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Banks told: Know thy clients
(Article published in the July 2, 2001 issue of TODAY, Business Section)

"KNOW Your Client" has always been a fundamental tenet of banking - almost as inherent, universal and demanding on banks as the Kantian categorical imperative.

Banks are not purely and simply public utilities which must accept any business that come their way provided fees are paid. Banks are stewards of the money of the depositing public whose business, which is subject to a standard of due diligence, is, as repeatedly articulated by the Supreme Court, more than that of a good father of a family, a national person extremely difficult to find nowadays.

But like the foundation of a building, the rule on due diligence of the banking business is buried in the banking industry’s unconscious, obscured by flashier regulations such as Dosri, reserves and other prudential rules that daily make a banker’s life miserable, necessitating frequent therapeutic visits to the golf course.

Even after the mandate was formally articulated by BSP Circular No. 251 issued in June last year (and prior to the jueteng accounts disclosures during the Erap Impeachment Trial), still the rule remained for the most part in the underground.

But the current wave of news items on how the country is threatened with countermeasures from the member countries of the so-called Financial Action Task Force, if it does not by this September pass a law against money-laundering, is pushing up this basic in banking to the surface of consciousness because it is the first line of defense against the inflow and outflow of dirty money.

Banks world-wide have been conscripted in the war against drug trafficking and other serious criminal offenses not unlike hapless enterprises which were long ago made part of the tax collection system by being constituted the government’s withholding agents.

Increased awareness and, hopefully, compliance with the "Know Your Client" rule are, of course, welcome, regardless of why and how the concern is made more urgent, but, danger lurks in understanding and following the tenet only in the context of present anti-money laundering hysteria. "Know Your Client" is as much a part of the campaign against crime as it is for the protection of the banks themselves. This is the message of Canlas et al. v. Court of Appeals, et al. (G.R. No. 112160, promulgated 28 February 2000).

Sometime in August, 1982, Canlas and Maņosca decided to venture into business together. To raise capital, Canlas executed a special power of attorney authorizing Maņosca to mortage two parcels of land, as well as the improvements thereon, which were owned by Canlas and his wife. Their being together did not last too long, and their venture turned into a misadventure.

Canlas and his wife in less than a month decided to sell the property to Maņosca. Canlas delivered the transfer certificates to title to Maņosca who, in turn, issued Canlas two post-dated checks, one for Php40,000 and another for Php 460,000. A sign of major trouble: the bigger of the two did not clear because of insufficiency of funds.

Maņosca somehow was quickly able to mortgage the property for Php 100,000 to a certain lawyer with the help of impostors who misrepresented themselves as the spouses Canlas. And doing better than lightning that does not usually strike the same spot twice, Maņosca got a second loan, this time from a local bank, for a Php 500,000 loan, secured also by a mortgage on the two parcels of land and again with the help of the same impostors. The bank loans ware not paid at maturity and therefore the local bank foreclosed on the mortgage. The real Canlas, upon learning of foreclosure, wrote to the local bank and to the sheriff to stop the scheduled auction sale but to no avail. Canlas had no other recourse but to go to court to annul the proceedings.

It is obvious that both Canlas and the leading bank had their respective share of negligence. Canlas was too casual about his titles and did not make sure that the certificates were not encumbered without his consent. The bank, for its part, was not able to detect that the purported Canlases were not the real Canlases. The issue was therefore between two negligent persons, but who should bear the loss? The Supreme Court ruled against the bank because it failed to know its client.

The Supreme Court observed that not a single identification card was required of the impostors to prove their identity. The local bank acted on the impostors’ representations simply on the basis of residence certificates bearing signatures that matched those in the previous mortgage to the lending lawyer. The previous mortage, furthermore, did not bear the tax account number of the supposed spouses or the residence certificate tax number of the purported Mrs. Canlas.

The bank has the last clear chance of preventing the fraud and because the diligence it exercised "fell short of the responsibility of the bank to observe more than the due diligence of a good father of a family" it was made to bear the loss.

"Know Your Client" is therefore should not be merely treated by a bank as an anti-money laundering regulation imposed on us by foreign countries; it is also a bank’s protection against scheming persons seeking to bring it to the cleaners.