Banking Reviewer

San Beda College of Law, Mendiola

BANKING LAWS AND JURISPRUDENCE By: Efren L. Dizon and Efren Vincent M. Dizon This Reviewer is made by: MANILA, ANTONIO CEASAR BERNARDO, JANSEN INTIG, JOY ESTELA DE JESUS, TRACY ANN. FROM SECTION 2S AY 2011-2012

Topic

Chapter 1- Banks and Business of Banking Chapter 2 - Organization, Management, Administration Of Banks Chapter 3 - Deposit Functions Of Banks Chapter 4 - Investments, Loans and Other Bank Functions Chapter 5 - Prohibited Transactions and Cessation Of Banking Business Chapter 6 - Foreign Banks and Trust Operations

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MIDTERM COVERAGE: Chapter 1 - 6

Chapter 7 - The Banko Sentral ng Pilipinas Chapter 8- Currency, Monetary Stabilization and Functions of BSP Chapter 9 - Unclaimed Balances and Trust Receipts Chapter 10 - Deposit Insurance Chapter 11 - Anti-Money Laundering Chapter 12 – Special Purpose Vehicle FINALS COVERAGE: Chapter 7 - 12

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San Beda College of Law Banking Laws CHAPTER 1 – Banks and Business of Banking •

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Declaration of the state with regards to banking – recognize vital role of the banks to provide environment conducive to development of national economy o It also states that banks need high standards of integrity and performance Banks – entities engaged in the lending of funds obtained in the form of deposits (borrowing, lending, safe-keeping) Banks may engage in other activities allowed by the law other than lending

Nature of Banking Business

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depositors with meticulous care and always have in mind the fiduciary nature of banks • Not enough that he exerted reasonable diligence to ascertain the safety of his clients • Such diligence is only required in its fiduciary relationship with its depositors and not to other transactions such as sale of foreign exchange demand draft • Sec 2 of GBL prescribes the statutory diligence required from banks – “high standards of integrity and performance” in serving its depositors. • Diligence required of banks is more than that of a good father (PBCom vs. CA) • Diligence extends to financial institutions (e.g. GSIS) Treatment of accounts with meticulous care • Must treat every account with utmost fidelity regardless of amount • There is no law mandating banks to call up their clients whenever a significant amount shall be withdrawn from their account Duty to keep records Banks are not gratuitous bailees Banks not expected to be infallible • However, they must bear the loss for not discovering mistakes if there are established procedures not followed Dealing with registered lands • General Rule: mortgagee can rely on title and does not need to investigate further • Exception: mortgagee cannot close his eyes to facts which should put a reasonable man on his guard, and yet claim that he is in good faith • With banking institutions, mere reliance on the title is not enough as they need to investigate also • Doctrine of the “mortgagee in good faith” – all persons dealing with property covered by the Torrens Certificates of Title are not required to go beyond what appears on the face of the title. (Cavite Development Bank vs. Spouses Lim)

1. Debtor-Creditor Relationship • It is a contract of loan and not deposit • Contract between bank and depositor is 7. governed by the provisions of the NCC on simple loan (Consolidated Bank and Trust Corp vs. CA) 2. Fiduciary duty • Fiduciary relationship – bank’s obligation to observe high standard of integrity and performance (Phil. Banking Corp. vs. CA) 8. 3. Not a trust agreement 9. • It is not a trust agreement and failure to 10. pay a loan is not a breach of trust • It is not a trust agreement because banks do not accept deposits to enrich depositors but to earn for themselves 11. 4. Indispensable Institution • Has a vital role in economic life • Significance of banking institution to commercial transactions (Metropolitan Bank & Trust Co. vs. Cabilzo) 5. Impressed with public interest • Has public interest because people depend on the honesty and efficiency of banks • Stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks. 6. Degree of diligence • Diligence higher than that of a good father. It must be extraordinary diligence • In Simex International vs. CA, the bank is under obligation to treat the accounts of its AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws •

The business o a bank is one affected with public interest, for which reason ghe bank should guard against loss due to negligence or bad faith (Sps. Omengan vs. PNB) • Where the mortgagee does not directly deal with the registered owner of real property, the law requires higher degree of prudence be exercised by the mortgagee (Abad vs. Guimba) 12. Banks may exclude persons in their premises 13. Charging interest for loans • It is considered the very core of the banking’s very existence Liability for Acts of Officers and Employees •

A bank is liable for the wrongful acts of its officers done in the interest of the bank or dealings as bank representatives but not for acts outside the scope of their authority.

1. Negligence of Manager – employer is liable to the acts of the manager 2. Negligence of officer – general rule: tortious acts of officers within their scope of employment shall make banks liable 3. Negligence of tellers – tellers must exercise high degree of diligence • Teller should not give passbook to wrong person as a person in possession of passbook is presumed the owner • Appropriation of deposited money by the teller is not estafa but considered as theft as the client only had material possession of it. Such deposit money are considered owned by the bank 4. Right to recover from employees 5. Liability for damages • Actual, exemplary, moral • Actual and compensatory – the interest due shall itself earn interest from the time it is judicially demanded • 12% - legal interest when judgment becomes final and executory • 6% - interest for obligations not constituting a loan or forbearance of money

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Moral damages Gen. Rule – a corporation is not entitled to moral damages • Exception – when its good reputation is besmirched by breach of fiduciary duty. • In culpa contractual – recoverable if there is fraud or bad faith • Depositor may recover even if bank’s negligence not attended by bad faith if he suffered mental anguish, serious anxiety, etc. 6. Respondeat superior of employees • Command responsibility • A bank is bound by the negligence of its employees Classification of Banks (CUT-RICO-NQU) 1. Universal Banks – large commercial banks that can do both commercial and investment banking • They have the power of both commercial bank and investment house • Have the power to invest in non-allied enterprises 2. Commercial banks – general powers incident of corporation and can perform commercial banking • Does not have the power to invest in nonallied enterprises 3. Rural banks – banks that promote rural development • They can extend loan or advances to primarily meet the normal credit needs of farmers, fishermen and their families • Can also deposit in private banks more than the amount prescribed by Single Borrower’s Limit in case there are no government banks • Rural Banks Act (RA 7353) 4. Thrift banks – encourages the industry, frugality and accumulation of savings of the public • To make it within easy reach to the people the credit facilities at reasonable cost • Includes: (1) savings and mortgage bank, (2) stock savings and loan associations and (3) private development banks • Thrift Banks Act (RA 7906)

AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws 5. Cooperative banks – organized by cooperatives to provide financial and credit services to cooperatives • Cooperative Code (RA 6938) • Membership of a cooperative bank shall include ONLY cooperative and federations of cooperatives 6. Islamic Banks – promote socio-economic development in autonomous region by performing banking and investment function based on Islamic concept of banking • Islamic Bank – RA 6848 • Subject to the principles and rulings of Islamic Shari’a 7. Others banks: • Philippine Veterans Bank – created to provide government depository to veterans for appreciation of grateful nation (RA 3518) • Land bank of the Philippines – finance distribution of estate to resale to small landholders (RA 3844) • Development Bank of Philippines – provide credit facilities for development in agriculture, commerce and industry • DBP was previously named as Rehabilitation Finance Corporation (RFC) 8. Non-stock savings and loan associations – nonstock, non-profit corporation engage in accumulation of savings of its members and loans to meet its members’ needs • Confines exclusive membership and cannot transact business with the general public 9. Quasi-banks – engaged in borrowing of funds through issuance of deposit substitute for purpose of relending or purchasing receivables and other obligations 10. Offshore Banks – deals with transaction with foreign currencies in receiving funds from external sources and utilization of such • Governed by PD 1034 Authority to Engage in Banking and Quasi-Banking Functions

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No person or entity shall engage in baking operations without authority from Bangko Sentral • Universal or commercials banks may engage in quasi-banking functions • Under Corporation Code: o No articles of incorporation or amendment of banks shall be given unless accompanied by recommendation of appropriate government agency (MB) • The determination whether the person or entity is performing banking or quasi-banking functions without authority of BSP shall be determined by MB o MB may examine the books and records to achieve this purpose • The department head and examiners can administer oaths and compel presentation of books, documents or records • BSP can examine a bank or an enterprise that is wholly or majority-owned by the bank o This can only be done when BSP is examining bank • SEC shall not register articles of incorporation of bank unless it is accompanied by authority of MB • SEC shall not register by-laws of bank unless accompanied by authority of BSP Service of summons upon banks o May be made on the president, managing partner, general manager, corporate secretary, treasurer, in-house counsel (domestic) o Upon resident agent or BSP (foreign bank) • As long as institute loans out money to its customers and collect the interest and charges a commission to lender and banker, it is a bank • Investment company engages primarily in the investing or trading of securities and is not a bank Bank name •

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Only universal and commercial banks may represent itself to the public as such in connection with its business name Thirft banks can be allowed to have a business name of its own provided that “A thrift bank, savings bank or private development bank” shall be added Above rule is also available to Rural/Coop


San Beda College of Law Banking Laws CHAPTER 2 – Organization, Administration of Banks

Management,

Organization of Banks •

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MB can authorize the organization of a bank based on the following conditions: 1. Entity is a stock corporation (par value stocks only) 2. Funds are obtained from the public which shall mean twenty persons or more 3. Minimum capital requirement prescribed by MB shall be satisfied MB shall take into consideration the capabilities of the entity in terms of their financial resources, technical expertise and integrity Bank licensing process shall incorporate assessment of: 1. Banks’ ownership structure 2. Director management 3. Operating plan 4. Internal controls 5. Projected financial condition Capital requirements:

Type of Bank Amount (M) Universal 4,950 Commercial 2,400 Thrift banks 1. Head office in Manila 325 2. Otherwise 52 Rural Banks 1. Within Manila 26 2. Cebu/Davao 13 3. 1st-3rd class city and 1st class 6.5 municipality 4. 4th-6th class city and 2-4th class 3.9 municipality 5. 5th-6th class municipality 2.6 • At least 25% of total authorized capital stock shall be subscribed by subscribers of proposed bank • 25% of such subscription shall be paid-up. It shall not be less than the minimum capital requirement • Incorporators/subscribers and proposed directors and officers must be (2) persons of integrity and (1) good credit standing • Such persons must (1) not be convicted of crime involving moral turpitude and (2) not officers of

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government agency or department charged with granting loans to banks Bank is organized 5-15 people (incorporators) Cooperatives may organized a rural bank upon consultation with the rural banks in the area Bank and its branches shall be treated as one unit Universal and commercial banks may open branches within or outside the Philippines upon prior approval of BSP Other banks shall be governed by their pertinent laws

Stockholdings 1. Treasury Stocks • GBL provides that NO bank shall: i. Purchase or acquire shares of its own capital stock ii. accept own shares as security for loan 1. Except if it approved by MB and will be returned in 6 months • Reason: if banks were allowed to have a lien in their own stocks for indebtedness of stockholders, prohibition against granting loans or discounts upon security would become ineffective 2. Foreign stockholdings: • Foreign individuals and non-banks can own 40% of voting stock of domestic bank.(aggregate foreign voting stocks) • A Filipino individual and domestic nonbank may each own up to 40% of the voting stock (no aggregate ceiling) • Citizenship of the corporation shall follow the citizenship of the controlling stockholders (>50%) • The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of individual stockholders • At least 60% of voting stock in any commercial bank shall be owned by Filipino citizens • In thrift banks, it shall be at least 40% • Rural banks, 100% Filipinos


San Beda College of Law Banking Laws • •

In determining nationality of banks, control test is applied Family groups or related interest must be fully disclosed in all transactions of the individual

Board of Directors •

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According to Corporation Code, there shall be at least five and maximum of 15 board of directors of bank Two of such shall be independent directors. Independent director – person other than officer or employee of bank All must be of legal age and majority of them are residents of the Philippines Non-Filipino citizens may become members of board of directors of bank up to the extent of allowed foreign participation Directors of merged or consolidated banks shall not exceed 21 Election: President, Treasurer (director or not), Secretary (resident citizen). Not allowed position: President/Secretary, President/Treasurer Meetings may be conducted through modern technologies A foreigner may be a member of the Board of directors of a rural bank at the time of their assumption of office To protect funds of depositors and creditors, MB shall regulate payment of directors under certain circumstances: 1. Comptrollership 2. Business in unsafe or unsound manner 3. Bank is found to be in an unsatisfactory financial condition

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Powers of MB against directors: a. Review qualifications and DQs of directors b. After due notice, may disqualify, suspend or remove director c. Fit and proper rule shall be determine by integrity, experience, education, training, competence of the director Disqualifications of directors:

a. Convicted of final judgment involving dishonesty or breach of trust b. Persons convicted of final judgment with a maximum imprisonment term of more than 6 years c. Convicts of banking laws d. Persons judicially declared insolvent e. Culpable of bank’s closure f. Administratively liable for violation of banking laws with penalty of removal from office g. Found unfit for position There can be also temporary disqualifications and shall exist until DQ is gone Under CC (Corporation Code) disqualification is only with (1) imprisonment more than 6 years or (2) violation of code committed within 5 years NCBA also provides DQ for members of MB that is connected with bank under supervision or examination of BSP Public officials cannot also be an officer of any private bank unless position is incidental to office Rural Banks Act – public official may be director (exception) PDIC – conviction of any criminal offenses involving breach of trust

Banking Days and Hours • • • •

Fit and Proper Rule •

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At least 6 hours a day on working days (Mon-Fri except holidays) May open in Saturdays, Sundays and holidays for 3 hours (to report to BSP) For purposes of deposits and withdrawals, bank can extend beyond or early of 8AM and 8PM If it is for other purposes, they can exceed 6 hours minimum but not extend beyond or early of 8AM and 8PM Banks in airports or major fish ports can open 24hours Changes in banking days and hours can be made once every 30 days except during emergencies

ATMs • •

Classes: 1.) Offsite 2.) Mobile

Banks may establish off-site ATMS provided that there is report on BSP and adequate security AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON. •

San Beda College of Law Banking Laws

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measures. They are installed only in centers of activity Mobile ATMS are allowed to visit places with large crowds of people provided it has adequate security

Independent Auditor •

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Any unsettled strike or lockouts involving banks after 7 days shall be reported by BSP to DOLE who will assume jurisdiction Banks, through their president, shall inform BSP of the cause of the strike and the operations affected

MB may require bank to engage services of independent auditor from list of CPA acceptable to MB

Financial Statements • • •

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Every bank, quasi-bank or trust entity shall submit to the BSP its financial statements Such statements must show the actual financial condition of its institution, including its operations Must publish such in an understandable knowledge once every quarter in a newspaper of general circulation Consolidated financial statement – combined statement of balance sheet and income expenses of two or more corporate entity Subsidiary – corporation where more 50% of its voting stock is owned by a bank Affiliate – linked directly/indirectly to the bank by 1.) 10% ownership or control 2.) interlocking directorship 3.) common stockholders owning 10% of each intermediary 4.) management contract 5.) permanent proxy or voting trust of 10%

Publication of Capital Stocks •

Bank, quasi-bank or trust entity shall not publish the amount of its subscribed capital stock without indicating the amount of its capital actually paidup

Settlement of Disputes •

BSP shall be consulted by (1) government agencies in actions initiated or brought before them by banks and (2) disputes between any of them which they are directors, officers, or stockholders

Strike and Lockouts AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws CHAPTER 3 – Deposit Functions of Banks

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I. Kinds of Deposits

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1. Demand deposits •

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All those liabilities of BSP and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by presentation of checks Only universal and commercial banks may accept or create demand deposits without prior authority from BSP Other types of bank require such authority. This considered as the current account in the bank

1.a. Temporary over drawings and DAUD •

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Temporary overdrawings are not allowed except normal bank charges and other fees incidental to handling such accounts Violations of temporary overdrawings will cause (1/10 of 1%) fine per day computed on the basis of the amount of overdrawn but not to exceed P30,000.00 per day Drawings against uncollected deposits (DAUD) – prohibited. Exception: made against uncollected deposits representing manager’s, cashier’s, treasury warrants, postal money order and on us check

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All officers, employees of bank in cash departments and other employees who have direct responsibility in handling deposit transactions are not allowed to maintain demand deposits or current accounts

When bank sees that depositor’s account has sufficient amount, then it shall honor such If there is sufficient amount but bank dishonored, then bank is liable. Otherwise if there is no sufficient amount Banks must ensure that the check is only paid to its designated payee Drawer must remember every time he issues a check and a bank must know the former’s signature A bank is under no obligation to make partial payment on the check only upon the amount in the drawer’s funds The cannot also compensate the lack of money in the deposit account to the savings account Cross-check must be: (1) may not be encashed but only deposited (2) check negotiated only once – to one who has an account with a bank and (3) serves as warning to holder (State Investment House vs. IAC) Cashier’s check – bank’s own check and is treated as PN with the bank as maker - deemed as cash (New Pacific Timber & Supply Co. Inc. Cs. Señeris)

1.d. Set off Rule •

1.b. Current accounts of officers •

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A bank can set off or compensate by debiting a personal account of depositor for an amount erroneously credits to the person’s proprietorship account

1.e. Relationship of Payee or Holder and the Bank • Principal and agent – relationship between payee or holder of commercial paper and the bank to which it is sent for collection (PCIB vs. CA)

1.c. Checks 2. Savings Deposits •

A written order addressed to a bank or person carrying banking business, by a party having money in their hands, requesting them to pay on presentment, to a person named therein or to bearer or to order, a named sum of money (Moran vs. CA)

1.d. Duty of bank to honor checks

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Banks may be authorized by the BSP to solicit and accept deposits outside their bank premises

2.a. Individual and Joint Accounts • •

If the joint account is “and”, both signatures of codepositors are required before withdrawals If “and/or” either their signature is sufficient


San Beda College of Law Banking Laws 2.b. Withdrawals •

There must always be a presentation of passbook and accomplishing necessary withdrawal slips before withdrawal except if authorized by BSP

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3. Negotiable Order of Withdrawal Accounts •

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NOW accounts are interest bearing deposit accounts that combine the payable on demand feature of checks and investment feature of savings account Universal and Commercial banks may offer NOW accounts but other banks need prior approval of MB

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4. Time Deposits •

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Time deposits – one the payment of which cannot be legally required within such specified number of days Special time deposits from the Agrarian Reform Fund Commission with lower interest shall be exempt from legal reserve requirements Certificated of Time Deposits can either be negotiable or non-negotiable. Only Universal or commercial banks can issue negotiable CTDs without prior approval of BSP

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1. Borrowing funds for the borrower’s account 2. Twenty or more lenders at any one time 3. Methods of borrowing are issuance, endorsement or acceptance of debt instruments 4. Purpose is for relending and purchasing receivables • Borrowing – all forms of obtaining or raising funds • For the borrower’s own account – assumption of liability in one’s own capacity • Relending – refer to the extension of loans by an institution with antecedent borrowing transactions 6. Foreign Currency Deposits •

Any person, natural or juridical may deposit with such any bank in good standing designated by BSP,

foreign currencies which are acceptable as part of international reserve, except those which are required by BSP to be surrendered Such banks can accept deposits and accept foreign currencies in trust 1. Numbered accounts for recording and servicing of deposits are allowed The depository bank shall 1. Maintain at all times a 100% foreign currency cover for their liabilities 2. 15% of such must be in the form of foreign currency deposit with BSP 3. The balance shall be in form of foreign currency loans/securities which are shortterm maturities and readily marketable 4. Such loans can be extended to domestic enterprises to cover the 100% foreign currency cover Depository banks under the expanded foreign currency deposit system shall be exempt from the 15% requirement of deposit with BSP There is no restriction on withdrawals by depositor of his deposit of the same abroad except does arising from contract of depositor and bank

7. Anonymous and Numbered accounts •

5. Deposit Substitute (Quasi-Banking Function) Essential Elements of quasi-banking are:

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Such accounts are not allowed. Numbered accounts is only allowed in foreign currency deposits However, banks/non-banks should ensure that the client is identified in an official document

II. Administration of Deposits 1. Specimen signature, ID photos •

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All banking institutions are required to set a minimum of 3 specimen signature from their depositors every 5 years or sooner Banks may also require submission of ID photos First time depositors require the presentation of at least 2 valid phot-bearing Ids Students who are beneficiaries of OFW are also required to present 2 Ids Submission is one-time basis only

2. Minors and Corporations as Depositors



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Minors can have savings and time deposit accounts without assistance of parents 1. Must be at least 7 yrs old 2. Able to read and write 3. Sufficient discretion 4. Not otherwise DQed by law Parents can still deposit money to minor For deposits of minors in thrift banks, guardian may make notice that payment (deposits, interest, dividends) be made to him and not to the minor Corporations may open bank accounts as follows: (1) Incorporation stage and (2) Post incorporation stage

may, at the option of the bank, be booked on the day of receipt. Other non-cash deposits are treated as contingent accounts on the day of receipt and shall be booked as deposits the following day

8. Booking Deposits after regular banking hours •

Interest on time deposit may be paid upon maturity, withdrawal or advance provided that the interest paid in advance shall not exceed interest for one year

4. Treatment of matured time deposits •

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Time deposits not withdrawn or renewed on its due date shall be treated as a savings deposit and shall earn interest until actual withdrawal with rates of savings deposit Deposit substitute not withdrawn shall have a maturity rate applicable to a deposit substitute

5. Clearing Cut-off Time •

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General rule: all deposits and withdrawals during regular banking hours shall be credited/debited to accounts on date of receipt or payment If there is BSP clearing arrangement, not earlier than 2 hours before BSP clearing time in head offices and 3.5 hours in branches If there is no BSP clearing arrangement 2 hours before local clearing time

6. Booking Cash Deposits •

Cash deposits received after clearing cut-off time shall be book as deposits on day of receipt

7. Booking Non-cash Deposits •

“on us” checks, manager’s/cashier’s checks, demand drafts received after clearing cut-off time

Deposits, whether cash or not, received after close of regular banking hours shall be treated as contingent accounts and booked the following day

9. Average Daily Balance •

3. Time of payment of interest in time deposits •

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Banks may impose and collect service charge or maintenance fee on savings and current accounts that fall below minimum monthly average daily balance (ADB) must be properly disclosed in the terms of deposit For dormant accounts: fall below 2 consecutive months

III. Survivorship Agreement •

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There is survivorship agreement when joint owners of a deposit agree that either of them could withdraw any part or whole of account during lifetime of both and the balance upon death of either belongs to the survivor It is an aleatory contract Survivorship agreement is per se not contrary to law but may be violative Agreement can be a mere cloak to hide in inofficious donation to transfer property in fraud

IV. Nature of Bank Deposits 1. Deposits are considered simple loans and not preferred credits 2. Bank deposits are in the nature of irregular deposits as they are loans who earn interest (BPI vs. CA) 3. Relationship between depositor and Savings and Loan Association is that of creditor and debtor 4. Contract between bank and its depositors are governed by NCC 5. Bank ultimately acquires ownership of deposits but has obligation to pay back equal amount 6. Banks can set-off or compensate


San Beda College of Law Banking Laws V. Duties of Banks • •

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Meticulous care with deposits of clients due to fiduciary relationship Banks must give payment to the proper party, thus collecting bank has obligation to ascertain that the drawer truly intended that the depositor is the payee In case of death of depositor and the bank knew of it, there shall be no further withdrawal Administrators or heirs can withdraw up to 20k without certification of CIR

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BSP can also inquire in deposits for periodic and special examinations Ombudsman has the In-Camera Inspection power to look into deposits provided that there is a pending case is court and 1.) the account must be properly identified 2.) inspection limited to the subject matter CIR can also look into deposits to determine gross estate of a decedent or he has applied for compromise tax liability

