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Likely points in the Congress-FATF face-off

(Article published in the Mar 3,2003 issue of TODAY, Business Section)

The meeting between the leadership in Congress and the emissaries of the Financial Action Task Force (FATF) that was expected to occur last week will apparently be held this week. On the table for discussion is, of course, the amendatory bill, recently passed by Congress but not neither signed into law nor vetoed by the President, to Republic Act 9160, our antimoney laundering law. I do not know how long the dialogue will last nor whether it will be primarily a monologue from the side of the legislators, but it is easy to see that attention will be focused on a few major points.

These major points will most likely be on (a) the effectivity of the reporting system in bringing to the attention of the Antimoney Laundering Council (AMLC) possible money laundering transactions; (b) ability of the AMLC to catch and prosecute actual money laundering; and (c) the capacity of the AMLC to contribute to and assist in the global fight against international crime by choking the perpetrators’ funds channels.

The adequacy of the reporting system is crucial to an antimoney laundering regime not so much to catch individual cases of money laundering but, more important, to establish a huge data base that would be most useful in determining the patterns of activity of money launderers. The idea is therefore, to cast a very wide net, even if most of the transactions caught in the net eventually turn out to be legitimate transactions.

The crux of the reporting system under RA 9160 is the obligation of the banks and other institutions subject to the law, collectively called "covered institutions", to report transactions being coursed through them that may have tell-tale signs of money laundering, which transactions are called "covered transactions". We are probably the only country that uses the term "covered". In my column that was published by this paper one day after the President signed RA 9160 into law, I pointed out the cultural resistance to use the more common term, "suspicious", that, I surmised, is the reason for this peculiar word that resonates with Eve’s reaction upon learning of her nakedness in paradise. Be that as it may, Section 4(c) makes the failure of covered institutions to report covered transactions to the AMLC a crime.

The definition of "covered transaction", however, was deliberately crafted to result in a very small net, contrary to the intent of producing a big catch. The legislative device was to require reporting only to transactions in excess of P4 million (as compared to the P500,000 or so equivalent of the $10,000 elsewhere) over a period of five consecutive banking days.

When the threshold was criticized by the FATF as too high, the Bangko Sentral tried to save the day by issuances effectively requiring suspicious transactions, regardless of amount, to be reported by banks. The FATF, fully aware that regulations cannot amend laws, was not convinced, and FATF insisted that an amendatory provision be introduced in the statute itself.

Our legislators’ response to the FATF was to (a) amend the definition of "covered transaction" by limiting it to cash or other monetary equivalent transaction done in one banking day and (b) add to the obligation to report "covered" transaction the obligation to report "suspicious" transactions, regardless of amount, when there is reasonable ground to believe, after an internal investigation conducted by the said institution, that it is related to a predicate offense.

It is difficult to see how the FATF can be happy with the lawmakers’ remedy. While the previous threshold for "covered" transactions was lowered to international standards, the obligation to report "suspicious" transactions appears to be no more than a paper duty.

In the first place, "suspicious" transactions would have to be investigated by the institution and it must find reasonable grounds to believe that the transaction is directly related to an unlawful or money laundering activity. Even granting the capability and willingness of the covered institutions to make such a determination (which is a very debatable point, complicated further by conflicts of interest and cultural dimensions) this imposes on the institutions, primarily the banks, the function of playing fiscals, a task we do not even give to our police.

Secondly, it is not at all clear what is meant by a transaction being "directly" related to an unlawful or money laundering activity. If a kidnapper uses ransom money to pay for, in cash, a P50-million property, sells it the next day, and deposits the sales proceeds on the third day, is the deposit, even by a bank who knows of the purchase, to be considered the deposit "directly" related to the kidnapping?

But more telling against this duty to report "suspicious" transactions, is the unspoken signal of the amendment for banks or other institutions to err in favor of not reporting illegal transactions. As its stands, unamended, the law punishes "malicious reporting" only when the person "with malice, or in bad faith, reports or files a completely unwarranted or false information" and the punishment is imprisonment from six months to four years and fine from P100,000 to P500,000. The proposal is to remove the requirement of "malice or bad faith" and to increase the penalties to imprisonment of six years to 12 years and file from one to five million.

Besides the weakness of the reporting mechanism, the ability of the authorities to fully investigate and prosecute under RA 9160 is in serious doubt. The stumbling block is, of course, our laws on the secrecy of bank transactions. A court order was required before the AMLC could inquire into a bank deposit.

The legislators addressed this FATF concern by permitting the AMLC to inquire into bank deposits, without a court order, in cases of kidnapping for ransom, violations of the Comprehensive Dangerous Drugs Act, and hi-jacking and other violations of RA 6235, destructive arson, and murder and providing a penalty for the punishment of officials making the inquiry when the inquiry is done without reasonable ground. The congressional concessions were purportedly limited to these three instances because it was believed that the global fight against money laundering was primarily to combat these crimes internationally.

Again, it is not likely that the FATF would be happy with the partial lifting of bank secrecy. Other significant crimes that have international repercussions remain protected by the need of a court order, such as, violations of the Electronic Commerce Act of 2000 and fraudulent practices and other violations under the Securities Regulation Code of 2000. I myself think that, at the very least, illegal gambling, piracy on the high seas, plunder, and graft and corruption crimes should be included.

Furthermore, the imposition of a penalty on officials authorized to make inquiries without a court order, when no reasonable grounds exist, results in a chilling effect that would deter vigorous enforcement of the antimoney-laundering law.

The third point of discussion is probably the way the Philippines fits in the global effort to combat money laundering. Section 13 permits the AMLC, in response to a request from a foreign state, to track down, freeze, restrain and seize assets alleged to be involved in money laundering. However, the law expressly provides under Section 23 that "the provisions of this Act shall not apply to deposits and investments made prior to its effectivity". There is no amendment addressing this concern of the FATF since it was expressed as early as 2001 when it assessed for the first time the recently passed RA 9160. It is likely, the FATF will bring that up once again.

It bears repeating that the consequences of our not complying with FATF recommendations are not going to be impositions on us. They are "countermeasures" to be recommended by FATF to the world designed to protect the members from being contaminated by us. The specific countermeasures are, in the final analysis, measures to be taken by the members in self-defense, as it were.

Actually, a number of institutions in other countries have been taken certain defensive measures already, even before the FATF has urged them to do anything. For instance, in a recent trip to Hong Kong, I was told by residents there that two banks refuse outright to accept any deposit from a Filipino. The reason given is that we are still in the FATF’s list of uncooperative countries and their dealing with us will put in jeopardy their status as listed companies in Hong Kong. Also, we understand that about 185,000 Filipinos in Japan could not access ATMs of the Japan Post Office for purposes of remitting their earnings to their families here. Again, the reason given is our being in the noncooperative list.

It is very crucial at this time for our country to maintain its position as a good member of the global financial community. It is most understandable that our lawmakers for practical reasons of their own and under the theoretical justification of national dignity, etc., would want to stand their ground when they meet with the FATF officials. So, let us do what I had suggested last week: have a set of rules compliant with FATF standards applicable to money flows with a foreign element; maintain our present antimoney-laundering laws, with all the benefits to politicians and criminal elements, for purely domestic transactions.