NOTES ON BANKING LAWS

(Compiled by Atty. Ventu)

BP Blg. 22 or The Bouncing Checks Law

Purpose of BP Blg. 22:
A check is a negotiable instrument that serves as a substitute for money and as a
convenient form of payment in financial transactions and obligations. The use of checks as
payment allows commercial and banking transactions to proceed without the actual handling of
money, thus, doing away with the need to physically count bills and coins whenever payment is
made. It permits commercial and banking transactions to be carried out quickly and
efficiently. But the convenience afforded by checks is damaged by unfunded checks that
adversely affect confidence in our commercial and banking activities, and ultimately injure
public interest.

BP 22 was enacted for the specific purpose of addressing the problem of the continued
issuance and circulation of unfunded checks by irresponsible persons. To stem the harm caused
by these bouncing checks to the community, BP 22 considers the mere act of issuing an
unfunded check as an offense not only against property but also against public order. The
purpose of BP 22 in declaring the mere issuance of a bouncing check as malum prohibitum1 is to
punish the offender in order to deter him and others from committing the offense, to isolate him
from society, to reform and rehabilitate him, and to maintain social order.2

What BP 22 punishes is the mere act of issuing a bouncing check, not the purpose for
which it was issued nor the terms and conditions relating to its issuance.3 The law did not look
either at the actual ownership of the check or of the account against which it was made, drawn,
or issued, or at the intention of the drawee, maker or issuer. Also, that the check was not intended
to be deposited was really of no consequence to the issuer incurring criminal liability under BP
22.

The gravamen of the offense is the act of making and issuing a worthless check or any
check that is dishonored upon its presentment for payment and putting them in circulation. The
law includes all checks drawn against banks. The law was designed to prohibit and altogether
eliminate the deleterious and pernicious practice of issuing checks with insufficient or no credit
or funds therefor. Such practice is deemed a public nuisance, a crime against public order to be
abated. The mere act of issuing a worthless check, either as a deposit, as a guarantee, or even as
an evidence of a pre-existing debt or as a mode of payment is covered by B.P. 22. The law is
broad enough to include, within its coverage, the making and issuing of a check by one who has
no account with a bank, or where such account was already closed when the check was presented
for payment.

1
An act which is immoral because it is illegal; not necessarily illegal because it is immoral.
2
Mitra vs. People of the Philippines, GR No. 191404, July 5, 2010.
3
Lee vs. Court of Appeals, GR No. 145498, January 17, 2005.
 2

The "check flasher" does a great deal more than contract a debt; he shakes the pillars of
business; and it is a mistaken charity of judgment to place him in the same category with the
honest man who is unable to pay his debts, and for whom the constitutional inhibition against
"imprisonment for debt, except in cases of fraud" was intended as a shield and not a sword.

Considering that the law imposes a penal sanction on one who draws and issues a
worthless check against insufficient funds or a closed account in the drawee bank, there is,
likewise, every reason to penalize a person who indulges in the making and issuing of a check on
an account belonging to another with the latters consent, which account has been closed or has
no funds or credit with the drawee bank.4

Specific acts in violation of BP 22:

BP 22 provides:

SECTION 1. Checks Without Sufficient Funds. Any person who

makes or draws and issues any check to apply on account or for
value, knowing at the time of issue that he does not have sufficient
funds in or credit5 with the drawee bank for the payment of such
check in full upon its presentment, which check is subsequently
dishonored by the drawee bank for insufficiency of funds or credit
or would have been dishonored for the same reason had not the
drawer, without any valid reason, ordered the bank to stop
payment, shall be punished by imprisonment of not less than thirty
days but not more than one (1) year or by a fine of not less than but
not more than double the amount of the check which fine shall in
no case exceed Two Hundred Thousand Pesos, or both such fine
and imprisonment at the discretion of the court.

The same penalty shall be imposed upon any person who, having
sufficient funds in or credit with the drawee bank when he makes
or draws and issues a check, shall fail to keep sufficient funds or to
maintain a credit to cover the full amount of the check if presented
within a period of ninety (90) days from the date appearing
thereon, for which reason it is dishonored by the drawee bank.

Where the check is drawn by a corporation, company or entity, the

person or persons who actually signed the check in behalf of such
drawer shall be liable under this Act.