VI. Secrecy of Bank Deposits •

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Purpose is to (1) give encouragement to the people to deposit their money in banking institution and (2) discourage private hoarding of depositors so that could be used in economic development All deposits of whatever nature with bas including investment bonds are considered absolutely confidential and may not be examined, inquired or looked into even by government officials RA 8367 prohibits inquire or disclosure of deposits Exception: (1) written permission of depositor, (2) impeachment, (3) order of court in case of bribery or dereliction or (4) subject matter of litigation It shall also apply to foreign currency deposits with the only exception of written permission In Islamic banks that only exceptions are: (1) inspection of bank auditor, (2) written permission by depositor (3) subject matter of litigation

VII. Exceptions to Secrecy of Deposits • •

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They are already stated above Accounts can be garnished to insure satisfaction of judgment as there is no real inquiry and some disclosure are merely incidental Congress not intended for debtors to escape General exemption against garnishment shall not apply to foreign transients Foreign currency deposits of a foreigner who was convicted of crime of rape may be garnished to satisfy judgment Under RA 1405 and Anti-Money Laundering Act, the secrecy of deposits do not apply


San Beda College of Law Banking Laws CHAPTER 4 – Investments, Loans and Other Bank Functions

Equity investments of universal bank in non-financial allied enterprise

I. Universal Operation of Universal banks

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Powers of Universal bank

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1. Commercial bank 2. Investment house 3. Invest in non-allied enterprises Equity Investments of Universal bank • • •

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Allied enterprises are those which enhance or complement banking If it is a financial allied enterprise, then it involves money matters. Otherwise it shall be non-financial Total investments in equities of allied and nonallied enterprises shall not exceed 50% of the net worth of the bank Equity investment in any one enterprise, whether allied or non, shall not exceed 25% Net worth – total of the unimpaired paid in capital including paid-in surplus, retained earnings and undivided profit

Equity investments of Universal bank in Financial Allied enterprise • •

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Universal bank can own 100% of the equity in a thrift, rural bank or financial allied enterprise Publicly-listed universal or commercial bank may own 100% of voting stock of another universal or commercial bank If not publicly-list then only 49% own Following are financial allied enterprises: 1. Leasing companies 2. Banks 3. Investment houses 4. Financing companies 5. Credit card companies 6. Financial institutions 7. Companies in stock brokerage and foreign exchange dealership 8. Insurance companies 9. Holding company provided that the equities of the entity is confined under universal bank BSP regulation

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Universal bank may own up to 100% of equity in non-financial allied Examples are: 1. Warehousing companies 2. Storage 3. Safe deposit box 4. Companies engaged in management of mutual funds and not funds itself 5. Computer services 6. Home building and development 7. Service bureaus 8. PCHC Rural and cooperative banks can invest in nonfinancial allied enterprises such as: 1. Warehousing 2. Fertilize and agricultural chemical 3. Farm equipments 4. Trucking and transportation 5. Marketing agricultural products 6. Leasing

Equity investment of Universal Bank in Non-allied enterprise •

Equity investment in a single non-allied enterprise shall not exceed 35% in total equity or voting stock

Investments in non-allied enterprises •

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Universal bank may invest in equity of enterprise of eligibles: 1. Enterprises engaged in agriculture, mining, quarrying, manufacturing, public utilities 2. Industrial parks 3. Commercial project with government privatization program Equity investment in Quasi-banks – universal bank can only invest up to 40% in equity of quasi-banks

II. Operations of Commercial Banks Powers of Commercial banks

1. General powers incident to corporations 2. All power necessary to carry business of commercial banking such as: AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws a. Accepting draft and issuing letters of credit b. Discounting c. Creating demand deposits d. Buy and selling Forex

Equity investment of commercial bank on financial allied enterprises • •

Issuance of Letters of Credit •

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Letter of credit – financial device developed by merchants as convenient mode of dealing with sales of goods The buyer will apply for a letter of credit in the issuing bank The seller will then send the goods to the carrier and he will make a draft, called bill of exchange Seller will present the draft and the necessary documents, such as bill of lading to issuing bank to receive the payment While the goods are in transit, it shall be owned by issuing bank When the goods arrived at the port of the buyer, the buyer will pay the corresponding payment and also gain the documents Since the buyer gain the documents, he can now acquire the delivered goods Independence principle – bank determines compliance with letter of credit only by examining shipping documents presented and need not examine the goods There are three contracts: 1. buyer-seller 2. buyer-bank 3. seller-bank There can be other parties such as notifying bank (inform seller), confirming bank (lend credence to letter of credit), paying bank and negotiating bank (discounter)

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Can own up to 100% in equity of thrift and rural bank However cannot own 100% of equity of financial allied enterprise other than above banks

Equity investment in commercial bank on non-financial allied enterprises •

Can own 100% of said enterprises

III. Risk-Based Capital Minimum Ratio • • • •

MB shall prescribe minimum ratio It will be based on the net worth and risk assets of a banks well as its compositions It may alter compliance with ratio for a max period of 1 year Ratio shall be uniformly applied to banks of same category

Effect of Non-compliance •

•

If a bank does not comply then the MB can: 1. Limit distribution of net profits and be used to increase capital accounts until minimum requirement is met 2. Restrict acquisition of major assets and new investments except with purchase of readily marketable evidence of indebtedness of RP BSP In case of merger, rehabilitation, MB may temporarily relieve such bank with compliance with capital ratio

IV. Limit on loans, credit accommodation and guarantees Equity investments on commercial bank Single Borrowers Limit • • •

Commercial bank may invest only in equities of allied enterprises Total investment in equities of allied enterprises shall not exceed 35% Equity investment in one enterprise shall not exceed 25%

•

• •

Total amount of loans, credits accommodation and guarantees extended to any person, partnership or corporation shall not exceed 20% of net worth of bank In Circular 425 of 2004 of BSP, the SBL was increased to 25% Exceptions to SBL:



14

subsidiaries, more than half of voting power of 1. MB may otherwise prescribe for reasons enterprise of national interest 2. Deposit of rural banks with GOC financial • Even if less than half of said voting power, it shall institutions such as LB, DBP and PNB still have controlling interest if: • Basis for determining SBL is the total credit 1. Agreement with investors 2. Govern financial and operations commitment of bank to borrower 3. Can appoint majority of directors • Loans - to all accounts under loan portfolio 4. Cast majority vote on meetings • Credit accommodations - to credit and market risk • Subsidiary – corporation where more than 50% of exposure of banks arising from accommodation the voting stock is owned by a parent corporation other than the loan • Bill of exchange drawn in good faith against • Total credit commitment - include loans, credit actually existing values – drawn by a seller on the accommodation, deferred letters of credit less purchase for the price of commodity sold margin deposits and guarantees • Commercial paper owned by person negotiating • Total credit commitment can be increased by 10% the same – paper arising from business transaction provided additional liabilities are secured by trust • Exclusion from SBL: receipts, shipping documents or readily marketable 1. Discount bills of exchange and discount goods commercial paper • Readily marketable goods – articles of commerce, 2. Credit accommodation to finance agriculture or industry as constant dealings in importation of rice or corn up to 100% net ready market and price is easily ascertainable and worth of bank disposable Must be approved by NEDA • Parent corporation’s total credit commitment shall 3. Loans and credit accommodation also include its subsidiaries’ if it guarantees, guaranteed by Industrial Guarantee and accommodate or subsidiary is merely a department Loan Fund of it 4. Liabilities of commercial paper issuer for • Wholesale lending of government banks shall not commercial paper held by UB as firm exceed 35% of net worth to participating financial underwriter. Only 180 days and not institutions exceed 5% from normal SBL • PFI – institutions for relending to end-user 5. Loans and credit accommodations covered borrowers by international or regional institutions • The end-user borrower shall be subject to the 25% where Philippines is shareholder such as SBL ADB • In municipalities where there are no government 6. Loans and credit accommodations with banks, deposits of rural and coop banks in private valuation reserves provided that bank has banks shall not be subject to SBL no unbooked valuation reserves • Deposit in private depository bank used by thrift, 7. Loans and credit accommodations as a rural and coop banks, with authority to accept result of underwriting agreement of debt demand deposits, after being cleared, shall be securities not exceeding 30 days exempted from SBL • Bank guarantee – irrevocable commitment of a Violations bank binding to pay a sum of money in event of • Monetary penalties – 1/10 of 1% of excess over non-performance of third party the ceiling but not exceed 30k per day • Credit Risk Transfer – arrangement that allows the • If bank resource is less than 50M, then only a max bank to transfer the credit risk associated with its loan or other credit accommodation to a third party penalty of P500 shall be imposed • There will also be reprimand to directors/officers • Control of majority interest or controlling interest – parent owns, directly or indirectly through its AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.


In subsequent offense, a 1k fine shall be imposed on the directors who approved it There can also be suspension of bank’s branching privilege and rediscounting facility of BSP

Pacto commisorio • •

Inclusion to Limit •

•

The following shall be included 1. Maker, acceptor of paper discounted and general indorser, drawer or guarantor 2. Individual who controls majority interest in corporation 3. In case of corporation, all liabilities to such bank of all subsidiaries it has majority interest 4. Partnership, liabilities of members Also includes parent coporations with majority interest

•

1. Loans and credit accommodations secured by BSP or RP. State is always solvent 2. Loans and credit accommodations guaranteed by government 3. Loans and credit accommodations covered by assigned of deposits by lending bank 4. Loans and credit accommodations under letters of credit covered by margin deposits 5. Loans and credit accommodations determined by MB as non-risk items

•

•

•

• • •

•

•

Assignment of Credits •

• • • •

It is the agreement where the owner of credit, know as assignor, by legal cause, transfer his credit to another, known as assignee without need of consent of debtor Assignee acquires powers of assignor There is no new obligation in assignment However, there must be a notice given to debtor so that he will know whom to pay Consent is not necessary in order that assignment may fully produce legal effects (Sison & Sison vs. Yap Tico and Avanceña)

Appropriating a thing given by pledge or mortgage It is not allowed. Encashment of deposit certificates is not pacto commissorio It is intended to protect the obligor against being overreached by creditor

V. Restriction on Bank Exposure to Directors, Officers, Stockholder and related interests (DOSRI)

• Exclusion to limit

15

No DOSRI can directly or indirectly borrow from such bank or become a guarantor, indorser or surety for loan Exception is when there is a written approval of the majority of all directors of the bank excluding the DOSRI concerned Such approval is not required if it is under a fringe benefit plan approved by BSP Directors include those named in incorporations, elected or filled Officers shall include any person who performs function of management Stockholder – stockholder of record in the books of the bank Related interest includes souse or relative within 1st degree or by legal adoption. This includes partnership, co-ownership of DOSRIs Corporations where the above mentioned owns 20% of subscribed capital, then the prohibition shall apply Can also be less than 50% if the DOS sits as representative of the bank in the board of such corporation

Effect of violation •

The director or officer who violates may be declared vacant and subject to penal provisions of NCBA

Limit on loans •

MB can limit the valid loan given to DOSRI provided that it shall be based on their unencumbered deposits and book value of their paid in capital contribution


16


Exclusion to the Limit • • •

Loans and credit accommodations considered as non-risk Loans and credit accommodations to officers in for of fringe benefits Limit on loans and credit accommodations shall not apply on those extended by coop bank to its coop shareholders

Applicability of DOSRI government borrowing •

•

rules

and

regulation

• • •

to

Circular 547 of 2006 provides that DOSRI rules shall also apply to loans and credit accommodations granted to RP, subdivisions, instrumentalities and GOCCs Exceptions would be: 1. Loans and credit accommodations that are non-risk and not subject to ceiling 2. Those made by BSP 3. LGU due to full autonomy in their propriety function 4. Director who acts as government representative

VI. Securities on Loans and credit accommodations Loans and credit accommodations against real estate •

•

•

Agreement is onerous and construed against credtor Requires that creditor obtain consent of the surety before there can be material alteration to the loan If surety director is not anymore party of the board then he cannot be held liable Surety cannot extend to more than what is stipulated Joint and solidary signature of major stockholder or officer constitutes as an additional security for loans granted to corporations (Security Bank & Trust Company vs. Cuenca) Joint and solidary agreement – agreement where the contracting parties consent to be jointly and severally liable in a loan obligation

VII. Grant and accommodations

purposes

of

loans

and

credit

Amount and purpose of loan •

• • •

Shall not exceed 75% of appraised value of respective real estate security plus 60% of the appraised value of the insure improvements

Bank must grant loans and credit accommodations only in amounts and for period of time essential for effective completion Must be consistent with safe and sound banking practice Purpose of loan shall be stated in application If bank finds that proceeds have been employed without its approval, the bank shall have the right to terminate the loan and demand immediate repayment

Requirement for grant of loan Loans and credit accommodations on security of chattels and intangible properties •

•

Shall also not exceed 75% of the appraised value of the security

Join and Solidary agreement • •

JSA is surety and not guarantee. It is an agreement where parties consent to be solidarily liable As a contract of adhesion, JSA should be taken contra proferentum against the party who may have caused any ambiguity therein.

Effect of Surety Agreement

•

Bank must first ascertain if debtor is capable of fulfilling his commitments to the bank. It must consists of: 1. Statement of assets and liabilities 2. Statement of income and expenditure 3. Prescribed by law and MB to evaluate credit application Even in the absence of such provision in GBL, Art 1198 of the NCC allows the creditor to demand full payment when debtor is insolvent, fails to give guarantee, impaired guarantee, lost thing through fortuitous event, violate undertaking or attempts to abscond



MB shall recognize peculiar characteristic of micro financing such as cash flow-based lending Microfinancing loans – small loans granted to basic sectors usually unsecured and given to small businesses

Escalation Clause •

•

Reason for stringent rule in granting loans •

Banking corporation holds the money of the depositors. Due to the nature that it is affected public interest, the bank must ensure that the loan shall be repaid

Unsecured loans and other credit accommodation •

MB shall authorize regulations with respect to such

• •

• •

Other security requirements for bank credits •

MB may prescribe security requirements to which bank credits shall be subject and reduce or increase maximum ratio

•

Authority to prescribe terms and condition of loans and other credit accommodations •

•

MB may prescribe maturities as well as related conditions of varios bank loans and credit accommodations Any change in maximum maturity shall only apply to those made after such action

Amortization on loans and other credit accommodations •

•

•

•

Amortization schedule of bank loans and other credit accommodations shall be adopted based on nature of operation If loans and other credit accommodations has maturity of more than 5 years, must have periodic amortization payments and must be made annually If borrowed funds are to be used for purposes which do not initially produce revenues for payment of regular amortization, bank may defer such time until revenues are sufficient. In no case shall initial amortization date be later than 5 years In case of loans and other credit accommodations to microfinance sectors, schedule shall consider cash flow of borrowers

17

•

Parties to an agreement pertaining to loan of may agree upon an increase in the event that the applicable maximum interest is increased by MB PROVIDED: such stipulation shall only be valid if there is also a stipulation that the interest rate agreed upon shall be reduced in the even maximum interest rate is also reduced by MB Escalation clause are not void per se It is void when it grants creditor unbridled right to adjust interest independently, completely depriving debtor of right to assent Such clause violate the mutuality of contracts In escalation clause there should be: 1. Increase in interest if increased by law or MB (escalation clause) 2. Include provision for reduction of stipulated interest in the event maximum interest is also reduced by law or MB (deescalation clause) Purpose of including de-escalation clause – prevent one-sidedness in favour of lender an repugnant to mutuality of contracts Absence of de-escalation clause will render escalation clause void

Effect of annulment of escalation clause • In case the escalation clause is annulled, principal amount of loan is subject to original interest rate Exception •

If there is no de-escalation clause, the escalation clause is still valid if the creditor unilaterally and actually decreased the interest charges whenever the interest rate is reduced by law or MB (Llorin vs. CA)

Unilateral increase of rates • •

Such violates the principle of mutuality of contracts in Art 1308 of NCC Any contract which appears to be heavily weighed in favour of any one party that will lead to unconscionable result is void



• •

Escalation clause are valid to maintain fiscal stability and retain the value of money on longterm contracts However, other party there must be right to assent to an important modification of contract Contract of adhesion – parties do not bargain on equal footing, the weaker party’s participation being reduced to a take or leave it

Iniquitous, unconscionable and exorbitant interests • • • •

• •

Though usury law is not inexistent, interest may be agreed upon by lender and borrower However, the same must be equitable reduced for being iniquitious, unconscionable and exorbitant In Medel vs. CA, SC found that 66% interest rate per anum is unconscionable In Cuaton vs. Salud, interest rate was 120% per annum interest rate is unconscionable and should be lowered to 12% per annum interest rate Dio vs. Virgilio, interest rate was 120% per annum also, reduction of interest must be made Bacolor vs. Banco Filipino, a 24% interest rate per annum is not unconscionable or excessive

Effect of void interest rate •

•

claim against the subsidiary is not a claim against the parent Development assistance incentives •

•

•

•

•

• •

Bad debts - all debts due to any bank on which interest is past due and unpaid

Extraordinary inflation or deflation •

•

A borrower may at any time prior to agreed maturity date, prepay in whole or in part the unpaid balance subject to reasonable terms

Under Art. 1278, compensation can take place where the parties are creditors and debtors of each other A person who secures a loan of money acquires ownership and is bond to pay the creditor an equal amount Deposits in bank can be set-off against obligation of depositor Subsidiary has an independent and separate juridical personality from parent company and any

Reason for this: 1. To curb undue speculation in foreign exchange market 2. Further reinforce memorandum that peso deposits should be funded inward foreign exchange remittances OFWs are residents and can avail peso loans

Provisions for losses and write-offs

Legal compensation •

BSP shall provide incentives to banks, without government guarantee, which extend loans to financial educational institutions, cooperatives, hospitals

Banks cannot extend peso loans to non-resident

If interest rate is void, it is as if no express contract thereon and court may reduce

Prepayment of loans and other credit accommodations

18

•

Under Art 1250 of NCC, in case of extraordinary inflation or deflation of currency stipulated, value of currency at time of establishment of contract shall be the basis of payment For extraordinary inflation or deflation to affect obligation, the following must be proven: 1. There must first be official declaration from BSP 2. Obligation is contractual 3. Parties expressly agreed to considered effects of extraordinary inflation or deflation Extraordinary Inflation exist when there is an unusual decrease in the purchasing power of the currency and such decrease could not be reasonably foreseen or was manifest beyond the contemplation of the parties at the time of the obligation

Purpose of Attorney’s Fees



Attorney’s fees are not integral part of cost of borrow but arise when collecting upon the Notes becomes necessary

• •

19

Both actions can be instituted independently of each other But there can also be a joinder of cause

VIII. Truth in Lending Policy •

Effect of violation Protect citizen from lack of awareness of trust cost of credit to the user by assuring full disclosure of such cost and prevent uninformed use of credit

• •

Disclosure •

•

The creditor shall furnish the debtor a clear statement in writing setting forth the following: 1. Cash price or delivered price to be acquired 2. Amount to be credited as DP 3. Difference between 1 and 2 4. Charges individually itemized 5. Total amount to be financed 6. Finance charge 7. Percentage that finance bears to the total amount to the financed Rationale: protect users of credit from lack of awareness of true cost

Definition • •

•

Credit – any loan, mortgage, deed of trsust, advance, conditional sale contract, rental Finance charge – interest, fees, service charges, discounts and other charges incident to extension of credit Creditor – any person engaged in business of extending credit who requires finance charge

•

Violation shall not affect the validity or enforceability of any contract In Consolidated Bank vs. CA, SC said that lender cannot charge interests not stipulated in promissory note In UCP vs. Beluso, interest rate provisions are illegal due to violation of mutuality of contracts and also violate TILA

Exemption of government •

TILA shall not apply to Philippine Government

Required disclosure on consumer loans not under openend credit plan •

Any creditor extending consumer loan or transaction which neither consumer credit sale nor open-end consumer credit plan shall also need to disclose information

Exempted transactions •

Disclosure requirement on consumer credit transactions shall not apply to those extension of credits for business or commercial purpose or to government

IX. Foreclosure of real estate mortgage Procedure

Penalties 1. Civil – any creditor who fails to disclose shall be liable for P100 or amount equal to twice of finance charge required a. Whichever is higher b. Liability shall not exceed 2k c. Must be brought within 1 year from date of occurrence 2. Criminal – fine not less than 1k or not more than 5k or imprisonment for not less than 6 mos nor more than 1 year or both

•

•

•

In the event of foreclosure of any mortgage, the mortgagor has the right to redeem the property within one year after sale of real estate Purchaser at auction sale shall have the right to enter upon and take possession of such after date of confirmation of auction sale In GBL, if purchased y banks, they are not required to set up bond before they can enter the property immediately during redemption period



•

•

• • •

• •

• • •

•

Writ of possession may also be issued after consolidation of ownership of property in name of buyer Buyer becomes absolute owner of property if not redeemed during the 1 year after registration of sale If the property extrajudicially foreclosed belong to a juridical persons, right to redeem property shall be counted until, not after, the registration of the certificate of foreclosure It shall be no more than 3 months after foreclosure whichever is earlier Accessory contract of real mortgage is used as security for fulfilment of principal obligation A loan value is only 70 percent of the appraised value so that a low bid price will be made and will be easier to redeem Real property may be mortgaged to aliens Redemption period is counted from date of registration of the certificate of sale with register of deeds An action for annulment of mortgage does not stop the running of the period of redemption Otherwise there shall be frivolous suits instigated to give mortgagor more time to redeem The amount redeemable is the amount under the mortgage deed or the outstanding obligation plus interest and expense in Sec 47 of GBL No personal notice in required in extrajudicial foreclosure of sale since it is action in rem

Demand before foreclosure essential •

There must first be demand before there can be foreclosure as where demand was not made, the loan shall not become due and demandable

Equity of redemption vs. Right of redemption •

Where foreclosure is judicially made, no right of redemption exist in case the mortgagee is not a PNB or bank In such a case, the mortgagor is given the right to extinguish the mortgage and retain ownership of property by paying debt within 90 days after judgment

20

Estoppel •

Bank or any purchaser is deemed consented to extension of redemption if it had time to object but it did not

Redemption after prescriptive period • • • • • •

•

Right to redeem becomes functus officio on the date of its expiry Redemption is by force of law, the buyer is bound to accept redemption However, there can be right to repurchase depending on the will of buyer The buyer is not bound to accept repurchase unlike in redemption The buyer shall also not be bound by the bid price as it now belongs to him An alien-owned bank cannot acquire ownership of residential lot by virtue of deed of transfer as settlement of debt Transfer of ownership, even for a limited period or in foreclosure, cannot be made to alien

Offer to repurchase not waiver to question sale •

•

If there was an offer to repurchase, it shall not be construed as waiver of right to question foreclosure sale Mortgagee has no right to recover the deficiency from the mortgagor of value of loan if foreclosure is invalid

Preferred status of banks not impaired in case borrower under rehabilitation •

In case of rehabilitation of corporation debtor, the right of a creditor bank is merely suspended

Writ of possession •

After consolidation of title in buyer’s name due to failure of mortgage to redeem, the writ of possession becomes a matter of right and its • issuance in a extra-judicial foreclosure is merely ministerial • Injunction to prohibit issuance of writ of possession is utterly out of place • Proceeding in petition for writ of possession is exRight of redemption may be extended by agreement parte and summary in nature AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.


