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TRUTH IN LENDING ACT (RA 3765) CONSUMER ACT OF THE PHILIPPINES (RA 7394) DECLARE POLICY OF THE STATE

The law declares that it is the policy of the state to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full d isclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy. COVERAGE OF THE LAWS INVOLVED The old law (R.A. 3765) covered only two groups of transactions, loans of money and sale on installments of property and allied transactions. The new law, calle d as the Consumer Act of the Philippines, applies to the following transactions (1) credit sale under Sec. 140, (2) open consumer credit plan under Sec. 141; (3) consumer loans not open and consumer credit under Sec. 142; (4) sale of cons umer products on installment basis. Bar Question: Embassy Appliances sells home theater components that are designed and customized as entertainment centers for consumers within the medium-to-high price bracket. Most, if not all, of these packages are sold on installment base s, usually by means of credit cards allowing a maximum of 36 equal monthly payme nts. Preferred credit cards of this type are those issued by banks, which regula rly hold mall-wide sales blitzes participated in by appliance retailers like Emb assy Appliances the salesclerk who is attending to you simply swipes your credit card on the electronic approval machine (which momentarily prints out your char ge slip since you have unlimited credit), tears the slip from the machine, hands the same over to you for your signature, and without more, proceeds to arrange the delivery and installation of your new home theater system. You know you will receive a statement on your credit card purchases form the bank containing an o ption to pay were charged for your purchase. Did Embassy Appliances comply with the provision of the Truth in Lending Act (R.A. 3756)? (2000 Bar) Suggested Answer: (U.P. Law Center): There is no need for embassy Appliances to comply with the Truth in Lending Act. The transaction is not a sale on installme nt bases. It is the credit card company which allows the buyer to enjoy the priv ilege of paying the price on installment basis. DISCLOSURE REQUIREMENTS Before a loan or a sale is consummated, the following disclosure requirements mu st be made in writing: a. 1. 2. 3. 4. 5. 6. 7. 8. 9. b. 1. 2. 3. 4. 5. 6. 7. 8. In credit sales Cash price Credit for downpayment or trade-in Total amount to be financed charges not incident to the sale finance charge percentage of the finance charge to the amount to be financed effective interest rate repayment program, and default or delinquency on late payments In consumer loans Amount of credit Charges Amount to be financed Amount of finance charges Effective interest rates Percentage of finance charge to the amount financed Default or delinquency charges, and Description of security

The disclosure requirement is not applicable to bank deposits and insurance cont racts. 4blue 95 notes:Banks and non-bank financial intermediaries authorized to engage in quasi-banking functions are required to strictly adhere to the provisions of the Truth in Lending Act and shall make the true and effective cost of borrowing a n integral part of every loan contract (Consolidated vs. CA, 246 SCRA 195) Bar Question: In general terms, what does the Truth in Lending Act provide in or der to accomplish the declared policy of the state in enacting the same (1969 Ba r) Answer: To accomplish the declared policy of the state to protect citizens from a lack of awareness of the true cost of credit to the user by assuring a full di sclosure of such cost, a creditor or lender is obliged to provide the debtor or borrower with a statement, before perfection of the contract containing the foll owing: a. Cash price or amount of money received by debtor, b. Amount credited as down payment; c. Balance of cash price; d. Non-finance charges advanced by the creditor or lender; e. Total amount to be financed f. Finance charges in pesos; and g. Percentage of finance charge to total amount to be financed. (2006 Note: Answered under the provisions of the Truth in Lending Law) PENALTIES FOR NON-DISCLOSURE Under Sec. 147 of the Consumer Act of 1992, the failure by the covered seller or lender to comply with the disclosure statement will subject him to the followin g penalties: P 1,000 or double the finance charge collected, but not exceeding P 3,000. the action should however be filed within one year from the date of viola tion. Bar Question: Dana Gianina purchased on a 36-month installment basis the latest model of the Nissan Sentra sedan car form the Jobel Cars, Inc. In addition to t he advertised selling price, the latter imposed finance charges consisting of in terests, fees, and service charges. It did not, however, submit to Dana a writte n statement setting forth therein the information required by the Truth in Lendi ng Act ( R.A. 3755 or 3765). Nevertheless, the conditional deed of sale which th e parties executed mentioned that the total amount indicated therein included su ch fianc charges. a. Has there been substantial compliance of the aforesaid Act? b. If your answer in the foregoing question is in the negative, what is the effe ct of the violation of the contract? c. In the event of violation of the act, what remedies may me availed by Dana? ( 1991 Bar) Answer: (a) There is no substantial compliance of the Truth in Lending Act. The law requ ires that before perfection of the contract, the lender/seller should execute a written disclosure statement containing among others: the amount of finance char ges, and the percentage of finance charge to the total cost, and a copy of this statement should be received by the borrower before the perfection of the contra ct. This was not done in the problem above, the mention in the deed of condition al sale that the consideration therein includes the finance charge is not a comp liance of the law. (b) A violation of the Truth in Lending Act will not adversely affect the validi ty of the contract itself. (c) Because of the violation, Dana may avail of the following remedies: 1) A civil action brought within one year to recover from the seller/lender an a mount double the finance charge imposed, but not less than P1000.00 2) A criminal action for willful violation of the law against the seller/lender

who if convicted may be imposed a fine ranging from P1,000 to P5,000 or imprison ed for not less than 6 months of both. (4blue 95 Note: Answered under the provis ions of the Truth in Lending Law) PHILIPPINE DEPOSIT INSURANCE CORPORATION (RA 9302) The PDIC is an attached agency of the Department of Finance. PDIC s overall mandate To provide protection to depositors of Philippine banks through deposit insuranc e, settlement of claims for insured deposits, financial assistance to banks and receivership/liquidation of closed banks. Functions of PDIC A. Insurance The PDIC assesses and collects insurance assessments from member-banks to insure member-banks deposit accounts. B. Bank Rehabilitation The PDIC may grant financial assistance to distressed banks if it is proven to b e a less costly alternative than closure. C. Settlement of claims for insured deposits The PDIC processes and services claims for insured deposits. Deposits are insure d up to a maximum coverage of P250,000 per depositor. D. Receivership of closed banks Once a bank is ordered closed by the Monetary Board (MB) of the Bangko Sentral n g Pilipinas, the PDIC is designated as statutory receiver. The PDIC upon receipt of the MB resolution ordering the closure of a bank, immediately and physically takes over the closed bank. Receivership is the stage within which the PDIC man ages the affairs of the closed bank and preserves its assets for the benefit of creditors. The closed bank is placed under receivership for a period of 90 days. E. Liquidation of closed banks After the 90-day receivership period and PDIC determines that the bank cannot be rehabilitated or permitted to resume business, the Monetary Board directs PDIC t o proceed to liquidation. Liquidation refers to the recovery and conversion of a ssets into cash for distribution to all creditors in accordance with the order o f credit preference pursuant to law. 4blue 95 notes: Membership of banks to PDIC is mandatory, hence, all operating b anks are members of PDIC, provided that insurance status of these banks has not been terminated due to non-payment of insurance assessments or other causes pres cribed by law. If my bank is bought by the another bank (or merged with another bank), will my deposits still be covered by insurance? A change of a member institution's name does not make a new and separate member. Deposits made with the bank prior to its acquisition or merger continue to be in sured to the P250,000 maximum. Any additional deposits you make with the bank ar e insured, only to the extent that your combined total of deposits, including th ose placed before the merger or acquisition, does not exceed P250,000. 4blue 95 notes: All peso and foreign currency savings deposit accounts, time dep osit accounts, current or demand deposit or checking accounts in member bank are insured with PDIC. PDIC covers only the risk of bank closure ordered by the Monetary Board. Thus, b ank losses due to theft, fire, closure by reason of strike or existence of publi c disorder, revolution or civil war, are not covered by PDIC. Deposits of all member commercial banks, savings and mortgage banks, rural banks , private development banks, cooperative banks, savings and loan associations, a s well as branches and agencies in the Philippines of foreign banks and all othe r corporations authorized to perform banking functions in the Philippines, are i nsured with PDIC. But PDIC insurance only covers deposits in banks located in th

e Philippines. Deposits in overseas branches of local banks are not insured with PDIC. Deposit liabilities of banks with terminated insured status are not insured by P DIC. Sec. 9 of RA 6426 ( An act instituting a foreign currency deposit system in the Ph ilippines, and for other purposes") and Sec. 79 of Central Bank (CB) Circular No . 1389, dated August 13, 1993, mandate that foreign currency deposits shall be i nsured under the provisions of RA 3591, as amended. Under CB Circular No. 1389, depositors are entitled to receive payment in the same currency in which the ins ured deposit is denominated. Shall the depositor pay any insurance premium to PDIC? No. Insurance premium is paid by the banks, not by the depositors. The bank is a ssessed 1/5 of 1% per annum of the assessment base of the bank as insurance asse ssment. In determining the insured amount, the outstanding balance of each account is ad justed, interests are updated, withholding taxes are deducted, accounts are cons olidated; whenever applicable, unpaid loans and other obligations are also deduc ted; and in no case shall insured deposit exceed P250,000. Deposits maintained in different categories of legal ownership are separately in sured. Can PDIC insurance coverage be increased by having several accounts in the same name in an insured bank? No. You cannot increase PDIC insurance coverage by having many deposits under th e same ownership category. Deposit insurance coverage is not determined on a per -account basis. The type of account (whether checking, savings, time or other fo rm of deposit) has no bearing on the amount of insurance coverage. Is there a need for a depositor to file his claim for insured deposit with PDIC? Yes. Depositors will be advised through the national and/or local media and post ers at the premises of the closed insured bank and other public places within th e locality on the schedule of claims servicing and the last day of filing claim. When should the depositor of a closed insured bank file his claim with PDIC? The depositor of the closed insured bank should file a claim for his insured dep osits within 24 months from date of bank closure. What happens when the depositor of a closed bank fails to file his claim within the 18-month period?All rights of the depositor with respect to the insured depo sit shall no longer be honored but his rights against the closed bank subsists. How long does it take PDIC to settle a claim for insured deposit? The claim for insured deposit should be settled within 6 months from the date of filing but the claim must be filed within 24 months after bank closure. The 6-m onth period shall not apply if the documents of the claimant are incomplete or i f the claim requires further verification. What processes are involved before PDIC starts servicing claims? Deposit records are subjected to a pre-settlement examination prior to servicing of claims. As soon as the pre-settlement examination is completed, PDIC shall s chedule the servicing of claims. How long does the pre-settlement examination take? The length of time needed for the pre-settlement examination of deposit liabilit ies of a closed insured bank largely depends on the completeness and accuracy of records turned over by the Bank to PDIC and the number of deposit accounts to b e examined. On the average, claims servicing for banks with problematic records starts 3-4 months after takeover by PDIC.

