04 Jan 2017

“Three things are necessary for the perfect bank robbery: the perfect thieves, the perfect heist and the perfect hideaway.”

In February, a sophisticated hacking attack spirited $101 million from Bangladesh Bank’s account with the Federal Reserve Bank of New York by mimicking the account’s credentials. It would have been followed by a further $851 million had the system not queried the suspicious transactions in the nick of time. The criminals have not been caught, though state actors including North Korea have been accused of complicity in the audacious hack.

But what about the hideaway? Where is the money? $20 million was sent to Sri Lanka, where banks were able to identify it through a combination of the transaction’s unusual size and a spelling mistake on the transfer request: the hackers mistakenly sent the money to a ‘fundation’ rather than the ‘foundation’ they had had in mind. The rest, all $81 million, was transferred to the Philippines, where it vanished.

This is not altogether surprising when one considers the Philippines’s record on money laundering. From 2000 to 2005 it was ‘blacklisted’ as a ‘non-cooperative’ country and subjected to significant sanctions by the Financial Action Task Force (“FATF”, an international organisation set up in 1989 through the G7), for its failure to tackle endemic problems with transparency and traceability in its financial system. It remained on the organisation’s ‘grey list’, denoting a need for future progress but a political commitment to meeting international standards, until 2013.

Tracking the Bangladesh Bank money shows why the Philippines is still a major destination for money laundering. Although the legal framework in the country is far more robust than it was a decade ago, there remain two major holes through which illicit cash can be funnelled.

The first is the Philippines’s powerful casinos, which were excluded from the major 2013 law which, by expanding mandatory reporting duties on financial institutions, earned the Philippines its freedom from the grey list. Sure enough, much of the $81 million appears to have been filtered through the Philippine gambling market by being transferred into untraceable gambling chips. Such a suspicious transaction would have to be notified to the authorities in most countries, but the lax regulations in the Philippines protected the launderers. Kim Son Wong, the chairman of one of the three implicated casinos, turned over $15 million to the Philippines’s Anti-Money Laundering Council (AMLC) in April, saying “My conscience is clean.” After officials raised fears of demotion to the grey list, though, most exempted institutions, including casinos, are to be included in a proposed new amendment to the Philippines’s anti-money laundering law, a reform endorsed by the FATF.

The second route into the Philippines is a harder nut to crack. Manila has some of the world’s strictest bank secrecy laws, with a 1955 law declaring all deposits in banks and banking institutions to be of an “absolutely confidential nature”, which “may not be examined, inquired or looked into by any person, government official, bureau or office”. The only exceptions (at least in the 1955 act) are where the depositor gives his written consent or a court makes an order in certain circumstances, including bribery and litigation – but not on suspicion of money laundering. As such, once a transaction ends up in a Philippine bank account, it is shielded from any inquiry by the authorities.

The law was passed in the white heat of the new, postwar, postcolonial Republic of the Philippines, facing threats of economic collapse after the Japanese occupation on the one hand and communist guerrillas on the other. In a historical overview for the Philippine Law Journal, Franz David Ong Lim notes that the bank secrecy law served to counteract capital flight and hoarding, as well as to encourage investment in government bonds to fund the campaign against the communists. Representative Jose P. Laurel said, during the debate on the tax secrecy law, that “[m]any people do not deposit their money in banks or invest in bonds for fear that the tax collection agencies might make inquiries about their bonds and deposits for purpose of taxation […] it is believed that the benefits that will accrue to our economy in enacting this bill will counter-balance the losses of Government from such tax evasion.”

It did its job at the time, but the persistence of the law has put the Philippine banks on a collision course with the new President, Rodrigo Duterte. Away from high-profile bank heists, the main money launderers in the Philippines are drug traffickers, using the country’s unique and strategically critical location to access markets around the world.

Although the Philippines’s drug problem is not especially bad by international standards (despite having the highest rate of methamphetamine use in East Asia), the US State Department notes in its briefing that prosecutions remain difficult because of judicial and prosecutorial inefficiencies. Furthermore, though the State Department diplomatically avoids mentioning it, the Philippines is plagued by corruption, falling ten places to 95th on Transparency International’s Corruption Index last January.