However, mortgagor still have right of recourse to petition to set aside foreclosure sale and cancel writ of possession in same proceeding

•

X. Major investments •

MB shall establish criteria for reviewing major acquisitions or investments of bank

Ceiling on investments in certain assets • • •

•

•

•

• Bank may acquire real estate as necessary for its conduct of business Total investment on such real estate shall not exceed 50% of capital accounts Equity investment of a bank in another corporation engaged in real estate shall be considered part of investment in real estate In determining compliance with the ceiling, the following shall apply o Investment shall include real estate and equipment necessary for bank use such as bank premises and real property of bank under its name o The cost of real estate leased by bank from corporation and amount of equity in lessor shall also be included In case of Tala vs. Banco Filipino, BF reached its maximum 50% capacity in real estate and Tala was created by major stockholders to buyer bak sites of BF and leases it back to them. However, BF defaulted and Tala wants the payment of rents The court rules that Tala cannot be allowed to collect rent as it clearly shows that the tried to circumvent the real estate investment limit in GBL

•

21

A bank may also perform the following services: 1. Receive custody of funds, documents and other valuable objects 2. Act as financial agent to buy and sell for their customers 3. Make collection for accounts of other 4. Act as managing agent of investment management accounts 5. Rent out safety deposit boxes Bank shall perform 1-4 as a depositary or as an agent It shall be duly separated from bank’s own assets and liabilities

Safety deposit box • •

• •

• • •

•

It is considered as a special kind of deposit It cannot be an ordinary contract of lease because the absolute control and possession of safety deposit box is not given to renters The guard key remains with bank and renters key remain in customer Where the renter keys are duplicated, the bank is not liable to either renters in case of loss attributable to them The SC said that it can be considered as a bailor and bailee relationship Duties of the parties may be defined by them The company renting safe-deposit boxed cannot exempt itself from liability due to fault of its own agents In Sia vs. CA, a bank was held liable for not immediately informing the customer that his safety deposit box was flooded which caused damage to the items of the customer

Acquisition of real estate by way of satisfaction of claims XII. Electronic transactions •

•

Notwithstanding the limitations, bank may still acquire the following property: 1. Mortgage to it in good faith for security 2. Conveyed for satisfaction of debt 3. Purchase under judgement or mortgage Any real property held in such circumstance must be disposed within 5 years After said period, those properties shall now be included in the 50% limitation

•

BSP shall have full authority to regulate use of electronic devices in connection with bank operations

XIII. Outsourcing of information technology •

Bank may outsource information technology • systems and processes except inherent banking functions • Functions that are not outsourced: XI. Other Banking Services 1. Strategic planning for use of IT AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws 2. Determination of system functionalities 3. Change management inclusive of quality assurance 4. Service level and contract management 5. Security policy and administration

•

22

Banks shall disclose to each prospective cardholder non-financial charges, percentage of interests, interest rate per annum, instalment details, default fees, etc.

Accrual of interest earned XIV. Outsourcing of other functions •

•

Subject to prior approval of MB, banks may outsource data imaging, storage, retrieval and other related systems Banks may outsource credit card services

XV. Credit Card Transactions General policy •

•

Interest accrued shall be reserved and no accrual shall be allowed 90 days after credit card receivable has become past due

Finance charges – interest charged to cardholder Deferral charges •

BSP shall develop consumer credit through innovative products

Parties can agree to a deferral of all or partly of unpaid instalments and will subsequently collect deferral charge

Late payment and penalty fees Definition of terms •

• • • •

Credit card – any card, plate, coupon book or other credit device for the purpose of obtaining money, property, labor or credit Credit card receivables – total outstanding balance of cardholders Minimum amount due - minimum amount that cardholder needs to pay on due date Default – non-payment of minimum amount due within two cycle dates Acceleration clause – gives bank the right to demand obligation in full in case of default

Risk management system •

System that shall safeguard interests, banks and subsidiary credit card companies

Minimum requirements •

•

Before issuing credit cards, banks must exercise proper diligence by ascertaining applicant possess good credit standing and are financially capable to fulfil payments All applications must go under strict credit risk assessment process

Information to be disclosed

•

No late payment or penalty fee shall be collected unless it is fully disclosed in the contract

Confidentiality if information •

Banks shall keep strictly confidential data on cardholder except when there is consent, exchange of information with other credit card companies, disclosure to collecting agent

Suspension, termination of effectivity and reactivation •

banks shall formulate parameters for such

Inspection of records covering credit card truncations •

banks shall make available for inspection credit card information to BSP

Offset •

Banks can offset their obligations with cardholder with the latter’s debts provided there is notice

Handling of complaints •

bank shall give cardholder 20 days to examine charges and after 2 billing cycles, bank can correct error

Unfair collection practices AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.


banks shall resort to legally permissible means to collect amount due under credit card agreement There shall be no use of threat or violence to coerce payment and no false representation

•

23

Retailers who honor credit/ATM/debit cards for payment shall not require payment of surcharge over and above the price tag

Additional deposit does not increase credit limit Contract of adhesion •

Contract between cardholders and credit card companies are contract of adhesion becomes they are prepared only by one party and the other party only signifies

Blanket freedom from liability is invalid •

The credit card company cannot excuse itself from liability completely as with blanket of freedom

XVI. Rules of Price tags One price tag requirement • •

Every retailer is required to display price tag to indicate price of good or service Price tag must be written clearly indicating the price including VAT. Service charge shall not be included in price tag

Mode of payment • • • •

• •

It is necessary to consider business practices relative to mode of payment under Price Tag Law When consumer pays in cash, he shall only pay the price indicated When consumer pays through credit/ATM/debit card, he shall only pay price indicated in tag When retailer offers consumer option to pay in cash or card, the same is allowed provided that options are disclosed by separate information but not on the price tag Price that indicates separate cash price and regular cash price is not allowed Price tag that indicates separate price tag and card price is also not allowed

Prohibition against surcharging



CHAPTER 5 – Prohibited Transactions and Cessation of Banking Business I. Prohibited Transactions Prohibited to act as insurer • •

•

Bank shall not directly engage in insurance business as insurer Insurance act shall include making insurance contract, surety contract, doing business of reinsurance Fact that no profit is derived shall not be deemed conclusive to show that there is no insurance business

•

•

•

No director shall: 1. Make false entries in any bank report 2. Without order of court, disclose to an unauthorized persons an information relative to funds or properties in custody of customers 3. Accept gifts, fees or commission in connection for approval of loan 4. Overvalue a security for purpose of influencing actions of bank 5. Outsource inherent banking functions This is to ensure secrecy of bank deposits No borrow shall 1. Fraudulently overvalue security for loan 2. Furnish false material facts to obtain or increase loan 3. Attempt to defraud bank in event of court action to recover loan 4. Offer any DOE any gift, fee, commission to influence person to approve loan No examiner, officer or employee of BSP assigned to supervise, examiner rendering technical assistance to bank shall commit the foregoing acts No bank shall employ causal or non-regular personnel or too lengthy probationary personnel in business involving bank deposits

Outsourcing inherent banking function shall refer to any contract between the bank and service provider for the latter to supply, or any act whereby the latter supplies, the manpower to service the deposit transaction of the former.

II. Conducting business in an unsafe or unsound manner •

Prohibited acts •

24

•

To determine whether act or omission is considered unsafe or unsound for banking, the following shall be considered: 1. Resulted in material damage or abnormal risk to stability, solvency of bank 2. Resulted damage in depositors, creditors, investor or public 3. Cause undue injury or unwarranted benefits to any party 4. Involves entering contract manifestly disadvantageous to bank regardless if DO will profit MB can take action and exclude erring bank from clearing

III. Prohibition on dividend declaration •

•

•

No bank shall declare dividends greater than its accumulated net profits on hand, deducting its losses and bad debts The bank shall also not declare dividends if at time there is: o Clearing account in BSP is overdrawn o Deficient in require liquidity floor for 5 or more consecutive days o Does not comply with liquidity standards o Committed major violation Banks are entities exempted from improperly accumulated earnings tax (10% of said income) by NIRC

IV. Unauthorized advertisement or business representation Prohibition against Outsourcing Certain Banking Functions AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.


No persons or corporation shall engage in banking business shall advertise that it has a business of a bank, quasi-bank or trust entity

Remuneration •

V. Placement under conservatorship Grounds for appointment of conservator •

•

•

•

• • • •

•

Whenever the MB finds the bank in a state of: 1. Continuing inability or 2. Unwillingness to maintain a condition of liquidity deemed adequate to protect depositors and creditors MB may appoint conservator with following powers: 1. Take charge of assets, liabilities and management thereof 2. Reorganize management 3. Collect monies and debs due 4. Exercise all powers necessary to restore viability Conservator shall report to MB and shall have the power to overrule or revoke actions of previous management Rehabilitation proceedings provide for equitable distribution of insolvent debtor’s remaining assets to its creditors and give debtor a fresh start by relieving them of the weight of their debts Liquidity – ability of an asset to be converted in cash quickly and without discount Solvency – liabilities amount to less than total assets providing ability to pay debts Test of insolvency – determining realizable assets of bank is less than its liabilities Insolvency of bank occurs when actual cash market value of its asset is insufficient to pay its liabilities BSP is vested with exclusive authority to assess, evaluate and determine condition of a bank whether it is insolvent or not. If insolvent, receivership proceedings

Qualification of conservator •

•

Conservator must be competent and knowledgeable in bank operations and management Period of conservatorship shall not exceed 1 year

25

•

•

•

Conservator shall receive remuneration to be fixed by MB in an amount not to exceed 2/3 the salary of president of bank in 1 year, payable in 12 equal instalments If within one year the conservatorship is terminated on ground that institution can operate on its own, conservator shall receive balance But if it is terminated on some other ground, conservator shall not be entitled to remaining balance MB can appoint conservator connected to BSP in which case he shall not receive remuneration from BSP

Expenses of conservatorship •

It shall be borne by bank concerned

Terminations of conservatorship • •

•

MB shall terminate the conservatorship is it is satisfied that bank can continue operations Conservatorship can also be terminated on basis of report of conservator or its own findings would involve loss In such as case, there shall be receivership or liquidation

Final and executory • •

Action of MB shall be final except on petition for certiorari in case of grave abuse of discretion It shall be filed within 10 days from receipt of notice of board of directors of conservatorship, receivership or liquidation

Exclusive power to appoint conservator shall lie in MB Designation of conservator is not precondition to designation of receiver Power of conservator cannot impair obligations of contracts •

Conservator power to revoke contracts cannot post-facto affect perfected transaction as it would infringe non-impairment clause



• •

•

•

Conservator is given power to revoke contracts only those that are defect (void, voidable, unenforceable, rescissible) Conservator merely takes place of board of directors Conservator cannot simply repudiate valid obligations of the bank and must bring them to court actions In FPIB vs. CA the court ruled that the conservator cannot revoke a previously valid contract entered by the bank even though the object of the contract has a higher price In conservatorship, the banking functions continue unlike in receivership and liquidation

1. Current and complete examination not necessary •

• •

•

Voluntary liquidation

•

In voluntary liquidation, bank sends to MB notice of liquidation No voluntary dissolution shall be undertaken by a bank without prior approval of MB. Request of voluntary dissolution shall be accompanied by liquidation plan

Receivership and liquidation •

•

•

The MB can summarily and without need of prior hearing forbid the institution from doing business and designate PDIC as receiver Grounds for receivership and liquidation: 1. Unable to pay liabilities that are due. This shall not include inability to pay cause by extraordinarily demands by financial panic 2. Insufficient realizable assets 3. Cannot continue business without involving probable loss to depositors or creditors 4. Wilfully violated cease and desist order involving transactions of fraud 5. In case a bank notifies BSP or public announces bank holiday where it suspends payment of its deposit liabilities continuously for more than 30 days For quasi-banks any persons recognize in competence in banking may be designated as receiver

In Rural Bank of San Miguel vs. MB, the SC ruled that there is no need for complete examination because it only needs a report A report is something that gives information while examination is a search, investigation or scrutiny Absence of examination before closure of bank does not mean that there is no basis for closure

2. Procedure

VI. Cessation of banking business

•

26

• •

• •

•

Receiver shall immediately: 1. Take charge of all assets and liabilities 2. Administer the same for benefit of creditors 3. Exercise general power of receiver under ROC 4. Shall not pay or any act that involves transfer of asset of bank Receiver may deposit or place funds of bank in non-speculative investments Receiver shall determine within 90 days from takeover, whether institution may be rehabilitated or otherwise Determination of resumption of business is subject to approval of MB In Teal Motor vs. CFI, receiver was defined as a indifferent person appoint by the court to preserve the funds of the in litigation pendent lite He is not an agent or representative of any party

3. Prohibited acts •

Any director or officer declared insolvent or under receivership shall not commit: 1. Refuse to turn over bank records and assets to receiver 2. Tamper with bank records 3. Appropriate for himself or other party assets of bank 4. Receive bank deposits or collect loans 5. Paying funds of bank 6. Transferring security of bank

4. When institution cannot be rehabilitated



•

• • •

If receiver determines that bank cannot be rehabilitated, MB shall notify the board of directors that it shall proceed with liquidation The receiver shall file ex parte with RTC a petition for assistance in the liquidation of the bank pursuant to liquidation plan of PDIC Court shall adjudicate disputed claims, assist the enforcement of liabilities Receiver shall pay cost of proceedings from assets of institution Receiver shall convert assets of institution to money and dispose the same to creditors and other parties to pay bank debts

5. Final and executory •

• •

Just like in the case of conservatorship, the action of MB shall be final and executor unless there has been certiorari In Rural Bank of San Miguel vs. MB, closure of a bank is an exercise of police power In only stockholders of bank can file action for annulment of MB resolution of placing bank in receivership

Reasons behind receivership and involuntary liquidation 1. Banking business is subject to regulation under police power and are affected with public interest 2. It is the government responsibility to see that financial interest of depositors and others are protected. Done through BSP 3. Public faith in banking system may deteriorate if depositors, creditors are not protected. BSP shall step in and salvage remaining resources of bank 4. Absence of notice and hearing is not a groun to annul MB resolution Effects of receivership 1. Retention of juridical personality • •

• • •

•

The law does not contemplate prior notice and hearing before bank may be directed to stop operations and placed under receivership Previous hearing before closure is not required in the law and does not infringe due process However, bank can question the receivership within 10 days after receivership Close now hear later – practical consideration to prevent unwarranted dissipation of bank’s assets and valid exercise of police power to protect depositors, creditors and public If otherwise, there mere filing of receivership by BSP can trigger bank run and drain its assets in days or hour leading to insolvency

• •

• •

Pendency of case questioning receivership does not diminish of receiver to administer bank’s transactions pertaining to normal operations of the bank

Banks declared insolvent and ordered closed by BSP cannot be held liable to pay interest When bank is closed, it cannot lend money, engage in transactions or any banking activities where it can derive income from Thus there is no way the bank can pay the interest the accrues in favour of its depositors However, there are two types of deposits that earn interest. The first one, deposit that earn from the existence until the bank cease to operate. This one must be paid. The second interest earned from the time the bank closed until payment of deposits. The interest here must not be paid

3. Assets deemed under Custodia Legis •

•

Effect of filing petition for review •

There shall be retention of judicial personality even though it is ordered closed by MB The suing must be done through the liquidator

2. Not liable to pay interest

Close Now Hear Later Scheme •

27

•

Assets if the bank becomes beyond its control. Receiver operates to suspend the authority of the bank to its properties Assets of bank shall be custodia legis in hands of receiver and exempted from garnishment, levy, attachment Liquidator – task is to dispose all assets of the bank and effect partial payments of banks obligations

4. Stay of execution AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.


Stay of execution is warrant if bank is placed under receivership To execute a judgment against a bank under receivership would unduly deplete its assets to the prejudice of depositors and creditors

Disposition of revenues and earnings •

•

5. Restriction of bank’s capacity to Act • •

• •

• •

•

Insolvency of bank restricts its capacity to act Bank cannot make new business such as accept new deposits or grant loans. But receiver must collect debts in favour of the bank that will form part on bank asset Foreclosure falls within board definition of “doing business” Doing business - continuity of commercial dealings and arrangements incident to object of organization However, it shall not be included in those act prohibited from doing business Thus even if there is receivership or liquidation, the period of prescription to foreclose continues to run In BF vs. Ybanez, the court ruled that receiver ca still collect interest on loans during period of closure

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All revenues and earning realized by receiver during receivership shall be used to pay costs of proceedings The balance of revenues shall form part of assets available to payment of creditors

Disposition of banking franchise • •

BSP, if public interest requires, award to another institution the banking franchise under liquidation Whatever proceeds may be realized from award shall be subject to exclusive disposition of MB

Liabilities • •

Bank is bound by the acts or failure to act of receiver Receiver is liable to bank for culpable and negligent failure to collect and safeguard assets of such banks

6. Exercise of jurisdiction of liquidation court • • •

• •

All claims of bank must be filed in BSP It is to prevent multiplicity of against bank Exclusive jurisdiction of liquidation court pertains only to adjudication claims against bank and does not cover reverse situation Not necessary that claim is initially disputed before it is filed In Ong vs. CA, if buyer bought a property from the bank who is already declared insolvent, sale is void

VII. Disposition and distribution of assets •

•

In case of liquidation, after payment of cost of proceedings, receiver shall pay debts of institution in accordance with preference of credit in NCC Current accounts and savings accounts are not preferred credits in cases involving insolvency where there are various creditors


San Beda College of Law Banking Laws CHAPTER 6 – Foreign Banks and Trust Operations

•

I. Foreign Banks Transacting business in the Philippines • • • •

• • •

RA 7721 – Foreign Banks Liberalization Act PD 1034 – Conduct of offshore banking business Offshore banking – conduct of banking transaction in foreign currencies Offshore banking unit – branch of a foreign baking corporation authorized by BSP to transact offshore banking Foreign corporation doing business in the Philippines are required to obtain a license However, even if foreign corporations do not have a license, they can still be sued or be sued License is only necessary if it is for transacting or doing business in the country

•

• •

•

Acquisition of voting stock in domestic bank •

Foreign banks are allowed entry in the Philippines subject to the following rules 1. Within 7 years from effectivity of GBL, MB shall authorize foreign banks to acquire 100% voting stock of 1 domestic bank 2. Within same period, MB may allow foreign bank which prior to GBL has already acquired 60% voting stock can now acquire 100% 3. MB must ensure that 70% of resources of banking system are held by majorityowned Filipinos

Local branches of foreign banks •

Foreign banks which has more than 1 branch in the Philippines, all such branches shall be treated as 1 unit

•

•

29

Residents and citizens of the Philippines that are creditors of foreign banks shall have preferential right to assets of such banks Under RA 7721, foreign banks have three modes of entry in the country: 1. Acquiring 60 of voting stock of existing bank 2. Investing 60% of voting stock of new banking subsidiary incorporated in Philippines 3. Establishing branches with full baking authority A foreign bank may only avail only 1 mode of entry GBL only stated that branches of foreign banks will be treated as one and shall have the head office guarantee to creditor Filipino citizens However, there is nothing in the law that states that citizens that are debtors to foreign bank local branches shall also be debtors to the head office There is also nothing in the law that the head office and its local foreign branches shall be treated as one Thus, compensation with Philippine branches with foreign branches cannot be effected as they cannot be considered creditors and debtors of each other

Summons and legal process • • • •

•

Summons must be given to the Philippine agent or head of foreign bank to have jurisdiction If there is no agent, summons may be made upon BSP deputy governor in-charge Once given, it shall be effect as if made upon bank or agent BSP deputy governor in-charge shall mail it to the bank and sending copy is a necessary part to complete service. In the corporation code, the service, in case of absence of agent, shall be given to SEC

Laws applicable Head office guarantee •

Head office shall fully guarantee prompt payment of all liabilities of its Philippines branch

•

Foreign banks shall be governed by GBL and other applicable laws such as Corporation Code

Revocation of license of foreign banks



•

MB may revoke license if it find foreign bank insolvent or imminent danger of insolvency and will involve probable loss After revocation, it shall be unlawful for foreign bank to transact business in the Philippines

•

•

30

Existing local branches of foreign banks shall be given 1.5 years to comply with minimum capital requirement RA 7721 was approved on May 18, 1994

II. Entry of Foreign Banks III. Trust Operations • •

•

•

•

•

• •

•

State shall devote self-reliant and independent national economy Guidelines for approval: 1. Ensure geographic representation 2. Consider strategic trade relationships 3. Study demonstrated capacity 4. See reciprocity of right 5. Consider willingness to fully share technology Only those belonging to top 150 in the world or top 5 banks in their country of origin shall be allowed entry To establish a branch or subsidiary, foreign bank must be widely-owned and publicly listed in its country origin unless government owned Capital requirement: 1. For locally incorporated subsidiaries – same minimum capital with domestic banks 2. Foreign bank branches – US dollar equivalent of P219M at exchange rate during effectivity of Act. The foreign bank shall be entitle to 3 3. Foreign banks may open 3 additional branches designated by MB – P35M per additional branches Foreign banks within 5 year from effectivity of this act is only allowed 6 foreign bank to enter the country An additional 4 foreign banks may be allowed entry by recommendation of MB Non-Filipino citizens can be members of board of directors up to the extent of the allowed foreign participation Philippine corporations who have listed share of stock in PSE or long standing for 10 year shall have right to own 60% voting stock of a domestic bank

Authority to engage in trust business •

• •

Trust business – any activity resulting in trustortrustee relationship involving appointment of a trustee by a trustor for the administration, holding, management of funds or properties of trustor by the trustee It is for the use, benefit or advantage of the trustor or other beneficiaries Cardinal principle of trust and other fiduciary relationship is fidelity

Conduct of trust business •

•

•

Trust entity shall administer the funds or property under its custody with diligence that a prudent man would exercise Trust entity – stock corporation or person authorized by MB to engage in trust business shall act as trustee or administer any trust or hold property in trust No trust entity shall for the account of the trustor or beneficiary, 1. purchase, acquire, sell, property 2. transfer or purchase money or debt instruments from/to DORSI of trust entity and relatives of first civil degree 3. unless authorized by the trustor after prior full disclosure of transaction

Registration of articles of incorporation and by-laws of trust entity • •

SEC shall not register such unless accompanied by certificate of authority from BSP A trust business shall start from the moment their articles of incorporations are registered

Minimum capitalization



A trust entity, before engage in trust business, shall comply with minimum paid-in capital requirement by MB

Powers of trust entity 1. Act as trustee on any mortgage or bond and accept and execute any trust consistent with law 2. Act under order of any court as guardian, receiver, trustee or depositary of estate of minor or incompetent person 3. Act as executor of any will 4. Act as executor of estate of any deceased person with a will or administrator without a will 5. Accept and execute trust for holding, management, administration of estate and rents, issues, profits thereof 6. Establish and manage common trust funds Transactions requiring prior authority •

Trustee or trust entity shall not undertake any of the following transactions for the account of the client unless there is prior full disclosure and authorization by client 1. Lend, sell, transfer or assign money or property to DOSRI of trustee, relatives of trustee or related interest of such DOSRI where trustee owns at least 50% of voting stock 2. Purchase and acquire property or debt instrument in the same manner 3. Invest in equities or in securities underwritten by trustee in which trustee has interest 4. Sell, transfer, assign or lend money or property from one trust account to another account

•

•

•

•

•

•

Before transacting trust business, they must deposit to BSP for faithful performance of trust duties an amount not less than 500k or higher as may be fixed by BSP MB shall require trust entity to increase the amount whenever the increase is necessary by reason of trust business

Paid-in capital and surplus of each entity must be equal to the amount required to be deposited in BSP In case it shall not meet the required paid-in capital, the MB shall limit or prohibit distribution of profits by trust entity until minimum requirement is met Trust entity, as long as solvent and comply with laws, shall have the right to collect interest earned on security deposited to BSP If trust entity fails to comply with law, BSP shall retain interest of securities for benefit of rightful claimants All claims arising from trust business shall have priority over all claims as regard to the security deposited

