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Legacy’s Secret

(Article published in the Mar 11, 2009 issue of Manila Standard Today)

Legacy fought tooth and nail to prevent Chuchi Fonacher, the officer-in-charge of the Supervision and Examination Department IV (now known as the Integrated Supervision Department II) from submitting to the Monetary Board the results of the simultaneous examination that her unit conducted of the Legacy rural banks that ended on 30 April 2005.  What was it that Legacy wanted to conceal from the Monetary Board?

 The short answer is in a statement made by Deputy Governor Nestor Espenilla, Jr. to the Committee on Banks and Financial Intermediaries of the House of the Representatives on 09 February 2009.  He described the business model of Legacy thus: “…we are dealing here with an organized syndicate that from day one was created to exploit human nature and weak links in the legal, regulatory and enforcement framework of our banking and financial system for the purpose of large-scale gathering of people’s earnings, diverting these through fraudulent means for the syndicate’s purposes, and then covering their tracks through accounting gimmicks and other dubious transactions long enough until they can make a clean get-away by selling out to new investors.   When the whole thing blows up, as inevitably it will since the funds have been moved through a web of fictitious loans and self-dealing investments, the PDIC and the taxpayers will all be left holding the proverbial empty bag.” 

The long answer is found in the complaint after complaint for syndicated estafa and other crimes involving moral turpitude that the Bangko Sentral has filed and is continuing to file against Celso De Los Angeles, et al, with the Department of Justice.  Although each complaint tells its own story of orchestrated deceit and damage wrought upon the gullible many, it is not necessary to go into the details of each one; a description of the typology of the Legacy deceit suffices for our present purposes.  Here is a slow description of how the fraud was carried by Legacy.


 Step One was is to set up the syndicate, or, a group of at least five conspiring with one another to fulfill their respective, but not respectable, roles in a common design to defraud the general public.  Legacy’s syndicate consisted of Celso De Los Angeles’ trusted explainer and implementor, chief finance officer, chief executive officer and their assistants working in the Legacy companies.

 Mission one of this syndicate is to cook up ways, fair or foul, of enticing people to give money to the Legacy companies, particularly its 14 banks which had a combined total of 36 branches and 2 pre-need companies.  Accordingly, an army of agents, who were paid commissions from 2% to 10%, were let loose to lure depositors into putting their money in the Legacy rural banks with the promise of interest, to be paid in advance, sometimes in kind, but in most cases excessively high either in amount or in value.

 Examples of these come-ons are certificates of time deposit, insured with the PIDC (because split into multiples of Php 250,000.00) and earning 20%, 33% or 41%; cars and motorcycles far exceeding in value the interest given in the open market. 

 Mission Two is for the money thus gathered to, of course, land in the De Los Angeles companies.  And there are many De Los Angeles companies: at least 11 real estate companies, such as One Realty Corporation; an investment house formerly known as United Pacific Capital Corporation and renamed Fusion Capital Corporation; a motor vehicle dealer doing business under the name of Legacy Motors, Inc., an investment house called Fusion Capital Corporation; and other companies such as United Sugar Farmers Corporation, Bagong Sinag Publication, Inc. and Hacienda Busay, Inc.

 Lending the money gathered through the solicitation of high-cost deposits in the Legacy rural banks straight to the Legacy companies would have tipped off the authorities.  Hence, there was a need for the money to take a detour to shake off the regulatory scent.

 Thus, Mission Three was to siphon off the money from the rural banks through fictitious loans.  The methodology ranges from the crass to crude.  A common technique was to convince people to sign loan documents purportedly showing that the transaction was bona fide  and then, in consideration of a commission (usually 1%), give the proceeds to a Legacy company.  The recipient of choice is Fusion Capital Corporation because, in its capacity as an investment house, it can plausibly represent that it will assume payment of the entire loan. 

 The poor motorcycles were again conscripted to the cause.  Papers were forged to make it appear that loans from the Legacy rural banks were granted to borrowers for the purpose of funding their purchase of motorcycles, naturally from Legacy Motors, Inc.  In an investigation of this scheme employed in one Legacy rural bank, 44,172 borrowers purportedly drew down Php 55,000 each for a total of Php 2.5 billion, all of which were credited to Legacy Motors, Inc.  However, only 119 borrowers actually received their motorcycles. 

 But not only were the motorcycles fictitious; so also were the purported borrowers.  In a random check, the BSP found that 20 of the 20 randomly selected borrowers who were supposed to be living in Manila never existed; all the 1,110 supposed borrowers in Tuy, Batangas were “ghost borrowers”; and 22 out of 22 alleged borrowers selected at random denied their having ever borrowed from Legacy bank.  The total fictitious motorcycle loans, in just 10 Legacy rural banks, amounted to at least Php 3.7 billion.

 Mission Four was to cover up the fraud; for this purpose, the Legacy banks from time to time sold their fictitious loans to other Legacy companies in exchange of overvalued real estate properties, sometimes covered by fake titles.  And since real estate cannot remain for a long time in bank, for a bank is not supposed to be in the realty business, they, over-valued and covered with dubious titles as they were, were in turn sold, again to other Legacy companies under long term agreements.  Thus, converting the real estate into cash receivables. 

 Bulk sales to the Legacy companies of the loans in the Legacy banks, which obviously could not for long show any interest payments, were also resorted to in order to keep the accounts current.  For just 7 Legacy banks, Php 7.8 billion was cleaned up in this way. 

 All these, naturally, would have to be noticed sooner or later by the BSP.  Hence, Mission Five was to hold off the regulator.  In answer to the demands by the BSP for the banks to increase their capital to address the risks increasingly becoming visible, money withdrawn by fictitious borrowers were plowed back into the banks and the increase in cash was reported as capital infusion.   BSP was flooded with merger proposals, expressions of interest from alleged outside investors, rehabilitation proposals, and investment agreements with reasonably credible entities.  But none materialized. 

 Finally, when all else seemed to become less and less effective, Mission Five had Legacy ironically resorting to the law.  Transactions were coursed through bank deposit accounts  thereby shutting the door against further tracing by the BSP examiners of money just making the rounds.  BSP personnel were threatened with administrative cases as well as cases with the Ombudsman.  Legal challenges were hurled on the legal basis for BSP actions, such as the imposition of Prompt Corrective Action, and finally, the courts were made to take its side, as Legacy sought successfully the issuance of the TRO by the lower courts. 

 When the music stopped in mid-December last year, about Php 14 billion was the cost of the De Los Angeles caper.  And, because part of the business model was to take advantage of the PDIC coverage, we the taxpayers are eventually the ones left to have to pay the piper.

 The Final Mission ought to be ours; to ensure the punishment of Celso De Los Angeles and his retinue of fallen angels.  But, things in our country being what they are, that could for some time be mission impossible.