Banking and Financial Institutions AB, 2FM5 PDF

BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 Unit I: Introduction to Banking 5. Advisory – banks employ people who are 1.1 Concepts of Banking experts on various fiel...

BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 Unit I: Introduction to Banking 5. Advisory – banks employ people who are 1.1 Concepts of Banking experts on various fields which gives 1.2 Brief History of Banking individuals and firms the provision of 1.3 Banks and Money professional, personalized investment 1.4 Philippine Banking Laws guidance. 1.1 Concepts of Banking WHAT BANKS DO? : PROVIDE LIQUIDITY WHAT IS A BANK? Liquidity: the ease and expense at which A financial institution engaged in lending of one asset can be converted into another funds obtained from deposits. asset. Like any other corporation, a creature of Liquidity mismatch: A situation in which statute and its right carry-on banking there is a lack of unity between the business is a franchise and privilege contractual amounts and dates of cash dependent on a grant of corporate powers inflows and outflows. by the State. o Savers want liquidity, while Business of Banking: Government, borrowers want to sign Depositors, Borrowers, Investors, Creditors. illiquid loans. o Bank provide liquidity to ROLE OF BANKS depositors while writing loans that will not be paid back for a long time. WHAT BANKS DO? : REDUCE TRANSACTION COSTS One of the biggest transaction costs in financial transactions are search costs.  o Search costs are the implicit and explicit costs involved in savers and borrowers looking for each other.  o Examples: implicit and MAJOR FUNCTIONS OF THE BANKS explicit costs of drawing up 1. Deposit Function – transfer of funds to contracts, conducting credit another party and for safekeeping of funds investigation. used as collateral for the loan. Banks and other financial intermediaries 2. Loan Function – obtain through deposits; reduce transaction costs by bringing savers subject to credit evaluation and must be and borrowers together. used for stated purpose. To understand why search costs are 3. Exchange – covers local and international important, think of what a hassle it would transactions. be if you were a saver and there were no 4. Trust – serves as an agent; administers the banks. funds or property under its custody. BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 WHAT BANKS DO? : BLOCK LENDING UNIVERSAL BANKS Banks gather together a bunch of small Can exercise the powers of an investment savings into one big bundle to then lend to house and invest in non-allied enterprises. borrowers. With highest capitalization requirements. Banks offer savers to diversify their risks. Examples of Universal Banks in the o Diversification: reducing risk Philippines: BDO, Metrobank, Landbank, by holding a variety of assets BPI, ChinaBank, RCBC, PNB, Security Bank, o Not “putting all your eggs in UnionBank, DBP. one basket” o The bank spreads among COMMERCIAL BANKS thousands of borrowers With lower capitalization requirements than universal banks. BANKS ARE SUBJECT TO BANK RUNS Neither exercise the powers of an Bank run is when all (or a large number) of investment house nor invest in non-allied the depositors of a bank want their money enterprises. back at once. Example of Commercial Banks in the How do you make people believe the Philippines: Maybank Philippines, Veterans banking system is safe? Bank, CTBC BANK. Give depositors confidence that their money was “safe”. WHAT IF BANKS DON’T LEND? Credit crunch: A reduction in the general availability of credit most often seen as an irrational increase in risk aversion. Credit crunches can come about: o because banks become concerned about the future of the overall economy; OR o because banks are already experiencing a decline in the market value of their assets. CLASSIFICATION OF PHILIPPINE BANKS Universal Banks Commercial Banks Thrift Banks Rural Banks Cooperative Banks Islamic Banks Digital Banks BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 THRIFT BANKS ISLAMIC BANK Governed by the Thrift Bank Act of 1995 Governed by RA 6848 or The Charter of Al (RA 7906). Amanah Islamic Investment Bank of the o Savings and Mortgage Banks – to Philippines (AAIBP) - the only universal accumulate the savings of depositors bank in the Philippines authorized to offer and to invest them together in Islamic banking. marketable securities. Business dealings and activities are subject o Stocks Savings and Loan Associations to basic principles and rulings of Islamic – engaged in the business of Shari’a. accumulating the savings of its Example: Amanah Islamic Bank members or stockholders; servicing the needs of households. DIGITAL BANKS o Private Development Banks – Guided by BSP Circular No. 1105, Series of medium and long-term financing 2020. needs of Filipino entrepreneurs; Done through the digital platform; helps construct, expand and substituting bank’s physical presence. rehabilitate agricultural and Digital Banking = Online Banking + Mobile industrial sectors. Banking o Examples: All Bank, Sterling Bank of o Online Banking – access Asia, PSBank, China Bank Savings, features and services by the Philippine Business Bank. use of the website of the bank. RURAL BANKS o Mobile Banking – use of an Governed by the Rural Banks Act of 1992 application to access the (RA 7353). banking features by the use Mandated to make needed credit available of mobile devices.  