Commercial Law 5: Regulatory Framework & Legal Business Issues (PDF)

COMMERCIAL LAW 5 REGULATORY FRAMEWORK AND LEGAL BUSINESS ISSUES COURSE DESCRIPTION This course provides basic knowledge on the laws on the other business transactions, to wit: PDIC Law, Secrecy of Bank Deposits and Unclaimed Balances Law, General Banking Law with emphasis on loans, AMLA L...

COMMERCIAL LAW 5 REGULATORY FRAMEWORK AND LEGAL BUSINESS ISSUES COURSE DESCRIPTION This course provides basic knowledge on the laws on the other business transactions, to wit: PDIC Law, Secrecy of Bank Deposits and Unclaimed Balances Law, General Banking Law with emphasis on loans, AMLA Law with emphasis on covered transactions, suspicious transactions and reportorial requirements, the New Central Bank Act with emphasis on legal tender power over coins and notes, conservatorship and receivership and closures, and the Intellectual Property Law (except provisions under part I) with emphasis on the Law on Patents, the Law on Trademark, Service Marks and Trade Names, and the Law on Copyright. GRADING SYSTEM GRADING SYSTEM MIDTERM ENDTERM FINAL Term Exam /LE 50% Term Exam /LE 50% Midterm 40% Quizzes 10% Quizzes 10% Endterm Activity Tasks 40% Activity Tasks 40% 60% Total 100% Total 100% Total 100% FIRST WEEK OBJECTIVES 1. Know the objectives and basic functions of the Banko Sentral ng Pilipinas (BSP) 2. Enumerate the powers of the Monetary Board 3. Know why the Central Bank is referred to as the lender of last resort  R.A. No. 7653 “ The New Central Bank Act” The New Central Bank Act (R.A. No. 7653) – passed in1993 Replaced Republic Act no. 265 ( Creation of the Central Bank of the Philippines) Amended by Republic Act no. 11211 on February 14, 2019 HISTORY OF BANKING IN THE PHILIPPINES – SPANISH PERIOD 1521-1898 No central bank in the Philippines during this period; The colonial government functioned as a central bank by prohibiting free coinage and free importation and exportation of money into and out of the country. Money supply in the Philippines consisted of Mexican pesos and Alfonsino pesos ( coins minted in Spain and shipped to the Philippines), Manila minted Spanish-Filipino silver coins, Spanish pesos, silver coins from Spanish America, copper coins of Spain, British North Borneo coins, Igorot copper coins, and banknotes issued by the El Banco Espanol Filipino de Isabel. HISTORY OF BANKING IN THE PHILIPPINES – SPANISH PERIOD continued With various kinds of money in circulation, there was widespread confusion among traders and their counterparties. It was only in 1857 when the Queen Isabel II of Spain authorized Manila to establish its first ( and only) mint. The Royal Decree established weight standards of coinage as well as valuation and design of Spanish Gold coins called doubloon. Paper currency were also printed during this time period. HISTORY OF BANKING IN THE PHILIPPINES – SPANISH PERIOD continued Banks did exist during this period and were regulated by the Spanish Civil Code of 1889 and the Code of Commerce. Only 4 Banks existed in the Philippines during this time period. 1. El Banco Espanol Filipino de Isabel ( only one able to print banknotes or Pesos Fuertes) 2. The Chartered Bank of India ( branch of Hong Kong and Shanghai Banking Corporation or the HSBC) 3. The Monte de Piedad, and 4. The Banco Peninsular Ultramarino de Madrid. HISTORY OF BANKING IN THE PHILIPPINES – AMERICAN PERIOD 1899-1941 In 1903, the Philippine Coinage Act was approved; establishing a standard of value and provided for a coinage system in the country. In 1916, the Philippine National Bank was established by legislation ( Act. 2612). Meant to be a government institution for the purpose of expanding banking services in the Philippines. Several banks entered the Philippine banking system. This includes the Philippine Bank of Commerce, which is said to be the first bank with genuine Filipino private capital. In 1939, despite the attempts of our leaders during the Commonwealth Period, a bill for the establishment of a Philippine Central Bank was disapproved by then US President Franklin D. Roosevelt. During the Commonwealth period (1935-1941) the Philippine monetary system was overseen by the Department of Finance and National Treasury. HISTORY OF BANKING IN THE PHILIPPINES – Japanese Occupation 1942-1945 The Japanese put into circulation military peso notes brought from Tokyo. The use of the pesos and dollar was penalized by the Japanese. As the military peso was backed by nothing it was called “Mickey Mouse Money”. Only Japanese and Filipino banks were allowed to operate. A Central Bank Law was passed. Objected to by the Japanese and never came into fruition as the Japanese were defeated by the Liberation Forces. Philippine Republic – Since 1946 1948 – Central Bank of the Philippines was established through Act no. 165. ; The General Banking Act also took effect during the same year and date. 1993 – The Central Bank Act was passed 2000- General Banking Law of 2000 2001 – AMLA 2012 – Terrorism Financing Prevention and Suppression 2020 – Anti Terrorism Act of 2020 2019- New Central Bank Act  State Declared Policy The Congress shall establish an independent central monetary authority… [which] shall provide policy direction in the areas of money, banking and credit. It shall have supervision over the operations of banks and exercise such regulatory powers as may be provided by law over the operations of finance companies and other institutions performing similar functions. - Section 20, Article XII, 1987 Philippine Constitution The 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 responsibilities concerning money, banking and credit. In line with this policy, and considering its unique functions and responsibilities, the central monetary authority established under this Act, while being a government-owned corporation, shall enjoy fiscal and administrative autonomy. - Section 1, Article 1, Chapter 1 Republic Act No. 7653 (The New Central Bank Act) As amended by Republic Act No. 11211 Bangko Sentral ng Pilipinas (BSP) The BSP is the State’s Central Monetary Authority mandated in the 1987 Philippine Constitution to function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking, and credit. Granted the power of supervision and examination over banks and non-bank financial institutions performing quasi-banking functions, which includes jurisdiction over savings and loans associations ( Busuego vs. CA, 1999)  BSP’s PRIMARY OBJECTIVES AND ROLES PRIMARY OBJECTIVES OF BSP To maintain price stability conducive to a balanced and sustainable growth of the economy; To promote and maintain the monetary stability and convertibility of the Philippine Peso; Promote financial stability and closely work with the National Government, including, but not limited to, the Department of Finance, the Securities and Exchange Commission, the Insurance Commission, and the Philippine Deposit Insurance Corporation; Oversee the payments and settlement systems in the Philippines, including critical financial market infrastructures, in order to promote sound and prudent practices consistent with the maintenance of financial stability; and Promote broad and convenient access to high quality financial services and consider the interest of the general public. Responsibilities of the BSP 1. To provide policy direction in the areas of money, banking, and credit; 2. To supervise the operations of the banks and to exercise such regulatory and examination powers as provided under Republic Act No. 7653 (The New Central Bank Act), as amended by Republic Act 11211, and other pertinent laws over the quasi-banking operations of non-bank financial institutions; and 3. To exercise regulatory and examination powers over money service businesses, credit granting businesses, and payment system operators Roles of BSP Banker of the Government – BSP acts a banker of the Government, its political subdivision, and instrumentalitiesl and their cash balances should be deposited to BSP, with only minimum working balances to be held by government-owned banks and such other banks, incorporated in the Philippines. Representation with the IMF- It represents the Government in all dealings, negotiations, and transactions with the IMF, and carries such accounts as may result from the Philippine membership in, or operations with, the said Fund Roles of BSP Representation with Other Financial Institutions – It may represent the Government in dealings, negotiations, or transactions with the World Bank and other foreign or international financial institutions or agencies. Fiscal Operations – It maintains a general cash account for the Treasurer, in which Government’s liquid funds are deposited, with transfer of funds to be made only upon the order of the Treasurer. Monetary Board BSP Powers and functions are exercised by the Monetary Board, composed of seven (7) members appointed by the President of the Philippines for a term of six (6) years: Governor, as Chairman A Cabinet member designated by the President of the Philippines; Five (5) Members who shall come from the private sector, all of whom shall serve full time. No member of the Board may be reappointed more than once. Powers of the Monetary Board 1. Issue rules and regulations 2. Direct the management, operations, and administration of Bangko Sentral; 3. Establish a human resource management system; 4. Exclusive and final authority to promote, transfer, assign, or reassign personnel of Bangko Sentral, and delegate such authority to the Governor; 5. Adopt an annual budget and authorize expenditures by Bangko Sentral; and 6. Indemnify members and other officials of Bangko Sentral for legal expenses.  