The Senate Blue Ribbon Committee held a hearing early this week to probe the alleged involvement of Philippine banks and casinos in a $100-million bank heist in the US. Computer hackers reportedly stole funds from the account of the Bangladesh Central Bank, and that a bulk of these funds was laundered through the Philippine banking system. Rizal Commercial Banking Corp. (RCBC) disclosed the laundered money was deposited in its Jupiter branch in Makati City. Despite a stop-payment order, these funds were released.
This could be the biggest money-laundering case in recent Philippine history. The circumstances surrounding this case require an understanding of the balancing act that bankers face on a daily basis. On one side, there is the need to safeguard the integrity of transactions in the Philippine banking and financial system. This is why banks and financial institutions adhere to strict rules on risk control and fraud prevention by generally using five basic controls: 1) joint custody; 2) dual control; 3) authority limits; 4) delineation of duties; and 5) secrecy of passwords.
Joint custody means that at least two people should watch over critical items, like cash and accountable forms. Dual control refers to a vouching process, where transactions have makers and checkers. Authority limits define triggers for escalation to higher management. Delineation of duties refers to people having specific job functions that are put in black and white. Secrecy of passwords simply means that one should never share his password with anyone else. In essence, these controls are meant to ensure that no individual gets to process transactions unilaterally, and accountability can be easily pinpointed.
On the other hand, banks need to maintain good relationships with their clients. In instances where big clients are involved, banks can go the extra mile to ensure that their transactions are facilitated, as these clients have business settlements that are time-sensitive.
A bills-purchased transaction, which is typically offered to big corporate clients, would serve as an example. Here, the client’s checks are immediately credited to the account, and the client does not have to wait for clearing. In effect, the bank advances the funds and will be the one to wait for the checks to clear. In a sense, the client is given a sort of credit line. Nonetheless, operational controls are still followed, but with some flexibility for big clients.
These functions of operational control and marketing (relationship management) can also be seen in two Philippine laws governing the banking industry. These are the Anti-Money Laundering Act (Amla) and the Secrecy of Bank Deposits Act.
As far as economic theory goes, financial markets exist to promote Pareto efficiency, which refers to mutually beneficial outcomes in the production and exchange of goods and services. Essentially, financial markets channel funds from people who do not have productive uses for them to those who do, and so everyone in society benefits. However, money laundering clearly defies this notion, because the amounts involved come from illegal activities that benefit some people at other people’s expense. The risks faced by banks in money- laundering cases are both operational and reputational in nature, and the Amla exists precisely to mitigate such risks.
For its part, the Secrecy of Bank Deposits Act exists to encourage people to entrust their money with banks. As lawyers explain, the secrecy law is meant to protect the constitutional right to privacy. People would be more willing to deposit, invest and do business with banks if they feel secure in knowing that their transactions will not be made known to others, especially kidnappers and extortionists. Hence, the law serves some sort of marketing purpose, too.
Nevertheless, confidentiality or secrecy is not absolute. As lawyer Dennis Funa explains in another BusinessMirror article, deposits of whatever nature, including investments in bonds, are expressly allowed to be examined, inquired, or looked into by the same bank- secrecy law, as amended, in these instances: 1) during a special or general examination of a bank, as authorized by the Monetary Board, to investigate bank fraud or a serious irregularity; 2) during a regular audit of a bank by an independent auditor; 3) upon the written permission of the depositor; 4) in cases of impeachment; 5) upon the order of a competent court in cases of bribery or dereliction of duty of public officials; and 6) in cases where the money deposited is the subject of litigation.
Thus, from a policy standpoint, to strengthen Amla, society will have to sacrifice some bank secrecy. To strengthen bank secrecy, society will have to wrestle with the possibility of increasing money laundering. Hence, for the greater good of society to be upheld, there needs to be a healthy balance between the Amla and bank secrecy, just as there needs to be a healthy balance between operational control and marketing in the conduct of banking activities. In a sense, the Amla and bank secrecy serve to temper one another.
The issue is, who gets to decide what this healthy balance is? Who gets to define what the greater good of society is? Who gets to represent society’s best interests?
There’s the rub.
Ser Percival K. Peña-Reyes, a former banker, currently teaches Economics of Money and Banking at Ateneo de Manila University. Comments are welcome at email@example.com.