and readily accessible in the rural Advantages: Convenience, better rates and communities on reasonable terms. lower fees. (farmers, merchants, etc.) Disadvantages: Downtime, learning curve, Examples: BDO (Network Bank), CARD Bank, security GM Bank, BANGKO ng KABUHAYAN Examples: GOtyme Bank, Maya Bank, UNO Digital Bank, Union Digital Bank, Tonik, COOPERATIVE BANKS Overseas Filipino Bank. Governed by Cooperative Code (RA 6938) and amended through Philippine OPERATIONS OF UNIVERSAL AND Cooperative Code of 2008 (RA 9520) COMMERCIAL BANKS Organized whose majority shares are owned Branch Banking and controlled by cooperatives primarily to o Universal or Commercial Banks may provide financial and credit services to open branches or other offices cooperatives. within or outside the Philippines Example: NCCB, Metro South Cooperative upon prior approval of the BSP. Bank. BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 o Used as outlets for the presentation Executive Committees: Office of the and/or sale of financial products of Chairman, Office of the President, Credit its allied undertaking or of its Committee (CreCom), Management investment house units. Committee (ManCom) o Bank and Branch offices: considered Wealth Management Group: Private as one unit. Banking Banking Days and Hours Treasury Group: Financial Markets, Trading o Weekdays: At least six (6) hours a & Investments, Market Sales, Liquidity day. Lending Group: Credit Card, Consumer o Weekends or Holidays: At least three Banking (Housing/Auto Loans), (3) hours a day Institutional Banking Retail Banking Group: Branches (Metro Manila, Provincial, Foreign) Central Operations Group Corporate Services Group: Human Resources, Legal & Collections, Customer Service IT Group: Information Security Department, Systems and Engineering Department Subsidiaries and Affiliates: Savings Bank, Insurance, Investment House, Securities. 1.2 Brief History of Banking PHILIPPINE BANKING HISTORY 1594 Obras Pias was organized by Fr. Juan Fernandez De Leon. A charitable foundation that accumulated large funds from wealthy individuals for the support of hospitals, convents, missions and schools. 1851 El Banco Espanol-Filipino de Isabel II was founded. (renamed as Bank of the Philippine Islands or BPI in 1912) First bank in the Philippines and Southeast BANK ORGANIZATION: FUNCTIONS, Asia. DEPARTMENTS, AND UNITS Board of Directors/Board Committees: 1882 Trust, Risk, Audit, Compliance, Corporate Fr. Felix Huertas founded Monte de Piedad y Governance. Caja de Ahorros de Manila. (Church’s BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 Pawnshop), the first savings bank in the Passage of Republic Act 8791 or General Philippines. Banking Law which establishes the The bank extended loans on the security of fundamental rules guiding the activities of personal properties aside from accepting banking institutions in the Philippines. deposits. 2001 1916 Passage of Republic Act 9160 or Anti-Money Established the Philippine National Bank Laundering Act which protect and which is the first agricultural bank in the preserve the integrity and confidentiality of country. bank accounts and to ensure that the Symbolized the country’s move towards country shall not be used as money financial independence laundering site for the proceeds of unlawful 1949 activity. Central Bank of the Philippines was 2007 established pursuant to the provisions of Philippine National Bank was fully privatized Central by Lucio Tan Group. Bank Act or Republic Act 265. 2020 Philippines’ central monetary authority to BSP introduced Circular No. 1105 which regulate the monetary system and promote introduced and formalized the digital economic stability. banking landscape. 1952 Tonik is officially the Philippines’ first Rodriguez Rural Bank, Inc. was established. neobank to secure a digital bank license (Present name: Bangko ng Kabuhayan) from First rural bank in the Philippines the Bangko Sentral ng Pilipinas (BSP). 1973 GOVERNMENT BANKS Established the first and only Islamic bank in Government bank from 1916 to 2007. the Philippines: Al-Amanah Islamic Fully privatized in 2007 by Lucio Tan group. Investment Bank of the Philippines through Presidential Decree 264 Government Banks at present… 1980 Land Bank of the Philippines (LBP) Philippine National Bank became the first ➔ Primary Objective: To promote universal bank in the country. countryside development and to 1993 provide financial support to Bangko Sentral ng Pilipinas (BSP) was agricultural sector and rural established pursuant to the provisions of communities. the Development Bank of the Philippines (DBP) New Central Bank Act of 1993 or Republic ➔ Primary Objective: To provide Act 7653 which took over from Central banking services, primarily catering Bank of the Philippines. to