If the deposit account in a closed bank is more than P100,000.00, what happens t o the excess of the maximum amount of insured deposit? If the closed bank is not rehabilitated or taken over by another bank, amount in excess of the P250,000 coverage can still be claimed upon the final liquidation of the remaining assets of the closed bank. The claim may be filed with the Liq uidator of the closed bank after filing the claim for insured deposits. However, if the closed bank is rehabilitated, the excess deposits are usually as sumed by the rehabilitator. What is the order of priorities for the payment of claims in excess of the P250, 000.00 maximum insurance coverage?The schedule of payment beyond the P250,000.00 maximum insurance shall be based on priorities set by law.Under the law, claims for deposit in excess of the insured P250,000.00 will be settled together with claims of other ordinary creditors, after preferred claims like government taxes , labor claims, secured credits and trust funds are settled. 4blue 95 notes:Deposits in different banking institutions are insured separately . However, if a bank has one or more branches, the main office and all branch of fices are considered as one bank. Thus, if you have deposits at the main office and at one or more branch offices of the same bank, the deposits are added toget her when determining deposit insurance coverage, the total of which shall not ex ceed P250,000. JOINT TRUST AND BY ACCOUNT: for example joint account of A&B is P700,000. then it must be divided into 2 so A will have 350,000. but since it is a joint account then the insurable limit wh ich is 250,000 will also be divided into 2 which is 125,000. which means the ins ured amount of A is only P125,000. The number of persons involved in the joint account, that is also the number of the divisor to determine how much each is entitled. So if A already has P250000 in that bank, then his insurable amount including th at of the joint account is already P375000. (4blue 95 says that joint account is the best way in order for a depositor to exceed the insurable limit) But if it is a joint account with a juridical entity, example Y Co and A, nothin g will go to A since it would operate that A merely hold it in trust for Y Co. The same way with trust, if it is A in trust for B (or B by A aka By Account) noth ing will go to A since A holds it in trust for B, so B will get all. EFFECTS OF PDIC RECEIVERSHIP * PDIC shall control, manage and administer the affairs of the closed bank. * Powers, functions and duties, as well as all allowances, remunerations and per quisites of the directors, officers, and stockholders of such bank are suspended , and the relevant provisions of the Articles of Incorporation and By-laws of th e closed bank are likewise deemed suspended. * Assets of the closed bank under receivership shall be deemed in custodia legis in the hands of the receiver. * Assets shall not be subject to attachment, garnishment, execution, levy or an y other court processes. A judge, officer of the court or any person who shall i ssue, order, process or cause the issuance or implementation of the writ of garn ishment, levy, attachment or execution shall be liable under Section 21 of this law. * Upon closure of insured bank, payment of the insured deposits shall be made as soon as possible either (1) by cash or (2) by making available to each deposito r a transferred deposit in another insured bank in an amount equal to insured de posit of such depositor * In its discretion, PDIC may require proof of claims to be filed before paying the insured deposits, in case PDIC is not satisfied as to the viability of a cla im for an insured deposit, it may require final determination of a court of comp etent jurisdiction before paying such claim * Failure to settle the claim, within 6 months from the date of filing of claim due to grave abuse of discretion, gross negligence, bad faith, or malice, shall,

upon conviction, subject the directors, officers or employees of the Corporatio n responsible for the delay, to imprisonment from 6 months to 1 year * Period shall not apply if the validity of the claim requires the resolution of issues of facts and or law by another office, body or agency including the case mentioned in the first proviso or by Corporation together with such other offic e, body or agency (BAR) As such a depositor may recover upto P250 000 only. For purposes of recove ry from the PDIC, all deposit account of a depositor opened by him in the same capacity shall be lumped together. 2006 notes: All deposits are insured, except trust fund and money market placem ent. 2006 notes: PDIC is preferred creditor over all assets of the insolvent bank. Th e insured bank may be examined by PDIC and if it deserves closure, the matter w ill be reported to the Central bank. SECRECY OF BANK DEPOSITS For peso deposits, Republic Act No.1405 (Bank Deposits Secrecy Law) declares all deposits of whatever nature with banks in the Philippines, including investments in government bonds, as of an absolutely confidential nature and prohibits the examination or inquiry into such deposits or investments by any person, governme nt official, bureau or office, as well as the disclosure by any official or empl oyee of a bank of any information concerning said deposits. Exceptions(BAR): 1.in an examination made in the course of a special or general examination of a bank that is specifically authorized by the Monetary board after being satisfied that there is reasonable ground to believe that a bank fraud or serious irregul arity has been or is being committed and that it is necessary to look into the d eposit to establish such fraud or irregularity. 2.in an examination made by an independent auditor hired by the bank to conduct its regular audit provided that the examination is for audit purposes only and the results thereof shall be for the exclusive use of the bank. 3.upon written permission of the depositor(DOSRI) The General Bank Act provides that in case of loan, the borrower should be requi red to waive the bank secrecy deposit. If the borrower borrows more than 5% of the bank s capital, the bank is allowed to waive the secrecy bank deposit. The Ma nual of Regulations of the Central Bank requires that for before a loan is secur ed by an assignment of certificate of time deposit, the borrower should be requi red to waive Secrecy of Bank Deposit. 4.in cases of impeachment Investment Management Accounts are not covered, that is why Clarissa Ocampo was able to disclose ERAP s IMA at Equitable Bank. (this case falls under provision of Sec. 55.1 of the General Banking Act of 2000) In the General Banking Act, there is a catch-all provision that: Sec. 55.1 No director, officer, employee or agent of any bank shall--(b) Without order of a court of competent jurisdiction disclose to any unauthori zed person any information relative to the funds or property in the custody of t he bank belonging to private individuals, corporations or any other entity: Prov ided that with respect to bank deposits, the provisions of existing laws shall p revail. 2006 notes:this provision may relate to transactions like Investment Management Accounts (Erap s in the Impeachment case. The one Clarissa O. disclosed). IMA are not covered by the Bank Secrecy Law. 5.upon order of a competent court in cases of bribery or dereliction of duty of

public officials 6.in cases where the money deposited or invested is the subject matter of the li tigation. 7.in cases of unexplained wealth under Sec 8 of RA 3019 (under jurisdiction of Ombudsman) Now the SC has repeated ruled that the anti-graft law has created another except ion to this. Because under the Anti-graft law in determining if the public offic ial has amassed ill-gotten wealth, the bank accounts and those of his family, hi s spouse, children and friends may be taken into consideration. Because of this provision, the Court said that Congress intended to create another exception to the Secrecy of Bank Deposit, because how can you determine if the official amass ed ill-gotten wealth unless you can get access to their bank deposit. (violation of the Anti-graft law) With the passage of R.A. 3019, the Anti-Graft and Corrupt Practices Act, an addi tional exception was created under 8 of R.A. 1405 which provides that a public of ficial, who has been found to have acquired during his incumbency an amount of p roperty and/or money manifestly out of proportion to his salary and to his other lawful income may be dismissed or removed. Bank deposits shall be taken into co nsideration in the enforcement of this section, notwithstanding any provision of law to the contrary. 4blue 95 notes: Inquiry into illegally acquired property extends to cases where such property is concealed by being held by or recorded in the name of other per sons. To restrict such inquiry only to property held by or in the name of the go vt official (defendant)who illegally acquire property,would tantamount that it would be an easy means of people in government who illegally acquired property an easy means of evading prosecution. In a prosecution for unexplained wealth, the Sandiganbayan may order the product ion of bank deposit records, not only of the wife and children of the accused, b ut also those of his friends and cronies. (Banco Filipino v. Purisima 161 SCRA 5 76) The Ombudsman law gives the Ombudsman the power to examine bank records in conne ction with any investigation he is conducting. He can subpoena bank records for violation of Anti-graft Law. The court can only subpoena records of bank if there is a pending case, and that is the subject matter of the case, and examine the accounts---According to 4blu e 95 this is inconsistent with the cases of PNB & Banco Filipino. Under Revenue Code, The Commissioner of Internal Revenue may inquire a bank acco unt of decedent to determine his correct amount of the estate. Also, when a tax payer compromises his tax liability, there is a waiver of the secrecy of bank de posits. 8.in inquiry into bank deposits , trust or investment funds of banking transacti ons when there is reasonable ground to believe that they have been used in suppo rt or in furtherance of Coup d etat under RA 6832 2005 notes: Only savings, checking and the trust fund are covered by the Law on Secrecy of Bank deposits as they are included in the explicit provision stating that ALL deposits of whatever nature with banks or banking institutions in the Phi lippines 2005 notes:Money market placement is not covered since it is not deposited in th e bank. 2005 notes:It may be noted that R.A. 1405 covers not only bank deposits but also investments in government bonds. (BAR) M wdraw w/o authority funds of the partnership in the amounts of P500T and U$ 50T for services he claims he rendered for the benefit of the partnership. H e deposited the P500T in his personal peso current account with Prosperity Bank and the U$ 50T in his personal foreign currency savings account with Eastern Ban k.

The partnership instituted an action in court against M ,Prosperity and Eastern Bank to compel M to return the subject funds to the partnership and pending liti gation to order both banks to disallow any withdrawal from his accounts.Can cour t compel Prosperity Bank and Eastern Bank to disclose the bank deposits of M? HELD: Yes, as far as the peso account is concerned, Sec 2 of RA 1405 allows the disclosure of bank deposits in case where the money deposited is the subject mat ter of the litigation. No, with respect to the foreign currency account ,under the Foreign Currency Law , the exemption to the prohibition against disclosure of information concerning bank deposits is the written consent of the depositor. For foreign currency deposits, Republic Act No. 6426 (The Foreign Currency Depos it Act) similarly declares that these deposits are of an absolutely confidential nature and cannot be examined, inquired or looked into by any person, governmen t official, bureau or office whether judicial or administrative or legislative o r any other entity whether public or private. There is only one instance for dis closure under said law and, that is, upon the written permission of the deposito r. RA 6426 also exempts foreign currency deposits from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever.For investments in trust accounts or in de posit substitutes, if these are in the form of investments in government bonds o r deposits, the protection under RA 1405 and RA 6426 extends thereto accordingly. If these are in other forms of investments, the disclosure of information related thereto is covered by Section 55 of the General Banking Law of 2000 (Republic A ct No. 8791) which prohibits, unless there is an order of a court of competent j urisdiction, the disclosure by any director, official, employee or agent of any bank any information relative to the funds or properties in the custody of the b ank belonging to private individuals, corporations or any other entity. 2006 notes: If the person or entity is not a party to the case being tried by th e court , then, he has the right to oppose the examination of his deposit. 9.Unclaimed Balances If an account has been dormant for 10 years, that dormant account is supposed to be escheated in favor of the government. The bank is supposed to report that s hare is an inactive account. The Secretary of Justice gave an opinion because of the power given to PCGG, the y may use any means to accomplish its purpose, and can require the production of bank records in connection with its investigation. FOREIGN CURRENCY DEPOSIT LAW (RA 6426) Sec 8 of R.A. 6426, as amended by P.D. 1246, provides that foreign currency depos its shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body wha tsoever . The secrecy of foreign currency deposits is given even more protection by R.A. 6 426, the Foreign Currency Deposit Act of the Philippines. In order to attract gr eater foreign investments and currency deposits in the country, all such deposit s are considered of an absolutely confidential nature and, except upon written p ermission of the depositor, in no instance shall such deposits be examined, inqu ired or looked into by any person, government official, bureau or office whether judicial, administrative or legislative or any other entity whether public or p rivate. All foreign currency deposits are absolutely confidential. In the case of RA 14 05, the Supreme Court held that bank accounts could be garnished, not covering b ank deposit. Foreign Currency, therefore, are exempt from attachment, garnishme nt, or any other order or process of any count, legislative body, government age ncy. Exception if the depositor has given a written authorization (same excepti on applicable to the RA 1405). NOTE: UNDER RA 1405 as distinguished with RA 6426--A writ of garnishment on bank deposit of a defendant is not an inquiry into his deposit as contemplated by RA