IV. Bond of Certain Persons for the Faithful Performance of Duties Bond requirement 1. Before executor, administrator, guardian, trustee, receiver or depositary appointed by the court enter upon execution of dues, court may order bond 2. Upon application of such persons, after notice and hearing, court shall order that subject matter of trust be deposited with trust entity 3. Upon presentation of proof that subject matter have been deposited to trust entity, court may order that bond be given by such persons for faithful performance 4. Reduce bond shall be sufficient to secure adequately the proper administration of any property Exemption of trust entity from bond requirement •

Deposit for the faithful performance of trust duties •

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•

No bond shall be required by court from trust entity for faithful performance However court may order bond for the protection of funds or property confided

V. Operations of Trust Entity Separation of trust business from general business


San Beda College of Law Banking Laws • • •

The trust business shall be kept separate and distinct from the general business They shall be physically separated from assets of its other business They shall be under the joint custody of at least two persons who are officers of the trust department

Investment limitation of a trust entity •

• •

•

Unless otherwise directed by instrument creating the trust, the lending or investment of funds by trust entity shall be limited to loans and investment as prescribed by law, MB or court Assets received in trust shall be administered with terms of the instrument creating the trust If trust entity is given discretionary powers to invest, loans and investments shall be limited to: 1. Evidence of indebtedness of RP and BSP 2. Loans guarantee by government 3. Loans fully secured by hold-out on, assignment or pledge of deposits that are maintained 4. Loans fully secured by real estate or chattels The following shall be required to be given as information 1. Transaction to be entered 2. Borrower’s name 3. Amount involved 4. Collateral security

Real estate acquire by trust entity •

• •

Trust entity may acquire real property under following circumstances: 1. Mortgage to it in good faith by way of security to debts 2. Conveyed to it for satisfaction of debts previously contracted 3. Purchase at sales under judgment, decrees, mortgages or trust deeds Any property acquire under circumstances shall be disposed within 5 years After said period, bank can still continue to hold property subject to limitations: 1. Total investment in real estate shall not exceed 50% of combined capital accounts

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2. Equity investment of bank in another corporation engage in real estate shall be considered a part of 50% Exemption of trust assets from claims •

No assets held by trust entity shall be subject to claims other than those parties interested in specific trusts • Property held in trust by insolvent debtor shall be excluded from insolvency proceedings • Trust entity and its branches shall be treated as one unit • Trust entities shall advertise services in a dignified manner

Money of government •

Banks may not receive as trustee the funds of the government except GOCC banks

QUIZZES: True or False: 1. The fiduciary nature of the relationship of a depositor with the depositary bank imposes on the latter the obligation to discharge the highest standard of trust and integrity and a violation thereof is considered a breach of trust. False 2. The humble wage-earner has not hesitated to entrust his life’s savings to the bank knowing that they will be safe in the custody of the banks. True 3. Banks are gratuitous bailees of the funds deposited with them by their clients. False 4. The public relies on the banks’ fiduciary duty to observe the highest degree of diligence but any violation of this duty by the bank is not a valid ground for the grant of exemplary damages to the depositor. False 5. Thrift banks may not act as correspondent for other financial institutions. False 6. A non-stock corporation may act as a trustee or administer any trust or hold property in trust or on deposit for the benefit of others. False


San Beda College of Law Banking Laws 7. A bank cannot use any of its branches as outlets for the sale of the financial products of its allied undertaking or its investment house units. True 8. A bank may declare dividends greater than its accumulated net profits then on hand, deducting there from its losses and bad debts. False 9. The appointment of a receiver is vested exclusively with the Monetary Board. True 10. The MB cannot appoint a conservator connected with BSP. False 11. In a judicial foreclosure of mortgage, there is an equivalent right of redemption. False 12. No late payment of penalty fee shall be collected from cardholders unless the collection thereof is fully disclosed in the contract between the issuer and the cardholder. True 13. A bank which had been ordered closed by the monetary board does not retain its juridical personality which can sue and be sued through its liquidator. False

Fill in the blanks 1. The law governing the creation, organization and operation of rural banks is Rural Banks Act. 2. The total investment in equities of allied enterprise shall not exceed 35 % of the net worth of the bank. 3. Subsidiary shall refer to a corporation or firm more than 50% of the outstanding voting stock of which is directly or indirectly owned. 4. The rule that the total amount of loans that may be extended by a bank to any person or entity shall at no time exceed 20% of the net worth of such bank is called Single Borrower’s Limit. 5. Credit Risk Transfer shall refer to any agreement that allows the bank to transfer the credit risk associated with its loan or other credit accommodation to a third party.

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6. The term Legal Compensation refers to that situation when two persons, in their own right, are creditors and debtors of each other. 7. The contracts between cardholders and credit card companies are called contracts of adhesion because their terms are prepared by only one party while the other merely affixes his signature signifying his conformity thereto. 8. Net worth means the total unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as maybe required by BSP. 9. Letter of Credit refers to a financial device availed of by businessmen as a convenient mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller who refuses to part with his goods before he is paid. 10. Survivorship agreement is the agreement that allows joint depositors to withdraw the whole deposit during their lifetime and transferring the balance to the survivor upon the death of one of them. 11. In the case of Consolidated Bank and Trust Co., the SC ruled that the contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan/mutuum. 12. In the case of Serrano vs. Central Bank of the Phil., the SC held that bank deposits are in the nature of irregular deposits. 13. In Simex International Case, the SC said that the banking system is an indispensable institution that plays a vital role in the economic life of the nation. 14. It is basic that after consolidation of title in the buyer’s name for failure of the mortgagor to redeem, the writ of possession becomes a matter of right and its issuance to a purchaser is merely a ministerial function. 15. Acceleration Clause means any provision in the contract between the bank and the cardholder that gives the bank the right to demand the obligation


San Beda College of Law Banking Laws in full in case of default or non-payment for whatever reason. 16. The law that protects its citizens from a lack of awareness of the true cost of credit to the user by assuring full disclosure of such cost is Truth in Lending Act. 17. The agreement between the parties in a loan transaction which stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by the MB is called escalation clause. 18. Joint and Solidary Agreement is an agreement where the contracting parties consent to be jointly and severally liable in a loan obligation. 19. A bank guarantee is an irrevocable commitment of a bank binding itself to pay sum of money in the event of non-performance of a contract by a third party. 20. Assignment of credit is an agreement by virtue of which the owner of credit, known as the assignor, by a legal cause, such as sale or dation in payment transfers his credit to another known as the assignee who acquires the power to enforce it. 21. All foreign currency deposit are of absolute confidential nature as a general rule and said deposit shall be exempt from attachment pursuant to RA No. 6426 otherwise known as Foreign Currency Deposit Act of the Philippines. 22. Negotiable Order of Withdrawal Accounts are interest bearing deposit accounts that combine the payable on demand feature of checks and investment feature of savings account. 23. Independent Auditor means a person other than an officer or employee of the bank, its subsidiaries or affiliates or related companies, or its majority shareholders. 24. Interest Rate Differential refers to the difference or margin between interest rates such as the difference between domestic and foreign interest rates.

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25. Secrecy of Bank Deposit Act is the law that was passed to give encouragement to people to deposit their money in banking institutions. 26. The Securities and Exchange Commission shall not register the articles of incorporation of any bank unless accompanied by certificate of authority issued by the monetary board. 27. The equity investment of a universal bank or its wholly or majority owned subsidiaries, in a single non-allied enterprise shall not exceed 20% of the total equity. 28. Demand deposit are all those liabilities of the Banko Sentral and of the other banks which are denominated in the Philippine currency and are subject to payment in legal tender upon demand by presentation of depositor’s check. 29. The rule intended to maintain the quality of bank management and afford better protection to depositors and the public in general is called fit and proper rule 30. Off shore banking units refer to a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Banko Sentral to transact offshore banking business in the Philippines 31. A bank is bound by the negligence of its employees under the principle of Respondeat Superior 32. Quasi banks refer to entities engaged in the barrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for the purpose of relending or purchasing receivables and other obligation 33. The business of banking is imbued with public interest in order to assure the stability of banks which largely depends on the confidence of the people in the honesty and efficiency of banks.

Summary of Laws AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws Chapter 1

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RA 7721 Foreign Bank liberalization Act

RA 8791 General Banking Law of 2000 RA 7353 an act providing for the creation, organization and operation of rural banks ------------GOD BLESS IN THE MIDTERMS!!!---------RA 7906 an act providing for the regulation of the organization and operations of the thrift banks RA 6938 an act to ordain a cooperative code of the Philippines RA 6848 an act providing for the 1989 charter of the AlAmanah Islamic bank of the Phil RA 6426 an act instituting a foreign currency deposit system in the Philippines BP 68 Corporation code

Chapter 2 RA 7653 The New Central Bank Act

Chapter 3 RA 1405 Secrecy of bank Deposit Act RA 8367 an act providing for the organization and operation of non stock savings and loan association RA 9160 an act defining the crime money laundering RA 6770 the ombudsman act of 1989

Chapter 4 RA 7394 Consumer Act Act No 3135 an act to regulate the sale of property under special powers inserted in or annexed to real estate mortgages

Chapter 6 PD 1034 Offshore Banking System Decree AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws CHAPTER 7 – The Banko Sentral ng Pilipinas I. Creation, Responsibility and Corporate powers of BSP Declared policy of the state •

•

State shall maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibility Concerning money, banking and credit BSP is a GOCC but enjoys fiscal and administrative autonomy

Creation of the BSP • • • • • • •

BSP – independent central monetary authority Capital of BSP – P50B which shall be fully subscribed by the government P10B shall be paid by the government upon effectivity of act The balance shall be paid within 2 years Place of business – principal place of business in Metro Manila or maintain other branches Creation of central monetary authority is cited in Sec 20 Art XII of Constitution The authority shall prove policy direction in areas of money, banking and credit and regulatory powers of such operations

Responsibility and primary objective of BSP 1. Responsibility of BSP – provide policy direction in areas of money, banking and credit 2. Shall have supervision over operation of banks 3. Exercise regulatory powers over operations of finance companies and non-bank finance institutions performing quasi-banking 4. Primary objective of BSP – maintain price stability conducive to a balance and sustainable growth of the economy 5. It shall promote and maintain monetary stability and convertibility of the peso • In Busuego vs. CA, the court ruled that the BSP has responsibility of administering the monetary, banking and credit system of the country and is granted power supervision and examination over banks

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1. Use corporate seal 2. Enter contracts 3. Lease or own personal and real property and may dispose the same 4. Sue and be sued 5. Perform any thing that may be necessary to carry out purpose of NCBA 6. Acquire and hold assets and incur liabilities in connection with NCBA 7. Comprise or release claim or settled liability to BSP regardless of amount involved Power to prosecute • • • •

• • • •

BSP can cause prosecution of those who violate banking law However, nothing in the law gives the BSPN the specific duty to do the actual prosecution Thus, BSP is not a prosecution agency unlike the fiscal office In Perez vs. Monetary Board, it was ruled that being an artificial person, BSP is limited to its statutory powers It nearest power to prosecute is its power to sue and be sued which refers to civil case only BSP can only cause prosecution which is a public offense and anyone can denounce such Mandamus for the purpose of causing the BSP to charge violation of bank laws is improper BSP and members of MB should not be impleaded as parties to a case under Sec 6, Rule 43 of RoC

Estoppel • • •

•

BSP is committed to maintain the stability of the country foreign exchange reserve position Must adhere to principles of fairness and decency under Bill of Rights BSP circulars must be implemented to promote country’s production and at the same time avoid irreparable prejudice to participants In CB vs. IAC, the court ruled that in case banks already faithfully complied with BSP directives, BSP is estopped from enforcing circulars which deny banks of their rights

II. Authority of BSP

Supervisory powers of BSP Corporate powers of BSP (SCP-SPAL) AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.


•

Operations and activities of banks shall be subject to supervision of BSP. Supervision shall include the following: (REO-ISC) 1. Issuance of rules of conduct or SOP for uniform application to al institutions covered 2. Conduct examination to determine compliance with laws and regulation 3. Overseeing to ascertain law and regulation are complied with 4. Regular investigation. Not oftener than once a year to determine whether there is business is conducted on a safe or sound basis. Deficiencies immediately addressed 5. Inquiring into solvency and liquidity 6. Enforcing prompt corrective action BSP shall have supervisions over operations of: 1. Quasi-banks 2. Trust entities 3. Other financial institutions

Composition • •

Phase out of BSP powers over building and loan associations •

Within period of 3 years, BSP shall phase out and transfer supervising and regulatiry power over building and loan associations to Home Insurance and Guaranty Corporation

Policy direction; rations, ceiling and limitations • •

•

BSP shall provide policy direction in areas of money, banking and credit MB shall prescribe ratios, ceilings, limitations in different accounts of banks to confirm to internationally accept standards including Bank for International Settlement MB may exempt particular categories of transactions from such rations, ceilings to: o Exceptional cases o Enable a bank under rehabilitation or during merger or consolidation to continue business with safety

III. Monetary Board •

Powers and functions of BSP shall be exercised by Banko Sentral Monetary Board

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MB shall be composed of 7 members appointed by President with term of 6 years The seven members are: 1. The governor who shall be the chairman of MB. Governor shall be head of a department and his appointment confirmation of COApp Whenever unable to attend board meeting, deputy governor shall act as alternate MB shall designate one of its members as acting chair 2. Member of cabinet designated by President Whenever cabinet member unable to attend meeting, Usec shall be alternate 3. 5 members who shall come from private sector serving full-time In the first appointments from effectivity of act, 3 serve 6 yrs while the other 2 - 3 years

Vacancies •

Any vacancy created by death, resignation or removal shall be filled by new appointment to complete unexpired term

Qualification of members of MB 1. Natural born citizens 2. At least 35 years of age, Governor must be 40 years old 3. Good moral character 4. Integrity 5. Probity and patriotism 6. Recognized competence in social and economic disciplines Disqualification of MB members 1. Disqualification under RA 6713 (Code of Conduct and ethical standards of public officer and employees) 2. Disqualified from being a DOSRI of any bank subject to the supervision or examination of BSP


San Beda College of Law Banking Laws a. In which case, such member shall resign before assumption of office 3. Member of MB coming from private sector shall not hold public office in tenure 4. No person shall be member if he has been connected directly with any multilateral banking institution or has substantial interest on any private bank 1 year prior appointment 5. No member shall be employed in any such institution within 2 year after expiration of term except when serving as representative of government (sec 9) Grounds for removal MB members 1. Subsequently disqualified under Sec 9 during tenure 2. Physically or mentally incapacitated and cannot discharge duties and incapacity lasted more than 6 months 3. Guilty of acts or operation of fraudulent or illegal character opposed to aim of BSP 4. Member no longer possess qualification under sec 8 Meetings, quorum, decisions and proceedings MB 1. MB shall meet at least once a week. MB may be called to meeting by governor or 2 other members of board 2. Presence of 4 members constitute quorum provided that governor or his alternate is among the 4 3. BSP shall maintain and preserve complete records of proceedings in their original form or in microfilm 4. General Rule: All decisions of MB shall require concurrence of at least 4 members

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banking institution once every 12 months and at such other time at the vote of 5 members of MB 3. Sec 72 NCBA – During exchange crisis or national emergency, with concurrence of 5 members of MB and approval of president, MB may temporarily suspend sales of exchange by BSP and may subject all transactions in gold and foreign exchange to license by BSP 4. Sec 84 NCBA – in nation or local emergency or imminent financial panic, MB may, with 5 vote of members, authorize BSP to grant extraordinary loans or advances to banks secured by assets Deputy Governors may attend meetings of MB •

They may attend meetings and have the right to be heard

Salaries of governor and members of MB •

Salary shall be fixed y President at a sum commensurate to the importance and responsibility attached to their position

Personal or Pecuniary interests •

•

Members of MB with personal or pecuniary interest in any matter in the agenda of MB shall disclose his interest and shall retire from the meeting when matter is taken The decision made on matter shall be made public and the minutes shall reflect disclosure made and retirement of member

Scope of authority of MB

1. Issue rules and regulations it considers necessary for the discharge of its responsibilities and exercise of its powers a. Rules and regulation issued shall be Exception to general rule where at least 5 votes is required: reported to President and Congress within 15 days from date of issuance 1. Sec 61 GBL – publication of financial statements 2. Direct the management, operation and is required once at least every quarter. In national administration of BPS, reorganize its personal and or local emergency or of imminent panic, MB by issue rules and regulations vote of 5, upon application of bank, may allow a. Legal units of BSP shall be under such bank to defer publication of financial exclusive control and supervision of MB statement 3. Establish human resource management system 2. Sec 28 NCBA – supervision and examining which shall govern selection, hiring, appointment department head shall examine books of every or dismissal of personnel. AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws a. Compensation structure based on job evaluation studies and wage surveys shall be the integral component of the HR program b. MB shall make its own system which conform closely to RA 6758 (Compensation and Position Classification Act of 1989) c. Those under salary grade 19 shall have rates under RA 6758 d. Upon recommendation of governor, appoint, fix remunerations and removal personnel subject to civil service law • In CB Employees Association vs. BSP, the court ruled that the establishment of unfair human resource management is unconstitutional. It shown that higher grades receive greater benefits withheld from lower grades. • Rank and file employees are limited to SSL while employees in higher rank are given higher compensation to entice them to stay. It is the rank and file employees that are of need for greater benefits 4. Adopt annual budget for and authorize expenditure by BSP 5. Indemnify its members against all costs and expenses incurred in connection with civil or criminal suit by reason of performance of duty unless liable for negligence or misconduct a. In event of settlement or compromise, indemnification are covered provided that there is no negligence b. Costs and expenses incurred in defending may be paid in advance and repay the amount advanced should it be determined that personnel is not entitled to indemnity

a. Disclosure of information of a confidential nature unless disclosure is in connection with performance of official function b. Use of such information for personal gain or detriment of the government, BSP or third parties. any data required to be submitted to President or Congress is not confidential 3. Legal obligation and good faith that BSP officer owe to public start with official acts of MB which are the cause of loss and injury and not any preparatory report or recommendation IV The Governor and Deputy Governors Powers and Duties of the Governor (CEO:PEDARE) 1. Shall be the CEO of BSP 2. Prepare the agenda for meetings and submit, for consideration, policies and measures necessary 3. Execute and administer policy and measures approved by MB 4. Direct and supervise operation and internal administration of BSP. Governor may delegate certain administrative responsibilities to other officers 5. Appoint and fix remuneration of personal below of a department head. Removal of personal is with approval of MB 6. Render opinions, decisions or rulings which is final and executor until reversed or modified by MB 7. Exercise other powers vested by MB Powers of Governor as representative of MB and BSP •

Responsibility of Members of MB 1. If anyone wilfully violate NCBA or guilty of negligence, abuses or malfeasance or misfeasance or fails to exercise extraordinary diligence in performance of duty, he shall be held liable for loss or injury suffered by BSP or banking institution (VNAMMFe) 2. Similar responsibility shall apply to officer or employees of BSP

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Governor shall be the principal representative of MB and BSP with following powers: 1. Represent MB and BSP in all dealings with other offices 2. Sign contracts entered into by BSP, notes and securities issued by BSP Signature may be facsimile 3. Represent BSP in any legal proceeding 4. Delegate his power to represent to other officers In order to preserve integrity of office, governor may choose not to participate in preliminary



•

discussions of multilateral banking institutions on negotiations for the government During such, he may be represented by permanent negotiator

Emergencies (CRM) 1. In case of emergency, governor with concurrence of 2 other members, may decide matter or take action within authority of the board 2. Governor shall submit report to President and Congress within 72 hours 3. At soonest possible time, governor shall call meeting of MB for ratification Limitation on outside interest of governor and members of board • •

They shall limit their professional activities directly to their position in BSP Shall not accept any other employment except when position in eleemosynary, civic, cultural or religious organization or by designation of President to represent government

Number and functions of deputy governors 1. Governor shall appoint not more than 3 deputy Governors who shall perform duties as may be assigned to them 2. In absence of governor, deputy governors designated to act as CEO of BSP shall exercise duties 3. Whenever governor is unable to attend government board or councils where he is ex officio member, deputy governor may be designated vested with power to participate and vote V. Operations of BSP

2. BSP, through governor or representative shall have the power to issue subpoena for production of books. Contempt if refused 3. Data on individual firms other than banks gathered by BSP Department of Economic Research shall not be available outside BSP. Collective data can be released to interested 4. Personnel of BSP shall be prohibited from revealing in any manner, except under orders of court, Congress or government office Training of Technical personnel •

BSP shall prepare data and conduct economic research for guidance of MB

Scope of Authority of BSP to obtain data 1. BSP shall have authority to require government office any data it may require

BSP shall sponsor training of technical personnel in field of money and banking

Scope of supervision and examination by BSP 1. BSP shall have supervision over, and conduct periodic or special examinations of bank, quasi banks including subsidiaries and affiliated engaged in allied activities a. Subsidiary – more than 50% voting stock is owned by bank or quasi-bank b. Affiliate –50% or less is owned by bank or related or linked to institution through common stock holders 2. Department heads and examiners are authorized to a. Administer oaths to any directors, office or employee of any institution b. Compel presentation of books, document and records relative to true condition of institution Restraining order or injunction •

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Research and Statistics of BSP •

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No restraining order or injunction shall be issued enjoining (preventing) BSP from examining institution under its supervision Exception: there is convincing proof that action of BSP is plainly arbitrary and in bad faith and petitioner files bond in favor of BSP Provisions of Rule 58 – Preliminary Injunction shall apply not inconsistent

VI. Director, Officer or Stockholder and Related Interests Contracting Loans



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Any DOSRI contract loans or any financial accommodation from his bank or a from a bank (lending bank) that is: 1. Subsidiary of bank holding company of which both his bank and lending bank is subsidiaries 2. Controlling proportion of share is owned by the same interest that owns a controlling proportion of share of his bank in excess of 5% if capital and surplus of bank Such shall be required by lending bank to waive the secrecy of his deposits in all banks Any information obtained from examination shall be strictly confidential. Used only by examiner only in connection with supervisory responsibility or by BSP in legal action

Prohibition against Personnel of BSP •

In additional to prohibition from RA 3019 and RA 7613, the BSP personnel prohibited from: 1. Being DOSRI of institution under supervision of BSP except non-stock savings and loan associations 2. Require or receive any gift from any institution subject to supervision 3. Reveal in any manner, except under court order, Congress or government officer. Shall not apply to giving of information to MB or governor of BSP 4. Borrowing from any institution subject to supervision and examination unless borrowings are adequately secured

VII. Examination of Banking Institutions Frequency of examination •

Department head shall examine books of every banking institution once every 12 months and at such other time at the vote of 5 members of MB. Interval shall be at least 12 months

Afford opportunity to examine •

Bank concerned shall afford the head full opportunity to examine its books, cash and assets during banking hours

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None of the reports shall be open to inspections of the public except when such is incidental in proceedings for violations

Service Fees •

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Banking which are subject to examination of BSP shall pay BSP within first 30 days of each year an annual fee as may be prescribed by MB Sec 65 of GBL states that BSP may charge equitable rates, commissions and fees fir supervision or examinations

VIII. Administration Operating departments of BSP •

MB shall determine operating departments including public information office

Required reports and publication of BSP 1. General balance sheet showing volume and composition of its assets and liabilities – 60 days after end of each month except December, 90 days if such 2. MB shall publish and submit to Congress and President the following reports: a. Analysis of economic and financial development – not later than 90 days after end of each quarter b. Preceding year’s budget and profit and loss statement – within 90 days after end of year c. Review of the state of financial system – 120 days after each semester d. Abnormal movements in monetary aggregate and general price movements – 72 hours after remedial measures was taken Annual Report of BSP 1. Annual report on the condition of BSP – before end of March each year. Submit to President and Congress and include review of policies and economic analysis circumstances: 2. Will also include statement of financial condition of BSP and statistical appendix include: (1) movement monetary aggregates, (2) movements of


