Launderers and lenders


Let us set off on a positive note. On a systemwide basis, Philippine banking is perhaps one of the most resilient in the region. Discounting the rural banking sub-sector, save for a few RB’s linked and backstopped by large universal banks, the greater sector’s ability to absorb serial global crises – whether spawned from Thailand, imported from the United States, or homegrown – the sector has been an accurate bellwether of a fundamentally sound macroeconomy.

“Here is an institution considered too big to fail, yet it repeatedly compels closer, stricter supervision, especially critical since Miss Prudence has obviously left the building.

Since 1997, the globalization phenomenon had been simultaneously spawned, spread and then systematically steeped into the banking system.

As banking entered the age of digital and paperless transactions where bank robbers can pry open three-meter-thick vault doors by simply punching in keys from several continents away and then diverting funds to fictitious accounts in a branch in Bel Air, Makati, risks grew exponentially as bankers entered Huxley’s Brave New World.

In a quaint and quiet Swiss city by the Rhine called Basel, the heads of central banks the world over would meet periodically and establish requisite conditions, called the Basel Accords, that banks must follow to protect from capital, operational and market risks, especially those that now arise from globalization.

The Philippine banking sector’s strict adherence to the Basel Accords has protected us over the years from both external and domestic economic crises. Our banks have bulked up and are above the requisite capital adequacy ratio minimums. Others that could not have either merged or downsized. The Bangko Sentral ng Pilipinas (BSP) has not only been extremely strict in their supervision, they’ve even preempted some of Basel’s timetables. Indeed, many of our larger banks are Basel-compliant.

But not all have been behaving well where operational details fall under BSP’s radar.
There is a curious coincidence currently playing out in the front pages of the mainstream broadsheets as well as niched business newspapers. It involves one of the biggest first-tier universal banks that finds itself periodically embroiled in financial controversy every so often.

The controversies span the whole gamut of shenanigans from extremely creative accounting for zero coupon bonds to money laundering of stolen funds and eventually, to the extension of unsecured clean loans accounting for over a third of a company’s total bank liabilities.

The bank was embroiled in the controversial PEACE bonds scandal involving 12-year long-term zero coupon bonds (Zeroes), its withholding tax issues, and a very unusual deal where a non-government organization lacking a securities dealership license was able to raise millions through a quick turnaround scheme that saw not just a mother bank eventually stuck with an inventory of Zeroes but several other secondary and tertiary banks and markets forced to keep the bonds in their balance sheets for extended periods.

In a way, it was a painful lesson for the bank that allowed itself and its investment banking subsidiary to be used as a conduit for a transaction that many consider not just unusual but so inherently questionable if not deceptive that the gaping loophole in the accounting system through which the gambit operated is now forever shut down and the scheme can no longer be replicated.

This same bank and one of its vice presidents are now being held accountable for their key roles in laundering millions of Bangladeshi funds electronically rediverted to several dubious accounts in one of the bank’s Makati branches.

Recently, the bank’s earnings and stock values are threatened by its involvement in bankruptcy processes surrounding one of the largest defaults in Philippine corporate history.

Not only was exposure on a “clean” and unsecured basis, but the debtor’s lifeline to its mother company is seriously impaired as both mother and subsidiary have filed for bankruptcy.

Here is an institution considered too big to fail, yet it repeatedly compels closer, stricter supervision, especially critical since Miss Prudence has obviously left the building.