1405. It merely requires the bank cashier to inform the court whether said debt or has a deposit in said bank only for the purpose of garnishment to be issued b y it. So that the bank will hold the same intact and not allow any withdrawal un til further orders. SALVACION V. CA This involved a tourist who enticed a girl with a toy and then he raped the girl . He was charged but escaped from jail and disappeared. The parents filed a sepa rate civil action for damages and obtained a favorable decision. Since the touri st was gone and the only assets available were his account in China Bank, the b ank account was garnished. China Bank argued that the foreign currency deposit l aw exempts currency deposits from execution. Court said that the garnishment sho uld be allowed. The underlying idea behind the law is to encourage investments. It could not have contemplated a situation like this where it would result in pa tent injustice, where the victim of a crime could not get recompense because the offender managed to escape and this is the only asset left. In the name of just ice, exemption was not allowed! MELLON BANK, NA V. MAGSINO, 190 SCRA 633 In action filed the bank to recover money it transmitted by mistake, the record s of the bank accounts in which the proceeds of the money were deposited may be ordered to be produced since the money deposited is the subject matter of litiga tion. Even if the money was deposited in the names of the persons other than the recipient of the payment by mistake. PCIB v. CA The prohibition against inquiry into a bank deposit does not preclude its garnis hment to satisfy a judgment. Note: Under the FOREIGN CURRENCY DEPOSIT ACT, by express provision, Foreign Curr ency Account cannot be garnished and they are exempt from any court process. VAN TRUEST V. CA 230 SCRA 42 V opened a joint foreign currency account with X (an and/or account; X was V s emp loyee.) The money was Deutshmark. X closed the account and withdrew all the mone y and opened another account in her own name. V sued to get the money back. V al so sought injunction to stop X form withdrawing the money. X said that foreign c urrency account is exempt from court processes. SC: the money involved here does not belong to X, she cannot invoke the exceptio n. USE OF ALIAS OR NUMBER IN OPENING DEPOSIT ACCOUNTS 4blue 95 notes:Is confidentiality/secrecy of deposit accounts compromised with t he issuance of Circular 251? No. Circular 251 merely disallowed the opening of fictitious and anonymous accou nts and has not in any way modified nor lessened the safeguards and protection t o depositors under RA 1405. This means that, notwithstanding Circular 251, depos it accounts cannot be examined or looked into except under the limited circumsta nces provided for in RA 1405. Are banks allowed to open accounts using an alias or a number? There is no specif ic banking law up to the present prohibiting banks from opening deposit accounts using an alias or a number. Prior to July 7, 2000, there is also no banking reg ulation providing for such prohibition. On July 7, 2000 and in seeking the adopt ion of anti-money laundering measures, the Bangko Sentral ng Pilipinas (BSP) iss ued a regulation, Circular No. 251, providing that, unless otherwise prescribed under existing laws, anonymous accounts or accounts under fictitious names are p rohibited.The exception referred to under Circular No. 251 was RA 6426 (The Fore ign Currency Deposit Act) which explicitly allows the keeping of numbered accoun ts for the recording and servicing of deposits. For peso accounts, when banks allo w the opening of deposit accounts under pseudonyms, it is assumed that:

(1) they have exercised due diligence to ascertain the identity of their clients ; and (2) they are aware of the legal provisions and requirements on the use of pseudo nyms. The above notwithstanding, it may be pointed out that in the Manual of Regulatio ns issued by BSP, or even before the issuance of Circular 251, there were alread y regulations requiring the banks to: (a) adopt systems to establish the identit y of their depositors; and (b) require to set a minimum of three (3) specimen si gnatures from each of their depositors subject to regular updating. Even for num bered accounts as authorized under RA 6426, BSP has required banks, under Circul ar 258, to take necessary measures to establish and record the true identity of their clients, which identification may be based on official or other reliable d ocuments and records. Are there other laws governing the use of pseudonyms or aliases? Art. 178 of the Revised Penal Code penalizes the: (a) publicly using of a fictitious name for t he purpose of concealing a crime, evading the execution of a judgment, or causin g damage; and (b) concealment by any person of his true name and other personal circumstances. On the other hand, there is also Commonwealth Act No. 142, as ame nded by Republic Act No. 6085 (Regulating the Use of Aliases) which provides tha t, except only as a pseudonym for literary purposes and athletic events, it is u nlawful for any person to use an alias, unless the same is duly recorded in the proper local civil registry. Related thereto, Articles 379 and 380 of the Civil Code provide that no person shall use different names and surnames except the em ployment of pen and stage names provided it is done in good faith and there is n o injury to third persons. What can be noted is that the above provisions allow the use of aliases under ce rtain circumstances. Conversely stated, the use of aliases is not absolutely dis allowed. Moreover, the sanctions for any violation of the above provisions on al iases are mainly directed to the one using the unauthorized alias. Q. How does Circular No. 251 apply to existing numbered accounts? For peso accounts, the banks should have their respective programs of compliance with the Circular. For foreign currency deposit accounts, they are allowed to c ontinue maintaining numbered accounts opened in accordance with RA 6426 subject to the requirement that the banks shall take necessary measures to establish and record the true identity of their clients. Q. What penalties/sanctions are applicable for violating the laws/regulatio ns? Article 178 of the Revised Penal Code is directed to the person concealing his i dentity publicly or using a fictitious name and the penalty would range from 1 d ay up to 6 months imprisonment and/or a fine up to P500,000. For violation of Co mmonwealth Act 142, which is likewise directed to the person using an unauthoriz ed alias, the penalty is imprisonment from 1 year to 5 years and a fine of P5,00 0.00 to P10,000.00. For the violation of Circular 251, it is subject to the admi nistrative sanction on the bank and/or responsible directors/officers of fine up to P30,000 per transaction. 10. without court order if Anti-Money Laundering council determines that particu lar deposit is related to unlawful activities. 2006 notes: such unlawful act pertains only to TERRORISM, KIDNAPPING and DRUGS which do not need court order. 11.with upon court order, if the Anti-money laundering council determined. 12.examination made by Bangko Sentral in compliance with the Anti-money launderi ng Act (with regard depositors who deposited P500,000 or more) ANTI MONEY LAUNDERING It is hereby declared the policy of the State to protect Declaration of Policy. and preserve the integrity and confidentiality of bank accounts and to ensure th at the Philippines shall not be used as a money laundering site for the proceeds

of any unlawful activity. Consistent with its foreign policy, the State shall ex tend cooperation in transnational investigations and prosecutions of persons inv olved in money laundering activities wherever committed. MONETARY INSTRUMENT refers to: (1) coins or currency of legal tender of the Philippines, or of any other countr y; (2) drafts, checks and notes; (3) securities or negotiable instruments, bonds, commercial papers, deposit cert ificates, trust certificates, custodial receipts or deposit substitute instrumen ts, trading orders, transaction tickets and confirmations of sale or investments and money market instruments; and (4) other similar instruments where title thereto passes to another by endorseme nt, assignment or delivery. COVERED TRANSACTION A transaction in cash or other equivalent monetary instrument involving a total amount in excess of P500,000 within 1 banking day. SUSPICIOUS TRANSACTIONS Transactions with covered institutions, regardless of the amount involved where any of the following amounts involved: 1.no underlying legal or trade obligation, purpose or economic justification 2.client is not properly identified 3.amount involved is not commensurate with the client s business or financial capa city 4.client s transaction may be perceived structured in order to avoid being subject of the reporting requirements 5.transaction is related in anyway to unlawful activities MONEY LAUNDERING OFFENSE. Money laundering is a crime whereby the proceeds of an unlawful activity are tra nsacted, thereby making them appear to have originated from legitimate sources. It is a process comprising of three (3) stages, namely, placement or the physica l disposal of the criminal proceeds, layering or the separation of the criminal proceeds from their source by creating layers of financial transactions to disgu ise the audit trail, and integration or the provision of apparent legitimacy to the criminal proceeds. Any transaction involving such criminal proceeds or attem pt to transact the same during the placement, layering or integration stage shal l constitute the crime of money laundering. It is committed by the following: (a) When it is committed by a person who, knowing that any monetary instrument o r property represents, involves, or relates to, the proceeds of any unlawful act ivity, transacts or attempts to transact said monetary instrument or property, t he penalty is imprisonment from seven (7) to fourteen (14) years and a fine of n ot less than P3M but not more than twice the value of the monetary instrument or property involved in the offense. (b) Any person knowing that any monetary instrument or property involves the pro ceeds of any unlawful activity, performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in paragrap h (a) above. Penalty is imprisonment from 4 to 7 yrs and a fine of not less than P1.5M but not more than P3M (c) Any person knowing that any monetary instrument or property is required unde r this Act to be disclosed and filed with the Anti-Money Laundering Council (AML C), fails to do so. Penalty is 6 months to 4 years imprisonment and fine of not less than P100000 but not more than P500000 or both. UNLAWFUL ACTIVITIES: 1.kidnapping for ransom 2.drug trafficking

3.piracy on the high seas 4.plunder 5.graft and corrupt practices 6.jueteng and masiao 7.swindling 8.robbery and extortion 9.smuggling 10.qualified theft 11.violation of e-commerce 12.hijacking, destructive arson, murder including acts of terrorism vs non comba tant persons and target 13.fraudulent practices under SEC 14.felonies similar in nature punishable under the Penal laws of other countries . 2005 notes:there can be a separate convictions for money laundering offenses and the unlawful activities constituting it. The unlawful activity shall be given p references over the money laundering crime but without prejudice to freezing an d other charges remedies provided by the act. PROSECUTION OF MONEY LAUNDERING. (a) Any person may be charged with and convicted of both the offense of money la undering and the unlawful activities. (b) Any proceeding relating to the unlawful activity shall be given precedence o ver the prosecution of any offense or violation under the AMLA without prejudice to the issuance by the AMLC of a freeze order with respect to the deposit, inve stment or similar account involved therein and resort to other remedies provided under the AMLA. (c) Knowledge of the offender that any monetary instrument or property represent s, involves, or relates to the proceeds of an unlawful activity or that any mone tary instrument or property is required under the AMLA to be disclosed and filed with the AMLC, may be established by direct evidence or inferred from the atten dant circumstances. (d) All the elements of every money laundering offense under Section 4 of the AM LA must be proved by evidence beyond reasonable doubt, including the element of knowledge that the monetary instrument or property represents, involves or relat es to the proceeds of any unlawful activity. No element of the unlawful activity , however, including the identity of the perpetrators and the details of the act ual commission of the unlawful activity need be established by proof beyond reas onable doubt. The elements of the offense of money laundering are separate and d istinct from the elements of the felony or offense constituting the unlawful act ivity. (e) No case for money laundering may be filed to the prejudice of a candidate fo r an electoral office during an election period. However, this prohibition shall not constitute a bar to the prosecution of any money laundering case filed in c ourt before the election period. (f) The AMLC may apply, in the course of the criminal proceedings, for provision al remedies to prevent the monetary instrument or property subject thereof from being removed, concealed, converted, commingled with other property or otherwise to prevent its being found or taken by the applicant or otherwise placed or tak en beyond the jurisdiction of the court. However, no assets shall be attached to the prejudice of a candidate for an electoral office during an election period. (g) Where there is conviction for money laundering under Section 4 of the AMLA, the court shall issue a judgment of forfeiture in favor of the Government of the Philippines with respect to the monetary instrument or property found to be pro ceeds of one or more unlawful activities. However, no assets shall be forfeited to the prejudice of a candidate for an electoral office during an election perio d. (h) Restitution for any aggrieved party shall be governed by the provisions of t he New Civil Code.