Issue Rules and Regulations The rules and regulations issue in the form of circulars cut across the responsibilities and objectives of Bangko Sentral, which are to promote and maintain price stability, financial stability, to supervise and regulate BSFIs, and to oversee the payment and settlement systems. May prescribe administrative sanctions against BSFIs, including their directors, officers, and employees, where the law itself makes the violation of administrative regulations punishable and provides for its penalty; The rules and regulations issued by the Board shall be reported to the President and Congress within fifteen (15) days from the date of their issuances. They are also required to be published in the Official Gazette or in a newspaper of general circulation and filed with the University of the Philippines Law Center. Adopt Annual Budget As an independent body, the Bangko Sentral does not rely on Congress for budgetary support. It generates money from its own operations and operates under a budget and expenditures adopted by the Monetary Board for a given fiscal year. Lender of Last Resort Provisions for this may be found in Section 81-89-B of the New Central Bank Act. A lender of last resort is an institution, usually a country’s central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse. Lender of Last Resort LOLR functions to protect individuals who have deposited funds- and to prevent customers from withdrawing out of panic from banks with temporary limited liquidity. This prevents bank runs. A bank run is a situation that occurs during periods of the financial crisis when bank customers, worried about an institution’s solvency, descend on the bank en masse, and withdraw funds. Because banks only keep a small percentage of total deposits as cash, a bank run can quickly drain a bank’s liquidity and, in a perfect example of self- fulfilling prophecy, cause the bank to become insolvent. Criticisms of Lenders of Last Resort It may encourage banks to take unnecessary risks with customer’s money, knowing they can be bailed out. Proponents state that the potential consequences of not having a lender of last resort are far more dangerous than excessive risk taking by banks. Assignment for Next Meeting https://www.youtube.com/watch?v=V7I9_QtNAlU https://www.youtube.com/watch?v=S3unbKRWJYU https://www.youtube.com/watch?v=I00qG_mZ-38 https://www.youtube.com/watch?v=qEPUHZV9MH0 https://www.youtube.com/watch?v=iuI4Zs-w5M0 https://www.youtube.com/watch?v=O0P0yIQyqvI https://www.youtube.com/watch?v=g_FrlBu9KJw General Banking Law Republic Act No. 8791 ( As Amended and Supplemented by other laws)  At the end of the chapter, the students should be able to : 1. Distinguish banks from quasi banks 2. Enumerate and discuss briefly the kinds of banks Week 2: 3. Enumerate the kinds of deposits Objectives 4. Define Related Interests under the DOSRI Rule and discuss its restrictions What are banks? Banks refer to entities engaged in the lending of funds obtained in the form of deposits, and are classified as follows: 1. Universal Banks; 2. Commercial Banks; 3. Thrift Banks; - Savings and mortgage banks/ Stock Saving and loan Associations/ Private Development Banks 4. Rural Banks; 5. Cooperative Banks; and 6. Islamic Banks. 7. Digital Banks State Declared Policy State Recognizes the: Vital role of banks in providing an environment conducive to the sustained development of the national economy; and Fiduciary nature of banks that require the highest standards of integrity and performance. In furtherance thereof the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic, and responsive to the demands of a developing economy. Banking Industry is Impressed with Public Interest The business of banking is impressed with public interest and great reliance is made on the bank’s sworn professional diligence and meticulousness in giving irreproachable service. The due diligence required of banks extend even to persons, or institutions regularly engaged in the business of lending money secured by real estate mortgages, such as the GSIS. Highest Degree of Diligence Being impressed with public interest, the diligence required of banks is more than that of a good father of a family. We have repeatedly emphasized that, since the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are even required, of it. By the nature of its functions, a bank is “under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.” What are deposits? Deposit refers to funds placed with a bank in a savings account, or in a demand account subject to withdrawal by check. Bank deposits are in the nature of irregular deposits. They are not true deposits but are in the nature of simple loans. Simple loan or mutuum is a contract whereby one of the parties delivers to another, money, or other consumable thing, and the latter acquires ownership thereof upon the condition that the same amount of the same kind and quality shall be paid.  The relationship between a bank and a depositor is Debtor- governed by contract. Being contractual in nature, a bank may receive or decline deposits and do business with whom it pleases, subject to existing laws, rules, and Creditor regulations. The relationship between a bank and depositor is that of a debtor and creditor. The depositor lends the money and the Relationship bank agrees to pay on demand. Consequences of the transfer of ownership 1. The bank can make use of the money deposited for its ordinary transactions and for the banking business in which it is engaged without the necessity of the depositor’s consent. 2. The bank has the right to invoke the rules on compensation. It can set-off the deposits in its hands for the payment of any indebtedness to it on the part of a depositor. Types of Accounts Deposit accounts in banks may be opened by natural persons, juridical persons, or for legal arrangement, such as trust.  Natural persons may open bank accounts in the form of Natural individual or personal account or joint account. 1. Individual or Personal Accounts – may be opened by any Persons person having legal capacity to enter into contracts. A depositor is presumed to be the owner of funds standing in his name in a bank deposit.  Joint Account – is a deposit account: (a) held jointly by two or more natural persons, or by two or more juridical persons or entities, or (b) held by a juridical person or entity jointly with one or more natural persons. The funds deposited in the joint deposit account are governed by the rules on co-ownership. The share or portion belonging to the joint depositors in the joint deposit account shall be presumed equal unless the contrary is proved, and the benefits as well as the charges in the joint account shall be proportional to their respective shares. “AND” Account: Depositors of joint accounts described as “and” shall only be allowed to withdraw from the said account with the authority of all the depositors named in the joint account. “OR” Account – Any of the depositors of joint accounts described as “or”, acting separately, may be allowed to withdraw from the said account, even without the authority of the other depositors named in the account. Juridical Persons Banks shall open and maintain accounts only in the true and full name of the entity and shall have primary responsibility to ensure that the entity has not been, or is not in the process of being dissolved, struck-off, wound- up, terminated, or otherwise placed under receivership or liquidation. Similar to natural persons, juridical persons may also open individual or joint accounts. For Legal Arrangement For legal arrangements, the name, nature, purpose, and proof of existence of the legal arrangement, among other things, must be obtained by the bank as part of its customer identification process. Types of Deposits Bank deposits may take the form of demand deposits, savings deposit, negotiable order of withdrawal account, time deposit, or long-term negotiable certificates of deposit. Demand Deposit This refers to all liabilities of banks that are denominated in Philippine Currency and are subject to payment in legal tender upon demand by the presentation of checks. This refers to deposits, subject to withdrawal by check through available bank channels and/or ATMs, which are otherwise known as current or checking accounts. The may bank may or may not pay interest on these accounts. Savings Deposit This refers to interest or non-interest-bearing deposits that are withdrawable upon demand through available bank channels. It has no stated maturity, as opposed to a time deposit. Funds can be withdrawn at will, and most pay interest from day of deposit to day of withdrawal. Types of Savings Accounts 1. Regular Savings Account – interest-bearing account that is withdrawable either upon presentation of a property accomplished withdrawal slip together with the corresponding passbook or through ATM 2. Kiddie and teen savings account- interest-bearing account of children and teens up to nineteen years old with an initial deposit of Php100 and no minimum maintaining balance requirement. 3. Basic Deposit Account – interest of non-interest bearing account designed to promote financial inclusion with a required initial deposit not exceeding Php 100, without minimum maintaining balance, and with a maximum balance of Php 50,000. 