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The IRR of the Antimoney-Laundering Act

(Article published in the March 25, 2002 issue of TODAY, Business Section)

When the implementing rules and regulations of the Antimoney-Laundering Act (RA 9160) takes effect on April 18, 2002, approved by the Congressional Oversight Committee on March 8, 2002, there shall be put in place, hopefully, the necessary legal framework for an effective antimoney-laundering regime in the country. A good approach to understanding its major provisions is to see how the rules try to address the concerns raised by the Financial Action Task Force (FATF) on the law itself. After all, undeniably, Congress passed RA 9160 reluctantly and the throbbing of its heavy heart can be heard from every page of the implementing rules and regulations.

One of the initial observations on the law was that the coverage of what is known as "predicate offenses" was too narrow since the law contained only 14 categories, with the last simply a statement intended to include into the net similar offenses committed abroad. The Congressional Oversight Committee’s response was to hold the view that every mode of committing an offense should be counted as one offense in itself. Thus, while "plunder" which is only one category under the law, should be really seen as six offenses since the plunder law, RA 7080, states six ways of committing it.

This logic, if it can be called that, was applied to the 13 categories in the law, resulting in an enumeration of one 114 predicate offenses which number, if that FATF insists on calling the coverage "narrow" can still be increased since two of the 114 are "other violations of any of the provisions of the implementing rules and regulations of the SEC" and "any other violations of the provisions of the Securities Regulation Code."

This attempt by the Congressional Oversight Committee to inundate the FATF with a list of offenses borders in the absurd. For instance, to our legislators in the Committee, fraudulent importation of any vehicle is one offense, fraudulent exportation is another offense; assisting in a fraudulent importation is a third offense, and assisting in a fraudulent exportation is a fourth offense. For normal people, however, all four is simply "smuggling".

FATF’s more serious concern (a euphemism for objection) is that the reporting threshold of P4 million is too low. This view is based on the law’s definition of a "covered transaction," in Section 3(b) which, into two paragraphs, makes reference to amount in excess of four million Philippine pesos (P4,000,000). Circular 251 of the Bangko Sentral ng Pilipinas (BSP), which requires banks to do suspicious reporting regardless of amount, was, because it was a mere administrative regulation not found adequate to compensate for this inadequacy.

The Congressional Oversight Committee meets this objection by writing in the regulations Rule 5.3 which allows the BSP, the Securities and Exchange Commission and the Insurance Commission, on their own in the exercise of the supervisory and regulatory powers in their respective charters, or upon direction from the Antimoney-Laundering Council (AMLC), to require that "all suspicious transactions to be reported to the AMLC when there is reasonable belief that any money-laundering offense or violation of this Act under Section 4 and Section 7[5] is about to be, is being or has been committed."

The AMLC is believed by the Congressional Oversight Committee to have that right to direct the three agencies because Section 7[5] of RA 9160 empowers the AMLC "to initiate investigations of covered transactions, money-laundering activities and other violations of this act." The presence of the comma between "covered transactions" and "money-laundering activities" is taken to mean that money-laundering activities" is different from "covered transactions." Thus, while "covered transactions" have a P4-million threshold; "money-laundering activities" does not and AMLC, by this provision, may therefore require ("requiring" being a form of "initiating") the reporting of suspicious amounts below P4 million.

This reasoning obviously hangs precariously on the comma and ought to be fortified by an amendatory law. In the first place, failure to report on the part of covered institutions is not penalized under the Antimoney-laundering law but only under the respective charters of the three government agencies. In fact, the failure of Section 14 of RA 9160 to penalize noncompliance with a reporting (assuming that requiring the reporting is equivalent to initiating investigations) is itself an indication that such a reporting was not in the minds of the legislators when they passed the law. But, more important, it is very doubtful whether this reporting that may be required under Section 5.3 of the regulations constitutes a valid exception to our bank secrecy laws.

Under Section 9 of the antimoney-laundering law, only the reporting of "covered transactions" are not deemed violations of RA 1405, as amended; RA 6426, as amended; RA 8791 and other similar laws. The suspicious reporting authorized under Rule 5.3 of the IRR is not among those listed as "covered transactions" under Rule 3.b of the IRR. So, we can really expect the banks to report suspicious transactions below P4 million when doing so good could expose them to liability under the bank secrecy laws? In my view, the sooner Congress writes Section 5.3 into RA 9160, the better.