San Beda College of Law Banking Laws foreign exchange, (3) balance of payments, (4) consumer prices, (5) exports/imports, (6) accounts of BSP, (7) data 3. BSP shall publish another version of the annual report understandable in layman 4. Failure to comply without justifiable reason shall cause withholding of salary of personnel

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•

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Chairman of COA act as ex officion auditor of BSP and authorized to appoint representative auditor to BSP. Can only be removed by COA Representative shall be (1) CPA, (2) 10 years experience, (3) not relative to member of MB or COA to 6th civil degree

X. Penalty for Violation Signature of statements •

IX. Profits, losses and special accounts Fiscal Year •

Within 30 days following end of each year, BSP shall determine net profits and losses

Distribution of net profits •

Within 60 days following end of each fiscal year, MB shall determine distribution of net profits according to the following: 1. 50% of net profits carried to surplus 2. Remaining 50% shall revert back to National Treasury

Revaluation profits and losses 1. Profits or losses from revaluation of gold or foreign currency shall not be included in computation of annual profits or losses 2. Any profit or losses from revaluation shall be offset by amounts owed by Philippines to international financial institutions 3. Any remaining profit or loss shall be placed in the Revaluation of International Reserve and net balance shall appear as either liability or asset depending whether profit or loss The Auditor

Sec 66 of GBL provides that if offender is director or officer, shall be suspended or removed from office. If offender is corporation, shall be dissolved by quo warranto instituted by SG

Penalty for refusal to make reports or permit examination •

Starts on January first and ends on December 31st of each year

Computation of Profits and Losses •

•

Balance sheet and other financial statements shall be signed by (1) officer responsible for preparation, (2) governor, (3) BSP auditor

Person was required in writing by MB or supervising department but refused to file or permit examination. Penalty 50k-100k

Penalty for wilful making of a false or misleading statement of material fact •

Penalty 100k-200k

Proceedings upon and penalty for violations of NCBA and banking laws 1. Bank, quasi bank or any person violates NCBA, penalty is 50-200k 2. Bank or quasi bank persists in carrying business in unlawful or unsafe manner same penalty Administrative violations on banks •

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MB shall impose administrative penalty to bank, quasi-bank, director or officer for: 1. Willful violation of charter 2. Willful delay in submitting report 3. Refusal to permit examination 4. Willful making of false or misleading 5. Willful failure to comply with bank laws 6. Any commission of irregularity 7. Conduct business in unsafe manner Following are the sanctions: 1. Fines not exceed 30k per day per violation 2. Suspension of rediscounting privileges 3. Suspension of lending or FOREX operations



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4. Suspension of interbank clearing privileges 5. Revocation of quasi-baking license Resignation shall not exempt criminal or administrative sanctions MB may preventively suspend office under investigation not exceed 120 days except when delay is caused by him Administrative sanctions need not be applied in order of severity

Administrative Proceedings on banks 1. WON there is administrative proceedings, if officer continue to persist in practice or violation, MB shall release cease and desist order effective upon service to respondents 2. Respondents have opportunity to defend their action in a hearing upon a request made within 5 days from receipt of order. If no hearing is requested, order is final 3. Governor is authorized to impose to banks fines not exceeding 10k per day per violation which can be appealed to MB


San Beda College of Law Banking Laws CHAPTER 8 – Currency, Monetary Stabilization and Functions of BSP I. The Unit of Monetary Value The Peso • • • •

Peso - unit of monetary value in the Philippines (P sign) Peso divided into 100 equal parts called centavo (c sign) All monetary obligation shall be settled in Philippine currency in legal tender Parties may agree that obligation shall be settled in other currency

2. Art. 164 – Mutilation of coins 3. Art. 165 – Selling of false or mutilated coins without connivance 4. Art. 166 – Forging treasure notes or other documents payable to bearer 5. Art. 167 counterfeiting, importing or uttering instruments not payable to bearer 6. Art. 168 - Illegal possession and use of false treasury notes 7. Art. 169 – How forgery is committed Exception to territoriality of penal laws •

Definition of Currency •

Currency – all Philippine notes and coins issued in accordance with NCBA

Value of Currency •

• • •

Currency has value because people are willing to accept it in exchange for goods or services or payment of debt Money has no value as a commodity but has value as means of medium of exchange Value of goods and services are measured by terms of medium Not applicable if no confidence in currency and people would use foreign currency

1. BSP shall have the sole power to issue currency within the Philippines 2. MB may issue regulations to prevent circulation of foreign currency , currency substitute or facsimiles of BSP notes 3. BSP shall have authority to investigate, arrest and conduct searches to maintain integrity of currency 4. Violation shall have imprisonment of 5-10 years unless RPC gives greater penalty Related Crimes under RPC

Art. 2 of RPC provides that the territoriality rule does not apply : 1. Should forge or counterfeit any coin or currency note the Philippines or obligations or securities of the Government 2. Liable for acts connected with introduction of such into islands

Liability for notes and coins • • • •

II. Issue of means of payment Exclusive issue power

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Notes and coins issued by the BSP shall be liability of BSP It shall be issued in amounts not exceeding assets of BSP Notes and coins shall be a first and paramount lien on all assets of BSP BSP’s holding of its own notes and coins shall not be considered a part of its currency issue and not part of assets and liabilities

Legal tender power •

•

• •

All notes and coins issued by BSP shall be fully guaranteed by the Government and shall be legal tender in Philippines for all debts, public or private Checks representing demand deposits do not have legal tender and acceptance is at the option of the creditor Check cleared and credited to account of creditor shall be equivalent to delivery BSP Circ. 537 of 2006 – maximum amount of coins to be considered as legal tender o 1,5,10 peso coins – 1k o 1,5,10,25 centavos – 100

1. Art. 163 – Making and importing and uttering false coins AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.


•

•

Art 1249 of NCC states that all payments of debts shall be in currency stipulated and if not possible currency in legal tender It also states that when there is payment by PN, it shall produce only effect when encashed or impaired through fault of creditor. Action derived from obligation is held in abeyance Art. 1250 of NCC, where there is extraordinary inflation or deflation, value of currency at time of establishment of obligation shall be basis of payment

Characteristics of the currency • • • • •

MB with approval of President shall prescribe denominations, dimensions, designs of notes. Notes shall state that they are liabilities of BSP and fully guaranteed by government Notes shall bear signature, in facsimile, of President and BSP Governor MB with approval of President shall prescribe weight, fitness, design and denomination of coins In minting of coins, availability of metals and its price shall be considered

Printing of notes and mining of coins •

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MB shall prescribe amounts of notes and coins to be printed and minted. MB has authority to contract institutions for such All expenses incurred shall be for the accounts of BSP

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BSP shall exchange on demand and without charge Philippine currency in any other denomination requested If BSP is temporarily unable to provide such, it shall deliver denomination nearest

Replacement of currency unfit for circulation •

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BSP shall withdraw from circulation and demonetize all notes and coins unfit for circulation and shall replace them BSP shall not replace notes under mutilated condition and without compensation to bearer

Mutilated condition: (1) identification is impossible, (2) signs of filing, clipping, (3) notes lost more than 2/5 of surface or all signatures

Retirement of old notes and coins • • •

•

BSP may call for replacement of notes (more than 5 yrs old) and coins (more than 10 yrs old) Notes and coins replaced shall remain legal tender for 1 year from date of call After period, such shall cease to be to be legal tender but can be exchanged at par and without charge in BSP during following year After said period, notes and coins not exchanged shall cease to be a liability of BSP and shall be demonetize

III. Domestic monetary stabilization Guiding principle on monetary stabilization 1. MB shall endeavour to control any expansion or contract of monetary aggregates prejudicial to price stability Power to define terms 2. MB shall define monetary aggregates, credit and prices and made public such definitions Action when abnormal movements occur in monetary aggregates, credit and prices •

Interconvertibility of currency •

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When such occurs that endanger stability of economy, MB shall: 1. Take remedial measures 2. Submit to Prresident and Congress of report containing the (1) cause, (2) extend of change and (3) measures taken by MB Whenever the following happen: 1. Monetary aggregates or level of credit increases or decreases by more than 15% 2. Cost of living index increases by more than 10% in relation to level of month existing of preceding year 3. Other circumstances so warrant • The monetary board shall submit reports and shall state whether these changes is a threat to stability



MB shall continue to submit periodic report to President and Congress until monetary aggregates, credit and prices disturbances disappeared or controlled

IV. International Monetary Stabilization

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International Monetary Stabilization •

BSP shall exercise its powers under the NCBA to preserve the international value of peso and maintain its convertibility

International Reserves •

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International reserves – must be maintained adequately to meet foreseeable net demands for foreign currencies Adequacy of international reserves – MB shall be guided by prospective receipts and payments of foreign exchange MB shall give special attention to volume and maturity of the following: o Liability of BSP in foreign currency o Foreign exchange assets and liabilities of other banks and all other persons

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International reserve shall include but not limited to: • Gold • Assets in foreign currencies Assets in foreign currencies include (1) documents of international transfer of funds, (2) demand and time deposits of banks abroad and (3) foreign government securities and notes MB shall hold the FOREX resource of BSP in freely convertible currencies MB shall issue regulations that FOREX assets must meet BSP shall be free to convert any asset in international reserves into other assets

Action when International Stability of Peso is Threatened •

2. International reserve appears to be imminent to fall on such level 3. International reserve is falling as a result of remittance abroad The MB shall: 1. Take remedial actions 2. Submit to the President and Congress a report including: Nature and cause Remedial measures taken Monetary, fiscal and administrative measures Character and extend of cooperation required 3. If resultant actions fails, the MB shall propose to the President with notice to Congress of additional action to restore equilibrium 4. MB shall submit periodic reports to President and Congress until threat has disappeared

Means of Action •

Composition of International Reserves •

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In order to achieve the primary objective of price stability, MB shall rely on moral influence and powers granted by NCBA

V. Operations in Gold and FOREX Purchases and sales of gold • •

BSP may buy and sell gold It shall be made in national currency at prevailing international market price

Purchase and sales of FOREX •

•

BSP may buy and sell foreign notes, coins and documents. They can also engage in future exchange operations BSP shall engaged with FOREX transactions with the following: (BIG-FO) 1. Baking institutions operating in the Philippines 2. International financial institutions 3. Government 4. Foreign governments 5. Other entities authorized by MB

Whenever: 1. International reserve falls to a level inadequate to meet prospective net demands for foreign currencies AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.


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In order to maintain convertibility of peso, BSP may buy those offered and sell any quantity demanded provided that FOREX is freely convertible into gold or US dollars This requirement shall not apply to demand for foreign notes and coins BSP shall effect its exchange transactions at the rates determined by Sec. 74

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Foreign Asset Position of BSP •

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BSP shall maintain a net positive foreign asset position so that gross FOREX assets will always exceed gross foreign liabilities If FOREX liabilities exceed twice the FOREX assets, BSP shall within 60 days, submit report to Congress stating origin of liabilities and manner which it will be paid

Emergency Restriction on Exchange Operations •

•

In order to: 1. Achieve primary objective (price stability) 2. Protect international reserves 3. And in time of national emergency, give MB time to takes constructive measures to forestall or combat crisis The MB with concurrency of 5 members and with approval of President may: 1. Temporary suspend or restrict sale of exchange 2. Subject all transactions in gold and FOREX to license 3. Require FOREX obtained by anyone be delivered to BSP at effective exchange rate. Foreign currency deposits RA 6426 (Foreign Currency Deposit System) shall be exempted

•

BSP shall avoid acquisition of such currencies It may require such currencies in an amount exceeding the minimum balance to cover current demands for said currency only when acquisition of such is considered of national interest

Exchange Rates (Sec. 73)

MB shall determine exchange rate policy of the country MB shall determine rates at which BSP shall buy and sell spot exchange and establish deviation limits for effective exchange rates BSP shall not collect any additional commissions other than actual telegraphic costs MB shall similarly determine rates for other types of FOREX transactions including sales of foreign notes and coins The margins between effective exchange rates and rates established may not exceed the corresponding margins for spot exchange transactions more than additional costs involved in each type of transactions

Operations with Foreign Entities •

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MB may authorize BSP to grant and receive loans from foreign banks and may engage in operations with such entities for national interest BSP may also act as agent of such entities BSP may pledge gold or other assets as security against loans it received

VI. Regulations of FOREX Operations FOREX Holdings of Banks •

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Acquisition of Inconvertible Currencies • •

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BSP may at all times have FOREX resources sufficient to enable it to maintain international stability and covert ability MB may require banks to sell to BSP part of their surplus holdings of FOREX to achieve this. Such transfers may be required to all foreign currencies MB may determine the net assets and liabilities of banks To determine such, the following shall be taken into consideration: (1) bank’s networth, outstanding liabilities or other financial or performance ratios Such determination shall be applied to all banks uniformly and without discrimination

Requirement of Balanced Currency Position •

MB may require the banks to maintain balance position of assets and liabilities in peso or other



•

currency. Banks shall be granted reasonable time for such Power above shall be exercised only under special circumstance and applied to all banks uniformly and without discrimination

Regulation of Non-Spot Exchange Transactions •

To restrain banks from taking speculative positions with respect to future fluctuation in FOREX rates, MB shall issue regulations for sales in non-spot exchange

Other exchange profits and losses • •

Banks shall bear risks of non-compliance with terms of FOREX documents they buy and sell They shall also bear other risks including exchange risk not assumed by BSP

Information on Exchange Operations •

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Banks shall report to BSP the volume and composition of the purchases and sales of gold and FOREX each day MB may also require other persons to report such purchases and sales of gold and FOREX. Accuracy of declaration may be verified by BSP

VII. Loans to Banking and Other Financial Institutions

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Guiding Principles •

The rediscount, discount, loans and advances shall be used to influence volume credit consistent with object price stability

Authorized Types of Credit Operations •

BSP may perform the following credit operations in the Philippines: (CPOA) 1. Commercial credits – credits where maturities are not more than 180 days and resulting from: 1. Purchase and sale of readily saleable goods, exportation, importation and their transportation (PESTI) 2. Storing non-perishable goods with are duly insured

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2. Production credits – credit where maturities are not more than 360 days and resulting from production of agricultural, animal, mineral or industrial products 1. Such must be secured by a pledge of respective product except if loan is secured by lien on 70% value of real estate property 3. Other credits – credits not under 1 and 2. BSP can provide funds from non0inflationary sources 4. Advances – grant advances against the following kinds of collateral for fixed periods which shall not exceed 180 days, except #4: (GSC-CUNN) 1. Gold 2. Securities representing obligations of BSP 3. Credit instruments in no. 1 4. Credit instrument in no. 2 for period not exceed 360 days 5. Utilized portions of advances in current amount covered by regular overdraft 6. Negotiable treasury bills maturity within 3 years 7. Negotiable bonds by government maturity not more than 10 years Rediscounting, discounts, loans and advances in above provision may not be renewed or extended unless extraordinary circumstance justify it Advances in No. 6 and 7 may not exceed 80% of current market value of collateral

Loans for Liquidity Purposes •

BSP may extend loans and advances for a period not more than 7 days without collateral for purpose of providing liquidity in the bank in times of need

VIII. Emergency Loans and Advances Nature of Emergency Loans and Advances •

Emergency loan or advance – credit facility intended to assist a bank experiencing serious liquidity problems from causes beyond its control



1. Furnish an undertaking to indemnify and hold harmless from suit a conservator appointed by MB 2. Provide acceptable security adequate to supplement the collateral assets

Grant of such is discretionary on MB and is a temporary remedial measure. It must also be fullysecured

When Granted 1. In period of national or local emergency or financial panic, MB may at 5 members vote, authorize grant of extraordinary loans to banks secured by assets o Such loans shall not expand the bank’s total volume of loans or investments 2. MB, at 5 members vote, grant emergency loans to banks even during normal period to assist bank in precarious financial condition brought by unforeseen events or foreseeable events though inevitable o Bank should not be insolvent and has assets to secure advances • No.1 contemplates emergency affects whole banking community in financial crisis giving rise to widespread confusion in public • No. 2 provides situation where BSP grants loan to a bank with uncertain financial condition but not insolvent Limits •

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Shares Collateral •

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Prohibition in 128 shall not apply if it refers to acceptance as collateral of share and their acquisition due to foreclosure proceeding BSP shall dispose of such share by public bidding within 1 year Sec 128 – BSP shall not acquire or accept shares as collateral and shall not participate in ownership of enterprise. BSP shall not engage in development banking or financing except for outstanding loans obtained or extended for development financing

Overdraft •

Overdraft shall be eliminated within a period of 5 consecutive banking days

IX. Credit Terms Interest and Rediscount

Amount of emergency loan or advance shall not exceed 50% total deposits and deposit substitutes of bank and is given in 2 tranches

First Tranche •

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Amount of 1st tranche shall be limited to 25% of total deposit and deposit substitute of bank and secured by government securities Amount of first tranche may exceed 25% if it is adequately secured by government securities and unencumbered first class collaterals Prior to release of first tranche, bank shall submit resolution of its board of directors authorizing BSP to evaluate their assets to determine that it is good for collateral

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BSP shall collect interest on all loans and advances it extends notwithstanding closure, receivership or liquidations MB shall fix interest and rediscount rates after due consideration has been given to credit needs of the market, composition of BSP portfolio and national monetary policy Interest rates shall be applied to all banks uniformly and without discrimination

Endorsement •

Documents rediscounted, discounted, bought or accepted as collateral by BSP must bear endorsement of bank

Repayment of Credits Second Tranche

• Documents rediscounted, discounted, bought or MB by vote of 5 members may release 2nd tranche accepted as collateral by BSP must be withdrawn on the following conditions that the principal stockholders shall: AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON. •


•

on dates of maturity or upon liquidation of obligation Banks shall have the right at any time to withdraw documents presented as collateral upon payment of full debt including interests

Other Requirements •

MB shall provide additional conditions which borrowing institutions must satisfy

Issue and Negotiation of BSP Obligations • • •

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Provisional Advances to the National Government •

BSP may make direct provisional advances with or without interest to national government to finance expenditures in annual appropriations provided that: o It is repaid before end of 3 months, extendible for another 3 months o Shall not exceed 20% of average annual income of borrower for the last 3 preceding fiscal year

Prohibitions • •

BSP shall not acquire or accept shares as collateral and shall not participate in ownership of enterprise. BSP shall not engage in development banking or financing except for outstanding loans obtained or extended for development financing

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Open market purchases and sales of security shall be made in accordance to primary objective of price stability

BSP may issue, place, buy and sell freely negotiable evidence of indebtedness of BSP The issuance of such shall only be made in cases of extraordinary movements in price levels It may be issued directly against the international reserves of BSP or issued without any relation to asset of BSP MB shall determine interest rates, maturities and may denominate the obligation in gold and foreign currencies BSP may acquire the said evidence of indebtedness before their maturity by: o Purchase in open market o Or redemption if the BSP has reserved its right to make such redemption Such shall not be included among BSP assets and shall be immediately retired and cancelled (because there was discharge, maker acquired the note he issued)

XI. Composition and Review of BSP Portfolio • •

X. Open market Operations for the Account of BSP Principles of Open Market Operations

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At least once every month, MB shall review portfolio of BSP for future credit policy MB shall consider if portfolio has a sufficiently large part consists of assets with early maturities in order to promptly contract BSP credit whenever national monetary policy so requires

XII. Bank Reserves Reserve Requirement •

In order to control volume of money created by credit operations, banks shall be require to maintain reserves against their deposit liabilities Purchases and Sales of Government Securities • MB may at its discretion require banks to maintain reserves against funds held in trust and liabilities • BSP may buy and sell in open market for its for deposit substitutes account the following: • Required reserves shall be proportional to volume 1. Evidence of indebtedness issued directly of deposit liabilities and shall ordinarily take a by Government form of a deposit in BSP 2. Evidence of indebtedness issued by • Reserve requirement shall be applied to all banks government instrumentality fully uniformly and without discrimination guaranteed by Government • Reserves against deposit substitutes shall be • The above must be freely negotiable and available determined like reserve requirement against to the general public in denomination of thousands regular bank deposits of pesos or more AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.


•

MB may exempt from reserve requirement such deposits with remaining maturities of 2 years or more and interbank borrowings Requirement to maintain bank reserves is imposed primarily to control volume of money and shall not pay interest on reserves maintained

Definition of Deposit Substitutes •

•

• •

Deposit substitutes – alternative form of obtaining funds from the public through the issuance, endorsement or acceptance of debt instruments for borrower’s own accounts for the purpose of relending receivables The following are some deposit substitutes: 1. Banker’s acceptance 2. Promissory notes 3. Participations 4. Certification of assignment 5. Repurchase agreements MB shall determine what instruments are considered as deposit substitutes Deposit substitutes of commercial, industrial and non-financial companies for the limited purpose of financing their own needs shall not be considered deposit substitutes

Required Reserves against Peso Deposits and foreign currency deposits •

MB may fix minimum reserve ratios to peso and foreign currency deposits that each bank shall maintain and shall be applied to all banks uniformly and without discrimination

Reserves against Unused Balances of Overdraft Lines •

MB may establish minimum reserve requirements for unused balance of overdraft

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•

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MB may increase reserve requirements against existing liabilities in a gradual manner and shall not exceed 4% in any 30 day period. Banks shall be notified reasonably in advance

Computation of Reserves

Reserve position shall be calculated daily on the basis of the amount at the close of business for the day In holiday or non-banking days, the reserve position is calculated at the close of the business day immediately preceding such holiday For purpose of computing reserve position, principal office of the bank in the Philippines and all branches are considered as single unit

Reserve Deficiencies •

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• • •

• •

When reserve position is below the required minimum, the bank shall pay: o 1/10 of 1% amount of deficiency or o The prevailing 91-day treasury bill rate plus 3% points whichever is higher Banks shall permitted to offset bank deficiency with any excess reserves which may have held during other days of the week Banks shall be required to pay penalty only on the average daily deficiency in the week In case of abuse, MB may deny any bank the privilege of offsetting reserve deficiencies If bank chronically has reserve deficiency, MB may limit or prohibit the bank from making new loans or investments It may also require that part or all net profits be assigned as surplus MB may modify or set aside the reserve deficiency penalty in a period of a strike or lockout of the bank or national emergency

Interbank Settlement • •

Increase in Reserve Requirement •

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•

BSP shall establish interbank clearing facilities. BSP may charge fees for such Deposit reserves maintained by banks in the BSP shall serve as bais for the clearing of checks and settlement of interbank balances Any bank that incurs an overdrawing in its deposit account in BSP shall fully cover such overdraft and pay interest (1) at 1/10 of 1% per pay or (2) prevailing 91-day treasury bill rate plus 3% point whichever is higher Settlement of clearing balances shall not be effect for accounts which continues to be overdrawn for



•

5 consecutive days until overdrawn is paid or has emergency loan Banks with existing overdrafts with BSP at effectivity of NCBA may either convert such to emergency loan or settle such immediately

Exemption from Attachment •

Deposits in BSP as reserve requirement shall e exempt from attachment, garnishment of court or government agency to satisfy claim of a party other than the government

XIII. Selective Regulation of Banking Operations Guiding Principle •

MB shall ensure supply, availability and cost of money are in accord with needs of Philippine economy and that bank credit is not granted for speculative purposes. Regulation on bank operations shall be applied to all banks uniformly and without discrimination

•

MB may prescribe minimum cash margins for opening of letters of credit

•

MB shall issue regulation with respect to maximum permissible maturities of loans and investments and amount of security

Portfolio Ceilings •

•

Whenever MB considers it advisable to prevent or check an expansion of bank credit, MB may place upper limit on amount on loans and investment of bank and its rate of increase In no case shall MB establish limits below the value of loans or investments of banks on the date on which they are notified by the restriction. Restrictions shall be applied to all banks uniformly and without discrimination

Minimum Capital Ratios

GOCCs which perform banking functions shall coordinate their banking policy with MB

XIV. Functions as Banker of the Government Designation of BSP as Banker of Government •

BSP shall act as baker of government, its political subdivisions and instrumentalities

Representation with IMF •

BSO shall represent government in IMF and shall carry accounts as may result from Philippine membership with such Fund

Representation to other Financial Institutions •

•

Required Security against Bank Loans •

MB may prescribe minimum ratios which capital and surplus of banks must bear to the volume of their assets

Coordination of Credit Policies

Margin Requirement against Letters of Credit •

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BSP may be authorized by the Government to represent it in dealings with International Bank for Reconstruction and Development and other international financial agencies The president may designate any of his financial advisers to jointly represent the government with BSP

Official Deposits • •

•

•

BSP shall be the official depository of the government As a general policy, government cash balance should be deposited with BSP and only minimum working balances is to be held by government banks Government bank may hold deposits of political subdivisions beyond minimum working balances when such subdivision have outstanding loans with former BSP may pay interest n deposits of the government as well on deposits of banks

Fiscal operations



•

BSP shall open a general cash account for the Treasurer of the Philippines in which liquid funds shall be deposited Transfers of funds from such account shall be made only upon order of Treasurer

Other Banks as Agent of BSP •

•

In performance as fiscal agent, BSP may engage services of other government and domestic banks for operations in localities or abroad where BSP does not have office Fiscal operations in foreign countries, BSP may engage in services of foreign banks

Remuneration for Services •

BSP may charge equitable rates for services it renders to the government

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Purpose of operations – increase liquidity and stabilize value of said security in order to promote investment in government obligation MB shall use the resources of the Fund to prevent or moderate sharp fluctuations in the quotations of government obligation However, it shall not endeavour to alter movements of the market resulting from basic changes in interest rates

Resources of Securities Stabilization Fund •

It shall come from balance of the fund held by the Central Bank (RA 265)

Profits and Losses of the Funds •

XV. Marketing and Stabilization of Securities for the Account of the Government

Securities Stabilization Fund shall retain net profits it may make on operations regardless if said profits arisen from capital gains or interest earning. It shall also bear net loss.

