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When trust is contaminated with dirty money

(Article published in the September 3, 2001 issue of TODAY, Business Section)

Trusts, whose parents, according to an English lawyer, are fear and fraud (Attorney General v. Sands, Hard. 488, 491) are, not surprisingly, at present suspected of being veritable tools of money laundering.

In the olden times, essential features like vesting of title to property in a person (who for most legal purposes is considered the owner) for the benefit of another (who for the most part is not known to the rest of the world) have made it very easy to conceal the origin of funds as they were, able to defeat the obligation to render feudal dues.

For a number of years, it was the growing perception among the members of the Financial Action Task Force (FATF) the trusts often facilitate the work of the money launderer (FAFT Report on Money Laundering Typologies for 2000-2001). In the Philippines, the Jose Velarde account opened in person, according to Kissa Ocampo, by then-President Joseph Ejercito Estrada, with the trust department of Equitable PCI Bank, although not technically a trust, demonstrated the availability of such a legal advice for one’s illegal devices.


Just precisely where may a trust fit in in a money launderer’s scheme of things? And what can the regulators, the practitioners as well, do to ensure that trust service is not contaminated by dirty money?

Typically, the money that is placed in trust is money that is already in the banking system. A trustor ordinarily does not accumulate his funds in paper bags and then goes to his trust officer to open a trust account. A deposit account in the commercial banking department of same bank where the trust officer works usually performs the function of the paper bag.

Thus, the funding of the Jose Velarde account in the trust department of Equitable PCI Bank was effected, according to Kissa Ocampo, by way of a letter of authorization, signed by the owner of both accounts, to debit (or take) P500 million from SA/CA No. 0160-62501-5 maintained at the same bank’s Pacific Star Branch.

If therefore the Jose Velarde account was part of a money laundering exercise, the trust department account entered the game not at the "placement" stage (which is the point when the funds enter the banking system) but at the second stage called "layering", where the transformation occurs.

Once dirty funds are in a trust, they become indistinguishable from clean money.

The FATF report, talking of trusts outside the Philippines, bewail the lack of a registration requirement or a central agency in many jurisdictions with supervisory function over trust investments as well as the absence of obligation on the part of the trustees to disclose the identities of the trustors nor of the beneficiaries.

Recent legislation in the so-called off-shore jurisdictions-which allows "black hole" trusts (where neither the purpose nor the beneficiaries can be gleaned from the face of the trust deed), "asset protection" trusts (where the settlor retains effective control of the assets), as well as trusts with "flee clauses" (i.e. where the trust deed mandates a transfer of the trust to another jurisdiction if it becomes subject to any kind of inquiry)-has made investigation of anomalies in trusts transactions very difficult.

To counteract this modern misuse of trusts, the FATF suggests that the trust professionals be licensed, thereby enclosing trust creation and administration within the net of the regulatory framework. Moreover, it proposed standardizing documentation, as well as banning the abusive forms of trusts while establishing a national registry for trusts.

Philippine clients, however, need not be concerned about the anxiety expressed by the FATF over trusts. In the first place, the country is not a financial center nor a tax haven. The Philippines, despite our local hysteria about the money laundering purportedly exemplified by the Jose Velarde episode in the impeachment trial, hardly registers in the global radar screen that monitors the flows of illegal money. But more important, trusts in the Philippines are ably supervised by the Bangko Sentral which has issued circulars specifically addressing the money laundering concerns of the FATF.

In July of last year, barely a month after the BSP was notified of the cracks in the legal system through which dirty money could, repeat could, flow, Circular No. 251 was issued requiring trust departments, among others, to take reasonable measures to establish and, just as important, record the true identity of their clients.

The departments are to base such identification on official and other reliable records. Should they have a doubt as to whether the client is acting for himself or for others, they are obliged to take reasonable measures to obtain the true identity of person on whose behalf the account is opened. Except when allowed by law, such as by Republic Act 6426, or the Foreign Currency Deposit Unit (FCDU) law, anonymous accounts or accounts under fictitious names are not allowed.

This regulatory prohibition came about five months before Kissa Ocampo revealed that then President Joseph Ejercito Estrada opened his account in the name of "Jose Velarde" but about five months after the said account was opened in February 2000.

Additionally, BSP issued Circular No. 253 which sets up a reporting regime for suspicious transactions involving funds believed to be proceeds of criminal and other illegal activities.

But even before the issuance of these antimoney laundering circulars, trust law and regulations in the Philippines already address the concerns of the FATF about trusts. Section 79 of R.A. No. 8791 establishes the need for licensing by the Monetary Board of all entities engaged in the trust business.

Black hole trusts are not possible under Section X409.1 of the trust regulations. By way of minimum documentary requirements needed to establish trust accounts, the trust deed must state the purposes and objectives of the trust. Control by the settlor of the investments of the trust assets, though permitted, can be wielded only if provided for in trust instrument itself (Sec. 88, R.A.No. 8791). Flee clauses must be specifically dealt with in the termination provisions of the trust deed (Sec. X409.1, Trust Regulations) and the approval and confirmation of the termination of the trust relationship with the bank is properly a board matter that must be duly recorded in the minutes. (Sec. X406.4, Trust Regulations).

The secrecy of bank deposits does not apply to trust accounts and while trusts are encompassed by the general prohibition against the disclosure of information relating to funds and properties in the custody of the bank, a proper court order is sufficient to lift the shroud of confidentiality.

To clinch the case that the Philippine trust industry is not a hospitable place of operation for money laundering, one need only go back to the fate of the Jose Velarde funds. According to the best available information, the money is still locked in in the promissory note, due but unpaid, of the Wellex Group of William Gatchalian. The laundering, if at all it was laundering, stalled somewhere in the process and failed to attain the integration phase, when the dirty money returns to the unclean hands.

It would benefit the FATF far more to spend its time and resources looking at big money centers in Asia, than scrutinize the way we conduct trust business here. Only an idiot would use the Philippine trust environment for money laundering. See what happened to that guy.