4. Other savings account – Interest bearing special savings account which offers tiered interest rates depending on the size of deposit. Negotiable Order of Withdrawal Accounts This refers to the interest-bearing savings deposits that are withdrawable by means of negotiable order of withdrawal that combine the payable on demand feature of checks and investment feature of savings accounts. Time Certificates of Deposit Refers to interest-bearing deposits with specific maturity dates and evidenced by certificates issued by the bank. Time deposit is a deposit account paying interest for a fixed term, with the understanding that funds cannot be withdrawn before maturity without giving advance notice. This kind of deposit shall be issued for a specific period or term. Long-Term Negotiable Certificates of Deposit This refers to interest-bearing negotiable certificates of deposit with a minimum maturity of 5 years. The BSP has set an indefinite moratorium beginning January 1, 2021, on the issuance of long-term negotiable certificates of time deposits that have been approved but remain unissued as of December 31, 2020. Commercial Banks ( Sec. 29 of General Banking Law) A commercial bank is a bank that has, in addition the general powers incident to corporations, all such powers as may be necessary to undertake the business of commercial banking, subject to such rules as the Monetary Board may promulgate. Universal Banks A universal bank has the authority to exercise, in addition to the powers granted to a commercial bank, the powers of an investment house and to invest in non-allied enterprises. A universal bank may own up to 100% of the equity in a thrift bank, rural bank, financial allied enterprise, or non-financial allied enterprise. A publicly-listed universal bank may own up to 100% of the voting stock of only 1 other universal bank or commercial bank. Powers of an Investment House An investment house is an enterprise that engages in the underwriting of securities of other corporations. An investment house is authorized to do, among other things, the following: 1. Arrange to distribute on a guaranteed basis securities of other corporations and of the government or its instrumentalities. 2. Participate in a syndicate undertaking to purchase and sell, distribute or arrange to distribute on a guaranteed basis securities of other corporations, and of the government or its instrumentalities; and 3. Arrange to distribute or participate in a syndicate undertaking to purchase and sell on a best-effort basis securities of other corporations, an of the government or its instrumentalities. Thrift Banks A thrift bank is established to: 1. provide incentives to needed investments, 2. meet the needs for capital, personal, and investment credit or medium- and long-term loans for Filipino entrepreneurs, 3. promote agriculture and industry and at the same time place within easy reach of the people the medium- and long-term credit facilities at reasonable cost, and 4.encourage industry, frugality, and the accumulation of savings among the public, and the members of the stockholders of thrift banks. 5. eliminate the practice of “five-six” financing.  A thrift bank includes savings and mortgage banks, private development banks, and stock savings and loans associations organized under existing laws, and any banking corporation that may be organized for the following purposes: 1. Accumulating the savings of depositors and investing them, together with capital loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgage, bonds and other forms of security, or in loans for personal or household finance, whether secured or unsecured, or in financing for homebuilding and home development; in commercial papers and in readily marketable and debt securities; in commercial papers and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transaction; and in such other investments and loans which the Monetary Board may determine as necessary in the furtherance of national economic objectives; 2. Providing short-term working capital, medium and long-term financing, to businesses engaged in agriculture, services, industry, and housing; and 3. Providing diversified financial and allied services for its chosen market and constituencies especially for small and medium enterprises and individuals. Rural Banks A rural bank is organized to promote comprehensive rural developments with the end view of attaining equitable distribution of opportunities, income, and wealth; a sustained increase in the amount of goods and services produced by the nation for the benefit of the people; and in expanding productivity as key in raising the quality of life for all, especially the underprivileged. The establishment of the rural banking system is designed to make needed credit available and readily accessible in the rural areas on reasonable terms. Cooperative Banks A cooperative bank is organized for the primary purpose of providing a wide range of financial services to cooperatives and its members. IT may also provide the same services to non-members or the general public. It shall be organized only by cooperative organizations that are duly established and registered under the Philippine Cooperative Code of 2008 Islamic Banks The Al-Amanah Islamic Investment Bank of the Philippines, other Islamic Banks, designated Islamic banking units of conventional banks, and foreign banks that are authorized to conduct business in accordance with the principles of Shari’ah shall be referred to collectively as “Islamic Banks” or “ Islamic Banking system”. The establishment of an Islamic Bank plays a vital role in creating opportunities for greater financial inclusion especially for the underserved Muslim population, in expanding the funding base for small and medium-sized enterprises as well as large government infrastructure through financial arrangements with risk sharing as their core element, and in contributing to financial stability through the use of financial contracts and services that are founded on risk sharing rather than speculation in compliance with Shari’ah principles. All business dealings and activities of Islamic banks are subject to the basic principles and rulings of Islamic Shari’ah. The business of Islamic Banking is one whose objectives and operations do not involve interest (riba) that is prohibited by the Islamic Shari’ah principles. Powers of a Universal Bank (1) UBs. A UB shall have the authority to exercise, in addition to the powers and services authorized for a KB and those provided by other laws, the following: (a) the powers of an investment house (IH) as provided under existing laws; (b) the power to invest in non-allied enterprises; (c) the power to own up to one hundred percent (100%) of the equity in a TB, an RB, a financial allied enterprise, or a non-financial allied enterprise; and (d) in case of publicly-listed UBs, the power to own up to 100% of the voting stock of only one (1) other UB or KB. A UB may perform the functions of an IH either directly or indirectly through a subsidiary IH; in either case, the underwriting of equity securities and securities dealing shall be subject to pertinent laws and regulations of the Securities and Exchange Commission (SEC): Provided, that if the IH functions are performed directly by the UB, such functions shall be undertaken by a separate and distinct department or other similar unit in the UB: Provided, further, That a UB cannot perform such functions both directly and indirectly through a subsidiary. Powers of a Commercial Bank In addition to the general powers incident to corporations and those provided in other laws, a KB shall have the authority to exercise all such powers as may be necessary to carry on the business of commercial banking, such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment. Powers of a Commercial Bank It may also exercise or perform any or all of the following: (a) invest in the equities of allied enterprises as provided in Sections 31 and 32 of R.A. No. 8791; (b) purchase, hold and convey real estate as specified under Sections 51 and 52 of R.A. No. 8791; (c) receive in custody funds, documents and valuable objects; (d) act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities; (e) make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business; (f) upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; (g) rent out safety deposit boxes; and (h) engage in quasi-banking functions. Powers of Thrift Banks In addition to the powers provided in other laws, a TB may perform any or all of the following services: (a) grant loans, whether secured or unsecured; (b) invest in readily marketable bonds and other debt securities, commercial papers and accounts receivable, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; (c) issue domestic letters of credit; (d) extend credit facilities to private and government employees; (e) extend credit against the security of jewelry, precious stones and articles of similar nature, subject to such rules and regulations as the Monetary Board may prescribe; (f) accept savings and time deposits; (g) rediscount paper with the Land Bank of the Philippines (LBP), Development Bank of the Philippines (DBP), and other government-owned or -controlled corporations; (h) accept foreign currency deposits as provided under R.A. No. 6426, as amended; Powers of Thrift Banks (i) act as correspondent for other financial institutions (FIs); (j) purchase, hold and convey real estate as specified under Sections 51 and 52 of R.A. No.8791; (k) offer other banking services as provided in Section 53 of R.A. No. 8791; and (l) buy and sell foreign exchange. With prior approval of the Monetary Board, and subject to such guidelines as may be established by it, TBs may also perform the following services: (m) open current or checking accounts; (n) engage in trust, quasi-banking functions and money market operations; (o) act as collection agent for government entities, including but not limited to, the Bureau of Internal Revenue (BIR), Social Security System (SSS) and the Bureau of Customs (BOC); (p) act as official depository of national agencies and of municipal, city or provincial funds in the municipality, city or province where the TB is located; (q) issue mortgage and chattel mortgage certificates, buy and sell them for its own account or for the account of others, or accept and receive them in payment or as amortization of its loan; (r) invest in the equity of allied undertakings; (s) issue foreign letters of credit; and (t) pay/accept/negotiate import/export draft/bills of exchange. Powers of Rural Banks In addition to the powers provided in other laws, an RB may perform any or all of the following services: (a) extend loans and advances primarily for the purpose of meeting the normal credit needs of farmers, fishermen or farm families as well as cooperatives, merchants, private