JURISDICTION: 1.RTC 2.Sandiganbayan where a public officers are involved and private persons in cons piracy with such officer. PENALTIES AND CONSEQUENCES OF FILING MONEY LAUNDERING CRIMES 1.fines and imprisonment 2.civil and criminal forfeiture of monetary instruments and property 3.upon conviction payment of an amount equal to the value of monetary instrument or property when order of forfeiture cannot be effected 4.person claiming legitimate title to the property must file a verified petition with the court within 15 days from date or order of forfieiture in default of w hich the order shall become final and executory. 2005 NOTES: no money laundering case shall be filed nor there can be freeze of a ccount against any candidate for public service during election campaign. COVERED INSTITUTIONS (1) Banks, offshore banking units, quasi-banks, trust entities, non-stock saving s and loan associations, pawnshops, and all other institutions including their s ubsidiaries and affiliates supervised and/or regulated by the Bangko Sentral ng Pilipinas (BSP). A subsidiary means an entity more than fifty percent (50%) of the outstanding vo ting stock of which is owned by a bank, quasi-bank, trust entity or any other in stitution supervised or regulated by the BSP. An affiliate means an entity at le ast twenty percent (20%) but not exceeding fifty percent (50%) of the voting sto ck of which is owned by a bank, quasi-bank, trust entity, or any other instituti on supervised and/or regulated by the BSP. (2) Insurance companies, insurance agents, insurance brokers, professional reins urers, reinsurance brokers, holding companies, holding company systems and all o ther persons and entities supervised and/or regulated by the Insurance Commissio n (IC). An insurance company includes those entities authorized to transact insurance bu siness in the Philippines, whether life or non-life and whether domestic, domest ically incorporated or branch of a foreign entity. A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another again st loss, damage or liability arising from an unknown or contingent event. Transa cting insurance business includes making or proposing to make, as insurer, any i nsurance contract, or as surety, any contract of suretyship as a vocation and no t as merely incidental to any other legitimate business or activity of the suret y, doing any kind of business specifically recognized as constituting the doing of an insurance business within the meaning of Presidential Decree (P. D.) No. 6 12, as amended, including a reinsurance business and doing or proposing to do an y business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of P. D. No. 612, as amended. An insurance agent includes any person who solicits or obtains insurance on beha lf of any insurance company or transmits for a person other than himself an appl ication for a policy or contract of insurance to or from such company or offers or assumes to act in the negotiation of such insurance. An insurance broker includes any person who acts or aids in any manner in solici ting, negotiating or procuring the making of any insurance contract or in placin g risk or taking out insurance, on behalf of an insured other than himself. A professional reinsurer includes any person, partnership, association or corpor ation that transacts solely and exclusively reinsurance business in the Philippi nes, whether domestic, domestically incorporated or a branch of a foreign entity . A contract of reinsurance is one by which an insurer procures a third person t o insure him against loss or liability by reason of such original insurance. A reinsurance broker includes any person who, not being a duly authorized agent, employee or officer of an insurer in which any reinsurance is effected, acts or aids in any manner in negotiating contracts of reinsurance or placing risks of

effecting reinsurance, for any insurance company authorized to do business in th e Philippines. A holding company includes any person who directly or indirectly controls any au thorized insurer. A holding company system includes a holding company together with its controlled insurers and controlled persons. (3) SEC regulated and supervised companies (i) Securities dealers, brokers, salesmen, associated persons of brokers or deal ers, investment houses, investment agents and consultants, trading advisors, and other entities managing securities or rendering similar services, (ii) mutual funds or open-end investment companies, close-end investment compani es, common trust funds, pre-need companies or issuers and other similar entities ; (iii) foreign exchange corporations, money changers, money payment, remittance, and transfer companies and other similar entities, and (iv) other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and o ther similar monetary instruments or property supervised and/or regulated by the Securities and Exchange Commission (SEC). A securities broker includes a person engaged in the business of buying and sell ing securities for the account of others. A securities dealer includes any perso n who buys and sells securities for his/her account in the ordinary course of bu siness. A securities salesman includes a natural person, employed as such or as an agent, by a dealer, issuer or broker to buy and sell securities. An associated person of a broker or dealer includes an employee thereof who dire ctly exercises control of supervisory authority, but does not include a salesman , or an agent or a person whose functions are solely clerical or ministerial. An investment house includes an enterprise which engages or purports to engage, whether regularly or on an isolated basis, in the underwriting of securities of another person or enterprise, including securities of the Government and its ins trumentalities. A mutual fund or an open-end investment company includes an investment company w hich is offering for sale or has outstanding, any redeemable security of which i t is the issuer. A closed-end investment company includes an investment company other than open-e nd investment company. A common trust fund includes a fund maintained by an entity authorized to perfor m trust functions under a written and formally established plan, exclusively for the collective investment and reinvestment of certain money representing partic ipation in the plan received by it in its capacity as trustee, for the purpose o f administration, holding or management of such funds and/or properties for the use, benefit or advantage of the trustor or of others known as beneficiaries. A pre-need company or issuer includes any corporation supervised and/or regulate d by the SEC and is authorized or licensed to sell or offer for sale pre-need pl ans. A foreign exchange corporation includes any enterprise which engages or purports to engage, whether regularly or on an isolated basis, in the sale and purchase of foreign currency notes and such other foreign-currency denominated non-bank d eposit transactions as may be authorized under its articles of incorporation. An investment agent or consultant or trading advisor includes any person who is engaged in the business of advising others as to the value of any security and t he advisability of trading in any security or in the business of issuing reports or making analysis of capital markets. However, in case the issuance of reports or the rendering of the analysis of capital markets is solely incidental to the conduct of the business or profession of banks, trust companies, journalists, r eporters, columnists, editors, lawyers, accountants, teachers, and publishers of newspapers and business or financial publications of general and regular circul ation, including their employees, they shall not be deemed to be investment agen ts or consultants or trade advisors within the contemplation of the AMLA and the se Rules.

A money changer includes any person in the business of buying or selling foreign currency notes. A money payment, remittance and transfer company includes any person offering to pay, remit or transfer or transmit money on behalf of any person to another per son. OBLIGATIONS OF COVERED INSTITUTIONS 1.keep records for 5 years of its client 2.report covered transactions and suspicious transactions to AMLC within 5 days from occurrence. Such report does not violate the Secrecy of Bank Deposits law , Gen Banking and Foreign Currency Law 3.Prohibits anonymous accounts, or accounts under fictitiuous name 4.BSP may conduct annual technical testing of banking institutions solely limite d to determining existence and true identity of owners of such accounts. PREVENTION OF MONEY LAUNDERING 1.customer identification- covered institutions shall establish and record the t rue identity of its clients 2.record keeping- covered institutions are required to maintain and safely store records of all transactions for 5 yrs from the date of transaction 3.reporting of covered transaction-covered institutions shall report to the AMLC all covered and suspicious transactions within 5 working days from occurrence t hereof, unless the supervising authority concerned prescribes a longer period no t exceeding 10 working days EXEMPTION FROM SECRECY OF DEPOSITS: When reporting covered or suspicious transactions to AMLC, covered institutions and their officers/employees, they shall not be deemed violated RA 1405 which is the secrecy of bank deposit laws but are prohibited from communicating the fact that a covered or suspicious transaction report was made , the contents thereof or any info in relation thereto. In case of violation, the concerned officer and employee of the covered institut ion shall be criminally liable. No administrative ,criminal or civil proceedings shall lie against any person for having made a covered or suspicious transactio n report in the regular performance of his duties whether or not such reporting results in any criminal prosecution. PROHIBITION AGAINST POLITICAL HARASSMENT AMLA shall not be used for political persecution or harassment or as an instrume nt to hamper competition in trade and commerce. No case for money laundering may be filed against and no assets shall be frozen to the prejudice of a candidate for an election office during an election period. POWERS OF THE COUNCIL The Anti-Money Laundering Council is hereby created and shall be composed of the Governor of the Bangko Sentral ng Pilipinas as chairman, the Commissioner of th e Insurance Commission and the Chairman of the Securities and Exchange Commissio n as member. The AMLC shall shall act unanimously in the discharge of its functi ons as defined hereunder: 1. institute civil forfeiture proceedings 2. to cause the filing of complaints with the Department of Justice or the Ombud sman for the prosecution of money laundering offenses 3. authority to inquire into accounts with any bank or non banking institution (a) The AMLC is authorized under Section 7 (2) of the AMLA to issue orders addre ssed to the appropriate Supervising Authority or any covered institution to dete rmine and reveal the true identity of the owner of any monetary instrument or pr operty subject of a covered transaction report, or a request for assistance from a foreign State, or believed by the AMLC, on the basis of substantial evidence, to be, in whole or in part, wherever located, representing, involving, or relat ed to, directly or indirectly, in any manner or by any means, the proceeds of an

unlawful activity. For purposes of the AMLA and these Rules, substantial eviden ce includes such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. (b) In case of any violation of the AMLA involving bank deposits and investments, the AMLC may inquire into or examine any particular deposit or investment with any banking institution or non-bank financial institution upon order of any comp etent court when the AMLC has established that there is probable cause that the deposits or investments involved are in any way related to any unlawful activity and/or money laundering offense. The AMLC may file the application for authorit y to inquire into or examine any particular bank deposit or investment in court, prior to the institution or in the course of, the criminal proceedings involvin g the unlawful activity and/or money laundering offense to which said bank depos it or investment is any way related. For purposes of Section 11 of the AMLA and Section 4, Rule 3 of these Rules, probable cause includes such facts and circums tances which would lead a reasonably discreet, prudent or cautious man to believ e that an unlawful activity and/or a money laundering offense is about to be, is being or has been committed and that the bank deposit or investment sought to b e inquired into or examined is in any way related to said unlawful activity and/ or money laundering offense. Exception: Without court s order, the AMLC may make inquiry into or examine any de posits or investment in the ff cases: 1.kidnapping for ransom ; 2.drug trafficking ; 3.terrorism including hijacking ,destructive arson and murder. 2005 notes: BSP may inquire into or examine any deposit or investments in a bank or non banking financial institutions when the examination is made in the cours e of periodic examination. 4. apply with Court of Appeals(ex parte) for the freezing of any monetary instr ument or property alleged to be proceeds of any unlawful activity (a) The AMLC is authorized under Sections 6 (6) and 10 of the AMLA to freeze any account or any monetary instrument or property subject thereof upon determinati on that probable cause exists that the same is in any way related to any unlawfu l activity and/or money laundering offense. The AMLC may freeze any account or a ny monetary instrument or property subject thereof prior to the institution or i n the course of, the criminal proceedings involving the unlawful activity and/or money laundering offense to which said account, monetary instrument or property is any way related. (b) The freeze order on such account shall be effective immediately for a period not exceeding 20 days unless extended by the court (c) The AMLC must serve notice of the freeze order upon the covered institution concerned and the owner or holder of the deposit, investment or similar account, simultaneously with the issuance thereof. Upon receipt of the notice of the fre eze order, the covered institution concerned shall immediately stop, freeze, blo ck, suspend or otherwise place under its absolute control the account and the mo netary instrument or property subject thereof. (d) The owner or holder of the account so notified shall have a non-extendible p eriod of seventy-two (72) hours upon receipt of the notice to file a verified ex planation with the AMLC why the freeze order should be lifted. Failure of the ow ner or holder of the account to file such verified explanation shall be deemed w aiver of his right to question the freeze order. (e) The AMLC shall have seventy-two (72) hours from receipt of the written expla nation of the owner or holder of the frozen account to resolve the same. If the AMLC fails to act within said period, the freeze order shall automatically be di ssolved. However, the covered institution shall not lift the freeze order withou t securing official confirmation from the AMLC. (f) Before the 20-day period expires, the AMLC may apply in court for an extensi on of said period. Upon the timely filing of such application and pending the de cision of the court to extend the period, said period shall be suspended and the freeze order shall remain effective. (g) In case the court denies the application for extension, the freeze order sha

ll remain effective only for the balance of the 20-day period. (h) No court shall issue a temporary restraining order or writ of injunction aga inst any freeze order issued by the AMLC or any court order extending period of effectivity of the freeze order except the Court of Appeals or the Supreme Court . (i) No assets shall be frozen to the prejudice of a candidate for an electoral o ffice during an election period. 5. receive and take action in respect of any request from foreign states for ass istance in their own anti-money laundering operations 6. impose administrative sanctions and reciprocally to make request for assistan ce from a foreign state. 7. to require and receive covered or suspicious transaction reports from covered institutions; 8. to issue orders addressed to the appropriate Supervising Authority (BSP ,SEC) or the covered institutions to determine the true identity of the owner of any monetary instrument or property subject of a covered transaction or suspicious t ransaction report or request for assistance from a foreign State, or believed by the Council, on the basis of substantial evidence, to be, in whole or in part, wherever located, representing, involving, or related to directly or indirectly, in any manner or by any means, the proceeds of an unlawful activity. 9. To investigate suspicious transactions and covered transactions deemed suspic ious after an investigation by AMLC, money laundering activities and other viola tions of this Act; 10. to implement such measures as may be necessary and justified under this Act to counteract money laundering; 11. to develop educational programs on the pernicious effects of money launderin g, the methods and techniques used in the money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders; 12. to impose administrative sanctions for the violation of laws, rules, regulat ions, and orders and resolutions issued pursuant thereto. GENERAL BANKING LAW The policy of the State sought to be carried out by the General Banking Law (GBL ) is the promotion and maintenance of a stable and efficient banking and financ ial system that is globally competitive, dynamic and responsive to the demands o f a developing economy. BANKS Banks are entities duly authorized by the Monetary Board to engage in the busine ss of regularly lending funds obtained regularly from the public through the rec eipt of deposits of any kind. Thus, entities which lend funds obtained from the public but not as deposits but rather as debts for their own account, whether done regularly or not, and those which regularly lend funds obtained through the occasional receipt of deposits, would not be considered as banks. Classification of Banks These are those that used to be called expanded commercial b (a) Universal banks anks and whose operations are now primarily governed by the GBL. They can exerci se the powers of an investment house and invest in non-allied enterprise. They h ave the highest capitalization requirement. (b) Commercial banks - These are ordinary or regular commercial banks, as disti nguished from a universal bank. They have a lower capitalization requirement tha n universal banks and cannot exercise the powers of an investment house and inve st in non-allied enterprises. (c) Thrift banks These are savings and mortgage banks, stock savings and loan as sociations, and private development banks which are governed primarily by the Th rift Banks Act (Republic Act 7906);