Based on Section 1 of BP 22, the law may be violated in two ways:

4
Resterio vs. People of the Philippines, GR No. 177438, September 24, 2012.
5
The word credit as used herein shall be construed to mean an arrangement or understanding with the bank for
the payment of such check (Sec. 4, BP 22)
 3

1. By making or drawing and issuing any check to apply on account or for value,
knowing at the time of issue that he does not have sufficient funds in or credit with the
drawee bank for the payment of such check in full upon its presentment, which check is
subsequently dishonored by the drawee bank for insufficiency of funds or credit or would
have been dishonored for the same reason had not the drawer, without any valid reason,
ordered the bank to stop payment; and

2. Having sufficient funds in or credit with the drawee bank when he makes or
draws and issues a check, by failing to keep sufficient funds or to maintain a credit to
cover the full amount of the check if presented within a period of ninety (90) days from
the date appearing thereon, for which reason it is dishonored by the drawee bank.

Prima facie evidence of knowledge of insufficient funds:

SECTION 2. Evidence of Knowledge of Insufficient Funds. The

making, drawing and issuance of a check payment of which is
refused by the drawee because of insufficient funds in or credit
with such bank, when presented within ninety (90) days from the
date of the check, shall be prima facie evidence of knowledge of
such insufficiency of funds or credit unless such maker or drawer
pays the holder thereof the amount due thereon, or makes
arrangements for payment in full by the drawee of such check
within five (5) banking days after receiving notice that such check
has not been paid by the drawee.

The law enumerates the elements of the crime to be (1) the making, drawing and issuance
of any check to apply for account or for value; (2) the knowledge of the maker, drawer, or issuer
that at the time of issue he does not have sufficient funds in or credit with the drawee bank for
the payment of the check in full upon its presentment; and (3) the subsequent dishonor of the
check by the drawee bank for insufficiency of funds or credit or dishonor for the same reason
had not the drawer, without any valid cause, ordered the bank to stop payment.

There is deemed to be a prima facie evidence of knowledge on the part of the maker,
drawer or issuer of insufficiency of funds in or credit with the drawee bank of the check issued if
the dishonored check is presented within 90 days from the date of the check and the maker or
drawer fails to pay thereon or to make arrangement with the drawee bank for that purpose. The
statute has created the prima facie presumption evidently because "knowledge" which involves a
state of mind would be difficult to establish. The presumption does not hold, however, when the
maker, drawer or issuer of the check pays the holder thereof the amount due thereon or makes
arrangement for payment in full by the drawee bank of such check within 5 banking days after
receiving notice that such check has not been paid by the drawee bank.
 4

Section 2 of B.P. 22 clearly provides that this presumption arises not from the mere fact
of drawing, making and issuing a bum check; there must also be a showing that, within five
banking days from receipt of the notice of dishonor, such maker or drawer failed to pay the
holder of the check the amount due thereon or to make arrangement for its payment in full by the
drawee of such check.

The State, under this statute, actually offers the violator a compromise by allowing him to
perform some act which operates to preempt the criminal action, and if he opts to perform it the
action is abated. In this light, the full payment of the amount appearing in the check within five
banking days from notice of dishonor is a `complete defense. The absence of a notice of
dishonor necessarily deprives an accused an opportunity to preclude a criminal prosecution.
Accordingly, procedural due process clearly enjoins that a notice of dishonor be actually served
on the issuer. The issuer of the check has a right to demand and the basic postulates of fairness
require that the notice of dishonor be actually sent to and received by her to afford her the
opportunity to avert prosecution under B.P. 22.6

While, indeed, Section 2 of B.P. 22 does not state that the notice of dishonor be in
writing, taken in conjunction, however, with Section 3 of the law, i.e., "that where there are no
sufficient funds in or credit with such drawee bank, `such fact shall always be explicitly stated in
the notice of dishonor or refusal," a mere oral notice or demand to pay would appear to be
insufficient for conviction under the law. Both the spirit and letter of the Bouncing Checks Law
would require for the act to be punished thereunder not only that the accused issued a check that
is dishonored, but that likewise the accused has actually been notified in writing of the fact of
dishonor. The consistent rule is that penal statutes have to be construed strictly against the State
and liberally in favor of the accused.7

Duty of the drawee-bank:

SEC. 3. Duty of drawee; rules of evidence. It shall be the duty of

the drawee of any check, when refusing to pay the same to the
holder thereof upon presentment, to cause to be written, printed or
stamped in plain language thereon, or attached thereto, the reason
for drawee's dishonor or refusal to pay the same: Provided, That
where there are no sufficient funds in or credit with such drawee
bank, such fact shall always be explicitly stated in the notice of
dishonor or refusal. In all prosecutions under this Act, the
introduction in evidence of any unpaid and dishonored check,
having the drawee's refusal to pay stamped or written thereon, or
attached thereto, with the reason therefor as aforesaid, shall
be prima facie evidence of the making or issuance of said check,
and the due presentment to the drawee for payment and the
dishonor thereof, and that the same was properly dishonored for

6
Domagsang vs. The Honorable Court of Appeals, GR No. 139292, December 5, 2000.
7
Cabrera vs. People of the Philippines, GR No. 150618, July 24, 2003.
 5

the reason written, stamped or attached by the drawee on such

dishonored check.