A third FATF concern refers to the power to the AMLC to effectively receive reports and require into or examine deposits or investments. That power is believed by the FATF as limited because of bank secrecy.

Presumably by law of an answer, the Congressional Oversight Committee wrote in Rule 5.2. This rule states three instances when the AMLC can initiate investigations. The first two allow the AMLC to investigate only "on the basis of a mandatory filing of a covered transaction report pursuant to Section 9" of the law. This reporting has P4-million threshold. The third covers the reporting that may be required under Rule 5.3 discussed above.

In my view, since, as I pointed out above since compliance by a bank with a directive to report based on Rule 5.3 may not be immune from the sanctions against bank secrecy violations, the third instance of investigation is purely cosmetic. It is not likely that banks will report suspicious transactions below P4 million and risk the ire, if not the prosecution, of its clients. The AMLC can, therefore, investigate only those mandatory reported transactions above the P4 million threshold.

Rule 5.2 does not even allow the AMLC to investigate referrals of information from, say, the Bureau of Immigration, the police authorities, or any other government agency that they may have stumbled upon, in the course of their operations, involving a money-laundering activity. In fact, Rule 5.2 does not even permit AMLC investigation of concealment in a bank account of the proceeds of a predicate offense, like kidnapping, if the amount is not more than P4 million, even if such concealment is part of a finding of a court in a final conviction of the perpetrators of the kidnapping.

A fourth FATF concern is the proviso in Section 9 of the law that excludes from the authority of the AMLC to inquire into bank deposits the "deposits and investments made prior to the effectivity of this act." This, the FATF fears, seriously inhibits the AMLC’s investigative power.

The IRR, to remedy the situation, Rule 11.3, interprets Section 9 to mean that "no covered transaction reports, investigation and prosecution of money-laundering cases, or any action authorized under the Antimoney-Laundering Act, may be undertaken with respect to such deposits and investments as well as transactions or circumstances in relation thereto that have been completed before October 17, 2001." October 17, 2001, was the date when the law took effect. However, transactions on and after October 17, 2001 are subject to the power of the AMLC to inquire into, "although said transactions relate to or involve deposit accounts and investment accounts opened or created prior to October 17, 2001." In other words, an account opened before October 17, 2001, is safe from AMLC’s investigation only if the account had no transaction, whether additional deposit or withdrawal, whatsoever. Obviously, the legal point that certainly will be raised in our courts in this respect is whether the nonretroactivity of the law refers to "deposits and investments" as clearly stated in the law, or to "transactions" as construed by the IRR.

Finally, the FATF was concerned about the inability of the BSP to determine the owners of "nonchecking" numbered accounts. Under Section 9 of the law, peso and foreign-currency nonchecking numbered accounts are allowed; however, the BSP is permitted to conduct annual testing but solely limited to the determination of the existence and true identity of the owners of such accounts. Peso – and foreign-currency non-checking numbered accounts shall be allowed. The BSP may conduct annual testing solely limited to the determination of the existence and true identity of the owners of such accounts. The FATF was obviously not happy with merely one testing a year that has only one purpose.

Rule 9.1g, hoping to address this concern, requires that the true identity of the customers are satisfactorily established and that the information and supporting documents are obtained and recorded by the covered institution. But still, because the BSP is constrained by the law, to (a) annual testing and (b) for the limited purpose and determining the existence and true identity of the owners of the numbered accounts, this power in practice will suffer from the same defect that vitiates the BSP’s power to examine the banks only once a year. In fact, this is weaker because there is no room for special examinations.

A bank and investment house failure of recent memory tells us that a lot of mischief can be done in between the yearly examination of the BSP. An 11-month period is long enough to open and close numbered accounts that may not ever be touched by the yearly BSP examination.

All told, although the efforts of the Congressional Oversight Committee in fashioning rules that give the semblance of meeting the issues raised by the FATF may be charitably described as heroic, it will not at all be very surprising if the FATF may be charitably described as heroic, it will not at all be very surprising if the FATF, come its Plenary Session this coming June, were to consider the regulations nothing more than an exercise in histrionics. Congress should not take the chance that FATF would be beguiled by the cosmetics the Congressional Oversight Committee has applied on the law. It should improve RA 9160 now.