and public employees; (b) accept savings and time deposits; (c) act as correspondent of other FIs; (d) rediscount paper with the LBP, DBP or any other bank, including its branches and agencies. Said banks shall specify the nature of paper deemed acceptable for rediscount, as well as the rediscount rate to be charged by any of these banks; (e) act as collection agent; (f) acquire readily marketable bonds and other debt securities; Powers of Rural Banks (g) offer other banking services as provided in Section 53 of R.A. No. 8791; and (h) buy and sell foreign exchange. With prior approval of the Monetary Board, an RB may perform any or all of the following services: (i) accept current or checking accounts: Provided, That such RB has net assets of at least P5.0 million; (j) accept negotiable order of withdrawal (NOW) accounts; (k) act as trustee over estates or properties of farmers and merchants; (l) act as official depository of municipal, city or provincial funds in the municipality, city or province where it is located; (m) sell domestic drafts; and (n) invest in allied undertakings. Powers of Cooperative Banks A Coop Bank shall primarily provide financial, banking and credit services to cooperatives and their members, although it may provide the same services to non-members or the general public. In addition to the powers granted to Coop Banks under existing laws, any Coop Bank may perform any or all of the banking services offered by rural banks as well as any or all of the banking services offered by other types of banks, subject to prior approval of the Bangko Sentral. Powers of Islamic Banks (a) open savings accounts for safekeeping or custody with no participation in profit and losses unless authorized by the account holders to be invested; (b) accept investment account placements and invest the same for a term with the IB’s funds in Islamically permissible transactions on participation basis; (c) accept foreign currency deposits from banks, companies, organizations and individuals, including foreign governments; (d) buy and sell foreign exchange; (e) act as correspondent of banks and institutions to handle remittances or any fund transfers; (f) accept drafts and issue letters of credit or letters of guarantee, negotiate notes and bills of exchange and other evidence of indebtedness under the universally accepted Islamic financial instruments; (g) act as collection agent insofar as the payment orders, bills of exchange or other commercial documents are exclusive of riba or interest prohibitions; (h) provide financing with or without collateral by way of leasing, sale and leaseback, or cost plus profit sales arrangement; (i) handle storage operations for goods or commodity financing secured by warehouse receipts presented to the bank; (j) issue shares for the account of institutions and companies assisted by the bank in meeting subscription calls or augmenting their capital and/or fund requirements as may be allowed by law;  (k) undertake various investments in all transactions allowed by the Islamic Shari’a in such a way that shall not permit the haram (forbidden), nor forbid the halal (permissible); (l) act as an official government depository, or its branches, subdivisions and instrumentalities and of government-owned or -controlled corporations, particularly those doing business in the Autonomous Region; (m) issue investment participation certificates, muquaradah (non-interest-bearing bonds), debentures, collaterals and/or the renewal and refinancing of the same, with the approval of the Monetary Board, to be used by the IB in its financing operations for projects that will promote the economic development primarily of the Autonomous Region; (n) carry out financing and joint investment operations by way of mudarabah purchasing for others on a cost-plus financing arrangement, and invest funds directly in various projects or through the use of funds whose owners desire to invest jointly with other resources available to the IB on a joint mudarabah basis; and (o) invest in equities of the following allied undertakings: (i) Warehousing companies; (ii) Leasing companies; (iii) Storage companies; (iv) Companies engaged in the management of mutual funds but not in the mutual funds themselves; and (v) Such other similar activities as the Monetary Board has declared or may declare as appropriate from time to time, subject to existing limitations imposed by law. Banks vs. Quasi Banks Banks Quasi -Banking "Banks" shall refer to entities engaged in the lending of a. Borrowing funds for the borrower’s own account; funds obtained in the form of deposits. b. Twenty (20) or more lenders at any one (1) time; c. Methods of borrowing are issuance, endorsement, or acceptance of debt instruments of any kind, other than deposits, such as acceptances, promissory notes, participations, certificates of assignments or similar instruments with recourse, trust certificates, repurchase agreements, and such other instruments as the Monetary Board may determine; and d. The purpose of which is (1) relending, or (2) purchasing receivables or other obligations. Definition of terms and phrases. a. Borrowing shall refer to all forms of obtaining or raising funds through any of the methods and for any of the purposes provided in this Section on Elements of quasi-banking whether the borrower’s liability thereby is treated as real or contingent. b. For the borrower’s own account shall refer to the assumption of liability in one’s own capacity and not in representation, or as an agent or trustee, of another. c. Purchasing of receivables or other obligations shall refer to the acquisition of claims collectible in money, including interbank borrowings or borrowings between FIs, or of acquisition of securities, of any amount and maturity, from domestic or foreign sources. d. Relending shall refer to the extension of loans by an institution with antecedent borrowing transactions. Relending shall be presumed, in the absence of express stipulations, when the institution is regularly engaged in lending. e. Regularly engaged in lending shall refer to the practice of extending loans, advances, discounts or rediscounts as a matter of business, as distinguished from isolated lending transactions. Transactions not considered quasi- banking. a. Borrowing by commercial, industrial and other non-financial companies through any of the means listed under this Section on Elements of quasi-banking, for the limited purpose of financing their own needs or the needs of their agents or dealers; and b. The mere buying and selling without recourse of instruments mentioned under this Section on Elements of quasi-banking: Provided, That: (1) The institution buying and selling without recourse shall indicate in conspicuous print on its instrument the phrase without recourse, sans recourse or words of similar import that will convey the absence of liability or guarantee by said institution; and (2) In the absence of the phrase “without recourse”, “sans recourse” or words of similar import, the instrument so issued, endorsed or accepted, shall automatically be considered as falling within the purview of these regulations: Provided, further, That any of the following practices or practices similar and/or tantamount thereto in connection with a without recourse transaction is hereby prohibited: (a) Issuance of postdated checks by a financial intermediary, whether for its own account or as an agent of the debt instrument issuer, in payment of the debt instrument, sold, assigned or transferred without recourse; or (b) Issuance by a financial intermediary of any form of guaranty on sale transactions or on negotiations or assignment of debt instruments without recourse; and (c) Payment with its own funds by a financial intermediary which assigned, sold or transferred the debt instrument without recourse, unless the financial intermediary can show that the issuer has with the said financial intermediary funds corresponding to the amount of the obligation. Pre-conditions for the exercise of quasi-banking functions. No bank shall engage in quasi-banking functions without authority from the Bangko Sentral: Provided, however, That banks authorized by the Bangko Sentral to perform universal or commercial banking functions shall automatically have the authority to engage in quasi- banking functions: Provided, further, That the authority to obtain funds from the public, which shall mean twenty (20) or more persons under Section 8.2 of R.A. 8791, is not a condition but an authorization for the bank or quasi-bank, once the Monetary Board has granted the quasi- banking license. DOSRI TRANSACTIONS DOSRI stand for Directors, Officers, Stockholders, and their Related Interests. Experience has shown that in some countries, unqualified DOSRI lending has been a major factor in the collapse of banks. DOSRI lending or self-dealing transaction, also known as insider lending and related- party lending, however, is not prohibited because it is natural for a bank to encourage its own DOSRI to borrow, within the allowed limits, from the bank. Being insiders does not mean that the DOSRI should get better terms when they borrow from the bank. PERSONS COVERED Directors – shall include those: (1) named as such in the AOI (2) duly elected in subsequent meetings of the stockholders or those appointed by virtue of the charter of government-owned banks, and (3) elected to fill vacancies in the BOD. Officers – shall include the CEO ( or president or any other title referring to the top management post) EVP, SVP, VP, GM, Treasure, Secretary, Trust Officer, and others mentioned as officers of the banks, or those whose duties as such are defined in the by-laws, or are generally known to be officers of the banks either through announcement, representation, publication, or any kind of communication made by the banks. PERSONS COVERED Stockholders – shall refer to any stockholder of record in the books of the bank, acting personally or through an attorney-in-fact, or any other person duly authorized by the stockholder or through a trustee designated pursuant to a proxy, voting trust, or other similar contracts, whose stockholdings in the lending bank amount to 1% or more of the total subscribed capital stock of the bank. Such stockholdings may be held individually or collectively with the stockholdings of “ The Stockholders spouse and/or relative within the first degree by consanguinity or affinity or legal adoption; A partnership in which the stockholder, the spouse, or any of the aforementioned relatives is a general partner; and Corporation, association, or firm of which the stockholder, his spouse, or the aforementioned relatives own more than 50% of the total subscribed capital stock of such corporation, association, or firm. Related Interests 1. Spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of a DOSR of the bank. 2. Partnership of which a DOSR of a bank or his spouse, relative within the first degree of consanguinity or affinity, or relative by legal adoption, is a general partner. 