XVI. Functions as Financial Adviser Issue of Government Obligations •

•

Financial Adviser on Official Credit Operations Issue of securities representing obligations of government may be made through BSP which may act as agent of government BSP shall not guarantee the place of said securities and shall not subscribe to their issue except to replace its maturity holdings

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•

Method of Placing Government Securities • •

BSP may place securities in the such through direct sale to financial institutions and public BSP shall not be a member of any stock exchange or syndicate but may interfere for the purpose of placing government securities

Servicing and Redemption of Public Debt shall be effected through BSP Securities Stabilization Fund •

Securities Stabilization Fund –made for the account of the government and its operation shall consists of purchases and sales, in the open market, of bonds fully guaranteed by the Government

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• •

Before undertaking credit operation abroad, government, through Secretary of Finance, shall request the opinion of MB Opinion of MB shall be based on (1) gold and foreign exchange resources of the nation and (2) effects of such operation in balance of payments and on monetary aggregates Whenever government contemplates borrowing within the Philippines, the prior opinion of MB should also be requested The constitution provides that foreign loans may only be incurred in accordance with the law and regulation of monetary authority Information on foreign loans by the government shall be made public The President may contract foreign loans with prior concurrence of MB and subject to limitation of the law. MB shall, within 30 days at end of quarter, submit to Congress a report of loans made by government that would increase foreign debt

Representation on the National Economic and Development Authority (NEDA)



The deputy governor shall be an ex officio member of NEDA in order to – assure effective coordination between economic, financial and fiscal policies of government

Phase out of Regulatory Powers over Finance Corporations •

XVII. Privileges Tax Exemptions •

•

• •

BSP shall be exempt for a 5 year from approval of NCBA from all national, provincial, municipal and city taxes Exemption shall apply to all property of the BSP as well as to contracts and deed related to conduct of business It shall not apply to those payable by persons merely doing business to BSP Foreign loans shall be exempt from any taxes and payment is assumed by BSP

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The following are exempted from custom duties notwithstanding special laws: 1. Importation and exportation of BSP of notes, coins and other metals 2. Importation of all equipment needed for bank notes and coin production

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Appointment BSP, except policy determining, primarily confidential or highly technical in nature, shall be in accordance with CSL No qualification requirement for position shall be imposed other than those set by MB MB or Governor may, without need of further obtaining approval of government agency, appoint personnel in BSP Officers of BSP shall not engage directly or indirectly in partisan political activities

XVIII. Transitory Provisions of NCBA Phase-out of Fiscal Agency Functions •

BSP shall within 3 years but no longer than 5 years, phase out all fiscal agency functions and shall transfer it to DOF

BSP shall be made operational by these acts: (1) President appoint members of MB within 60 days and (2) transfer of assets and liabilities of CB to BSP within 90 days All incumbent personnel of CB shall continue to exercise duties in BSP if they are necessary

Transfer of Asset and Liabilities

Applicability of Civil Service Law •

BSP shall within 5 years phase out its regulatory powers over finance companies without quasibanking and transfer it to SEC

Implementing Details

Exemption from Customs Duties •

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Upon effectivity of Act, (1) 3 members of MB including Governor, (2) Sec. of Finance, (3) Sec. of DBM and (4) Chairmen of Committee on Banks of Congress shall determine assets and liabilities of CB to be transferred to BSP: o MB and Sec. of Finance shall work out creative monetary solution to retire CB of its liabilities at least cost o BSP shall remit 75% of net profits to a special deposit account (sinking fund) until net liabilities of CB is liquidated o Assets and liabilities shall be limited to an amount that will enable BSP to perform on viable basis. Assets shall exceed liability, by COA, by P10B o Liabilities by BSP shall include liabilities circulating notes and coins o Asset or liability of CB not transferred shall be retained and liquidated by CB Board of Liquidators for a period not exceeding 25 years All actions shall be reported to Congres and the President within 30 days

Mandate to Organize • •

BSP shall be organized irrespective of RA 7430 (Optimum Utilization of Personnel Act) There shall be no preferential or priority right to be given to any personnel for appointment in new staffing pattern



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Separation Benefits •

MB shall authorize separation benefits in addition to all gratuities under the law to those separated in service due to reorganization

Repealing Clause: RA 265 and PD 1792 are repealed Transfer of Powers •

All powers vested in CB not inconsistent with NCBA is deemed transferred to BSP

Suspense Accounts •

Sec 46 - Monetary Adjustment Account and Exchange Stabilization Adjustment Account are repealed. Revaluation of International Reserve Account shall continue for the account of the same entity


San Beda College of Law Banking Laws CHAPTER 9 – Unclaimed Balances and Trust Receipts I. Unclaimed Balances

5.

Definitions •

• •

•

Unclaimed balances – includes credits or deposits of money, bullions, security and any evidence of indebtedness with banks, loan associations and trust corporations in favor of any person (1) known to be dead or (2) who has not made further deposits or withdrawal during the preceding 10 years or more Governed by Act No. 3936 – Requiring Banks to Transfer Unclaimed Balances to Insular Treasury Such unclaimed balances, together with crease and proceeds shall be deposited to the Treasurer to the credit of the government Demand drafts cannot be escheated but telegraphic notes can (Republic vs. FNCB)

6.

7. 8.

Procedure 1. Within month of January of every odd year, all banks shall forward to Treasurer a statement under oath of all credits and deposits held by them of persons (1) known to be dead or (2) who has not made further deposits or withdrawal showing: a. Name and last known residence b. Amount and date of outstanding unclaimed balance c. Date when person died or made his last deposit or withdrawal d. Interest due on unclaimed balance 2. Copy of sword statement shall be posted n conspicuous place in premises of the bank at least 60 days from date of filing 3. Immediately before filing, bank shall communicate with person whose favor the unclaimed balance stand of such a. It is the duty of the Treasurer to inform the SG the existence of unclaimed balances 4. When SG is informed of such, he shall commence an action in the name of the People of the Republic in the CFI (RTC) of the province or city where the bank is located a. It shall be joined as parties the bank and all such creditors and depositors

9.

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b. All creditors or depositors or bank may be included in one action Service of process in such action or actions shall be made by delivery of copy to defendant bank and by public in a newspaper of general circulation At time of issuance of summons, clerk of cert shall also issue notice: a. Signed by him b. Directed to all persons other than defendants named therein c. Requiring them to appear within 60 days after first publication d. Show cause why unclaimed balance should not be deposited to Treasurer e. Notify them that if they do not appear, the court will grant relief to RP Copy of notice shall be attached to summons required Any person interested may appear to become a party. Upon completion of publication, court shall have complete jurisdiction Court must hear all parties. If the such are unclaimed, they shall be escheated to government and court will order their deposit to the Treasurer

Penalties •

If president, cashier or managing office of the bank neglects or refuses to file sworn statement, bank shall pay to the government 500Php per month for each infraction

Immunity from suit •

Any bank which has made a deposit to the Treasurer shall not thereafter be liable to persons who brought an action against the bank for such unclaimed balances. The bank shall be defended by SG without costs

Disclosure of Service and Maintenance Fees on Dormant Accounts • •

Banks may impose service or maintenance fees on dormant or inactive accounts Provided that before such fees are imposed, the period for dormancy and minimum balance is properly disclosed


San Beda College of Law Banking Laws Reclassification •

All unclaimed balances already reported to Treasurer shall be transferred/reclassified from deposit liability/other credit accounts to liability account, “Due to the Treasurer of the Philippines” until deposited to Treasurer

Escheats under Rules of Court • •

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•

•

Rule 91 of ROC applied in case a person died intestate and left properties in the Philippines Sec 1 – when person died intestate, left properties and has no heir, SG may file petition in CFI of province where deceased last resided or where he had estate Sec 2 – court shall release order of hearing that shall fix date and place of hearing not more than 6 months after entry of order and shall direct publication in newspaper once a week for 6 consecutive weeks Sec 3 – upon arrival of date fixed and no sufficient cause shown to the contrary, court shall adjudge estate, after payment of just debts and charges, escheated o Personal estate assigned to city or municipality deceased last resided o Real estate assigned to city or municipality property is situated o If deceased never resided here, whole estate shall be assigned to city or municipality where it is situated o Such estate shall be for benefit of public schools and charity Sec 4 – if devisee, legatee, heir, widow, widower or other person entitled to estate claim such within 5 years from date of judgment, he shall have title of such o If already sold, municipality or city shall be accountable to proceeds o If claim not made within said time, he shall forever be barred Sec 5 – actions for reversion or escheat of properties in violation of constitution, shall be governed by this Rule

The State as the Heir of a Decedent

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State has right over property of decedent under Art. 1101-1014 of NCC where state shall inherit decedent estate Bank can be a defendant in an Unclaimed Balance petitioner in Act. 3986 because it is a real party as the judgment of the case would injure the bank since it shall be deprived of its use of deposits (Republic vs. CFI) All defendant banks are not to be included in one action alone if they are in different jurisdictions because the law state “actions” There will only be one action filed for all banks if they are under one jurisdiction (Republic vs. CFI) Sec 2b of Rule 4 of ROC cannot govern escheat proceedings because Act. 3986 is an action in rem while former is in personna

II. Trust Receipts Law (PD 115) Policy of the State 1. Encourage and promote use of trust receipts as aid to commerce 2. Provide regulation of trust receipts to assure protection of rights of parties 3. Declare the misuse and/or misappropriation of goods or proceeds as a criminal offense punished under Estafa Definition of Terms 1. Document – written or printed evidence of title to goods 2. Entrustee – person taking possession of goods, documents or instruments under trust receipt and any successor in interest 3. Entruster – person holding title over the goods, documents or instruments and any successor in interest (title here is security interest and not absolute ownership) 4. Goods – includes chattels and personal property other than money, things in action or things affixed in lands 5. Instrument – negotiable instruments under NIL; certificate of stock, certificate of deposit, credit or investment instrument where enstrustee appears to be the owner in its face. Instrument does not include document


San Beda College of Law Banking Laws 6. Purchase – taking by sale, conditional sale, lease, mortgage or pledge 7. Purchaser – person taking by purchase 8. Security interest – property interest in goods, documents or instruments to secure performance of some obligation by entrustee. It includes title whenever such title is in substance taken or retained for security only. 9. Person – an individual, trustee, receiver or two more persons having joint interest 10. Trust receipt – written of printed document signed by entrustee in favor of entruster comply with condition of TRL. No formality for execution is necessary for validity 11. Value – any consideration sufficient to support a simple contract Trust Receipt Transaction •

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Trust receipt transaction – any transaction by and between entruster and entrustee where entruster hold absolute title or security interest over goods, documents or instruments, releases the same to the entrustee The entrustee signs a trust receipt and binds himself to hols the goods for the entruster and to sell such with obligation to return the proceeds or return such in case of non-sale In case of goods or documents: 1. To sell the goods 2. To manufacture the goods with the purpose of ultimate sale or 3. To load, unload, ship or tranship them in manner necessary for their sale In case of instruments: 1. To sell or procure exchange 2. Deliver them to principal 3. Effect consummation involving delivery to depository 4. Effect their presentation, collection or renewal Sale of goods, documents or instruments by person in business of selling such for profit who (1) has general property rights in such goods over the buyer or (2) who sells the same to the buyer on credit, retaining title or interest as security for payment does not constitute trust receipt transaction

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There are two possible situation in trust receipt transaction: 1. Refers to money received under the obligation involving the duty to deliver it (entregarla) to owner of merchandise – this happens when entrustee sold the goods and must return the proceeds to enstruster 2. Refers to merchandize received under obligation to return in (devolvera) to owner – this happens when entrustee failed to sell the goods and must return goods to entruster Trust receipt is a separate and independent security transaction intended to aid in financing importers whereby goods are held as security by lending institution for loan In Sps. Vintola vs. Insular Bank of Asia and America, it stated the following: 1. Letter of credit-trust receipt is where a bank extends a loan with a trust receipt for the loan. Transaction involved a loan feature in the letter of credit and security feature for the trust receipt 2. Trust receipt is a security agreement which a bank acquires a security interest in the goods. 3. It secures indebtedness and there can be no such thing as security interest that secures no obligation 4. Trust receipt is a security transaction to aid financing importers who do not have sufficient funds to finance importation and who may not be able to acquire credit except utilization, as collateral of their merchandise It is a document where the lender (entruster), having no prior title or possession to the goods lends money to the borrower (entrustee) on security of the goods

Form of Trust Receipts •

Trust receipt need not be in any particular form but every trust receipt must contain: 1. Description of goods, documents or instruments 2. Total invoice value



•

3. Undertaking of entrustee 4. To hold in trust, sell or return for the entruster the goods, documents or instruments May contain other terms not contrary to TRL or laws

Currencies in which Trust Receipt may be denominated • •

Trust receipt may be denominated in Philippine or foreign currency If it is denominate in foreign currency, payment shall be made in its equivalent Philippine currency at FOREX in turn over

Rights of Entruster

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In Philippine Blooming Mills vs. CA, it was stated that if the entruster took possession of the goods, the entrustee is still liable for the whole amount The entrustee shall only be released from his liability if he pays the entruster his obligation or the entruster sells the goods at a private or public sale and appropriate the proceeds Even if the thing is taken as a right of the entruster but is not sold to a public/private sale yet, the debt of the entrustee still exists

Entruster not Responsible on sale by Entrustee •

Entruster shall not, merely by giving entrustee liberty of sale, be responsible as principal/vendor of sale made by entrustee

1. Entitled to proceeds to the extent of the amount Obligations of Entrustee owing to the entruster or in case of non-sale return of goods 1. Hold the goods and shall dispose them in 2. Entruster may cancel trust and take possession of accordance with conditions of trust receipts goods, documents or instruments at any time upon 2. Receive proceeds in trust and turn over to entruster default or failure of entrustee to comply with 3. Insure the goods against loss obligation 4. Keep said goods or proceeds separate and capable a. Entruster now in possession may give of identification notice to entrustee of intention to sell 5. Return goods in event of non-sale or demand of b. May, not less than 5 days after serving entruster notice, sell such in public or private sale 6. Observe all other terms provided c. Entruster in public sale can become a Liability of Entrustee for Loss purchaser 3. Proceeds of sale shall be applied to: • Risk of loss shall be borne by entrustee. a. Payment of expenses thereof • Loss of goods, documents or instruments b. Payment of expenses of retaking, keeping irrespective of WON it was due to the fault or and storing goods, documents or negligence of entrustee shall not extinguish his instruments obligation c. Satisfaction entrustee’s indebtedness 4. The entrustee shall receive any surplus but shall be Rights of Purchaser for Value and in Good faith liable t the entruster for deficiency • Any purchaser in good faith and for value of the • Trust receipts partake nature of conditional sale goods from entrustee acquires the goods free from where importer becomes absolute owner of entruster’s security interest merchandise as soon as he paid purchase price or loan (PNB vs Vda de Hijos de Angel Jose and Validity of Entruster’s Security Interest against Creditors Colinares vs. CA) • The law uses the word “may” in granting entruster • Entruster’s security interest in goods, documents the right to cancel the trust and take possession of or instruments shall be valid against all creditors the goods of entrustee for the duration of the trust receipt • Entruster has discretion to avail of such right or agreement seek alternative action such as third party claim of Violation of TRL ICA upon default of entrustee AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.


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• •

TRL is violated whenever entrustee fails to: 1. Turn over proceeds 2. Return goods in non-sale Mere failure to account or return gives rise to the crime which is malum prohibitum There is no requirement to prove intent to defraud (Ong vs. CA and Colinares vs. CA) What the law punishes is the dishonest and abuse of confidence in handling money Intent to misuse or misappropriate goods should be proved (Metrobank vs. Go) Failure to account upon demand of funds or property is evidence of conversion or misappropriation Mere failure to account for goods constitute Par 1(b) of Estafa (Ong vs. CA) Failure to deliver proceeds cause prejudice not only to the creditor but also to the public interest In Sps. Vintola vs. Insular Bank of Asia and America, it is tated that the return of merchandize does not amount to recover by the lending bank This is because the lending bank (entruster) only acquires a security interest over the goods and not the absolute ownership If the lending bank acquires absolute ownership, it shall defeat the loan feature of a trust receipt and shall become a contract of sale where bank gained ownership of goods upon giving a loan The title of the entruster is a mere artificial expedient, more of a legal fiction than fact It was also stated that there was no double recovery because when shells were deposited in the court, IBAA did not yet accept it. Thus, they have not appropriate the shells and can recover the obligation from the petitioners

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In Colinares vs. CA, failure of entrustee to turn over the proceeds or non-return constitute crime of estafa under Art. 315(1) of RPC without need of proving intent to defraud If violation is committed by a corporation, its directors, officers or employees responsible for the offense shall have criminal liability Rationale for making such officers responsible: they are vested with authority and responsibility to devise means to ensure compliance with the law and if they fail to do so, they shall be accountable Corporations cannot be put in jail. However, these entities are made liable for civil liabilities arising from criminal offense Violation of trust receipt constitutes fraud under Art. 33 of NCC an ICA to enforce civil liability arising from criminal liability In Sarmiento Jr. vs. CA, complaint based on failure to comply with obligation in Trust Receipt is separate from criminal liability under PD 115. It is an obligation ex contractu and may proceed independently regardless of result of criminal action In People vs. Cuervo, TRL with its penal sanction is in reality, merely confirmatory of situation covered under Art. 315(1)(b) RPC In Colinares vs. CA, if the person who executed the trust receipt did not pass title to the bank, where there is security interest of the property, and person is not an importer, there is no trust receipt created It is unjust and inequitable for banks of making borrowers sign trust receipt to facilitate collection of loans under threat of criminal prosecution in case of non-payment

Application •

In Allied vs. Ordonez, TRL applies to items: o Destined for sale o Processed as component of product ultimately sold o Used to repair equipment of business

Penalty •

Failure of entrustee to turn over the proceeds or non-return constitute crime of estafa


San Beda College of Law Banking Laws CHAPTER 10 – Deposit Insurance I. Roles of PDIC 1. Insure the deposits of all banks which are entitled to benefits of insurance 2. As a basic policy, promote and safeguard interest of depositing public by way of providing insurance coverage • RA 3591 – Act establishing PDIC • PDIC is entitled to free use of Philippine mail II. Powers of PDIC as Corporate Body 1. 2. 3. 4.

5. 6. 7. 8.