the medium and long-term needs 2000 of agricultural and industrial Philippine banks started to engage in enterprises, with a particular focus electronic banking. BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 on small and medium-scale Triggered by wild speculation in the stock industries. market; loose lending by banks; lack of Al-Amanah Islamic Investment Bank of the effective oversight of financial markets. Philippines (AAIIBP) Fritz Augustus Heinze: Trying to “corner a ➔ Primary Objective: To perform and market” - buying up as much of an asset to provide Islamic banking, financing control the price. and investment services. ○ However, this attempt did not pan ➔ 2008: AAIIBP became a subsidiary of out well. Development Bank of the ○ Issue of stock manipulation. Philippines, owning 99.9% of its J. Pierpont Morgan ended the panic of 1907 capital stock, which introduced its current logo and tag name. “Amanah Early Structure of Federal Reserve System Islamic Bank”. Congress envisioned a “lender of last resort” to the banking system. FINANCIAL MARKETS THROUGH TIME Created a quasi-government agency; being U.S. business sector was dominated by the there for the benefit of banks. expansion of trusts. Former US Pres. Wilson – system of 12 ○ Trusts are horizontally integrated regional banks, whose policies are ownership that dominated key coordinated by the Federal Reserve’s Board industries of monopolies such as of Governors. railroads, oil, steel, and banking. District Banks: setting their own interest ○ Agreements that created rates and lending policies, no consideration monopolies. of how these would impact the overall American corporations moved away from economy. trust dominated markets. 1913: Federal Reserve System was Frederick Tyaylor: “Scientific Management” established. or the “Taylorism.” 1914: Benjamin Strong, Jr. was appointed ○ Make managers responsible for the as 1st President of Federal Reserve of New organization of the firm and the York. production process. 1923: Open Market Investment Committee ○ As level of output increased was created to centralize the making of significantly, the demand for the monetary policy. number of workers increased. Financial Markets during Great Depression The Panic of 1907 September 3, 1929 – stock market hits an National banking era (1863-1913) all-time high ○ The U.S. did not have a central bank. Stock bought on credit was falling, cash ○ Almost all commercial banks were would be needed or face the loss of the “local” and regulated on a state stocks held. Margin calls were not being level. met and thus forcing to sell their shares. BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 Markets react to lower prices causing fear prices would increase markets selling in a near panic. Panic selling dramatically. had set in. ○ Compounding this fear, employment 1933: Glass-Steagall (Banking Act) creates increase needed for war. the Federal Deposit Insurance Corporation Government rationing – limitation on the (FDIC) and separates commercial and amount of goods a person can purchase. investment banking into different ○ Ration coupon – issued by industries. government, helped to retard 1934: Created the Securities and Exchange household spending. Commission. Wage and price controls: Also called 1935: Established the Federal Open Market incomes policy, an economic policy where Committee (FOMC) as the Fed’s principal governments place legal limits on the monetary policy decision- making group. amount of wage and price increases. Financial Markets during World War II The Rise of Stagflation Funding the War Effort Stagflation: When the economy suffers John Maynard Keynes: author of “How to from high rates of inflation and economic Pay for the War”. stagnation, often a high and/or increasing ○ To pay for the war: The government unemployment rate. should run budget deficits by ○ Stagflation = growing inflation + borrowing from the public and growing unemployment. financial system. ○ To avoid inflation from spiking up: Policies of Vlocker, Reagan, Thatcher Rationing of necessities. Paul Volcker: appointed as Federal Reserve ○ To prevent increased inequality Chairman in 1979; tightened monetary from firms benefitting from war policy by raising interest rates to control production: High progressive inflation. income taxes. ○ Volcker Rule: Banks must never be 1940-1946: US government spending in conflict to the interest of their increased, 75% being used for military clients; restricts banking entities expenditures. from engaging in proprietary Debt covering; Government sells trading. government bonds. US Pres. Reagan and UK Prime Minister Thatcher – economic policies focuses on Financial Markets during World War II: Controlling long- term issues; growing economy, INFLATION controlling inflation, and creating economic War bonds: used to fund government’s opportunities. purchases. 