(d) Rural banks These are mandated to make needed credit available and readily a ccessible in the rural areas on reasonable terms and which are governed primaril y by the Rural Banks Act of 1992 (Republic Act No. 7353); (e) Cooperative banks These are banks organized primarily to make financial and credit services available to cooperative banks and are governed primarily by the Cooperative Code (Republic Act NO. 6938); (f) Islamic banks These are banks whose business dealings and activities are sub ject ot he basic principles and rulings of Islamic Shari a, such as the Al Amanah Islamic Investment Bank of the Philippines which was created by Republic Act No. 6848; and (g) Other classifications of banks as determined by the Monetary Board. Another way of classifying banks is into (i) private banks and (ii) government-o wned banks. Quasi-banks are entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse of acceptance of deposit substitutes 9a s defined in Sec. 95 of the BSP Law; see Paragraph 1.20) for purposes of relendi ng or purchasing of receivables and other obligations. Universal or commercial bank need not have to separately licensed to engage in q uasi-banking since an entity authorized by the BSP to perform universal or comme rcial banking functions shall likewise have the authority to engage in quasi-ban king functions. THE SUPERVISORY AND REGULATORY POWERS OF THE BSP: The BSP has supervisory and regulatory powers over-banks, quasi-banks, trust ent ities, and other financial institutions which under special laws are subject to BSP supervision. To what kind of examinations may the BSP subject banks? (Sec. 4) Apart from the authority of the BSP under Section 25 of the BSP Law to conduct p eriodic or special examinations of banking institutions and quasi-banks, includi ng their subsidiaries and affiliates engaged in allied activities, the BSP may a lso conduct the following examinations of banks: (a) An examination to determine compliance with laws and regulations if the circ umstances so warrant as determined by the Monetary Board (subsection 4.2); (b) A regular investigation which shall not be oftener than once a year from the last date of examination to determine whether an institution is conducting its business on a safe or sound basis (Subsection 4.4); (c) An inquiry into the solvency and liquidity of the institution (Subsection 4. 5). When could the BSP examine an enterprise which is wholly or majority-owned or co ntrolled by a bank? The BSP could examine an enterprise which is wholly or majority-owned or control led by a bank only when examining the bank, i.e., in the course of its examinati on of such bank. The legislative intent, as explained in the deliberations of th e Senate, is to limit the possibility of abuse. Bank of International Settlements The Bank for International Settlements is an international organization based in Basle, Switzerland which was established by the Hague Agreement of January 20, 1930. its stockholders are central bans, not governments. (a) It is a bank for central banks The BIS assists central banks in managing and investing part of their foreign exchange reserves. Over 80 central banks have d eposits with the BIS. These funds are lent out to central banks (e.g., to provid e bridge financing) or placed in treasury bills or in the international inter-ba nk market. (b) It is also a service organization The BIS provides initiatives and ideas, a s well as the professional, organizational and material logistics, for central b ank cooperation in all areas of common interest. One of its committees, the Comm

ittee on Banking Regulations and Supervisory Practices, more popularly known as the Basle Committee on Banking Supervision, came up in 1988 with standards in th e measurement and assessment of the capital adequacy of banks and the minimum st andards which all major international banks would be expected to observe. These standards came to be known as the Basle Accord. The Basle Accord is aimed a rais ing the standards of safety and soundness in the world s splits a bank s capital bet ween core (Tier 1) capital and supplementary (Tier 2) capital. Tier 1 capital in cludes stockholders equity items that can still be legitimately recognized as cap ital such as undisclosed reserves, asset revaluation reserves, hybrid debt/ equi ty instruments and subordinated term debt. What are the minimum conditions that a prospective bank must comply with before it may be authorized by the BSP to be organized as a bank? (Sec. 8) (a) That the entity must be organized as a stock corporation; (b) That its funds must be obtained form the public, i.e., 20 or more persons; a nd (c) That the minimum capital requirements prescribed by the Monetary Board for e ach category of banks are satisfied. Banks could not issue no par value stocks as such, banks shall issue par value s tocks only. Bank cannot purchase or acquire shares of its own capital stock or accept its ow n shares as a security for a loan, except when authorized by the Monetary Board; provided that in every case the stock so purchased or acquired shall, within 6 months from the time of its purchase or acquisition, be sold or disposed of at a public o private sale. Does this mean that the stockholders of a bank can no longer exercise their appr aisal rights under Sections 37 and 81 of the Corporation Code? No, the stockholders of a bank may still exercise their appraisal rights under t he aforesaid sections of the Corporation Code but, as stated in the proviso of S ection 10, the stock purchased or acquired by the bank shall, 6 months from the time of is purchase or acquisition, be sold or disposed of. What is the total number of voting stocks of a domestic bank that could be owned by (i) a Filipino or a domestic non-bank corporation, and (ii) a foreign indivi dual or foreign non-bank corporation? (a) In the case of a Filipino individual or a domestic non-bank corporation, eac h one may own up to 40% of the outstanding voting stock of a domestic bank. (b) In the case of a foreign individual or foreign non-bank corporation, 40% of the outstanding voting stock of a domestic bank is also the limit but 40% is, at the same time, also a limit on the aggregate foreign-owned stocks that could be owned by foreign individuals and foreign, non-bank corporations in a domestic b ank. Note, however, that under Section 8 of Republic Act No. 7721 (An Act Liberalizin g the Entry of Foreign Banks), Philippine corporations whose shares of stock are listed in the Philippine Stock Exchange or are of long standing for at least 10 years shall have the right to acquire, purchase or own up to 60% of he voting s tock of a of a domestic bank. Note also that under Section 73 of the GBL, a fore ign bank may own up to 100% of the voting stock of only 1 existing domestic bank within 7 years from the effectivity of the GBL on June 13, 2000. When are the stockholdings in a bank deemed owned by a family group or by relate d interests? (Sec. 12) The stockholdings in a bank are deemed owned by a family group or by related int erests if the individual stockholders are related to each other within the 4th d egree f consanguinity or affinity, legitimate or common-law. Such relationship m ust be fully disclosed in all transactions by such individuals with the bank. Could the SEC, motu proprio, approve the incorporation of a bank? No, the SEC shall not register the articles of incorporation of any bank, or any

amendment thereto, unless accompanied by a certificate of authority issued by t he Monetary Board, under its seal. Such certificate shall not be issued by the M onetary Board unless it is satisfied from the evidence submitted to it: (a) That all requirements of existing laws and regulations to engage in the busi ness for which the applicant is proposed to be incorporated have been complied w ith; (b) That the public interest and economic conditions, both general and local, ju stify authorization; and (c) That the amount of capital, the financing, organization, direction and admin istration, as well as the integrity and responsibility of the organizers and adm inistrators, reasonably assure the safety of deposits and the public interest. The SEC shall not also register the by-laws of any bank, or any amendment there, unless accompanied by a certificate of authority from the BSP. What is an independent director? (Sec. 15) An independent director is a person other than an officer or employee of the ban k, its subsidiaries or affiliates or related interests. Note that the term independent director is also used in the Securities Regulation Code (Sec. 38; see Paragraph 16.25) to refer to a person other than an officer o r employee of the corporation, its parent or subsidiaries, or any other individu al having a relationship with the corporation, which would interfere with the ex ercise of independent judgment in carrying out the responsibilities of a directo r. What is the fit and proper rule? The fit and proper rule provides that to maintain the quality of bank management and afford better protection to depositors and the public in general, the Monet ary Board shall: (a) prescribe pass upon and review the qualifications and disqualifications of i ndividuals elected or appointed bank directors or officers and disqualify those found unfit; or (b) after due notice to the board of directors of the bank the Monetary Board ma y disqualify, suspend or remove any bank director or officer who commits or omit s an act which render him unfit for the position. In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his integrity, experien ce, education, training, and competence. Could an elective or appointive public official serve as an officer of a private bank? (Sec. 19) Except as otherwise provided in the Rural Banks Act, no appointive or elective p ublic official, whether full-time or part-time shall at the same serve as office r of any private bank, save in cases where such service is incident to financial assistance provided by the government or a government-owned or controlled corpo ration to the bank or unless otherwise provided under existing laws. Section 5 o f RA 7353, i.e., the Rural Banks Act, allows an elected or appointive pubic offi cial to serve as director, officer, consultant or in any other capacity in a rur al bank. OPERATIONS OF BANKS Distinguish a universal bank from a commercial bank (a) A universal bank shall have the authority to exercise, in addition to the po wers authorized for a commercial bank in Section 29 of the GBL, the powers of an investment house as provided in existing laws and the power to invest in non-all ied enterprises as provided in the GBL; a commercial bank does not have these a dditional powers. (b) A universal bank, subject to the conditions stated in Section 24 of the GBL, may invest in the equities of allied, whether financial or non- financial, and non-allied enterprises as may be determined by the Monetary Boar; a commercial b ank, subject to the conditions stated in Section 30 of the GBL, may only invest

in the equities of allied enterprises, whether financial or non-financial. What are financial and non-financial allied enterprises? How about non-allied en terprises? (a) Under Section X377 of the Manual of Regulations for Banks (as amended by BSP Circular NO. 263 dated October 20, 2000), the following are considered financia l allied enterprises in the equities of which universal and commercial banks (ex cept as indicated) may (i) leasing companies; (ii) banks; (iii) investment houses; (iv) financing companies; (v) credit card companies; (vi) financial institutions catering to small and medium scale industries, inclu ding venture capital corporations; (vii) companies engaged in stock brokerage or securities dealership; (viii) companies engaged in foreign exchange dealership or brokerage; (ix) insurance companies (not allowed to commercial banks); and (x) holding companies investing in allied and non-allied enterprises (not allowe d to commercial banks). (b) Under Section X380 of the Manual of Regulations for Banks, the following are considered non-financial allied enterprises in the equities of which universal and commercial banks (except as indicated) may invest. (i) warehousing companies; (ii) storage companies; (iii) safe deposit box companies; (iv) companies primarily engaged in the management of mutual funds but not in mu tual funds themselves; (v) management corporations engaged in an activity similar to the management of mutual funds; (vi) companies engaged in providing computer services; (vii) insurance agencies or brokerage; (viii) companies engaged in house building and home development; (ix) companies providing drying or milling facilities for agricultural crops; (x) bank service corporations. (xii) Philippine Central Depository, Inc. (c) Non-allied enterprises are all other enterprises not specified as allied on es. Distinguish a universal or commercial bank from other banks only a universal or commercial bank can accept or create demand deposits without the approval of the BSP, Other banks may do so only upon prior approval of, and subject o such conditions and rules as may be prescribed by the Monetary Board. What are SBL Rules? (Sec. 35) SBL (i.e., single borrower s limit) rules are those promulgated by the BSP, upon t he authority of Section 35 of the GBL, which regulate the total amount of loans, credit, accommodations and guarantees that may be extended by a bank to any per son, partnership, association, corporation or other entity. The rules seek to pr otect a bank from making excessive loans to a single borrower by prohibiting it from lending beyond a specified concerned, subject to possible increase by an ad ditional 10% under certain conditions. What are DOSRI Rules? (Sec. 36) DOSRI Rules are those promulgated by the BSP, upon the authority of Section 36 o f the GBL, which regulate the amount of credit accommodation that a bank may ext end to its directors, officers, stockholders and their related interests (thus, DOSRI). Generally, a bank s credit accommodations to its DOSRI must be in the regu lar course of business and on terms not less favorable to the bank than those of fered to non-DOSRI borrowers.

