same collateral is determined by the type of interest held and the actions taken
to secure it. When one security interest in collateral is perfected and another is not, the perfected security interest takes
precedence.
For perfected security interests, priority is based on the first action taken, which may include registering an initial notice,
taking possession of the collateral, or obtaining control over it.
In the case of unperfected security interests in the same collateral, priority is determined by the order in which the interests
were created (Section 30 of the Act).
Enforcement of the security interest

When a debtor defaults on an obligation to pay or another event of default occurs, the security interest becomes enforceable.
In enforcing the security interest, the secured creditor may exercise any rights granted under the Act, the security agreement,
or any other applicable law. Before doing so, the secured creditor must provide the debtor with a notice of default,
demanding payment, or performance of the obligation under the Act.
If the debtor fails to remedy the default within the specified time, the secured creditor may, in the case of a security interest
perfected by registration, file a default and enforcement notice with the registrar. If the security interest is perfected by other
means, the secured creditor may take possession or control of the collateral in accordance with the provisions of the Act
(Section 44 of the Act)

The tables below show the security interest notices registered with URSB, the number of clients as of February 2024 and
the type of security interest in the collateral used by the users in Uganda.
 C. Foreign Exchange Transactions

1. The foreign exchange Act of 2004 as amended

This Act governs foreign exchange operations in Uganda, offering clear guidelines on currency exchange and the execution
of international payments and transfers involving foreign exchange. Under Section 5, financial institutions intending to
engage in foreign exchange activities must first obtain a license from the Bank of Uganda.

The Bank of Uganda retains the discretion to approve or deny applications for such licenses. If a license application is
rejected, the aggrieved party has the right to appeal the decision before the High Court within 30 days of receiving notice of
the rejection, as per Section 7 of the Act. Additionally, the Bank of Uganda is empowered to suspend or revoke a license if it
believes that the licensee has violated the provisions of the Act (Section 6).

According to the Foreign Exchange (Amendment) Act 2023, the minimum paid-up share capital required for conducting
foreign exchange business is 2,500 currency points, while for money remittance businesses, the threshold is 10,000 currency
points.

Financial institutions involved in foreign exchange and money remittance services must maintain ongoing capital of no less
than 1,000 currency points and 2,500 currency points, respectively, as outlined in the 2023 Amendment Act. Furthermore,
the Act mandates that all foreign currency payments be processed exclusively through entities licensed by the Bank of
Uganda (Section 5 of the Foreign Exchange Amendment Act 2023).
 D. Taxes

1. The income tax Act as amended

The operation of a financial institution in Uganda is subject to various taxes, including employment, corporate, and
withholding taxes.

• Employment Taxes: Under Section 19 of the Income Tax Act, financial institutions are required to report and remit
taxes on employees' salaries. These taxes must be filed no later than the 15th day of the month following the month
in which the payments were made.

• Corporate/Business Tax: Financial institutions are also subject to corporate tax, which is paid at the end of the fiscal
year, as outlined in Section 18 of the Act.

• Withholding Tax: Financial institutions are mandated to withhold a percentage of tax on payments for goods and
services, as prescribed under the Income Tax Act. This tax also applies to payments made on dividends or interest
from loan repayments.

2. Stamp Duty Act

Under the Stamp Duty Act, financial institutions are required to pay stamp duty on certain transactions. The applicable fees
are specified in the Second Schedule of the Act. Transactions that attract stamp duty include security bonds and mortgage
deeds.

3. Excise Duty Act

The Excise Duty Act imposes a 10% charge on specific financial services, including ledger fees, ATM fees, withdrawal fees,
and periodic charges levied by financial institutions. However, loan-related charges are exempt from this duty, as detailed
in the Second Schedule of the Act.
 E. Consumer Protection and Privacy

1. The data protection and privacy act 2019

This Act seeks to protect individuals' privacy and personal data by regulating the collection, processing, and management
of personal information. Given the nature of their operations, financial institutions require customers to share personal
data, and this Act provides a framework for collecting, processing, and controlling such data, as well as for its use and
disclosure.

Under Section 2, "personal data" is defined as information from which an individual can be identified, including details
related to nationality, education level, and identification numbers. Before collecting personal data from customers, financial
institutions must obtain the individual's consent (Section 7). In cases where the data pertains to children, the consent of a
parent or guardian authorized to make decisions on the child’s behalf must be obtained (Section 8). Additionally, any data
collection must respect the individual’s right to privacy (Section 10).

The Act also mandates that financial institutions collect personal data for lawful and specific purposes (Section 12) and
maintain accurate, up-to-date information (Section 15).

To ensure the security of personal data, financial institutions must implement appropriate technical and organizational
measures to prevent loss, damage, unauthorized destruction, or unlawful access and processing (Section 20).

Furthermore, customers have the right to opt out of having their personal information used for direct marketing purposes
by financial institutions (Section 26).

2. Bank of Uganda financial consumer protection guidelines.

These guidelines were established by Bank of Uganda to achieve the following objectives
(a)promote fair and equitable financial services practices by setting minimum standards for financial services providers in
dealing with consumers.
(b) increase transparency to inform and empower consumers of financial services.
(c) foster confidence in the financial services sector; and
(d) provide efficient and effective mechanisms for handling consumer complaints relating to the provision of financial
products and services.

These guidelines emphasize that the relationship between financial institutions and consumers should be based on the
principles of fairness, reliability, and transparency. This ensures that consumers are provided with clear and accurate
information and treated with integrity (Please read the guidelines in detail).

F. Electronic Transactions.

Electronic banking, also known as Electronic Funds Transfer (EFT), refers to the use of electronic methods to transfer funds
directly between accounts, bypassing the need for physical cheques or cash. E-banking encompasses a variety of services
and can be categorized into several types, including consumer electronic banking, corporate electronic banking, interbank
electronic banking, and plastic card transactions.
Consumer electronic banking utilizes various platforms and devices, such as ATMs, telephones, mobile banking, internet
banking, and home or office banking. These services allow individuals to conveniently manage their financial transactions
remotely.
Electronic banking transactions are regulated by the Electronic Transactions Act, which governs the use, security,
facilitation, and regulation of electronic communications and transactions. One key aspect of the Act is the requirement for
electronic signatures in instances where the law mandates a signature, as well as the legal consequences of failing to provide
one. This is particularly important for financial institutions, as many electronic transactions require consumer approval
before they can be processed.

The use of electronic signatures is further detailed in the Electronic Signatures Act of 2011, which provides guidelines on
the validity and application of digital signatures in financial transactions. (This shall be covered in detail under
Section 13 of the reading list).