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BSP, SEC deal v. pseudo investment 

(Article published in the Jun 9,2003 issue of TODAY, Business Section)

THE Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC) on May 6, further fine-tuned their campaign against pseudo investment or borrowing schemes by entering into a memorandum agreement of operational cooperation and coordination that addressed the issues which were not adequately dealt with in their earlier attempt made on June 7, 2001.

The previous agreement, which by itself reflected the two institutions felt need to work as a team, set the stage for prompt reporting from one to the other of suspected violations of the laws they respectively administer, exercise of their functions, and the conduct of joint audit by the BSP and the SEC of suspected companies.  Thus, among other things, the June 2001 memorandum of agreement committed the SEC to report to the BSP financial institutions which were suspected to be engaging in activities without proper license required by the General Banking Law (GBL) and the new Central Bank Act (BSP Charter) from the BSP, like banking, quasibanking, trust and/or investment management functions.  In turn, BSP was committed to report to the SEC any suspicion of violation by the institutions under its regulatory power of the provision of the Securities Regulation Code (SRC).

In addition, where allowed by law, the two institutions were bound to furnish each other with the necessary documents and data that were gathered in the examinations and investigations of companies under their respective jurisdictions as well as with their respective reports of examination and investigation


Finally, the possibility of conducting a joint audit whenever practicable or deputizing by BSP and by the Sec of each other to do the audit for the two of them, was agreed upon.  Obviously, this last was a measure triggered by the collapse of Urban Bank Inc. and its investment house affiliate, Urbancorp Investment Inc. in 2000.  With benefit of the 20-20 vision of hindsight, it was realized that the fiasco could have been prevented, or at least earlier warning signs of the impending disaster detected, if the two institutions audited the bank and the investment house at the same time during the two or three years before the collapse, thereby detecting how, if not preventing, the two companies from shifting their assets and liabilities to each other to prevent the regulatory authorities from getting a consolidated picture of their true exposure to risk.

The need to refine the June 2001 memorandum agreement surfaced when the cumulated experience of the two institutions showed that the majority of the modus operandi of the pseudo investment and borrowing scam perpetrators permutated, like a virus, into forms that did not exactly fit the legal categories that defined the respective areas of responsibility the BSP and the SEC under their charters.  Not being easily recognizable either as under the supervision and regulation of either the BSP or the SEC, the scams, at least for a while, were able to avoid showing up in the radar screen of both.

Resulting situation is similar to the familiar scene in many volleyball games among weekend athletes: the serving player of one team directs the ball to that point across the net that is between two players of the opposing team.  Each one of the two players thinks the other will return the serve and does not move to take it.  Sometimes, both might even step away from the ball, each one mistakenly thinking that stepping back would provide his or her teammate more space.  The result is that the ball falls unattended to the ground.

Fortunately, despite the equivocal mien of many investment and borrowing scams, the SEC nevertheless detected some common patterns that enabled the agency to categorize their modus operandi five major categories.  The first category consists in soliciting funds from the public and not relending them, thus making it appear as covered by the Investment Company Act (ICA) or the SRC.  The second is soliciting funds from the public under the representation that the funds will be relent, seeming to be in the quasibanking business.  The third is advertising itself as an investment company and this appearing to be covered by the ICA.  The fourth is soliciting funds and advertising as lending investors engaged in the business of relending, purchase of receivables and other obligations, this seeming to be engaged in quasibanking.  And the fifth, is pyramiding schemes and other sales schemes masquerading as legitimate multilevel marketing.

Working with these categories, the BSP and the SEC agreed on a process flow chart that clearly determines which agency of government will take the ball.  Subject to compliance with the governing laws of their respective competencies, the flow chart indicates the steps that they will take to coordinate their investigations of the various types of scams and pinpoint which agency will take primary responsibility for investigating a particular scheme.

The new memorandum, agreement requires the BSP and the SEC, upon receiving an information or complaint, “tip” or discovery of a possible investment or borrowing scam to (a) immediately inform the other party and (b) make its own preliminary characterization of the scam, i.e. determine under which of the five categories the particulars scam falls.

If the scam is clearly a soliciting of funds without any relating or an advertising of itself as an investment company, then the case is considered an SEC matter and is dealt with by the SEC following its internal procedures.  If the scam is clearly soliciting of funds with a representation of relending or a soliciting of funds with advertising or public representations of being a lending investor engaged in quasibanking, then the case is considered BSP matter and is dealt with by the BSP following its own internal procedures.  If the scam is clearly a pyramiding scheme or other sales scheme masquerading as legitimate multilevel marketing, the case is forwarded to the Department of Trade which has jurisdiction to look into it on the authority of the Consumer Act of the Philippines.

Those cases which are not clearly under one of the five categories, i.e. those that are more effectively camouflaged, are to be subjected to a joint investigation until such time that it becomes apparent, based on the cumulative evidence gathered in the course of the joint investigation, which of either the BSP or the SEC or the Department of Trade should be the agency to continue to conduct the full and thorough investigation.

Upon completion of the investigations of the scams referred to each of them in accordance with the foregoing, the BSP and the SEC will provide each other with a copy of the final report and will make the proper referral, if warranted, to the Antimoney Laundering Council, the National Bureau of Investigation, the Department of Justice, the Bureau of Internal Revenue and other government agencies as the evidence warrants.

In effect, the May 2003 memorandum of agreement will enable the BSP to say “your” and the SEC to say “mine,” or vice versa, or, say together, “Department of Trade,” every time a scam shows up on their radar screens.

The campaign, of course, against pseudo investment or borrowing scheme cannot be won simply by the execution and even by the implementation alone of the May memorandum agreement.  Just as a volleyball team does not win the game simply by putting in place a system by which those inside the court can determine, as the serve sails into the air, who will take the serve.  The success of scams is due to not merely to the modus operandi of the scam operators, but also to the weakness of the victims themselves.  Driven as they are by greed (which is essentially, at least to me, hope gone awry) or helpless as they are to resist the high pressure tactics of their relatives and friends, they do flirt in their heart of hearts with the thought of getting rich very quickly and painlessly.

But still, the continuous efforts of BSP and SEC to refine their art of fighting investment and borrowing scams together indicate fierce commitment of the two agencies to protect the investing public and safeguard their savings.  Like the viruses that always seem to be two or three steps ahead of medical science feverishly looking for the proper vaccines and antidotes, scam perpetrators can be expected to be able to inflict some damage before the government comes along to stop them.  But the though that the hounds of heaven are continually right them will certainly drive the injury they cause to the margin.