What are the formalities required to be observed by a director or officer of a b ank who wish to borrow from such bank? (Sec. 36) (a) the borrowing must be with the written approval of a majority of the bank s bo ard of directors, excluding the director concerned; (b) Such approval must be entered upon the records of the bank, ie., the minutes of the board meeting in which the approval was given and (c) A copy of the entry of such approval shall be transmitted forthwith to the a ppropriate supervising department of the BSP. What is micro financing? Microfinancing as defined in BSP Circular No. 272 is the grant of small loans (m icrofinance loans) to the basic sectors, as described in the Social Reform and P overty Alleviation Act of 1997 (Republic Act No. 8425), and other loans to the p oor and low-income households for their microenterprises and small businesses so as to enable them to raise their income levels and improve their living standar ds. These loans are granted on the basis of the borrower s cash flow and are typic ally unsecured. Could a bank prohibit a borrower from prepaying his loan? No, a borrower may at any time prior to the agreed maturity date prepay, in whol e or in part, the unpaid balance of any bank loan and other credit accommodation , subject to such reasonable terms and conditions (such as the payment of a prep ayment fee) as may be agreed upon between the bank and the borrower. Could a bank acquire real estate? (Secs. 51 and 52) (a) A bank may acquire real estate as shall be necessary for its own use in the conduct of its business; provided, however, that the total investment in such r eal estate and improvements thereof, including bank equipment, shall not exceed 50% of the bank s combined capital accounts and, provided, further, that the equit y investment of a bank in another corporation engaged primarily in real estate s hall be considered as part of the bank s total investment in real estate, unless o therwise provided by the Monetary Board. (b) Notwithstanding the limitations in Section 51, a bank may acquire, hold or c onvey real property under the following circumstances: (i) Such as shall be mortgaged to it in good faith by way of security for debts. (ii) Such as shall be conveyed to it in satisfaction of debts previously contrac ted in the course of its dealings; or (iii) Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it. Any real property acquired or held under the circumstances enumerated above shal l be disposed of by the bank within a period of 5 years or as may be prescribed by the Monetary Board; provided, however, that the bank may, after said period, continue to hold the property for its own use, subject to the limitations of Sec tion 51. Apart from the services specified in Section 29, what other services a bank perf orm? (a) Under Section 29 (Powers of a Commercial Bank), a commercial bank shall have , in addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking (subject to suc h rules as the Monetary Board may promulgate) such as (i) accepting drafts and issuing letters of credit; (ii) discounting and negotiating promissory notes, drafts, bills of exchange, an d other evidences of debt; (iii) accepting or creating demand deposits; (iv) receiving other types of deposits and deposits substitutes; (v) buying and selling foreign exchange and gold or silver bullion; (vi) acquiring marketable bonds and other debt securities; and (vii) extending credit;

(b) The other services a bank could perform under Section 53 are as follows: (i) receive in custody funds, documents and valuable object; (ii) 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 (iii) make collections and payments for the account of others and perform such o ther services for their customers as are not incompatible with banking business; (iv) upon prior approval of the Monetary Board, act as managing agent, advises, consultant or administrator of investment management or advisory or consultancy accounts; and (v) rent out safety deposit boxes. The bank shall perform the services permitted under items (i) to (iv) as deposit ory or as an agent. Accordingly, it shall keep the funds, securities and other e ffects which it receives duly separate from the bank s own assets and liabilities. Could a bank engage in the insurance business? (Sec. 54) a bank cannot directly engage in the insurance business as the insurer. However, if it is a universal bank, I could invest in the equity of an insurance company . Is a bank required to maintain the secrecy or confidentiality of deposits only? (Sec. 55.1 [b]) No. Without order of a court of competent jurisdiction, a bank cannot disclose t o any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other, entity; provided, that with respect to bank deposits, the provisions of e xisting laws shall prevail. In other words, under Section 55.1 [b], a bank is re quired to keep secret or confidential not only information relative to deposits (which is governed principally by the Secrecy of Bank Deposits Law) but also inf ormation about the funds or properties belonging to private entities in the cust ody of the bank such as, for example, those held by the bank in its capacity as trustee or escrew agent. What functions could a bank outsource? (Sec. 55.1 [e]: BSP Circular No. 268, dat ed December 5, 2000) a bank may not outsource inherent banking functions, i.e., a bank may not enter into a contract with a service provider for the latter to supply the manpower, e .g., tellers, to service the deposit transactions of the former, so as not to vi olate the Secrecy of Bank Deposits Law. Subject to the prior approval of the Mon etary Board. (a) All information technology systems and processes, except for certain functio ns affecting the ability of the bank to ensure the for of technology services de ployed to meet its strategic and business objectives and comply with pertinent l aws and regulations (such as strategic planning for the use of information techn ology determination of system functionalities, service level and contract manage ment and security policy and administration ); (b) date imaging storage, retrieval and other related systems; (c) clearing and processing of checks not included in the Philippine Clearing Ho use System; (d) printing of bank deposit statements; (e) credit card services; (f) printing of bank loan statements and other non-deposit records, bank forms a nd promotional materials; (g) credit investigation and collection; (h) processing of export, import and other trading transactions; (i) transfer agent services for debt equity securities; (j) property appraisal; (k) properly management services; (l) messenger, courier, and postal services; (m) security guard services; (n) vehicle service; and

(o) janitorial services; and (p) such other services as may be determined by the Monetary Board. Could a bank employ casual or non-regular personnel? consistent with the provisions of the Secrecy of Bank Law, no bank shall employ casual or non-regular personnel or too lengthy probationary personnel in the con duct of its business involving bank deposits. What circumstances may be considered by the Monetary Board in determining whethe r a particular act or omission of a bank, quasi-bank or trust entity, not otherw ise prohibited by any law, rule or regulation affecting them, constitutes conduc ting business in an unsafe or unsound manner? in determining whether a particular act or omission, which is not otherwise proh ibited by any law, rule or regulation affecting banks, quasi-banks or trust enti ties, may be deemed as conducting business in an unsafe or unsound manner for pu rposes of Section 56 (Conducting business in an Unsafe or Unsound Manner), the M onetary Board shall consider any of the following circumstances. (a) The act or omission has resulted or may result in material loss or damage or abnormal risk or danger to the safety, stability, liquidity or solvency of the institutions; (b) The act or omission has resulted or may result in material loss or damage or abnormal risk o he institution s depositors, creditors, investors, stockholders o r to the BSP or to the public in general. (c) The act or omission has caused any undue injury, or has given any unwarrante d benefits, advantage or preference to the bank or any party in the discharge by the director or officer of his duties and responsibilities through manifest par tially, evident bad faith or gross inexcusable negligence; or (d) The act or omission involves entering into any contract or transaction manif estly and grossly disadvantageous to the bank quasi-bank or trust entity, whethe r or not the director or officer profited or will profit thereby. Apart from the limitation under the Corporation Code, does the General Banking L aw impose any further limitation on the ability of banks to declare dividends? Yes, it does. No ban or quasi-bank shall declare dividend if at the time of decl aration. (a) its clearing account with the Banko Sentral overdrawn; or government deposit s for 5 or more consecutive days; or (b) if does not comply with the liquidity standards/ratios prescribed by the Ban ko Sentral for purposes of determining funds available for dividend declaration; or (c) it has committed a major violation as many be determined by the Banko Sentra l. The following acts or omissions of a director or officer of a bank, done after t he bank is declared insolvent or placed under receivership by the Monetary Board , are prohibited and penalized: (a) Refusal to turn over the bank s records and assets to the designated receives, or (b) Tampering with banks records, or (c) Appropriating for himself or another party or destroying or causing the misa ppropriating and destruction of the bank s assets, or (d) Receiving or permitting or causing to be received in said bank any deposit, collection of loans and/ or causing to be paid out any funds of said bank, or (e) Paying out or permitting or causing to be paid out any funds of said bank, o r (f) Transferring or permitting or causing to be transferred any securities or pr operty of said bank. TRUST ENTITY A trust entity is a stock corporation or a person duly authorized by the Monetar

y Board to engage in the trust business, that is, to act as a trustee or adminis ter any trust or hold property in trust or on deposit for the use benefit or beh oof of others. A trust entity shall administer the funds or property under its custody with the diligence that a prudent man would exercise in the conduct of an enterprise of a like character and with similar aims. If a trustee entity should become insolvent, could its trust assets be included in the insolvency proceeding? No. The assets by a trust entity in its capacity as trustee shall not be subject to any claims other than those of the parties interested in the specific trust. Article 2240 of the Civil code provides that [p]roperty held by the insolvent de btor as a trustee of an express or implied trust shall be excluded from the inso lvency proceedings. What is the nature of the relationship between a bank and its depositors? The relationship between a bank and its depositors is that of creditor and debto r. Under Article 1980 of the Civil Code, fixed, saving and current deposits of m oney in banks and similar institutions shall be governed by the provisions on si mple loans. Thus the failure of the bank to honor the deposit is a failure to pa y its obligation as a debtor and not a breach of trust arising from a depository s failure to return the subject matter of the deposit (Serrano vs. Central Bank, et al., G.R. No. L-30511, February 14, 1980; 96 SCRA 96) What is the responsibility of a bank to its depositors? (a) As banking is a business affected with public interest, a bank is under obli gation to treat the accounts of its depositors with meticulous care having in mi nd the fiduciary nature of their relationship. Accordingly, while a bank is not expected to be in fallible it must bear the blame for not discovering he mistake of its teller des pite the established procedure requiring the papers and bank books to pass throu gh a battery of bank personnel whose duty it is to check and countercheck them f or possible errors. The bank in this case is liable to the client for moral dama ges because its negligence caused serious anxiety, embarrassment and humiliation to the client (BPI vs IAC, et al., 206 SCRA 408 [1992]) (b) When a bank account is carried in the name of a depositor with word added to the effect that the money belongs to some other person than the depositor, the money in such account cannot be applied by the bank to the satisfaction of an ov erdraft in the personal account of the same depositor. However, a bank is not a guardian of trust funds deposited with it in the sense that it must see to its p roper application, and so long as it serves its function and pays the money out in good faith to the person who deposited it, without knowledge that it is assis ting in the misappropriating, the bank will be protected (Fulton Iron Works Co. vs. China Banking Corporation, et al., G.R. No. 32576, November 6, 1930; 55 Phil . 208). On the other hand, where a depository bank allows its client to withdraw deposits of treasury warrants before they are cleared, it is guilty of negligen ce (Metropolitan Bank & Trust Co. vs. Court of Appeals et al., 194 SCRA 169 [199 1]) BANGKO SENTRAL NG PILIPINAS I. CONSERVATORSHIP If from the report of the appropriate supervisory department of the Banko Sentra l, the Monetary Board finds that a bank or quasi-bank is in a state of continuin g inability or unwillingness o maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors, the Monetary Board may app oint a conservator (Sec. 29, RA 763). A conservator appointed by Central Bank (n ow Bangko Sentral) may take over a bank or quasi-bank without the need of first declaring the bank insolvent (PD 1937, June 27, 1984) Nonetheless, the designat ion of a conservator is not a precondition to the designation of a receiver