3. Co-owner with the DOSR or his spouse, relative within the first degree of consanguinity or affinity, or relative by legal adoption, of the property or interest or right mortgaged, pledged, or assigned to secure the loans or other credit accommodations, except when the mortgage, pledge, or assignment covers only said co-owner’s undivided interest. 4. Corporation, association, or firm of which any group of DOSR of the lending bank or their spouses, relatives within the first degree of consanguinity or affinity, or relative by legal adoption, hold or own at least 20% of the subscribed capital of such corporation, or of the equity of such association or firm. 5. Corporation, association, or firm wholly-or majority-owned or controlled by any related entity of a group of related entities mentioned in items 2 and 4 above. 6. Corporation, association, or firm, which owns or controls directly or indirectly whether singly or as part of a group of related interest at least 20% of the subscribed capital of a substantial stockholder of the lending bank or which controls majority interest of the bank Related Interests Substantial stockholder refers to a person, or group of persons whether natural or juridical, owning such number of shares that will allow such person or group to elect at least one member of the board of directors of a bank, or who is directly or indirectly the registered or beneficial owner of more than 10% of any class of its equity security. Corporation, association, or firm which has an existing management contract or any similar arrangement with the parent of the lending bank. Non-governmental organizations or foundations engaged in retail microfinance operations which are incorporated by any of the DOSR of related banks.  TRANSACTIONS COVERED Transactions covered. The terms loans, other credit accommodations and guarantees as used herein shall refer to transactions of the bank which involve the grant of any loan, advance or other credit accommodation in any form whatsoever, whether renewal, extension or increase, and shall include: a. Any advance by means of an incidental or temporary overdraft, cash item, “vale”, etc.; b. Any advance of unearned salary or other unearned compensation for periods in excess of thirty (30) days; c. Any advance by means of DAUDs; d. Outstanding availments under an established credit line; e. Drawings against an existing letter of credit; f. The acquisition of any note, draft, bill of exchange or other evidence of indebtedness upon which the bank’s DOSRIs may be liable as makers, drawers, acceptors, endorsers, guarantors or sureties; g. Indirect lending such as loans or other credit accommodations granted by another financial intermediary to said DOSRIs from funds of the bank invested in the other institution’s trust or other department when there is a clear relationship between the transactions; h. The increase of an existing indebtedness, as well as additional availments under a credit line or additional drawings against a letter of credit; i. The sale of assets, such as shares of stock, on credit; and j. Any other transactions as a result of which the bank’s DOSRIs become obligated or may become obligated to the lending bank, by any means whatsoever to pay money or its equivalent.  TRANSACTIONS NOT COVERED Transactions not covered. The terms loans, other credit accommodations and guarantees as used herein shall not refer to the following: a. Advances against accrued compensation, or for the purpose of providing payment of authorized travel, legitimate expenses or other transactions for the account of the bank or for utilization of maternity and other leave credits; b. The increase in the amount of outstanding credit accommodations as a result of additional charges or advances made by the bank to protect its interest such as taxes, insurance, etc.; c. The discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, including, but not limited to, the acquisition by a domestic bank of export bills from any of its DOSRI which are drawn in accordance with the terms and conditions of the covering letters of credit: Provided, That the transaction shall automatically be subject to the ceilings as herein provided once the DOSRI who is a party to the transaction becomes directly liable to the bank; d. Transactions with a foreign bank which has stockholdings in the local bank where the foreign bank acts as guarantor through the issuance of letters of credit or assignment of a deposit in a currency eligible as part of the international reserves and held in a bank in the Philippines to secure other credit accommodations granted to another person or entity: Provided, That the foreign bank stockholder shall automatically be subject to the ceilings as herein provided in the event that its contingent liability as guarantor becomes a real liability; and e. Interbank call loan transactions. Applicability to credit card operations. The credit card operations of banks shall not be subject to these regulations where the credit cardholders are bank’s DOSRI: Provided, That (a) the privilege of becoming a credit cardholder is open to all qualified persons on the basis of selective criteria which are applied by the bank to all applicants thereof; and (b) the bank’s DOSRIs reimburse/pay the bank for the billed amount in full on or before the payment due date in the billing or statement of account, as set by the bank for all other qualified credit card holders on availments made for the same period on their credit cards. However, the transaction shall be subject to applicable DOSRI regulations if the bank’s DOSRIs: a. fail to reimburse/pay the bank within the period mentioned herein; or b. on the outset, opt for deferred payment scheme, and the availment is booked by the bank. For purposes of this Section, stockholders and related interests refer to individual credit card holders. Loans, other credit accommodations and guarantees granted to subsidiaries and/or affiliates. a. Ceilings. The total outstanding loans, other credit accommodations and guarantees to each of the bank’s subsidiaries and affiliates shall not exceed ten percent (10%) of the net worth of the lending bank: Provided, That the unsecured loans, other credit accommodations and guarantees to each of said subsidiaries and affiliates shall not exceed five percent (5%) of such net worth: Provided, further, That the total outstanding loans, other credit accommodations and guarantees to all subsidiaries and affiliates shall not exceed twenty percent (20%) of the net worth of the lending bank: Provided, finally, That these subsidiaries and affiliates are not related interest of any of the director, officer, and/or stockholder of the lending bank. Loans, other credit accommodations and guarantees granted by a bank to an entity (often a special purpose entity or SPE) that is a subsidiary or affiliate of that bank for the purpose of project finance as defined under Sec. 344 (Exclusion from the thirty percent (30%) unsecured individual ceiling for project finance) shall be subject to a separate individual limit of twenty-five percent (25%) of the net worth of the lending bank, subject to the following conditions: (1) That the unsecured portion thereof shall not exceed twelve and one-half percent (12.5%) of such net worth when the project is already operational; (2) That such project finance loans are for the purpose of undertaking initiatives that are in line with the priority programs and projects of the government; (3) That the lending bank shall ensure that the standard prudential controls in project finance loans designed to safeguard creditors’ interests are in place, which may include pledge of a borrower’s shares, assignment of the borrower’s assets, assignment of all revenues and cash waterfall accounts, and assignment of project documents; (4) That the lending bank shall consider its total project finance exposures in complying with Sec. 361 (Large exposures and credit risk concentrations) and Sec. 143 (Credit limits, large exposures, and credit risk concentrations) on the guidelines in managing large exposures and credit risk concentrations; (5) That the subsidiary or affiliate is not a related interest of any of the director, officer, and/or stockholder of the lending bank; and (6) That the total outstanding loans, other credit accommodations and guarantees to all subsidiaries and affiliates shall be subject to the aggregate limits for related party transactions. Exclusions from the ceilings. The following loans, other credit accommodations and guarantees shall be excluded in determining compliance with the ceilings prescribed in Item “a” above: (1) loans, other credit accommodations and guarantees secured by assets considered as non-risk under existing Bangko Sentral regulations; (2) Interbank call loans; and (3) The portion of loans and other credit accommodations covered by guarantees of international/regional institutions/multilateral financial institutions where the Philippine Government is a member/shareholder, such as the International Finance Corporation and the Asian Development Bank.  