Use corporate seal Have succession until dissolved Make contracts Sue and be sued a. All suits of civil nature is deemed to arise from Philippine law b. No attachment or execution against PDIC before final judgment c. BOD designate agent of insured bank Appoint its Board of Directors (BOD) Prescribe by-laws not inconsistent with law Exercise all powers granted by law and incidental thereto Conduct examination of bank with prior approval of MB a. No examination conducted within 12 days from last examination b. To avoid overlap examinations, maximize use of reports Act as receiver Prescribe rules deemed necessary to implement PDIC law Establish provident fund for payment of benefits of employees Compromise, condone or release any claim to PDIC

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3. President of PDIC – vice chairman a. appointed by the President with term of 6years 4. Two members from the private sector a. Term of 6 years without reappointment b. Qualifications: i. Good moral character ii. Unquestionable integrity and responsibility iii. Recognized competence iv. 35 years old Disqualification of appointive members •

For duration of tenure and 1 year after, appointive members of the board are disqualified from holding office in any insured bank

Quorum • •

•

3 members shall constitute a quorum Secretary of Finance and BSP Governor can designate a representative with no lower rank than U.Sec and Deputy Governor If Secretary of Finance fails to attend, President of PDIC shall be chairman

Per Diem •

Secretary of Finance shall fix per diem

Authority of the Board

1. Prepare rules and regulations for effective discharge of responsibilities 9. 2. Direct management of PDIC 10. 3. Establish human resource management system a. Compensation structure shall be based on 11. job evaluation studies b. All positions shall be governed by 12. compensation position classification system III. Board of Directors c. Compensation plan comparable with prevailing compensation • BOD shall administer the affairs of PDIC fairly d. Exempted from existing laws on and impartially without discrimination compensation 4. Appoint, establish rank and fix remuneration Composition 5. Adopt annual budget 1. Secretary of Finance – ex-officio chairman 6. Approve methodology in insurance and finance 2. Governor of BSP – ex-officio member assistance AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws IV. Officers

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President

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• • • •

Shall be Chief Executive of PDIC Salary fixed by President of Philippines Total salary shall be ceiling of all other personnel Powers and duties: 1. Prepare agenda for meeting 2. Execute and administer policies 3. Direct and supervise operations 4. Represent PDIC 5. Authorize, with his signature and prior approval of board, contracts, notes and securities issued 6. Represent PDIC in legal action 7. Delegate power to represent 8. Exercise other powers vested in him

Vice President • •

Shall assist President During absence or temporary incapacity of President, VP shall act as president pending the appointment of new President

Bank Examiners • • •

BOD shall appoint examiners to examine insured bank Each examiner has the power to make thorough examinations They have the power to: o Administer oaths o Examine and take testimony of officers o Compel presentation of books

•

• •

Claim agents – power to investigate and examine all claims for insured deposits

Investigators •

Investigators – power to conduct investigations on fraud, irregularities and anomalies committed in banks

Deposit liabilities of any bank engaged in business of receiving deposit shall be insured with PDIC Factors considered by BOD 1. Financial history and condition of bank 2. Adequacy of capital structure 3. Future earnings prospects 4. General character of management 5. Convenience and needs of community Deposit – unpaid balance of money received by a bank and for which it has given credit to a: 1. Commercial 2. Checking 3. Savings 4. Time 5. Thrift accounts 6. Those evidenced by passbooks Any obligation of a bank payable outside of Philippines shall not be a deposit under PDIC Law Insured bank that has branch outside the Philippines may avail insurance for its deposit payable only in such branch

Statutory Liability of PDIC • •

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PDIC primarily governed by special law Liability of PDIC is statutory and rests upon existence of a deposit with an insured bank and not the negotiability of the certificate evidencing the deposit Fourth National Bank of Wichita vs. Wilson: negotiability of instrument has no dependence of existence of guaranty or insurance

Deposit must be in fact made •

Claim Agents •

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Fact that certificates stated that they are insured by PDIC does not ipso facto make the certificate insured Deposit liability is determined by RA 3519 To claim deposit insurance, law requires that a deposit is placed in the insured bank Deposit may be constituted only if money or its equivalent have been received by a bank

Holder in due course not applicable •

Even if depositor is HDC, it does not mean that he already has a claim against the insurance fund Deposit Liabilities • The fund protects deposits only AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON. V. Deposit Insurance Coverage

San Beda College of Law Banking Laws Liability under negotiable instrument vs. Guarantee fund •

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Liability of the make is different from liability of the guarantee fund. The latter is purely statutory

Deposit insurance of Foreign Currency Deposits • • •

Foreign currency deposits – insured with PDIC Insurance payment shall be in same currency in which deposit is denominated PDIC Law is not applicable to Offshore Banking Units

All banks must indicate that it is under the PDIC and maximum insurance

VI. Assessment

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Trust fund – funds held by insured bank in fiduciary capacity Trust fund shall be insured in an amount not to exceed 10k for each trust estate Such insurance shall be separate from other deposits of owners of trust funds When fiduciary bank deposits any trust fund with other insured bank, such amount shall not be considered as a deposit liability

Payment of Dividends and/or Interests •

Certified Statement of Assessment Base and Assessment Due 1. On or before July 31, each bank shall file in PDIC certified statement showing amount of assessment based and semi-annual assessment due. On such date, the bank shall pay the semi-annual assessment due 2. On or before January 31, each bank shall file similar statement as above 3. If insured bank assumed liabilities for deposits of another bank, it shall be included in assessment base 4. Certified statements required shall be in such form as BOD shall prescribe 5. Any insured bank that fails to file certified statement shall be compelled to file by mandatory injunction

PDIC shall not terminate insured status of any bank which continues to receive deposits Should insured bank fails to pay assessment dues required, PDIC may file collection case and administrative charges against bank officials

Trust Fund

Assessment Rule 1. Assessment rate – not exceed 1/5 of 1% per annum 2. Semi-annual assessment rate – ½ of assessment rate. Not less than P250 3. Assessment base – amount of liability of bank for deposits 4. Semi-assessment base for semi-annual period – average of assessment base in close of business

PDIC may: o Refund to an insured bank any payment of assessment that is excess of amount due o Credit such expense toward payment of assessment of next following period

Termination

Duty to indicate insurance on Deposit •

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No insured bank shall pay dividends on capital stock or interest or distribute capital assets while it remains in default in payment of assessment dues If default in payment is due to dispute between bank and PDIC over amount of assessment, this rule shall not apply

Civil Penalities •

• •

Any assessment payable by insured bank shall be subject to payment of interest computed at legal rate for loan There shall be an added penalty equivalent to twice the amount of interest payable for each day Penalty shall not be applicable if there is dispute over amount of assessment

VII. Deposit Insurance Fund •

Permanent insurance fund – P3B

Refund and Credit AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.


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Deposit insurance fund shall be capital account of PDIC and shall consist of: 1. Permanent insurance fund 2. Assessment collections 3. Reserves for insurance 4. Retained earnings Reserves for insurance shall be maintained at a reasonable level to ensure capital adequacy PDIC may, within 2 years from passage, conduct study to adjust amount of Permanent Insurance Fund Assessment collections and incomes shall be added to Deposit Insurance Fund after deduction from expenses and charges. Such expenses and charges consists of: 1. Operating costs 2. Additions to reserve 3. Net insurance and financial assistance losses PDIC may recover from any insured bank any unpaid assessment No action shall be brought to recover assessment unless such action shall have been brought within 5 years after right accrued If insured bank filed a false certified statement with intent to evade, such claim is not deemed to accrue until PDIC discovers

VIII. Unsound Practice •

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IX. Reports by Insured Bank • •

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•

•

Each insured bank shall make reports to PDIC of conditions required If bank fails to make such report within given time, BOD may provide 100php penalty for each day of violation PDIC shall have access to reports made to the BSP to the insured bank and BSP shall also have access to reports of BSP Each insured bank shall keep true and accurate record of its daily deposit transactions. Compliance with such shall be duly certified by bank president Refusal to issue such shall be a violation

X. Prohibitions on PDIC Personnel 1. Being an officer, director, consultant, employee or stockholder directly or indirectly of any bank 2. Receiving gifts from any officer, director or employee of any bank 3. Revealing in any manner, information relating to business of any bank except when required by Congress or the President XI. Legal Assistance •

PDIC shall advance litigation costs to its directors, officers or employees in connection with any criminal, civil or administrative case where such person acted within the performance of his duty Even if they resign, they shall still receive legal assistance in connection with the act done during tenure The amount advance shall be repaid by the officer if it is determined by the board that such officer need not be indemnified

Upon examination by PDIC, it shall be disclosed whether insured bank is committing unsound • practices • The BOD in such a case shall: 1. Submit report of examination to MB • 2. If no corrective action by MB, BOD shall motu proprio institute such BOD can issue cease and desist XII. Dealings by PDIC Personnel with Banks order to the bank 3. If violation cause insolvency or • Members of Board and personnel of PDIC may dissipation of assetsm the period to take become directors or officers of any bank if the corrective action shall be done within 15 position is in connection with the financial days and impose fines assistance extended by the PDIC • Actions and proceedings may be undertaken by PDIC if insured bank have violated: Borrowing from Banks 1. Any provision of PDIC Law 2. Any order or rule of PDIC 3. Any written condition imposed by PDIC AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.


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Borrowing from banks by examiners or other personnel shall be prohibited with respect to particular bank to which they are assigned Borrowing by personnel from any bank not included in the prohibition shall be secured and disclosed to the BOD

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Appointment

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MB shall appoint the PDIC as receiver Receiver – includes receiver, commission or other agency charged by law with the duty to take charge of assets and liabilities of a bank prohibited from doing business It has the duty to gather preserve and administer assets and liabilities of such banks for the benefit of its depositors

Effect of receivership 1. PDIC shall control, manage and administer affairs of closed bank 2. Powers, functions and duties of directors, officers and stockholders are suspended 3. Assets of closed bank is in custodia legis 4. Assets of closed bank shall not be subject to attachment, execution or levy Powers of PDIC in receivership 1. Bring suit to enforce liabilities of bank 2. Appoint persons to perform functions of PDIC as receiver or liquidator 3. Suspend or terminate employees of closed bank a. Payment of separation pay shall be made after closed bank is in liquidation 4. Pay accrued utilities, rentals and salaries of closed bank 5. Collect loans and other claims 6. Hire private counsels if necessary 7. Borrow loan when necessary to preserve assets of closed bank to minimize loss 8. If stipulated interest on deposits is unusually high, reduce interest rate 9. Exercise other powers inherent in receiver Suits Filed by PDIC

Actions filed by PDIC as receiver, payment of all docket and court fees shall be suspended until action is terminated Such fees shall constitute first lien on judgment

Distribution of Assets

XIII. Receivership

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Before distribution of assets, PDIC shall charge against the bank the receivership expenses After payment of all liabilities, PDIC shall pay surplus dividends to creditors and claimants of bank

XIV. Payment of Insured Deposits Manner of Payment •

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Payment of insured deposits shall be made in: 1. Cash 2. By making available a transferred deposit in another insured bank Transfer deposit – deposit in an insured bank made available to a depositor as payment of insured deposit from closed bank assumed by another insured bank Insured deposit – amount due to any deposit for deposits in an insured bank 1. In PDIC Law, 250k. Now it’s 500k Joint account shall be insured separately from any individually-owned deposit account If account s held jointly, maximum insured deposit shall be divided into as many equal shares as to individuals If account is held by juridical person, maximum insured deposit shall be presumed to belong entirely to such entity Aggregate interests of each co-owner over several joint accounts shall be subject also to maximum insured deposit No owner of an negotiable certificate of deposit shall be recognized as depositor unless his name is registered as owner in issuing bank

Proof of Claims • •

PDIC may required proof of claims before paying insured deposit Final determination if person is entitled to insurance is the court


San Beda College of Law Banking Laws Settlement Period and Penalties in case of failure to settle •

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Failure to settle claim within 6 months from date of filing claim, where such failure by the officer was due to GAOD, iffucer shall be imprisoned from 6 months – 1 year Period shall not apply if validity of claim is under resolution Upon payment to any depositor, PDIC shall be subrogated to all the rights of the depositor against the closed bank Subrogation shall include right to receive same dividends from proceeds of assets Depositor shall retain claim for any uninsured portion of his deposit

•

PDIC shall commence determination of insured deposit upon actual takeover of closed bank PDIC shall public a notice once a week for 3 consecutive weeks in newspaper of general circulation such closing of the bank

Discharge •

Neither PDIC or insured bank shall be required to recognize owner of a deposit appearing on the records under a name other than claimant

Withholding of Payment •

PDIC may withhold payment of insured deposit if payment of liability by such depositor as stockholder of closed bank not yet offset is pending determination

Prescription •

XV. Investment by PDIC •

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Payment of insured deposit shall discharge

Recognition of Owner •

All right of depositor against closed bank which PDIC may have been subrogated shall revert to depositor again

Money of PDIC not employed shall be invested in obligation of the Republic of the Philippines or guaranteed obligations o Not sell or purchase such obligations for its owner account in excess of 100k o Insurance commissioner may waive requirement of approval in above Banking and checking accounts of PDIC shall be kept in BSP, PNB or fiscal agent

XVI. Extension of Loans

Notice •

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All rights of depositor shall be bared if: o Depositor in closed bank fail to claim insured deposit within 2 years from actual take over o Depositor does not enforce his claim within 2 years after th2 year period to file a claim

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When insured bank is determined as in danger of closing, in order to prevent such, PDIC is authorize to: 1. Make loans to such bank 2. Purchase assets of such bank 3. Assume liabilities of such bank 4. Make deposits in insured bank The grant shall be made if bank is essential in community and for financial stability Such authority to extend financial assistance may also be exercised if PDIC finds that the resumption of operations of the closed bank is vital to community Reopening of such close bank is subject to prior approval of MB PDIC may provide any corporation acquiring assets of insured bank in danger of closing with financial assistance Prior to exercise of these above powers, PDIC shall determine whether actual payoff will be more expensive than exercise of such When MB has determined systematic consequence of closure of bank, PDIC may grant financial assistance in amount necessary to prevent its failure Systematic risk – possibility that failure of one bank to settle the transactions with other banks will trigger chain reaction and general shutdown of clearing activity



• •

Systematic risk also means the likelihood of a sudden unexpected collapse in confidence with the banking system PDIC may not use such powers to purchase stocks of insured bank Financial assistance may take form of equity or quasi-entity

XVII. Borrowings • •

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PDIC is authorized to borrow from BSP Any loan granted by BSP shall be consistent with monetary policy and interest rate shall not exceed treasury bill rate If funds of PDIC are not sufficient, it can borrow money from any bank designated as fiscal agent of RP Such loans shall be short-term durations

XVIII. Issuance of Bonds •

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1. Merge and consolidate with non-insured bank or convert into non- insured bank 2. Assume liabilities of deposits by any noninsured bank 3. Transfer assets to non-insured bank Protection against losses •

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With approval of President of Philippines, PDIC is authorized to issue bonds, debentured and other obligations to settle insured deposits in closed banks The BOD shall determine interest rate PDIC shall provide reserves for redemption

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PDIC shall annual make report of its operations in Congress Its financial transactions shall be audited by COA COA shall have access to all books, accounts, records and reports

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XX. Miscellaneous

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Every insured bank shall display at each place of business signs that deposits are insured by PDIC Those which do not relate to deposits or are impractical shall be exempted from this requirement

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Without prior written consent from PDIC, no insured bank shall:

BOD is authorized to impose administrative fines but no more than 3 times amount of damages caused

XXIII. TRO and Injunction •

Merger or Consolidations of Insured Bank •

Prison mayor or fine 50k-2M o Willful refusal to submit report o Refusal to permit examination o Making false statement o Submission of false materials o Refusal to allow PDIC to takeover o Refusal to turn-over records o Fraudulent disposal of assets o Violation of exemption from garnishment o Willful failure to comply with PDIC and conducting unsound business o Splitting deposits Splitting deposits - deposit account with outstanding balance of more than maximum insured amount is broken down to two or more accounts within 30 days preceding closure of bank for purposes of availing maximum deposit

XXII. Fines

Signs •

PDIC may require insured bank to provide protection against burglary, defalcation and losses from discharge of duties BOD shall determine bonding requirement as to its directors, officer and employers If insured bank refused to comply with such requirement, PDIC may contract such protection for them payable to such bank

XXI. Criminal Penalties

Reports and Audit •

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Only CA can issue TRO, Preliminary Injunction against PDIC. Prohibition shall apply to all cases SC can issue restraining order if of extreme urgency



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Restraining order in violation of this shall be void and judge who issued is suspended

Reorganization • • •

PDIC may be reorganized in new staffing pattern. No preferential right shall be enjoyed Reorganization must be completed within 6 months from effectivity of PDIC law BOD shall provide separation incentives

PDIC vs. CA •

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Even if the bank has knowledge that it shall be under receivership, it does not ipso facto mean that the depositors also has knowledge of such Thus, they can still engage in business transactions in course of business as long as they acted in GF and did not know such closure Thus, such deposits made in the period shall be covered by deposit insurance


San Beda College of Law Banking Laws CHAPTER 11 – Anti-Money Laundering •

RA 9160 – Act defining Crime of Money Laundering and Providing Penalties and AMLL

I. Concepts •

• •

Money laundering – any act to conceal or disguise the indemnity of illegally obtained proceeds so that they appear to have originated from legitimate sources Even before AMLA, BSP issued various circulars to avoid money laundering Under AMLA, money laundering is a crime whereby the proceeds of an unlawful activity are transacted and making them appear to have originated from legitimate sources

Three steps in Money Laundering (ML) 1. Placement – launderer inserts dirty money into a legitimate financial institution a. Often in bank deposits b. Most riskiest stage as there is large amounts and banks are required to report high-value transactions 2. Layering – sending money through various financial transactions to change its form and make it difficult to follow a. Consists of bank-to-bank transfers b. Change form of money c. Most complex step as it makes dirty money hard to trace 3. Integration – money re-enters in mainstream economy in legitimate looking form a. It appears to come from legal transaction b. Involve final bank transfer into the account of the launderer Policies 1. Protect and preserve integrity and confidentiality of bank accounts 2. Ensure that Philippines is not used as ML site 3. Consistent with foreign policy, extend cooperation in transnational investigations involving ML Covered Institutions

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1. Banks, non-banks, quasi-banks, trust entities and subsidiaries and those regulated by BSP 2. Insurance companies 3. Securities dealers, brokers, salesmen and investment houses 4. Mutual funds, closed-end-investment companies 5. Foreign exchange corporations, money chargers 6. Other entities dealing in currency, commodities or financial derivatives Covered and Suspicious transaction 1. Covered transactions: Any transaction in cash or other monetary instrument involving amount of 500k within 1 banking day 2. Suspicious transactions: a. No underlying legal or trade obligation or economic justification b. Client not properly indentified c. Amount involved not commensurate to financial capacity of client d. Client’s transaction is structured to avoid reporting requirements in AMLA e. Circumstances relating to transaction deviate from profile of client f. Transaction is relate to any unlawful activity g. Transaction is analogous to above Monetary Instrument 1. Coins or currency of legal tender whether in Philippines or other country 2. Drafts, checks, notes 3. Securities or NI, bonds, commercial papers or substitute instruments 4. Other similar instrument where title passes through indorsement, assignment or delivery Unlawful Activity 1. 2. 3. 4. 5. 6. 7. 8.

Kidnapping for ransom CDDA RA 3019 Plunder Robbery and extortion Jueteng and masio Piracy in the high seas Qualified theft


San Beda College of Law Banking Laws 9. 10. 11. 12.

Swindling/estafa Smuggling Violation of Electronic Commerce High-jacking and destructive arson perpetrated by terrorists 13. Fraudulent practise of Securities Regulation Code 14. Felonies of similar nature in other countries

5. 6. 7. 8. 9. 10. 11.

How is ML committed 1. Any person knowing any monetary instrument involves proceeds of unlawful activity and attempts or actually transacts such instrument 2. Any person knowing that monetary instrument involves proceeds of unlawful activity and performs or fails to perform any act as a result of which he facilitates ML 3. Any person knowing monetary instrument is required to be disclosed and filed with AMLC but fails to do so

12. 13.

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RTC shall have jurisdiction of all ML Those committed by public officers are under jurisdiction of SB

Prosecution of ML • •

Any person can be convicted with both offense of ML and the unlawful activity Any proceeding relating to unlawful activity is given precedence without prejudice to freeze order

III. Anti-Money laundering Council (AMLC) Composition

Cause filing of complaint in DOJ or OMB Investigate suspicious and covered transactions Apply freeze order in CA ex parte Implement measures necessary to counteract ML Receive and request from foreign states assistance in AML operations Develop education programs against ML Enlist assistance of any branch of government to promote AML operations Impose administrative sanctions Establish secretariat head for term of 5 years

IV. Prevention of Money Laundering Customer Identification • • •

II. Jurisdiction and Prosecution Jurisdiction of ML Cases

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Covered institutions shall establish true indemnity of clients based on official documents Maintain a system of verifying true identity of clients Anonymous accounts, those under fictitious names and similar accounts are prohibited Peso and foreign currency non-checking numbered accounts are allowed o BSP may conduct annual testing of such accounts to determine identity

Record Keeping •

Another way of preventing ML is this: 1. All records of all transactions of covered institution must be safely stored for 5 years from date 2. In closed accounts, records on customer identification and correspondence shall be preserved for 5 years from date of closing

Reporting Covered and Suspicious Transactions

1. Covered institutions shall report to AMLC all covered and suspicious transactions within 5 days from occurrence therefore a. There can be extension but not exceed 10 Functions working days 2. Transaction be determined to be both covered and 1. Must act unanimously in discharge of function suspicious, report such as suspicious 2. Require and received covered and suspicious 3. When reporting, covered institution is deemed not transactions to have violated: 3. Issue orders to determine true indemnity of owner a. RA 1405 – Act Prohibiting Disclosure of 4. Institute civil forfeiture proceedings Deposits, AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON. 1. Governor of BSP 2. Commissioner of Insurance Commission 3. Chairman of Securities and Exchange Commission

San Beda College of Law Banking Laws b. RA 6426 - Foreign Currency Deposits, c. RA 8791 – GBL 4. In case of violation, officer shall be criminally liable except if in GF 5. When reporting covered or suspicious transactions, covered institution is prohibited from communicating to any person or media such fact 6. There can be no publication or airing of such report by mass media, e-mail or other device a. In violation, covered institution and media shall be criminally liable

Republic vs. Eugenio 1. Whether or not the phrase “in cases of” requires that there must be a pending trial in another court for an unlawful activity 2. Whether or not the power to inquire in the bank deposit can be done ex parte First Issue •

Freezing Monetary Instrument • • •

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One way to prevent ML CA can issue freeze order which shall be effective immediately Requisites of freeze order: 1. Filed in CA 2. Upon application ex parte by AMLC 3. After determination that probable cause exists where money instrument is related to unlawful activity Freeze order shall be effective for a period of 20 days unless extended by court In all instances of unlawful activity, there can be an ex parte freeze order There is no need for full-blown trial

Authority to Inquire into Bank Deposits •

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To complete legal measure to prevent ML, AMLC may examine deposits in any banking institution upon order of court It must be established that there is probable cause that deposits relate to: 1. Unlawful activity or 2. Money laundering offense No court order shall be required in unlawful activities of: 1. Kidnapping with ransom 2. Violation of CDDA 3. High-jacking (RA 6235) 4. Destructive arson in connection with terrorism BSP may make emanation of deposits when examination is made n course of period or special examinations

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No. The court ruled that there is no need that there must be a pending trial for an unlawful activity in another court before there can be a petition to inquire to bank deposits Otherwise, it would render it a limited too in aid of litigation and wholly inutile In such situation, it will not anymore as a discovery tool

Second Issue • • • • • •

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No. As a general rule, ex parte bank inquiry order is not allowed The proviso does not have the same word “ex parte” unlike in the freeze order Silence of the law does not automatically construe it to have such ex parte Also, in IRR of AMLA, there is no ex parte bank inquiry order However, bank inquiry order does not necessitate any physical seizure The reason of court is that, even if the accused is notified that there will be inquiry due to the fullblown trial, the accused cannot hide his fraudulent records as it is maintained in the bank and cannot be erased Thus, in such interpretation, bank inquiry order have no ex parte orders, it does not weaken the law Also Bank Inquiry Order (BIO) not analogous to search warrant Moreover, the right to privacy must be upheld under Bank Deposit Secrecy Act Thus, there shall be no ex parte orders. But if the exceptional unlawful activity is present, there can be BIO without need of court order

V. Ex Post Facto Clause



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Under AMLA no person can be prosecuted under AMLA for acts committed prior to October 17, 2001 Also, BIO prior to October 17, 2001 is prohibited as it is an ex post facto o It deprives a persons of some lawful protection to which he has become entitled However, those accounts created prior to October 17, 2001 are still under the coverage of AMLA Otherwise, the offenders can mere circumvent by laundering into an account created prior to October 17, 2001

VI. Forfeiture Civil Forfeiture •

Where there is a covered transaction report made and court ordered seizure or monetary instrument, rules of civil forfeiture applies

Claim on Forfeiture Assets 1. When court issued order of forfeiture, offender may apply for a declaration that the same legitimately belongs to him 2. Verified petition filed in court which rendered judgment of conviction within 15 days from order

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Instead of order of forfeiture, court may order offender to pay amount equal to value of monetary instrument when said order cannot be imposed because: 1. Monetary instrument cannot be located with due diligence 2. It was substantially altered or destroyed 3. It has been concealed, removed or converted from being found 4. Located outside the Philippines or outside jurisdiction of court 5. It has been commingled with other monetary instruments

VII. Mutual Assistance among States Request from Foreign State

When foreign state makes a request for investigation or prosecution of ML, the AMLC may accept or refuse the same for valid reasons Principles of mutuality and reciprocity shall at all times recognized

Powers of AMLC to act on request of foreign state 1. AMLC may execute request for assistance by: a. Tracking down, freezing proceeds of unlawful activity b. Giving information c. Apply order of forfeiture 2. Court will issue such order only if application is accompanied by: a. Authenticated copy of order of court of requesting state b. Certification by competent court of requesting state that conviction or order is final Obtaining assistance from foreign states •

Payment in Lieu of Forfeiture •

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AMLC may request assistance in: a. Tracking down, freezing, proceeds of unlawful activity b. Obtain information c. Apply with proper foreign court an order to enter premises or seize documents and objects in request d. Applying for order of forfeiture of any monetary instrument Must be accompanied by authenticated copy of forfeiture by RTC and affidavit of clerk of court

Limitation on Request for Mutual Assistance •

AMLC may refuse to comply with request for assistance if it contravenes the Constitution or execution of require prejudicial to national interest unless there is a treaty specifically provided

Requirement for Request for Mutual Assistance from Foreign state

1. Confirm investigation or prosecution being conducted 2. State grounds which person is investigated AUTHORS: MANILA, ANTONIO CEASAR; BERNARDO, JANSEN; INTIG, JOY ESTELA; DE JESUS, TRACY ANN. FROM SECTION 2S - SAN BEDA COLLEGE OF LAW, MENDIOLA: AY 2011-2012. REFERENCE: BANKING LAWS & JURISPRUDENCE BY DIZON.