1981-1982: Worst recession since Great ○ Key in keeping down inflation. Depression. ○ Consumer Goods become scarce; diverted for the war effort. Many BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 Savings & Loan Crisis Subprime Crisis Savings & Loans: Major player in the The mortgage bubble and resulting housing boom; post-WWII era. subprime crisis spread across the globe and When inflation began to rise, causing trigger the worst economic slowdown since interest rates to follow, S&L began losing the Great Depression. deposits to money market mutual funds. ○ Started with mispricing or ○ Regulation Q law: capped interest misunderstanding of risk, leads to rates that S&L could pay. speculative behavior. ○ Depository Institution Deregulation ○ Asset prices increase quickly and and Monetary Control Act irrationally. More people are drawn (DIDMCA): allowed S&L to pay in and the asset bubble grows...and market interest rates on deposits. then bursts. ○ Garn-St. Germain Act of 1982: reduced the amount of regulation Other Financial Crisis over the Savings & Loan or thrift Asian Financial Crisis (1997): originated in industry. Thailand; overextension of credit and too much debt accumulation; abandonment of Leveraged Buyout and Junk Bonds fixed exchange rate against US dollar; Leveraged buyout: The acquisition of a plunged the countries affected into deep public or private company where the recessions that brought rising buyout is financed mostly by debt unemployment, poverty and social (leverage). dislocation. Assets of the acquired company are used as The Great Recession/Global Financial Crisis collateral for the debt that is issued to buy (2007 to 2009) : crisis resulted in the the acquired company’s outstanding stock. collapse of Lehman Brothers and downturn 1980s: LBOs increase due to the in global growth; cheap credit and lax deregulation of financial markets and the lending standards that fueled a housing relaxation of anti trust and securities laws. bubble. Rise of the Junk Bond Market – used to raise the money needed for LBOs. 1.3 Banks and Money Why Banks Exist? Tech Bubble and Burst If financial markets worked like the perfect 1990’s – Financial markets funding the competition markets, life would be so much technology-focused “New Economy” easier. Venture capitalists – to get in on the A perfect competitive market has perfect “ground floor” of the next big industry; information: provide seed stage capital to firms that ○ Everyone can enter &/or level the were starting out. market at any time. Initial Public Offering (IPO). ○ Zero transaction costs. Stocks were crashed. ○ Everyone is selling the exact same thing. BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 good or serves without However, perfect competition happens only paying for the good or in theory, not in reality. service. So, there is a need for and an important role ○ Government-Required Disclosures to be played by depository institutions such Securities and Exchange as banks. Commission (SEC) ○ Screening Asymmetric Information Know Your Customer (KYC). Information that is not equal or even. Depository institutions exist because Moral Hazard information is not perfect and market One entity takes on an excessive amount of outcomes are not perfectly efficient. risk because it knows another entity will Asymmetric Information in markets can lead bear the burden of those risks. to inefficient outcomes – the scarce AFTER a financial transaction takes place. resources of society can be wasted or Exists when one party of a transaction has misallocated. difficulty monitoring the behavior of the other party after the contract begins. Moral Hazard in Corporate Governance Incentives of owners and employees of companies are different - incentive compatible contracts need to be created to align these incentives for the good of the organization. Adverse Selection Principle–agent problem: The problem of BEFORE a financial transaction takes place. motivating one party (the agent) who has A situation where undesirable results occur been hired by another party (the principle) because the two parties in a transaction, to act in the best interests of the hiring the buyer and seller, have different amounts party. of information. Adverse Selection in Financial Markets: Moral Hazard in Financial Markets 1. Bank Lending: Bad borrowers know Major problem in financial markets. who they are, but lenders don’t. Consider the following: 2. Bond Market: Issuers know if they ○ Moral Hazard in Insurance can repay, bond buyers don’t. ○ Moral Hazard in Lending 3. Equity Market: Directors know ○ Moral Hazard in Debt & Equity potential profits, shareholders don’t. Markets Overcoming Adverse Selection in Financial Markets: ○ Information Collection Free-rider Problem: A situation where some members of society benefit from the consumption of a BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 Here are some of the ways in which Authorized to perform universal or financial markets attempt to overcome the commercial banking functions may also moral hazard problem: engage in quasi-banking functions. 1. Deductible & AdjustablePremiums 2. RestrictiveCovenants Organization of Banks, and Quasi-Bank 3. CompensatingBalances The entity is a stock corporation. 4. Corporate Board of Directors Funds are obtained from the public, which shall mean 20 or more persons. 