Procedural requirements The following provisions shall apply if a bank grants a loan, other credit accommodation or guarantee to any of its subsidiaries and affiliates. (1) Approval of the board, when to obtain. Except with prior written approval of the majority of all the members of the board of directors, no loan, other credit accommodation and guarantee shall be granted to a subsidiary or affiliate. (2) Approval by the board, how manifested. The approval shall be manifested in a resolution passed by the board of directors during a meeting and made of record. (3) Determination of majority of all the members of the board of directors. The determination of the majority of all the members of the board of directors shall be based on the total number of directors of the bank as provided in its articles of incorporation and by-laws. (4) Contents of the resolution. The resolution of the board of directors shall contain the following information: (a) Name of the subsidiary or affiliate; (b) Nature of the loan or other credit accommodation or guarantee, purpose, amount, credit basis for such loan or other credit accommodation or guarantee, security and appraisal thereof, maturity, interest rate, schedule of repayment and other terms; (c) Date of resolution; (d) Names of the directors who participated in the deliberation of the meeting; and (e) Names in print and signatures of the directors approving the resolution: Provided, That in instances where a director who participated in the board meeting and who approved such resolution failed to sign, the corporate secretary may issue a certification to this effect indicating the reason for the failure of the said director to sign the resolution. (5) Transmittal of copy of board approval; contents thereof. A copy of the written approval of the board of directors, as herein required, shall be submitted to the appropriate supervising department of the Bangko Sentral within twenty (20) banking days from the date of approval. The copy may be a duplicate of the original, or a reproduction copy showing clearly the signatures of the approving directors: Provided, That if a reproduction copy is to be submitted, it shall be duly certified by the corporate secretary that it is a reproduction of the original written approval. Assignment for next week: Answer the following questions: Short Bond Paper/ A4: 1. What are the two principles in Shari’a Law which distinguish an Islamic Bank from a regular bank? Describe and Explain Each. 2. Why do our laws regulate DOSRI Transactions in banks? Provide references to your basis or bases.\ 3. Explain how a quasi-bank sources its funds from the public. Give at least 3 examples of a deposit substitute and describe or explain each. 4. How does the Central Bank of the Philippines (BSP) exercise control over other banks in the Philippines. Explain your answer thoroughly. Reading Assignment Republic Act no. 10846 – Liquidation Framework for Banks Act. With focus on: 1. Briefly explain notice of closure and takeover activities by the Philippine Deposit Insurance Corporation (PDIC) 2. Enumerate the significant powers of the receiver 3.Know the effects of the placement of the bank under the liquidation The PDIC as RECEIVER  WEEKLY OBJECTIVES: 01 02 03 1. Briefly explain 2. Enumerate the 3.Know the effects notice of closure significant powers of the placement and takeover of the receiver of the bank under activities by the the liquidation Philippine Deposit Insurance Corporation (PDIC) What is the PDIC? BANK CLOSURE The MB of the BSP orders the closure of a bank when it finds that the concerned bank has: (1) unilaterally declared a closure, or (2) has been dormant for at least 60 days, or (3) suspended payment of deposit liabilities, (4) or is no longer able to pay its liabilities as they become due, or (5) or has insufficient realizable assets to pay its liabilities, or (6) cannot continue business without involving probable losses to its depositors or creditors, or (7) has willfully violated a final cease-and- desist order for activities that amount to fraud or dissipation of its assets. ( Section 30 of the New Central Bank Act/ Republic Act No. 7653)  Sec. 12 of the PDIC Charter – Whenever a bank is ordered closed by the Monetary Board, LIQUIDATI the Corporation ( referring to the Philippine Deposit ON OF A Insurance Corporation ) shall be designated as receiver and CLOSED it shall proceed with the takeover and liquidation of BANK the closed bank in accordance with this Act. For this purpose, banks closed by the Monetary Board shall no longer be rehabilitated.  As the statutory RECEIVER AND LIQUIDATOR of closed banks, the PDIC shall take over banks ordered closed by the Monetary Board. It administers closed banks’ assets, records and RECEIVER affairs, and preserves disposed these assets for and the AND benefit of the creditors and uninsured depositors. LIQUIDATOR When the Monetary Board orders the liquidation of a bank that has been placed under receivership, its assets are managed, liquidated, and distributed to creditors and uninsured depositors according to the preference and concurrence as provided for by the Civil Code of the Philippines.  “SEC. 14. (a) Upon the designation of the Corporation as receiver of a closed bank, it shall serve a notice of closure to the highest-ranking officer of NOTICE OF the bank present in the bank premises, or in the absence CLOSURE of such officer, post the notice of closure in the bank premises or on its main entrance. The closure of the bank shall be deemed effective upon the service of the notice of closure. Thereafter, the receiver shall takeover the bank and exercise the powers of the receiver as provided in this Act.  “(b) The receiver shall have authority to use reasonable force, including the authority to force open the premises of the bank, and exercise such acts necessary to take actual physical possession and custody of the bank and all its assets, records, documents, and take charge of its affairs upon the TAKEOVER service of the notice of closure. “(c) Directors, officers, employees or ACTIVITIE agents of a bank hold money and other assets of the bank in trust or under administration or management by them for S the bank in their fiduciary capacity. Upon service of the notice of closure to the bank, all directors, officers, employees or agents of the closed bank shall have the duty to immediately account for, surrender and turn over to the receiver, and provide information relative to, the assets, records, and affairs of the closed bank in their possession, custody, administration or management. “(d) When the circumstances so warrant, the local government unit and law enforcement agencies concerned shall, AUTHORITIES SEC. 13. (a) The receiver is OF A authorized to adopt and RECEIVER implement, without need of consent of the stockholders, AND EFFECTS board of directors, OF creditors or depositors of the closed bank, any or a PLACEMENT combination of the following OF A BANK modes of liquidation: UNDER “(1) Conventional liquidation; and LIQUIDATION “(2) Purchase of assets and/or assumption of liabilities.  Include: 1. Asset Management and Conversion ( Section 16 (A) to (F)) – The PDIC gathers the assets of the bank for evaluation and verifies their existence, ownership, condition, and other factors to determine Conventio realizable value. 2. Petition for Assistance in the nal Liquidation of a closed bank – A Liquidati special proceeding in rem for the liquidation of a closed bank, and on includes the declaration of the concomitant right of its creditors and the order of payment of their valid claims in the disposition of its assets. 3. Winding Up – Execution of the order of the Liquidation Court to distribute the assets of the bank  SEC. 15. (a) The receiver shall have the authority to facilitate and implement the purchase of the assets of the closed bank and the assumption of its liabilities by another insured bank, without need for “PURCHASE approval of the liquidation court. The exercise of this authority shall be in OF ASSETS accordance with the Rules on Concurrence and Preference of Credits under the Civil AND Code or other laws, subject to such terms and conditions as the Corporation may ASSUMPTION prescribe. The disposition of the branch licenses and other bank licenses of the OF closed bank shall be subject to the LIABILITIE approval of the Bangko Sentral ng S” Pilipinas. “(b) Such action of the receiver to determine whether a bank may be the subject of a purchase of assets and assumption of liabilities transaction shall be final and executory, and may not be set aside by any court.”  “(b) In addition to the powers of a receiver provided under existing laws, the Corporation, as receiver of a closed bank, is empowered to: “(1) Represent and act for and on behalf of the closed bank; “(2) Gather and take charge of all the assets, records and affairs of the closed bank, and administer the same for the benefit of its creditors; “(3) Convert the assets of the closed bank to cash or other forms of liquid assets, as far as practicable; “(4) Bring suits to enforce liabilities of the directors, officers, employees, agents of the closed bank and other entities related or connected to the closed bank or to collect, recover, and preserve all assets, including assets over which the bank has equitable interest; “(5) Appoint or hire persons or entities of recognized competence in banking, finance, asset management or remedial management, as its deputies, assistants or agents, to perform such powers and functions of the Corporation as receiver of the closed bank, or assist in the performance thereof; “(6) Appoint or hire “(7) Pay accrued “(8) Collect loans “(9) Hire or retain “(10) Borrow or persons or entities utilities, rentals and other claims of private counsel as obtain a loan, or of recognized and salaries of the closed bank and may be necessary; mortgage, pledge or competence in personnel of the for this purpose, encumber any asset of forensic and fraud closed bank for a modify, compromise or the closed bank, when investigations; period not exceeding restructure the terms necessary to preserve three (3) months, and conditions of or prevent from available funds such loans or claims dissipation of the of the closed bank; as may be deemed assets, or to redeem advantageous to the foreclosed assets of interests of the the closed bank, or creditors of the to minimize losses to closed bank; its depositors and creditors; “(11) If the “(12) Utilize “For banks with “(13) Charge stipulated interest available funds of insufficient funds, reasonable fees for rate on deposits is the bank, including the Corporation is the liquidation of unusually high funds generated by authorized to the bank from the compared with the receiver from advance the assets of the bank: prevailing the conversion of foregoing costs and Provided, That applicable interest assets to pay for expenses, and payment of these rates, the reasonable costs and collect payment, as fees, including any Corporation as expenses incurred and when funds unpaid advances receiver, may for the preservation become available. under the exercise such powers of the assets, and immediately which may include a liquidation of, the preceding paragraph, reduction of the closed bank, without shall be subject to interest rate to a need for approval of approval by the reasonable rate: the liquidation liquidation court; Provided, That any court; modifications or reductions shall apply only to earned and unpaid interest; “(14) Distribute the available assets of the closed bank, in cash or in kind, to its creditors in accordance with the Rules on Concurrence and Preference of Credits under the Civil Code or other laws; “(15) Dispose records of the closed bank that are no longer needed in the liquidation in accordance with guidelines set by the PDIC Board of Directors, notwithstanding the laws on archival period and disposal of records; and “(16) Exercise such other powers as are inherent and necessary for the effective discharge of the duties of the Corporation as receiver. “The Board of Directors shall adopt such policies and guidelines as may be necessary for the performance of the above powers by personnel, deputies, assistants and agents of the Corporation.  “(c) After the payment of all liabilities and claims against the closed bank, the Corporation shall pay surplus, if any, dividends at the legal rate of interest from date of takeover to date of Winding distribution to creditors and claimants of the closed bank Up in accordance with the Rules on Concurrence and Preference of Credits under the Civil Code or other laws before distribution to the shareholders of the closed bank.  “(1) On the corporate franchise or existence “Upon placement by the Monetary Board of a bank under liquidation, EFFECTS it shall continue as a body corporate until the termination of OF THE the winding-up period under Section 16 of this Act. Such continuation PLACEMENT as a body corporate shall only be for the purpose of liquidating, OF THE settling and closing its affairs and for the disposal, conveyance or BANK distribution of its assets pursuant UNDER to this Act. The receiver shall represent the LIQUIDATI closed bank in all cases by or against the closed bank and ON prosecute and defend suits by or against it. In no case shall the bank be reopened and permitted to resume banking business after being placed under liquidation. the functions and duties, as well as the allowances, powers remuneration and perquisites of the directors, officers, and and stockholders of such bank functions are terminated upon its closure. Accordingly, the of its directors, officers, and directors stockholders shall be barred from interfering in any way , with the assets, records, and officers affairs of the bank. “The receiver shall exercise and all authorities as may be stockhold required to facilitate the liquidation of the closed bank ers for the benefit of all its  “Upon service of notice of closure as provided in Section 14 of this Act, all the assets of the closed bank shall he deemed in custodia legis in the hands of the receiver, and as such, these assets may not be subject to attachment, garnishment, execution, levy or any other court processes. Any judge, officer of the court or any person who shall issue, order, process or cause the issuance or implementation of the garnishment (3) On order, levy, attachment or execution, shall be liable under Section 27 of this Act: Provided, however, That collaterals securing the loans the and advances granted by the Bangko Sentral ng Pilipinas shall not be included in the assets assets of the closed bank for distribution to other creditors: Provided, further, That the proceeds in excess of the amount secured shall be returned by the Bangko Sentral ng Pilipinas to the receiver. “Any preliminary attachment or garnishment on any of the assets of the closed bank existing at the time of closure shall not give any preference to the attaching or garnishing party. Upon motion of the receiver, the preliminary attachment or garnishment shall be lifted and/or discharged.  “Notwithstanding the provisions of the Labor Code, the employer-employee relationship between the closed bank and its employees shall be deemed terminated upon service of the notice of (4) On closure of the bank in labor accordance with this Act. Payment of separation pay or relations benefits provided for by law shall be made from available assets of the bank in accordance with the Rules on Concurrence and Preference of Credits under the Civil Code or other laws.  “The receiver may cancel, (5) terminate, rescind or repudiate any contract of the Contractu closed bank that is not al necessary for the orderly liquidation of the bank, or is obligatio grossly disadvantageous to the ns closed bank, or for any ground provided by law.  “The liability of a bank to pay interest on deposits and all other obligations as of closure shall cease upon its closure by the Monetary Board without prejudice to the first paragraph of Section 85 of Republic Act No. 7653 (the New Central Bank Act): Provided, That the receiver shall have the authority, without need (6) On for approval of the liquidation court, to assign, as payment to secured interest creditors, the bank assets serving as collaterals to their respective loans payments up to the extent of the outstanding obligations, including interest as of date of closure of the hank, as validated by the receiver. The valuation of the asset shall be based on the prevailing market value of the collaterals as appraised by an independent appraiser on an ‘as is where is’ basis. (7) Liability for penalties “From the time of closure, the and closed bank shall not be liable for the payment of surcharge penalties and surcharges s for arising from the late payment or nonpayment of real property late tax, capital gains tax, payment transfer tax and similar charges. and nonpaymen t of (8) Bank “The receiver may impose, on behalf of the closed bank, charges charges and fees for services and fees rendered after bank closure, such as, but not limited to, on the execution of pertinent services deeds and certifications.  “Except for actions pending before the Supreme Court, (9) actions pending for or against Actions the closed bank in any court or quasi-judicial body shall, pending upon motion of the receiver, for or be suspended for a period not exceeding one hundred eighty against (180) days and referred to mandatory mediation. Upon the termination of the mediation, closed the case shall be referred back to the court or quasi- bank judicial body for further proceedings.  “The execution and enforcement (10) of a final decision of a court other than the liquidation Final court against the assets of a closed bank shall be stayed. decisions The prevailing parly shall against file the final decision as a claim with the liquidation the court and settled in closed accordance with the Rules on Concurrence and Preference of bank Credits under the Civil Code or other laws.  “Payment of docket and other court fees relating to all cases or actions filed by the receiver with any judicial or (11) quasi-judicial bodies shall be deferred until the action is Docket terminated with finality. Any and other such fees shall constitute as a first Hen on any judgment in court favor of the closed bank or in fees case of unfavorable judgment, such fees shall be paid as liquidation costs and expenses during the distribution of the assets of the closed bank.  “(12) All assets, records, and documents in the possession of the closed bank at the time of its closure are presumed held by the bank in the concept of an owner. “(13) The exercise of authority, functions, and duties by the receiver under this Act shall be presumed to have been performed in the regular course of business. “(14) Assets and documents of the closed bank shall retain their private nature even if administered by the receiver. Matters relating to the exercise by the receiver of the functions under this Act shall be subject to visitorial audit only by the Commission on Audit.” Secrecy of Bank Deposits Act Republic Act no. 1405 WEEKLY OBJECTIVES At the end of the chapter, the students should be able to: 1. State the purpose of the law on secrecy of bank deposits 2. Enumerate the deposits covered under the law Policy under Republic Act No.1405 R.A. No. 1405 has two (2) allied purposes: (a) to discourage private hoarding; (b) at the same time encourage the people to deposit their money in banking institutions so that it may be utilized by way of authorized loans and thereby assist in economic development. Under the act, the confidentiality of bank deposits remains a basic state policy in the Philippines. Sec. 2 institutionalized this policy by characterizing as absolutely confidential in general all deposits of whatever nature with banks and other financial institutions in the country. History Enacted in September 1955, primarily to encourage the public to invest their money in government securities and deposit them in banks; discouraging private hoarding and enhancing protection of privacy rights. Passed to thwart reluctance and to afford depositors a stricter mantle of protection against unwarranted scrutiny of their deposits with the objective of raising funds for banks. In more recent years, the law on secrecy of bank deposits has been used by depositors to perpetuate ingenious ways of defrauding counterparties, regulators, and ultimately the government. Presently, the Philippines is the only country to still have restrictive banking laws making it hard for the government to go after tax evaders and money launderers. Operative Provisions of Republic Act No. 1405 A. Secrecy of Bank Deposits – All deposits of whatever nature with banks or banking institutions, including investments in bonds issued by Government and its political subdivisions and instrumentalities, are absolutely confidential in nature and may not be examined, inquired, or looked into by any person, government official, bureau, or office. Absolute Confidentialit y Absolute Confidentiality applies to the following bank transactions: 1. Deposits of whatever nature in banks or banking institutions in the Philippines. 2. Investments in government bonds. These bank transactions may not be examined, inquired, or looked into by any person, government official, bureau or office, except in certain limited instances. The General Banking Law of 2000 prohibits bank directors, officers, employees, or agents from disclosing to any unauthorized person, without order of a competent court, any information relative to funds or properties belonging to private individuals, corporations, or any other entity in the custody of the bank. It is not required that all the details of bank deposit be examined, inquired, or looked into. The prohibition applies even if the disclosure pertains only to the mere existence of a bank deposit, without revealing the bank or amount. Deposits Deposit means the unpaid balance of money, or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account, evidenced by a passbook, certificate of deposit, or other evidence of deposit issued in accordance with Bangko Sentral rules, regulations, and other applicable laws. Construed broadly to include accounts that may be used by banks for authorized loans to third persons, although there is no creditor-debtor relationship arising from the account, such as money placed under trust accounts. Investment in Government Bonds Refers to investments in bonds issued by the government of the Philippines, its political subdivisions, and its instrumentalities. Government bonds are debt securities that are unconditional obligations of the State and backed by its full taxing power. Includes treasury bills, treasury notes, retail treasury bonds, dollar linked peso notes, and other risk-free bonds. Transactions Not Covered The protection of the law does not extend to papers and documents pertaining to commercial transactions of banking institutions that do not involve deposits of money. Examples of these transactions are letters of credit, trust receipts, and instruments of indebtedness, such as bank drafts and promissory notes. The confidentiality does not cover investments in bonds that are not issued by the government of the Philippines, its political subdivisions, and instrumentalities. Investments in private bonds and bonds issued by foreign governments are not covered.  Persons Liable 1. Any person or government official who, or any government bureau or office that, examines, inquires, or looks into a bank deposit or government bond investment in any of the instances not allowed under the law; 2. Any official or employee of a banking institution who makes a disclosure concerning bank deposits to another in any instance is not allowed by law;and 3. Any person who commits a violation of any of the provisions of the law. Any bank official, director, employee, or agent who discloses information relative to funds or properties in the custody of the bank may also be held liable under the applicable provisions of the General Banking Law of 2000, Thrift Banks Act of 1995, and Rural Banks Act of 1992 Penalties Violation of the Law on Secrecy on Bank Deposits will subject the offender upon conviction, to the following penalties. Imprisonment of not more than five (5) years; Fine of not more than P20,000.00; or Both imprisonment and fine. Exceptions to Confidentiality Bank deposits and investments in government bonds may be examined, inquired, or looked into under the following limited exceptions: 1. Law on Secrecy of Bank Deposits: Bank deposits and investments in government bonds may be examined, inquired, and looked into in the following instances: Upon written permission or consent in writing by the depositor. For consent to be valid, it should be made knowingly, voluntarily, and with sufficient awareness of the relevant circumstances and likely consequences. In cases where money deposited or invested is the subject matter of litigation Upon a competent court’s order in cases of bribery of, or dereliction of duty by, public officials; or Impeachment cases; Other Laws and Jurisprudence 4. Application for 3. Borrowings of DOSRIs 2. Cases of Unexplained Compromise of Tax who are required to 1. Investigation by the Wealth of Public Liability, Determination execute a written waiver Ombudsman under the Officials or Violations of Decedent’s Estate, of secrecy of bank Ombudsman Act of 1989 of the Anti-Graft and and Exchange of Tax deposits under the New Corrupt Practices Act. information under the Central Bank Act. NIRC. 7. Depositors or 5. As a Remedy for the 6. Garnishment of Investments Related to 8. Annual Testing of Collection of Delinquent Deposits in Satisfaction Unlawful Activities or Numbered Accounts under Taxes or Duties under of Judgment under the Money Laundering AMLA. the NIRC. Rules of Court. Offenses under the AMLA. 9. Cases of Unsafe or 10. Failure of Prompt Unsound Banking under Corrective Action under the PDIC Charter. the PDIC Charter. Other Laws and Jurisprudence 11. Examination Pursuant to the Anti-Terrorism Act of 2020. 12. Examination Pursuant to the Terrorism Financing Prevention and Suppression Act of 2012. 13. Audit of Government Deposits under the Constitution and the Government Auditing Code. 14. Investigation to Recover Ill-Gotten Wealth under Executive Order No. 1. 15. Review of Records by a Rehabilitation Receiver under the Financial Rehabilitation and Insolvency Acy (FRIA) of 2010 16. Escheat Proceedings under the Unclaimed Balances Act. 17. Records of Closed Banks based on jurisprudence. Foreign Currency Deposit Act of the Philippines. Foreign currency deposits refer to funds in foreign currencies that are accepted and held by authorized banks in the regular course of business with the obligation to return an equivalent to the owner thereof, with or without interest. Absolute Confidentiality All foreign currency deposits are absolutely confidential and cannot be examined, inquired, or looked into by any person, government official, bureau, or office, whether judicial or administrative, or legislative, or any other private or public entity. Foreign currency deposits are also exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency, or any administrative body whatsoever. Prohibited Acts and Persons Liable The following are liable under this law: 1. Any person or government official who, or any government bureau or office that, examines, inquiries, or looks into a foreign currency deposit without the written permission of the depositor. 2. Any official or employee of a banking institution who makes a disclosure concerning foreign currency deposits to another, in any instance not allowed by law; 3. Anyone who shall attach, garnish, or subject the foreign currency deposit to any other order or process of any court, legislative body, government agency, or any other administrative body; or 4. Any person who commits a willful violation of any of the provisions of FCDA of the Philippines or regulation issued by the Monetary Board pursuant to the said law. Exceptions to Confidentiality 1. FCDA – written permission of the depositor. 2. Other laws and jurisprudence: DOSRI borrowings under New Central Bank Act. In cases of application for compromise of tax liability, determination by the Commissioner of BIR of a decedent’s gross estate, and exchange of tax information, A covered institution that reports foreign currency deposits in covered transaction reports or suspicious transaction reports to AMLC Inquiry by AMLC into deposits or investments related to unlawful activities or money laundering offenses. Investigation by AMLC of deposits and investments related to financing or acts of terrorism.  Conduct of annual testing by Bangko Sentral that is solely limited to the determination of the existence and true identity of the owners of foreign currency non-checking numbered accounts to prevent money laundering. Inquiry or examination of deposits or investments by Bangko Sentral in the course of a periodic or special examination to ensure compliance with the AMLA Inquiry by PDIC and Bangko Sentral in cases of unsafe or unsound banking and failure to prompt corrective actions; Audit of government deposits by Commission on Audit; Investigation by PCGG to recover ill- gotten wealth. Penalties Violation of the FCDA shall subject the offender, upon conviction, to the following penalties: 1. Imprisonment of not less than 1 year but not more than 5 years; 2. Fine of not less than P5,000.00 but not more than P25,000.00 3. Both imprisonment and fine.