Faced with this, President Duterte launched his promised war on drugs within days of taking office in June. Already 5,000 suspected drug offenders have been killed, about three-fifths of whom were targeted by extrajudicial vigilante gangs. Such extreme measures have met with furious condemnation by rights groups and NGOs, but Duterte won in part because of his toleration of anti-drug death squads as mayor of Davao City. At the start of his six-year term, a national poll in July attributed him with a record trust rating, with 91% of Filipinos saying they ‘trust’ the President.

Yet the legal traditions of the Philippines may stymie the creation of a lasting solution from Duterte’s policies. While pursuing legal methods to investigate suspected drug transactions, Mr Duterte’s Department of Justice was unable to inquire into a particular bank account. On live television, the President warned the bank and the AMLC to “avoid a confrontation between us” – but thanks to the bank secrecy law, millions of pesos of suspected drug money remain largely untouchable in ironclad bank accounts.

What will the President do? At present it is hard to tell: it is expected that he will approve the amendments to the money-laundering law to open up the casino industry, but large-scale amendments to the bank secrecy law is more politically difficult, especially since the AMLC already has nominal power to investigate bank deposits notwithstanding the law. Laws similar to the 2001 anti-money laundering act passed by previous Congresses have been deemed to impliedly repeal the 1955 bank secrecy law as far as is necessary to accomplish the intention of the legislature: Philippine National Bank v. Gancqyco 15 SCRA 91 (1965). The problem is that the power the AMLC has requires a court order, an issue in the sclerotic and corrupt Philippine courts.

As it stands, President Duterte’s war on drugs may have trouble achieving any sort of lasting reform without a thorough detoxification of Philippine officialdom, which is far harder than killing thousands of street criminals. The story of development economics is, again and again, the story of foreign direct investment being scared off by rampant corruption: the most startling example of the depth of drug corruption in the Philippines came with the public acknowledgment by the Duterte that a colossal maximum-security prison in Muntinlupa is no barrier to several notorious drug lords who continue to run their operations from their cells with the assistance of prison guards.

There are indications, though, of possible routes through which the new President may be planning to root this out. The first is through constitutional reform. Reforms proposed by Duterte to be put before a constitutional assembly would open up the economy to foreign investment as well as granting autonomy to regions stricken by guerrilla warfare; meanwhile, the country’s top-heavy presidential system would be reformed, devolving more power to the legislature. In theory this package of reforms would kick-start development and economic openness, helping to do away with corruption over time. In practice the Philippines is going to have to make its financial system more transparent before investors will feel sufficiently confident of good returns to plunge their money into the economy.

The second, more troubling way of resolving the corruption feeding money laundering and drugs is to purge it from the system, violently. Duterte publicly named 158 officials suspected of collusion with the drug lords in a major speech in September, and warned of the existence of another list in October. Instead of pursuing the malefactors through the country’s unreliable courts, Duterte appears to be encouraging vigilantism against them similar to that over which he presided in Davao City. In November these fears were apparently confirmed when a mayor named on the list was killed in prison.

Although a violent purge of corrupt officials might be effective in the short term, the risk is that by purging corruption through extrajudicial means President Duterte overrides (or, as he put it, ‘innovates’) the rule of law. This would backfire, discouraging foreign investment even more: without some semblance of the rule of law, investors cannot feel confident in their property rights and, indeed, personal safety.

At the moment, despite his tough talk, President Duterte is balancing these two competing plans, making strong signals to foreign investors about liberalisation while hunting down drug lords, even as he runs roughshod over Philippine law to do so. But vigilantism is not the foundation for a stable economy, and as his government moves towards finally bringing the Philippines’s financial system into line with the other Asian markets, Philippine civil society would do well to take every opportunity it can to seed stability for the long term. It may not get a second chance for some time.

Author profile: Richard Nicholl is Legal Editor for a leading provider of corporate legal intelligence. He also works as a freelance political commentator and investigative journalist.

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