San Beda College of Law Banking Laws 3. Give sufficient particulars to identity of person and covered institution 4. Ask from covered institution any information necessary 5. Specify manner and to whom information is to be produced 6. Give all particulars necessary for issuance by the court of requesting State certain order 7. Contain other information that may assist execution of request

1. AMLA shall not be used for political persecution or to hamper competition in trade 2. No case of ML may be filed against any candidate during election period X. Implementing Rules and Regulations (IRR) •

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Authentication of Documents •

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A document is authenticated if: a. Signed or certified by judge of requesting state b. Authenticated by oath of witness or sealed with official seal of state Certificate of authentication may also be made by secretary of embassy

Extradition •

Philippines shall negotiate inclusion of ML offenses among extradutable offenses in future treaties

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BSP, Insurance Commission and SEC shall promulgate IRR of AMLA subject to approval of Congressional Oversight Committee Covered institutions shall formulate their respective ML prevention programs

XI. Congressional Oversight Committee (COC) Composition • • •

7 members from Senate and 7 members from HR Members of Senate shall be appointed by Senate president in proportional representation This shall also be done in HR

Powers of COC •

COC shall have power to promulgate own rules, to oversee implementation of AMLA and review IRR

XII. Rules and Regulations for Banks VIII. Penalties 1. In ML: 7 - 14 years imprisonment and 3M 2. In Failure to Keep Records: 6 months – 1 year imprisonment and 100k-500k 3. In Malicious reporting: 6 months - 4 years imprisonment and 100k-500k a. If juridical person, officers shall be punished and revoke such license b. If an alien, deported after service c. In public official, shall have PAD or TAD d. If such public officials refuse to testify, same penalties Breach of Confidentiality • •

For breach under AMLA, penalty is 3-8 years with fine of 500k-1M Responsible reporter, writer, president or publisher shall be liable

IX. Prohibition against Political Harassment

1. When establishing business relations in opening deposits accounts, banks should take reasonable measure to establish identity of client. In corporate entities, following shall be made: a. Verification of legal existence of client b. Verification of authority of person purporting to act on behalf of client 2. In case of doubt as whether purported clients are acting for themselves, reasonable measures shall be taken 3. Anonymous or accounts under fictitious names are not allowed. In case such is allowed, banks must still ensure identity of client in some other document 4. Identity of existing clients should be renewed at least every other year 5. All necessary records should be maintained for at least 5 years 6. Special attention shall be given to complex, unusual large and all unusual patterned transactions with no lawful purpose



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7. Other suspicious transactions not involving deposits should still be reported to proper authorities 8. Banks should not or avoid transact with criminals 9. Programs against ML should be developed: a. Development of internal policies and hiring high standard employees b. Ongoing employee training c. Audit function to test system


San Beda College of Law Banking Laws CHAPTER 12 - Special Purpose Vehicle A. Policies of the State • Develop and maintain a sound financial sector for the country • Address the non-performing asset problems of the financial sector • Encourage private sector investments in nonperforming assets • Eliminate existing barriers in the acquisition of non-performing assets • Help in the rehabilitation of distressed business with the end in view of contributing to economic value added • Improve the liquidity of the financial system which can be harnessed to propel economic growth B. Definitions • Act - Special Purpose Vehicle Act of 2002 • Appropriate Regulatory Authority agency/authority having jurisdiction over the FI's operations, which shall be the following • Department of Finance (DOF) - in case of the PDIC and GOCCs, in consultation with other agencies that have primary jurisdiction over the said FIs whenever deemed appropriate by the DOF • Bangko Sentral ng Pilipinas (BSP) - in the case of banks which include LBP and DBP, and trust and QB functions of financing companies and investment houses licensed by the BSP • Commission - in case of financing companies and investment houses, except their trust and QB functions or any qualified entity not under the DOF or BSP • Audited Financial Statements - a set of financial reports consisting of balance sheet, income statement, statement of changes in equity and cash flow statement, audited by a Commissionaccredited independent CPA • Certificate of Eligibility or COE - certificate issued by the Appropriate Regulatory Authority as to the eligibility of the NPL or ROPOA for purposes of availing of the tax exemptions and privileges • Code - BP 68 aka the Corporation Code of the Philippines • Commission - Securities and Exchange Commission • Dation in Payment (dacion en pago) - a payment whereby property, whether real or personal, tangible or intangible, is alienated in favor of the

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creditor, which could either be an FI or an SPV in satisfaction of an NPL FIA - Foreign Investment Act, RA 7042 FI or Financial Institutions - credit granting institutions which shall be limited to the following 1. the BSP 2. a bank as defined under RA 8791, aka “The General Banking Law” 3. a financing company as defined under RA 8556 aka “The Financing Company Act of 1998” 4. an IH as defined in PD 129 aka “The Investment Houses Law” 5. Government Financial Institutions or GFIs, shall be limited to the PDIC, LBP and DBP 6. GOCCs 7. other institutions licensed by the BSP to perform QB Investment Unit Instruments or IUIs - participation certificates, debt instruments or similar instruments issued by the SPV and subscribed by the Permitted Investors o It shall not include the instruments to be issued by the SPV to the selling FIs o SPV shall not be considered as deposit substitutes and shall not form part of the capital stock of SPV Non-Bank Financial Institutions performing QB functions or NBQBs - financing companies, IH, and other institutions licensed by the BSP to perform QB functions Non-Performing Assets or NPA - consists of NPLs and ROPOAs by the F.I.s, certified to be eligible as such ARA Non-Performing Loans or NPLs - loans and receivables such as mortgage loans, unsecured loans, etc, whose principal and/or interest has remained unpaid for at least 180 days after they have become past due or any of the events of default under the loan agreement has occurred as of June 30, 2002 ROPOA - Real and other properties owned or acquitted by an FI in settlement of loans an receivables which have been acquired by way of Dacion en pago or judicial or extra judicial foreclosure or execution of judgment as of June 30 2002 PROVIDED, the property is deemed acquired 1. on the date of notarization of the Deed of Dacion


San Beda College of Law Banking Laws 2. on the date of the entry of judgment in case of judicial foreclosure 3. on the date of notarization of the Sheriffs Cert in case of extra judicial foreclosure • True Sale - a sale wherein the selling FI transfers or sells its NPAs without recourse for cash or property to an SPV with the ff results o The transferor relinquishes effective control over the transferred NPAs o The transferred NPAs are legally isolated and put beyond the reach of the transferor and its creditors C. Organization • An SPV shall be organized as a stock corporation in accordance with the Corporation Code and with these Rules o Provided that if the SPV will acquire land, at least sixty percent (60%) of its outstanding capital stock shall be owned by the Philippine Nationals pursuant to the FIA D. Powers of an SPV • An SPV shall be incorporated primarily to invest in, or acquire NPAs of F.I.s. Secondary powers 1. Engage in 3rd parties to manage, operate, collect and dispose of NPAs acquired from an FI 2. Rent lease, hire, pledge, mortgage, transfer, sell, exchange, usufruct, secure, securitize, collect rents and profits and other similar acts concerning its NPAs acquired from FIs 3. In case of NPLs, to restructure debt, condone debt and undertake other restructuring related activities 4. Take, transfer shares or buy shares issued by the borrower for the purpose of business reorganization or rehabilitation of the borrower 5. Enter into dation in payment, foreclose judicially or extrajudicially and other forms of debt settlement involving NPLs 6. Spend funds to renovate, improve, complete or alter its NPAs acquired from an FI 7. Issue equity or participation certificates 8. Borrow money and issue other instruments ofr paying operational and administrative costs 9. Guarantee credit, accept or intervene for honor the bills of the borrowers 10. Advance funds to borrowers where required by an acquired asset or any debt 11. Entrust to 3rd parties asset servicing company, the collection and receipt of debt payments for debts under restructuring or business reorganization

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E. Period for Filing Applications • 18 months from date of approval of the IRR by the Congressional Oversight Committee created in Sec 23 of the Act Registration Requirements • An SPV shall submit to the SEC the ff docs for incorporation: 1. Name verification slip 2. Articles of Incorporation and By laws 3. Treasurer's affidavit/ authority to verify bank account 4. Bank Certificates or Deposits 5. Written undertaking to change corporate name by any incorporator or director 6. Registration Data Sheet F. Authorized, Subscribed and Paid-Up Capital of the SPV • An SPV shall have: 1. Minimum authorized capital stock of 500Mphp 2. Minimum subscribed capital stock of 125Mphp 3. Minimum paid-up capital of 31.25M • This shall be in form of cash • If an SPV issue IUIs or offers other securities to the public, it shall maintain a net worth based on its Audited Financial Statements in an amount equivalent to not less than its minimum paid-up capital G. Submission of SPV Plan – Contents 1. Investment policies 2. Contribution plan 3. Features of the IUIs 4. Timetable of Issuance 5. Rights of the holders of IUIs 6. Draft agreements for the appointment of trustees and agents 7. Appointment or engagement of external auditor 8. Roles and Responsibilities of the trustee, advisors, loan servicers and property managers 9. Draft form of financial reports of the SPV 10. Details of the distribution policies 11. Methods for the increase and decrease of future fund contributions 12. Methods for the alteration or modification of the approved SPV plan 13. Methods for the liquidation and distribution of assets to the holders of IUIs 14. Details of credit enhancements


San Beda College of Law Banking Laws 15. such other documents or information as may be required by the SEC H. Approval • Upon approval of the SPV Plan, the Commission shall issue an Approval Certificate stating that the application has been approved and the IUIs may be issued I. Issuance of IUIs • Registration Requirements 1. All IUIs proposed to be sold or distributed within the Philippines shall be duly registered with the SEC 2. Registration statement including: 1. business of the issuer 2. use of proceeds 3. risk factors 4. legal proceedings 5. market of securities 6. management's discussion of financial condition and results of operations 7. directors and officers 8. securities ownership 9. certain related party transactions 10. audited and interim financial statements in accordance with SRC rule 68 3. In addition, the ff information shall be disclosed in the registration statements of an SPV a. details of the SPV plan b. details of credit enhancements c. detailed description of the assets or loan constituting the pools of assets d. rights and obligations of the selling FI assumed by the SPV e. description of any relationship or interest of the selling FI parent f. Incentives and exemption privileges 4. The SPV shall also submit a certification from the FI that the affected borrowers of the NPLs and all persons holding prior encumbrances upon the assets 5. SPV shall pay a registration fee of 1/10 of 1% of the aggregate offering price of the IUIs subject to the diminishing fee set by the Commission

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6. SPV shall cause the publication of a notice of filing of registration statement its expense 7. The Commission may audit the financial statements, assets and other information of an SPV applying for registration 8. Upon the registration statement being declared effective by the Commission, the sale of the securities subject thereto shall be commence within 2 business days and be counted until the end of the offering period or until the sale has been terminated by the action of the issuer 9. The SPV shall ensure wide dissemination of preliminary and final prospectuses 10. Written notification shall be given to the SEC within 3 business days from completion or termination of the offering by the issuer, including therein the number of securities sold Amendments or Rejection • Within 45 days after the date of filing of the registration statement, or at such later date to which the issuer has consented, the SEC shall declare the registration statement effective or rejected • UNLESS the applicant is allowed to amend the registration statement • After which, the SEC shall determine if it should be effective or rejected • The SEC may reject an RS and refuse registration thereunder or revoke the effectivity of an RS and the registration of the security thereunder after due notice and hearing by issuing an order to such effect, setting forth its findings in respect thereto if its finds that: • The issuer: 1. has been judicially declared insolvent 2. violated any provision of the Corporation Code as well as orders of the SEC 3. has been or engaged or is about to engage in fraudulent transactions 4. he has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities 5. has failed to comply with any requirement that the SEC ma impose as a condition for registration of the security for which the registration statement has been filed



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The RS is on its face incomplete or inaccurate in any material aspect or include any untrue statement or other misleading statements The issuer, or any D, O, or controlling person of the issuer or a person performing a simple function has been convicted by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and/or fraud or is enjoined or restrained by the SEC for violation of such If the SEC deems it necessary, it may issue an order suspending the offer and sale of the securities pending any investigation

Issuance of Securities of the Public without prior registration • Any SPV that offers to sell or distribute its IUIs to the public within the Phils without prior registration shall be subject to the penalties provided of the SRC • The imposition of the foregoing administrative sanctions shall be without prejudice to the filing criminal charges against the individuals responsible for the violation

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Tax Treatment of IUIs • Since IUIs are not considered as deposit substitutes under the Act, the interest or other monetary benefit derived from IUIs is not subject to the 20% final withholding tax under the NIRC • However, the IUI and any income arising from the IUIs shall be subject to the normal tax and/or such other applicable taxes, including but not limited to, documentary stamp tax, imposed under the NIRC and its implementing regulations J. Permitted Investors • May acquire or hold IUIs of an SPV in the minimum amount of 10Mphp provided: 1. that an SPV shall not be authorized to acquire the IUIs of another SPV 2. that the Parent, Subsidiaries, Affiliates or DOSRI shall not acquire, hold, directly or indirectly, the IUIs of the SPV that acquired the NPAs of the FI • Affiliate - a juridical person, directly or indirectly, thru one or more intermediaries, is controlled by or is under common control with selling FI or its affiliates • Control - exists when the Parent owns directly or indirectly thru subsidiaries more than one half of

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the voting power of an enterprise it may also exist when there is: 1. power over more than ½ of the voting rights by virtue of an agreement with other investors 2. power to govern the financial and operating policies of the enterprise under a statute or an agreement 3. power to appoint or remove the majority of the members of the BoD or equivalent governing body 4. power to cast the majority of votes at meetings of the BoD or equivalent governing body 5. any other arrangement similar to any of the above Parent - a juridical person who has control over another juridical person directly or indirectly thru one or more intermediaries Related Interest: 1. entities in which the amount of investment of the selling FI is more than 20% but less than 50% of the outstanding capital stock thereof 2. trusts for the benefit of employees such as pension and profit sharing trusts that are managed by or under the trusteeship of the selling FI 3. provident and other employees/officers' benefit funds of the selling FI 4. principal owners of the selling FI 5. management of the selling FI 6. members of the immediate families of the principal owners and management of the selling FI 7. other parties with which the selling FI may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests Subsidiary of a specified person is an affiliate controlled by such person D/I thru one or more intermediaries

K. Notice and Manner of Transfer of Assets Prior Notice • No transfer of NPLs to an SOV shall take efect unless the FI concerned shall give prior notice to the borrowers of the NPLs and all persons holding


San Beda College of Law Banking Laws prior encumbrances upon the assets mortgaged or pledged 1. must be in writing by registered mail 2. the borrower and the FI shall be given a period of at most 90 days upon receipt of notice to restructure or renegotiate the loan under such terms and conditions as may be agreed upon by the borrower and the FI concerned Procedures on the Transfer of Assets to the SPV • An FI who wants to apply must file an application shall be filed for each transfer of assets with the Appropriate Regulatory Authority having jurisdiction. It must be accompanied with a certification of the FI that: 1. the assets to be sold/transferred are NPAs as defined under the SPV Act of 2002 2. the proposed sale/transfer of said NPAs is under a True Sale 3. the notification requirement to the borrowers has been complied with 4. the maximum 90 days period for renegotiation and restructuring has been complied with • This must be signed by a senior officer with a rank of at least Senior VP or equivalent provided such officer is duly authorized by the FI BoD or the Country Head, in case of foreign banks • the 3rd and 4th items shall not apply if the NPL has become a ROPOA after June 30, 2002 Issuance of the COE • The ARA shall issue to the borrower a COE within 45 days from the date of application • said COA shall always be required by the BIR for purposes of availing the tax exemptions and other privileges under the Activities • The ARA shall furnish the SEC and the BIR a duplicate copy of said COE. The ARA and BIR shall coordinate to ensure the integrity of the COE Subsequent Notice • after the sale/transfer of the NPLs, the transferring FI shall inform the borrower in writing at the last known address of the fact of the sale/transfer of the NPLs Subsequent Transfers • Each COE shall be valid for only one transfer. All subsequent transfers shall require a separate COA from the ARA

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Nature of Transfer • in the nature of True Sale • any transfer of NPAs not in the nature of True Sale shall not qualify for tax exemptions and fee privileges granted under the Act • The transfer by an FI of its NPAs to an SPV shall be considered NOT A TRUE SALE if the FI: 1. invests in or acquires, D/I, the IUIs issued by the SPV that acquired its NPAs 2. has d/i management of the transferee SPV 3. has any of its directors, officers, employees on the board of the transferee SPV 4. has obligated to repurchase or substitute/exchange the NPA or any part of the pool of NPAs at any time, except in cases of a breach of representation or warranty of the FI 5. Has RI with the transferee SPV 6. Possesses a claim of beneficial ownership of more than 5% of the transferee SPV • Following shall NOT presumed to be a true sale if the FI: 1. Purchases/invests in the IUIs of the SPV that acquired its NPAs thru its trust department including the trust department of its Subsidiaries/Affiliates, Parent bank and the trust department of the Parent bank's subsidiaries/affiliates 2. Is made the beneficiary of a trust used as a vehicle for purchasing and securitizing the NPAs 3. Pays further expenses in relation to the NPAs after said NPAs have been sold/transferred to the transferee SPV 4. Extends any credit facility, guaranty, or any similar financial transaction to the transferee SPV 5. Extends any credit facility, guaranty or any similar financial transaction to any party for the purpose of investing in the equity or IUIs of the SPV, or for acquiring the NPAs from the SPV 6. Extends any CF, F, AST to any party for the purpose of acquiring the NPAs from the transferring FI 7. Acts as trustee (FIs trust dept) or if the Trust dept of any of the FIs subsidiaries/affiliates, parent bank or parent banks, subsidiaries/affiliates acting as trustee in the securitization of NPAs that it has transferred to the SPV



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8. Accepts as collateral for a loan extended by said FI the equity shares and IUIs of the SPV that acquired its NPAs 9. Enters into buy-back and other similar arrangements, or financial derivative transactions with similar effect, involving the NPAs or the securities backed by such NPAs 10. Enters into any other transaction where the FI retains effective control over the transferred NPAs or shares in the losses of the SPV “Any party” includes proxies, nominees, and voting trustees. The extension of credit to an individual for the purpose of acquiring a single family residential unit ROPOA or NPL secured by real estate mortgage on a residential unit shall be allowed.

Penalties • prescribed under Sec 25 of teh Act without prejudice to other penalties that may be imposed by the ARA of the transferring FI under applicable laws • The SPV shall assume all Rights and Obligations of the FI over the transferred NPA N. Tax Exemptions and Fee Privileges • Transactions covered 1. the transfer of the NPL by the FI to an SPV 2. transfer of the ROPOA by the fi to an SPV 3. Dacion en pago (DEP) of the NPL by the borrower to the FI 4. DEP of the NPL by a 3rd party, on behalf of the borrower, to the FI 5. transfer of NPL by the FI to an individual 6. transfer of the ROPOA by the FI to an individual 7. transfer of the NPL by the SPV to a 3rd party 8. transfer of the ROPOA by the SPV to a 3rd party 9. DEP of the NP by the borrower to the SPV 10. DEP of the NPL by a 3rd party on behalf of the borrower to the SPV 11. transfer of the NPL by the individual to a 3rd party 12. transfer of ROPOA by the individual to a 3rd party

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Provided that these tax exemptions and reduction of fees shall apply only upon compliance with the following requirements 1. NPA has been certified by the ARA as an NPL or ROPOA as of 06/30/02 provided that for tax purposes, a property shall be deemed acquired after the lapse of the redemption period in cases where such period still exists 2. all transfer taxes and registration fees have been paid or subsequently paid upon assessment on ROPOAs who redemption period has lapsed as of 063002 where legal title has not been transferred in the name of the FI 3. The properties acquired by an SPV from the GFIs or GOCCs which are devoted to socialized or low-cost housing shall not be converted to other uses Tax exemption privileges 1. Documentary stamp tax 2. Capital gains tax imposed on the transfer of lands and other assets treated as capital assets 3. Credible withholding income taxes imposed on the transfer of land and or buildings treated as ordinary assets 4. the VAT or gross receipts Reduction of Fees 1. 50% of the applicable mortgage registration and transfer fees on the transfer or real estate mortgage and chattel mortgage registration to and the SPV/individual, imposed in accordance with the existing circular of LRA 2. 50% of the filing fees for any foreclosure initiated by the SPV/individual in relation to any NPA acquired from an FI 3. 50% of the registration fees prescribed Manner of Claiming Tax Exemptions o shall provide the BIR with the appropriate certificate of eligibility o In case of the transfer of real property or shares, the CIR or his duly authorized representative shall issue a Certificate (Cert Authorizing Registration/ Tax Clearance Cert) that such transfer has been reported and is tax-exempt

Q. Abuse of Tax Exemptions and Privileges


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Any person, natural or juridical, who shall benefit from the said exemptions and privileges without being entitled thereto, shall be liable. In addition, he shall refund the Government double the amount of he was exempted from plus12% interest per annum

R. Redemption Periods • provided by the following: Sec 47 of RA 897 or the GBL of 2000 and Rules of Court S. Books of Accounts and Records • Internal Record Keeping and Accounting Controls 1. An SPV must make and keep books, records and accounts which reflect the transactions and dispositions of its assets, it minutes of meetings and other business transactions 2. It shall advise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that a. The transactions and access are pursuant to management authorization b. Financial statements are prepared in conformity with the generally accepted accounting principles c. Recorded assets are compared with existing assets at reasonable intervals and differences reconciled • External Auditor - shall be appointed by SPV accredited by the Commission • Inspection of Books and Records – those who has a right to inspect: 1. Stockholder of SPV or Holder of an IUI at a reasonable hour of business 2. Authorized representatives of the Commission, BIR or the BSP any time 3. Failure to comply with this right will be a ground for the suspension order on the offering of the IUIs T. Reports • Reports to be submitted by SPV to the Commission 1. As Stock Corporation General Information Sheet (GIS) within 30 days from stockholder's meeting date

Audited Financial Statements within 120 days from the end of the fiscal year 2. As Issuer of Securities to the Public a. Annual Report on SEC Form 17A b. Quarterly Report on SEC Form 17Q c. A current report on SEC Form 17C d. Monthly Reports on total issuances and amounts of IUIs 3. Audited Financial Statements - The filing of SEC Form 17A shall suffice 4. Violations - any violation of the above due to the failure of the SPV, it shall be subject to penalty provided by SRC, this Code, and their IRR Reports to be submitted to the BIR by an SPV for purposes of implementing the tax provisions of the Act Reports filed to the BSP o By SPV 1. Report on any sale/transfer to any party of NPLs and ROPOAs acquired from banks and NQBQs quarterly 2. Report on the latest appraised/ fair market value of ROPOAs and real estate properties/ chattels used as collateral and NQBQs semiannually o By Selling Financial Institution - monthly report regarding the actual sale/ transfer to an SPV

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U. Penalty in case of violation of the provisions of the Act • Fine: Not less than 50k not more than 1M, or • Imprisonment: not less than 6 years 1 day not more than 12 years • OR BOTH • If the penalty was committed by a corporation, association, partnership etc., the one responsible would be those officers who participated in the commission of the crime or who shall have knowingly permitted or failed to prevent the commission • If the offender is an alien, he shall, in addition to the prescribed penalties, be deported without further proceedings after serving the sentence • If the offender if a public official, or employee, in addition to the penalties above, the penalty of absolute/temporary DQ shall apply


Banking Reviewer

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