1.4 Philippine Banking Laws Minimum capital requirements prescribed 1. General Banking Law of 2000 (RA 8791) by Monetary Board for each category of 2. Truth in Lending Act (RA 3765) banks are satisfied. 3. Anti-Money Laundering Act (RA 9160) Organization, Management and Administration RA 8791: General Banking Law of 2000 of Banks, Quasi-Banks and Trust Entities AN ACT PROVIDING FOR THE REGULATION OF THE Board of Directors – shall be at least five (5) ORGANIZATION AND OPERATIONS OF BANKS, and a maximum of fifteen (15) members of QUASI-BANKS, TRUST ENTITIES AND FOR OTHER the board of directors of bank, two (2) of PURPOSES whom shall be independent directors. Purpose: To promote and maintain a stable Independent Director – a person other than and efficient banking and financial system an officer or employee of the bank, its that is globally competitive, dynamic and subsidiaries or affiliates or related interest. responsive to the demands of a developing Directors of Merged or Consolidated Banks economy. – number of directors shall not exceed to Declaration of Policy: The State recognizes twenty-one (21). the vital role of banks in providing an Fit and Proper Rule – the Monetary Board environment conducive to the sustained shall prescribe, pass upon and review the development of the national economy and qualifications and disqualifications of the fiduciary nature of banking that individuals elected or appointed bank requires high standards of integrity and directors or officers and disqualify those performance. In furtherance thereof, the found unfit. State shall promote and maintain a stable ○ Integrity and efficient banking and financial system ○ Experience that is globally competitive, dynamic and ○ Education responsive to the demands of a developing ○ Training economy. ○ Competence Quasi-Bank Other Concepts Engaged in the borrowing of funds through Allied Enterprises – those entities with the issuance, endorsement, or assignment enhance or complement banking. with recourse or acceptance of deposit Non-Financial Allied Enterprises – pertains substitutes. to activities that do not involve money BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 matters (ex: warehousing, safety deposit boxes) Directors, Officers, Stockholders, and Related Interests (DOSRI) - No director or Net Worth – the total of the unimpaired officer of any bank shall, directly or paid-in capital including paid-in surplus, indirectly, for himself or as the retained earnings, and undivided profit, net representative or agent of others, borrow valuation reserves, and other adjustments from such bank nor shall he become a as may be required by the BSP (Sec. 24) guarantor, indorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned. (Sec. 36) Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable to the bank than those offered to others. (less favorable) Basic Functions of Banking: DEPOSITS Deposits as a Loan Contract ○ Enable to receive and make payments, as well as have a facility for store of value. ○ Philippine Deposit Insurance Corporation (PDIC) provides a Prudential Measures maximum deposit insurance Requirement for Grant of Loans: a bank coverage of ₱500,000 per depositor must ascertain that debtor is capable of per bank. fulfilling his commitments to the bank. (KYC, Elements of a Bank Deposit 5Cs of Credit) ○ Object – money physically delivered Single Borrowers’ Limit (SBL) – total by the depositor to the bank. amount of loans extended by a bank to any ○ Consent – both for the depositor to person, partnership, association, make a deposit and the bank to corporation or other entity shall at no time accept the deposit (voluntary). exceed 20% of the net worth of the bank; ○ Consideration –the promise of the total amount of loans may be increased by bank to repay the same amount plus an additional 10% of the net worth of such applicable interest (for the bank – provided the additional liabilities of depositor) ; the privilege to use and any borrower are adequately secured by dispose the amount deposited (for trust receipts, shipping documents, etc. the bank). (Sections 35.1 & 35.2) BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 Types of Account Ownership Trust Operations ○ Individual – an account in which a Trustor- Trustee relationship. single individual transacts with the ○ Trustor - a person who establishes a bank trust, typically either an individual under its own name. person or a married couple; may ○ Joint – an account named under also be called a grantor or a settlor. more than one depositor. ○ Trustee - a person or persons Types of Joint Account: designated by a trust document to “AND” – allowed to hold and manage the property in the withdraw from the trust. account with the Only a stock corporation or a person duly authority of ALL authorized by the Monetary Board to the depositors named engage in trust business shall act as in the joint account. TRUSTEE or administer any trust or hold “OR” – any of the property in trust or in deposit for the use, depositors named benefit or behalf of others. named therein, acting Trust entity shall administer the funds or