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Splitting hairs about splitting deposits

(Article published in the May 6, 2009 issue of Manila Standard Today)

One of the more difficult issues to tackle in any bank deposit insurance regime is the question of splitting of deposits.  Splitting, in general, occurs when a bank account is broken up into smaller accounts.

On the one hand, there is really nothing wrong, per se, in breaking up a deposit account.  After all, it is well within a depositor’s legitimate discretion to decide not only how much money to deposit with a bank but also under what terms and conditions some or all of his money is to be cared for by the bank. 

On the other hand, the notorious Legacy Group’s collapse demonstrates how a mind like Celso de los Angeles’ could construct a business model founded on the statutory guarantee of PDIC coverage in order to perpetuate one of the least imaginative way of robbing one’s own banks, or more precisely, robbing the government insurer.

The still sitting President (not a “running”, mind you) signed into law last week, on 29 April 2009, a bill that made further amendments to the charter of the PDIC. The amendments ushered in by R.A. No. 9576 were primarily intended to increase the maximum deposit insurance coverage, from Php 250,000 to Php 500,000 and, additionally, to strengthen the regulatory and administrative authority and financial capability of the PDIC.  Specifically, the new law tweaked the current statutory definition of “splitting of deposits.”


The concept of “splitting of deposits” was merely a creation of regulatory issuances up until 1904. On 27 July 2004, however, R.A. No. 9302 gave it a statutory definition.  “Splitting of deposits occurs,” says Section 21(f) of the PDIC charter as then amended by R.A. No. 9302,  “whenever a deposit account with an outstanding balance of more than the statutory maximum amount of insured deposit maintained under the name of natural or juridical persons is broken down and transferred into two or more accounts in the name/s of natural or juridical persons or entities who have no beneficial ownership on transferred deposits in their names within thirty (30) days immediately preceding or during a bank-declared bank holiday, or immediately preceding a closure order issued by the Monetary Board of the Bangko Sentral ng Pilipinas for the purpose of availing of the maximum deposit insurance coverage.”

That definition was amended by R.A. No. 9576 that lengthened the insurance disqualification period from thirty (30) days to one hundred twenty (120) days.  No other changes were made in the definition.  That, in my view, is wasted opportunity.  I submit that Congress ought to have scrutinized the concept of “splitting of deposits” more minutely instead of limiting itself to what just might be a meaningless enlargement.

One area that needed reexamination is the internal structure of the offense.  Under the PDIC charter, as it was amended by Section 23 of R.A. No. 9302, splitting of deposits is a criminal offense that is penalized, following the style of the Revised Penal Code, with “prision mayor or a fine of not less than fifty thousand pesos (P50,000) but not more than Two million pesos (P2,000,000) or both at the discretion of the court…”  The penalty is imposable on “any director, officer, employee or agent of a bank.”  But, how about the depositor?

The point I am making that no splitting of deposits, in the ordinary course of events, ever occurs without the cooperation of the depositor.  Splitting of deposits, of the kind the law wants to proscribe, cannot be done without the collusion of the depositor.  In the first place, names will have to be supplied by the depositor. Those names could not just be plucked out of the phone book by the bank officer; current Know-Your-Client (KYC) rules, require that the depositor present sufficient proof of identification, evidence of his financial capability, etc. Already in the vortex of swirling banking problems, such as finding liquidity, the bank officials simply are not, by themselves, in a position to perpetuate the splitting. 

The common occurrence, seen time and time again, is for the bank officer, already nervous about the liquidity situation in his bank, to get in touch with the depositors with balances above the maximum deposit insurance coverage in order to advise them to split.  The bank officer does this, sometimes out of real concern for his clients who, in many instances, had put money in his bank with the reasonable expectation that they would be alerted by the officer should there be signs of impending trouble at the bank.  To look “good”, the bank officer who could not give back the deposits of withdrawing clients offers them the next best thing, namely, protection from the hapless PDIC.

But still, no matter how the bank officer makes the offer, the bank depositor must accept, albeit half-heartedly, the offer and thus participate in the perpetuation of the offense.  So, why is not the depositor, whose cooperation is indispensable, also made liable for the offense of splitting of deposits?

I am not, of course, suggesting that since some of our lawmakers are self-confessed victims of bank failures, like my former tax student at the Ateneo Law School and now the Speaker of the House of Representatives, the failure to include participating depositors in the enumeration of persons liable for splitting of deposits, was a deliberate act of self-interest.

The cut-off period, whether of the previous 30 and now the 120 days, out also to have been reviewed.  As the statute is worded, the offense starts to kick in only if the splitting is done within the period.  With the current (and if I may say so correct) regulatory stance of the Bangko Sentral not to close an ailing bank, but instead to assist it, in every legal way possible, survive a crisis, the period of four months becomes meaningless.  Way before that, the alert and hands-on regulator that we have now shall have taken measures to intervene (though not interfere) in the day-to-day activities of the bank.  Such interventions, in the eyes of a seasoned banker or alert depositor, are enough to trigger the splitting of deposits.   Again, in the natural order of things, the rats shall have all jumped out of the shifting ship by the time the exclusion from PDIC deposit insurance coverage starts.

Again, I am not suggesting that the lawmakers who claimed to have been also victimized by Celso De Los Angeles’ Legacy Group have already been alerted to the problems way before 120 day exclusion period began.

What could have been done was to simply use the 120 period, not as a cut-off of the offense, but as the start of a prima facie presumption. Thus, any splitting made within the exclusionary period, ought to be prima facie considered as intended to make the depositor avail himself of the maximum deposit insurance coverage.  But, even if the splitting was done way before that, as may have been done from Day 1 as the Bangko Sentral seem to have determined in the case of the Legacy Group, the PDIC ought to still have the prerogative of denying payment in the presence of evidence that indeed, the splitting was deliberately done for the sole purpose of availing oneself of insurance protection.

But then, R.A. No. 9576 was passed under exceptional circumstances and not all lawmakers are reputed to have exceptional concern for the common good.