A bank placed under conservatorship by the Central Bank retains its judicial per sonality and is neither replaced or substituted by the conservator (Central Bank vs. CA, 208 SCRA 652). The powers granted to the conservator of a bank, enormous and extensive as they are, cannot extend to the post-facto repudiation of perfected transactions, othe rwise they would infringe against the non-impairment clause of the Constitution (First Philippine vs. CA, 252 SCRA 259) Section 28-a of R.A. 265 (now Sec. 29 RA 7653) merely gives the conservator pow er to revoke contracts that are, existing law, deemed to be defective the conser vator merely takes the place of bank s board of directors, and what the said board cannot do, the conservator cannot do either (Ibid) Bar Question: A 10-year old commercial bank during the past year committed the f ollowing actions: (1) it opened letters of credit for banned items of importatio n (2) for the second consecutive year, there was a deficiency in their reserve r equirements (3) exceeded substantially that which they normally grant in one yea r (4) the total liabilities of one private company to the bank exceed 15% of the unimpaired capital and surplus of the bank and (5) the bank officers delayed su bmission of reports required by law to the Central Bank. (a) Assuming that the above facts did not result in any liquidity problem or did no affect the financial condition of the bank. What administrative sanctions ma y be imposed by the Monetary Board? (b) Assuming that the above acts were done in good faith but they nevertheless r esulted in financial difficulties to the bank in fact affected the country s monet ary stability due to a run on the bank, what administrative sanctions or remedi es may be taken by the Monetary Board? (1982 Bar) Answer: (a) The above enumerated acts of the offending bank which all constitute serious violations of existing applicable banking laws, and rules and regulatio ns promulgated by the Monetary Board, give to the Monetary Board the power to im pose the following administrative sanctions: 1. fines in amounts as may be determined by the Monetary Board to be appropriat e, but in no case to exceed Thirty thousand pesos (P30,000.00) a day for each vi olation, taking into consideration the attendant circumstances, such as the natu re and gravity of the violation or irregularity and the size of the bank or quas i-bank. 2. suspension of lending or foreign exchange operations or authority to accept n ew deposits or make new investments. 3. suspension of lending or foreign exchange operations or authority to accept n ew deposits or make new investments; 4. suspension of interbank clearing privileges; and/or 5. revocation of quasi-bank license. If the above violations were done in good faith but nevertheless resulted in the bank s financial difficulties and in a bank run, the Monetary board may appoint a conservator, not connected with the Central Bank (now Banko Sentral), to take c harge of the assets, liabilities and management of the bank, collect all receiva bles, exercise all powers necessary to preserve its assets, reorganize the manag ement and restore its viability with power to overrule or revoke the actions of the previous management and board. He stays with the said bank until the Monetary Board is satisfied that the bank can continue to operate on its own, or the Board decides that proceedings on ins olvency should be undertaken in any of which cases, the conservatorship is termi nated. Bar Question: The superintendent of Bank arrived at the following findings regar ding the Alexis Commercial Bank., first a corporation owned by the bank s principa l stockholder has total liabilities to the bank equivalent to 20% of the bank s un impaired capital and surplus, second the real estate securities on the same corp oration s loans were overvalued as much as 100%, third, the said loans, in princip al and interests, have been delinquent for three years and fourth, 80% of this b

orrower corporation s assets are in unsecured receivables owing from affiliate cor porations with no visible assets. To safeguard the interest of the bank s deposito rs, creditors and stockholders, and the public what steps or measures may be tak en against the bank and by whom> (1974 Bar) Answer: A conservator may be appointed by the Monetary Board to take charge of t he assets, liabilities and management of the bank, with power to reorganize it a nd revoke actions of the previous board and management. If he reports that the viability of the bank has been restored then the new bank management takes over, otherwise proceedings on insolvency will be undertaken. If, on the other hand, he reports that the continuance of operations will prejud ice the public, creditors and stockholders, the bank may be liquidated under the procedure set by law. (Note: answer valid under R.A. 7653) May a Monetary Board Resolution placing a private bank under receivership be ann ulled on the group of lack of prior notice and hearing? Is absence of prior noti ce and hearing constitutive of acts of arbitrariness and bad faith? Under Sec. 29 of R.A. 265 (now RA 7653), the Central Bank (Now Banko Sentral), t hrough the Monetary Board, is vested with exclusive authority to assess, evaluat e and determine the condition of any bank, and finding such condition to be one of insolvency, or that its continuance in business would involve probable loss t o its depositors or creditors, forbid the bank or non-bank financial institution to do business in the Philippines and shall designate an official of the CB or other competent person as receiver to immediately take charge of its assets and liabilities. Prior notice and hearing is no required before placement of bank un der receivership Sec 29 does not contemplate prior notice and hearing receiversh ip. When par 4 (now par 5 as amended by E.O. 289) provides for the filing of a c ase within ten (10) days after the receiver takes charge of the assets of the ba nk, it is unmistakable that the assailed actins should precede the filing of the case. Plainly, the legislature could not have intended to authorize no prior not ice and hearing in the closure of the bank and at the same time allow a suit to a nnul it on the basis of absence thereof (CB vs. CA, 220 SCRA 539) Judicial review is allowed to determine the presence of arbitrariness and bad fa ith in placing bank under receivership. Admittedly, the mere filing of a case fo r receivership by Central Bank can trigger a bank run. The procedure prescribed in Section 29 is truly design to protect the interest of all concerned, and the summary closure pales in comparison to the protection afforded pubic interest. A t any rate, the bank is given full opportunity to prove arbitrariness and bad fa ith in placing the bank under receivership in which event, the resolution may be properly nullified and the receivership lifted as the trial court may determine d (Ibid). Sec. 29 of R.A. 265 is a sound legislation promulgated in accordance with the co nsultation in the exercise of police power of the state. Consequently, the absen ce of notice and hearing is not a valid ground to annul a Monetary Board resolut ion placing a bank be deemed acts of arbitrariness and bad faith. Thus, an MB re solution placing a bank under receivership, or conservatorship for that matter, may only be annulled after a determination has been made by the trial court that its issuance was tainted with arbitrariness and bad faith. Until such determina tion is made, the status quo shall be maintained, i.e., the bank shall continue to be under receivership (Ibid) II. RECIEVERSHIP: Only stockholders (representing the majority of capital stock) of a bank have pe rsonality to file action for annulment of Monetary Board resolution placing a ba nk under receivership (Ibid) Receivership is equivalent to an injunction to restrain the bank officers from i ntermedding with the property of the bank in any way. Thus, the appointment of a receiver operates to suspend the authority of the ba nk and of its directors and officers over its property and effects (Villanueva v s. CA, 244 SCRA 395)

Bar Question: In case the condition of any bank is one of insolvency or that its continuance in business would involve probable loss to its depositors or credit ors, what may the Central Bank do? (1968 Bar) Answer: In case the condition of a bank is one of insolvency or that its continu ance in business would involve probable loss to the depositors, the Monetary boa rd may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution and, for a quasi-bank any pe rson of recognized competence in banking or finance may be designated as receive r. The receiver shall gather and take charge of all the assets and liabilities of t he institution, administer the same for the benefit of its creditors, and exerci se the general powers of the receiver under the Rules of Court, but shall not pa y or commit any act that will involve the transfer or disposition of any asset o f the institution. Within 90 days from takeover, the receiver shall determine whether the instituti on may be rehabilitated or permitted to resume business with safety to its depos itors and creditors and the general public. If the receiver determines that the institution cannot be rehabilitated or resum e business, the Monetary Board shall notify in writing the Board, of Directors o f its findings and thereafter the receiver shall: (1) file ex-parte with the proper regional trial court a petition for assistance in the liquidation of the institution. (2) Convert the assets of the institution to money, dispose of the same to cred itors and other parties, in order to pay the debts of such institution in accord ance with the rules on concurrence and preference of credit under the Civil Code of the Philippines. The actions of the Monetary Board shall be final and executory and may not be re strained or set aside by the court except on petition for certiorari. The petiti on for certiorari may only be filed by the stockholders of record representing t he majority of the capital stock within 10 days from receipt by the board of dir ectors o the order directing receivership, liquidation or condervatorship. (Note: answered under R.A. 7653) Bar Question: Family Bank was placed under statutory receivership and subsequent ly ordered liquidated by the Central Bank (CB) (now Banko Sentral) due to fraud and irregularities in the lending operations which rendered it insolvent. Judici al proceedings for liquidation were thereafter commenced by the Central Bank bef ore the Regional Trial Court (RTC) Family Bank opposed the petition. Shortly thereafter, Family Bank filed in the same court a special civil action a gainst the CB seeking to enjoin and dismiss the liquidation proceedings on the g round of grave abuse of discretion by the CB. The court was poised to (1) restra in the CB from closing Family Bank and (2) authorize Family Bank to withdraw mon ey from its deposits during the pendency of the case. If you were the Judge, would you issue such orders? Why? (1992 Bar) Answer: If I were the judge, I will not issue the two orders. Respecting the mov e to restrain B from closing Family Bank, it will not prosper because three prer equisites should be present for the restraining purpose (1) the action should be filed by stockholders of record representing majority capital stock; (2) the pe tition should be filed within 10 days from receipt by the board of directors of the order directing receivership, liquidation or conservatorship; and (3) he act ion of the Monetary Board was in excess of jurisdiction or with grave abuse of d iscretion amounting to lack of jurisdiction. No mention is at all made of the ex istence of all these prerequisites in the problem above. The court therefore sho uld not restrain the closure made by CB of the bank. Respecting withdrawal by the distressed bank of its deposits during the pendency of the case, the same should likewise not be allowed by the court. Once the pet ition for assistance in the liquidation of the bank is filed in court, the recei

ver shall immediately gather all the assets and liabilities of the bank, adminis ter the dame for the benefit of its creditors, and except for administrative exp enditures, it shall not pay or commit any act that will involve the transfer or disposition of any asset of the institution, deposits included. Hence, the withd rawal of money from its deposits cannot be allowed. (Note: Answered under R.A. 7653) Bar Question: give the basic requirements to be complied with by the Central Ban k (Bangko Sentral ng Pilipinas) before the Monetary Board can declare a bank ins olvent, order it closed and forbid it from doing further business in the Philipp ines (1997 Bar) Answer: The law is explicit as to the conditions prerequisite to the action of t he Monetary Board to forbid the institution to do business in the Philippines an d to appoint a receiver to immediately take charge of the bank s assets and liabil ities. These are (a) an examination made by the examining department of the Cent ral Bank; (b) report by said department to the Monetary Board, and (c) prima pro bable loss to its depositors and creditors (CB vs., CA, 220 SCRA 539, Rural Bank vs. CA, 162 SCRA 288) The following are the mandatory requirements to be complied with before a bank f ound to be insolvent can be ordered close (1) an examination shall be conducted by the appropriate CB department as to the condition of the bank (2) disclosed in the examination is that the condition of the bank is one of insolvency (3) th e director shall inform the Monetary Board in writing of such fact, and (4) The Monetary Board shall find the statement of the department to be true (Banco Fili pino vs. Monetary Board, 204 SCRA 767) The test of insolvency laid down in Sec. 29 of the Central Bank Act (now Sec. 30 of the New Central Bank Act) is measured by determining whether the realizable assets, realizable within a reasonable time by a reasonably prudent person of a bank are less than its liabilities, not considering capital stock and surplus wh ich are not liabilities for such purpose (Ibid) In a nutshell, the insolvency of a bank and the consequent appointment of a rece iver restrict the bank s capacity to act, especially in relation to its property ( Villanueva vs. CA, 244 SCRA 395) Where a bank became insolvent before its acceptance of an offer came to the know ledge of the offeror, the offer became ineffective (Ibid) The prescriptive period to institute the foreclosure proceeding was legally inte rrupted when the mortgagee-bank was placed under receivership with express prohi bition form transacting business, a circumstance considered as force majeure (Pr ovident vs. CA, 222 SCRA 125). All claims against the insolvent bank should filed in the liquidation proceeding (Almeda vs. CA, 256 SCRA 292) III.LIQUIDATION: Bar Question: Under what circumstances may a bank be ordered liquidated and what is the procedure prescribed by law for the purpose? Answer: The circumstances to justify the liquidation of a bank are: a. The condition of the bank is one of insolvency or that its continuance would involve probable loss to its depositors and creditors. b. A determination by the Monetary Board that the bank cannot resume business wi th safety to its creditors. The procedure prescribed by the law for the liquidation of a bank is as follows: a. The receiver files ex parte with the proper regional trial court a petition f or assistance in the liquidation of the institution; b. The receiver converts the assets of the institution to money; c. The receiver shall pay the debts of the institution in accordance with the ru les on concurrence and preference of credit as provided in the Civil Code; d. The receiver shall pay the costs, fees and expenses of the institutions in th e order of their legal priority.