separately, property under its custody. shall be allowed to Powers of Trust Entity withdraw from the ○ Act as trustee on any mortgage or said account, even bond issued by a firm; without the ○ Act under the order or appointment authority of other of any court as guardian, receiver, depositors named in trustee, or depositary of estate of the account. any minor or other incompetent Deposit Substitutes – an alternative form of person; obtaining funds from the public, other ○ Act as executor of any will when it is than deposits, through issuance, named the executor thereof; endorsement or acceptance of debt ○ Act as administrator of the estate of instruments for the borrower’s own any deceased person, with the will account, for the purpose of relending or annexed, or as administrator of the purchasing of receivables or other estate of any deceased person when obligations. there is no will; ○ Accept and execute any trust for the holding, management, and administration of any estate, real or personal, and the rents, issues and profits thereof; ○ Establish and manage common trust funds, subject to such rules and regulations as may be prescribed by the Monetary Board. BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 fees, service charges, and other related RA 3765: Truth in Lending Act (1963) expenses, must be itemized. To protect consumers by ensuring full 3. Clear and understandable terms: Loan disclosure of the true cost of credit. contracts should be written in simple To prevent consumers from being misled by language that is easy for consumers to hidden charges or unclear terms when understand. borrowing money. 4. Protection against deceptive advertising: Section 4: Any creditor shall furnish to each The act prohibits misleading advertisements person to whom credit is extended, prior to that misrepresent the true cost of the consummation of the transaction, a borrowing. clear statement in writing setting forth, to Truth in Lending Act empowers consumers the extent applicable and in accordance to make informed decisions about with rules and regulations prescribed by the borrowing by providing them with complete Board, the following information: and accurate information about the terms 1. The cash price or delivered price of and conditions of a loan. the property or service required; 2. The amounts, if any to be credited as RA 9160: Anti-Money Laundering Act down payment and/or trade-ins; Purpose: 3. The difference between the ○ To protect and preserve the integrity amounts set forth under clauses 1 & and confidentiality of the bank 2; accounts; 4. The charges, individually itemized, ○ To ensure that the Philippines shall which are paid or to be paid by such not be used as a money laundering person in connection with the site for the proceeds of any unlawful transaction but which are not activity. incident to the extension of credit. MONEY LAUNDERING is a crime where: 5. The total amount to be financed; ○ Proceeds from ILLEGAL activities are 6. The finance charge expressed in disguised. terms of pesos and centavos; and ○ Making those proceeds seem to 7. The percentage that the finance come from LEGAL sources. bears to the total amount to be Anti-Money Laundering Council (AMLC) – financed expressed as a simple Philippines’ Financial Intelligence Unit which annual rate on the outstanding are composed of the following: unpaid balance of the obligation. 1. Bangko Sentral ng Pilipinas (BSP) Governor as Chairman Key Provisions: 2. Commissioner of Securities and 1. Full disclosure of finance charges: Lenders Exchange Commission (SEC are required to clearly state the total 3. Commissioner of Insurance amount of interest and other charges Commission (IC). associated with a loan. 2. Itemized breakdown of costs: The law mandates that all fees, such as processing BANKING AND FINANCIAL INSTITUTIONS AB, 2FM5 UNIT 1 Prevention of Money Laundering 1. Customer Identification Requirements - Covered institutions shall establish and record the true identity of its clients based on official documents. They shall maintain a system of verifying the true identity of their clients and, in case of corporate clients, require a system of verifying their legal existence and organizational structure, as Stages of Money Laundering well as the authority and identification of all 1. Placement - illegal proceeds from illicit persons purporting to act on their behalf. activities are placed into the financial 2. Record Keeping - All records of all system. transactions of covered institutions shall be Example: Opening of accounts in financial maintained and safely stored for five (5) institutions to put the dirty money in. years from the dates of transactions. 2. Layering - various layers, multiple 3. Reporting of Covered Transactions transactions,wiretransferstoconceal the origin of the illegal proceeds and to complicate the tracing of funds. Example: Various transfer of funds, wire transfer to different destinations. 3. Integration - integration of funds into the financial system through legitimated form. Example: Purchases of luxury assets, financial investments, industrial/commercial investments.