e. The Bankgo Sentral, if public interest so requires awards to an institution a s approved by the Monetary Board the banking franchise of a bank under liquidati on to operate in the area where said bank or its branches were previously operat ing (Note: Answered under R.A. 7653) If the Central Bank (now Bangko Sentral) through its Monetary Board has promised to rehabilitate the distressed bank, and the stockholders on said assurance pro ceeded to mortgage their real properties to guarantee CB promised loan advances to said bank. estoppel, an cannot insist in its liquidation (Ramos vs. CB, 41 SC RA 565). Where the Central Bank, in the course of the rehabilitation of a commercial bank , extended loans and advances, but subsequently the bank was forced by CB to clo se, and subsequently allowed to reopen, interest due on said loans and advances, cannot be collected because it should be deemed read into every contract of dep osit with a bank that the obligation to pay interest on a deposit ceases from th e moment the operation of the bank is completely suspended by the duly constitut ed authority the Central Bank (Ibid.; Overseas Bank vs. CA, 105 SCRA 49) While the closure and liquidation of a bank may be considered an exercise of pol ice power, the validity of its exercise is subject to judicial determination, an d could be set aside, if it is capricious, discriminatory, whimsical, arbitrary, unjust or a denial of the due process and equal protection clauses of the Const itution (CB vs. CA, 106 SCRA 143) A deposit in a distressed bank already forbidden by CB to do business does not b ecome a preferred credit simply because some depositors went to court and were a ble to secure judgments against the bank (CB vs. Morfe, 63 SCRA 114) Where in the course of bank s distressed condition, the Central Bank gave financia l assistance to restore the bank s viability, but that inspite of these moves, the bank was closed by CB on august 1968, and allowed to reopen on January 8, 1981, under a new name, Commercial Bank of Manila the obligation by the bank to pay i nterest on the CB advances remained suspended during the whole period of its clo sure, following the ruling in OBM vs CA and Tapia (105 SCRA 49) Hence, the inter est obligation starts to run from the date of the reopening of the bank on Janua ry 8, 1981 (Ramos vs. CB 137 SCRA 685) A bank is not liable to pay interest on deposits during the time that its operat ions were suspended by the Central Bank. (Overseas Bank vs. CA. 113, SCRA 778) CURRENCY The Bangko Sentral ng Pilipinas has the sole power and authority to issue curren cy, within the territory of the Philippines. He Bangko Sentral shall have the au thority to investigate, make arrest, conduct searches and seizures in accordance with law person or any entity who may put into circulation notes, coins or any other object or document without prior authority from the Bangko Sentral (Sec. 5 0, R.A. 7653) All notes and coins issued by the Bangko Sentral shall be fully guaranteed by th e Government of the Repubic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private (Sec. 52). The Bangko Sentral have the sole authority to replace currency unfit for circula tion and retire or call in for replacement all types of notes, which are more th an five years old and coins which are more than 10 years old. The BSP shall with draw from circulation and shall demonetize all notes and coins which for any rea son are unfit for circulation and shall replace them by adequate notes and coins except those mutilated in condition which shall also be withdrawn in circulatio n without compensation to bearer (Secs. 56 and 57) Bar Question: Can a creditor be compelled to accept payment all in 25 centavo Ce ntral Bank coins of a forty (P40.00) peso debt? Explain briefly (1975 Bar)

Answer: Yes Under Central Bank Law (now The New Central Bank Law) coins with den ominations from P1, 5,and 10 are legal tender not exceeding P1000 while those in amounts not exceeding 25 centavos are legal tender upto amount of P100.(2007 upd ates) Bar Question: After many years of shopping in the Metro Manila area, housewife H W has developed the sound habit of making cash purchases only, none on credit. I n one shopping trip to Mega Mall, she got the shock of her shopping life for the first time, a store s smart salesgirl refused to accept her coins in payment for a purchase worth not more than one hundred pesos. HW was paying seventy pesos in 25-centavo coins and twenty five pesos in 10-centavo were not legal tender . Do yo u agree with the salesgirl in respect of her understanding of legal tender ? (2000 Bar) Suggested Answer (U.P. Law Center): No. The salesgirl s understanding that coins a re not legal tender is not correct (REFER TO PRECEEDING PROBLEM). MONETARY STABILIZATION The Monetary Board shall control any expansion or contraction in monetary aggreg ates which is prejudicial to the attainment or maintenance of prior stability (S ec. 61, R.A. 7653) The Bangko Sentral shall exercise its powers to preserve the international value of the peso and maintain its convertibility into other freely convertible curre ncies by maintaining international reserves adequate to meet any forseable net d emands on the Bangko Sentral for foreign currencies (Secs. 64 and 65) The Bangko Sentral may buy and sell gold in any form ion the national currency a t the prevailing international market price as authorized by the Monetary Board. It may also buy and sell foreign notes and coins and documents and instruments employed for the international transfer of funds from banking institutions opera ting in the Philippines, the Government, its political subdivisions and instru mentalities foreign financial institutions, foreign governments and their instru mentalities and other entities or persons which the Monetary Board authorizes as foreign exchange dealers. The Monetary Board shall determine the exchange rate policy of the country (Secs. 69, 70 and 74) The new Central Bank Act merely authorizes the Monetary Board to license or o re strict or regulate foreign exchange, said act does not authorize it to commandee r foreign exchange earned by exporters and pay for it the price it fixes, later selling it to importers at the same rate of purchase. The power to commandeer am ounts to a confiscatory power that may not be exercised by the Central Bank (now Bangko Sentral) under its charter, such confiscatory measures if justified by a monetary crisis can be adopted by the legislature alone under its policy power (Bacolod-Murcia vs. CB. 9 SCRA 268) LOANS TO BANKS The Bangko Sentral may normally and regularly carry on credit operations with ba nking institutions operating in the Philippines (Sec. 82) it may extend loans an d advances to banking institutions for not more than 7 days without collateral t o provide liquidity to the banking system in times of need (Sec. 83) and in peri ods of national and/or monetary and banking stability, the Monetary Board, by a vote of at least 5 members, may authorize the BSP to grant extraordinary loans o r advances to banking institutions secured by assets. The Monetary Board may als o grant emergency loans or advances even during normal periods, to assist a bank in a precarious financial condition or under serious financial pressures due to unforeseen events or events which not be prevented by the bank. concerned (Sec. 84) To control the volume of money create by the credit operations of the banking sy stem, all banks operating in the Philippines shall maintain reserves against the ir deposit liabilities. Banks and/or quasi-banks may also be required by the Mon etary Board to maintain reserves against funds held in trust and liabilities for deposit substitutes (Sec. 94) Deposit substitutes is an alternative form of obtaining funds from the public, o

ther than deposits, through the issuance, endorsement, or acceptance of debt ins truments for the borrower s own account, for the purpose of relending or purchasin g of receivables and other obligations. These instruments may include, but need not be limited to, bankers acceptances, promissory notes, participations certifi cates of assignment and similar instruments with recourse and repurchase agreeme nts (Sec. 95). What are the instruments of BSP action? (a) Gold and foreign exchange operations (Secs. 69-79) The BSP may buy and sell gold in any form (Sec. 69); foreign notes and coins (Sec. 70); and spot exchange (Sec. 74). It may also grant loans to and receive loans from, act as agent or c orrespondent for, foreign banks and other foreign or international entitles, bot h public and private (Sec. 75). (b) Credit operations (Secs. 81-89;93) As controller of credit (Secs. 61-63, 8189; 109). The BSP shall endeavor to control the expansion or contraction of cred it consistent with the objective of price stability. It shall conduct normal cre dit operations (rediscounting, etc., of commercial credits, production credits a nd other credits, and advances against collaterals of not more than 18 days), sp ecial credit operations (loans and advances without any collateral of not more t han 7 days to provide liquidity in times of need) and emergency credit operatio ns (grant of extraordinary loans or advances secured by certain assts to banks in periods of national or local emergency or of imminent financial panic, or to banks in precarious financial condition or under serious financial pressure, eve n during normal periods.) Note that Section 84 (Sec. 90 of RA 265) has been expanded to provide for a ceil ing on the total amount of loans or advances that could be given to a bank and o n the amount of the first tranche. Note also the requirement that the principal stockholders of the bank execute an undertaking to indemnity and hold harmless f rom suit the conservator the MB may find necessary to appoint in case a loan or advance greater that the amount provided in Section 84 is warranted under the c ircumstances. (c) Open market operations (Secs. 90-92) This refers to the purchases and sales of securities by the BSP with the primary objective of achieving price stabilit y. (d) Reserve requirements (Secs. 94-103) The purpose of reserve requirements is t o control the volume of money created by the credit operations of the banking sy stem. Since the requirement to maintain bank reserves is imposed primarily to co ntrol the volume of money, the BSP shall not pay interest on the reserves mainta ined by banks with it unless the MB decides otherwise as warranted by circumstan ces (Sec. 94) Deposits maintained by banks with the BSP as part of their reserve requirement s hall be exempt form attachment, garnishment or any other order or process of any court, government agency or other administrative body issued to satisfy the cla im of a party other than the Government or its political subdivisions or instrum entalities (Sec. 103). (e) Selective regulation of bank operations (Secs. 104-108) Aside from its inter est rate policy, the BSP may use the following other credit control instruments to support its objective (i) margin requirements against letters of credit; (ii ) maximum permissible maturities of loans and investments; (iii) kind and amount of security against bank loans (iv) loans and investments portfolio ceilings; a nd (v) minimum capital ratios. (f) Moral influence (Sec. 68) whereby some banks attempted several years ago to charge fees for ATM withdrawals, the BSP its moral influence over the said bank s to dissuade them from carrying out their plan. Demand deposits are the liabilities of the BSP and of other banks which are deno minated in Philippine currency and are subject to payment in legal tender upon d emand by the presentation of checks. Deposit substitute is an alternative form of obtaining funds from the public, ot her than deposits, through the issuance, endorsement, or acceptance of debt inst

ruments for the of receivables t be limited to s of assignment .

borrower s own account, for the purpose of relending or purchasing and other obligations. These instruments may include but need no banker s acceptance, promissory notes, participations, certificate and similar instruments with recourse, and repurchase agreements

What special prohibitions are imposed by the BSP law on BSP personnel? (a) They cannot be an officer, director, lawyer, agent, employee, consultant, or stockholder, directly or indirectly, of any institution subject to supervision or examination by the BSP, except non-stock savings and loan associations and pr ovident funds organized exclusively for BSP employees and except otherwise provi ded in the BSP Law. (b) They cannot directly or indirectly request or receive any gift, present or p ecuniary or material benefit for themselves or another from any institution subj ect to supervision or examination by the BSP. (c) They cannot reveal in any manner information relating to the condition or bu siness of any institution subject to supervision or examination by the BSP, exce pt under orders of a court. Congress or any government office or agency authoriz ed by law, or under such conditions as may be prescribed by the MB, or where th e information is given to the MB or the BSP governor, or any person auhorized by either of them in writing to receive such information. (d) They cannot borrow from any institution subject of supervision or examinatio n by the BSP unless said borrowing are adequately secured, fully disclosed to th e MB, and otherwise in compliance with such other rules as the MB may prescribe. In he case of personnel of the BSP supervising and examining department they ar e prohibited from borrowing from a bank under their supervision and examination. The corporate powers of the Bangko Sentral ng Pilipinas are: a. to adopt, alter and use a corporate seal which shall be judicially noticed; b. to enter into contracts; c. to lease or own real and personal property; d. to sell or otherwise dispose of the same; e. to sue and be sued; f. to acquire and hold such assets and incur such liabilities in connection with its operations authorized by R.A 7653, or as are essential to the proper conduc t of such operation. g. to compromise, condone or release, in whole or in part, any claim of or settl ed liability to the Bangko Sentral. h. to do and perform any and all things that may be necessary to carry out the p urposes of R.A. 7653