Notwithstanding receipt of an order to stop payment, the drawee

shall state in the notice that there were no sufficient funds in or
credit with such bank for the payment in full of such check, if such
be the fact.

To prove the first and third elements of the crime, Section 3 of the law provides that the
introduction in evidence of the unpaid or dishonored check, having the drawees refusal to pay
stamped or written thereon, or attached thereto, with the reason therefor as aforesaid shall be
prima facie evidence of the making or issuing of the said checks and the due presentment to the
drawee for payment and the dishonor thereof, and that the same was properly dishonored for the
reason written, stamped or attached thereto by the drawee on such dishonored checks. It is
difficult for the prosecution to prove the second element because knowledge involves a state of
mind. Hence, Section 2 of the law provides for prima facie evidence of knowledge of insufficient
funds.

In order to create the prima facie presumption that the issuer knew of the insufficiency of funds,
it must be shown that he or she received a notice of dishonor and within five banking days
thereafter, failed to satisfy the amount of the check or shall arrange for its payment. The
prosecution is burdened to prove the acts that gave rise to the prima facie presumption. On the
other hand, the drawer has the right to adduce evidence to rebut the same. It is important to stress
that this presumption is not conclusive, or one that forecloses or precludes the presentation of
evidence to the contrary. Thus, the drawer of the check can still overturn the prima facie
presumption by proving that the holder thereof was paid the amount due thereon, or that
arrangements were made for payment in full by the drawee of the check within five banking days
after receipt of notice that such check has not been paid by the drawee bank.8

Philippine Deposit Insurance Corporation9

(Republic Act 3591, as amended)
Mandate of PDIC:
PDIC is a government instrumentality created to insure the deposits of all banks which
are entitled to the benefit of insurance. It has the authority to determine which deposit products
are covered by insurance.

PDIC exists to provide permanent and continuing deposit insurance coverage for the
depositing public to help promote public confidence and stability in the economy. Aside from
being a deposit insurer, PDIC also acts as co-regulator of banks, and receiver and liquidator of

8
Ibid.
9
See www.pdic.gov.ph
 6

closed banks. It has the authority to conduct independent special examination of banks and may
inquire into or examine deposit accounts of ailing banks in the event there is finding of unsafe
and unsound banking practices.

Maximum deposit insurance coverage (MDIC):

Deposits of all commercial banks, savings and mortgage banks, rural banks, private
development banks, cooperative banks, savings and loan associations, as well as branches and
agencies in the Philippines of foreign banks and all other corporations authorized to perform
banking functions in the country, are insured with PDIC. Any insured domestic bank with branch
outside the Philippines may elect to include for insurance its deposit obligations payable at such
branch. Moreover, pursuant to RA 6426, foreign currency deposits are also insured by PDIC.
Depositors may receive payment in the same currency in which the insured deposit is
denominated. Membership of banks to PDIC is mandatory, hence all operating banks are
members of PDIC.
The MDIC is P500,000.00 per depositor. To determine such amount due to any depositor
in case of a closed bank, there shall be added together all deposit accounts in the bank
maintained in the same right and capacity for his benefit either in his own name or in the name of
others. However, deposits in different banking institutions are insured separately. The PDIC may
propose to adjust the MDIC subject to the approval of the President of the Philippines, in case of
a condition that threatens the monetary and financial stability of the banking system that may
have systemic consequences.
An insured deposit is the amount due to a bona fide depositor for legitimate deposits in
an insured bank net of any obligation of the depositor to the insured bank as of date of closure,
but not to exceed P500,000.00.
A joint account regardless of whether the conjunction and, or, and/or is used, shall
be insured separately from any individually-owned deposit account subject to the following
conditions:
(1) If the account is held jointly by two or more natural persons, or by two or
more juridical persons or entities, the maximum insured deposit shall be
divided into as many equal shares as there are individuals, juridical persons or
entities, unless a different sharing is stipulated in the document of deposit;
(2) If the account is held by a juridical person or entity jointly with one or more
natural persons, the maximum insured deposit shall be presumed to belong
entirely to such juridical person or entity;
(3) The aggregate of the interests of each co-owner over several joint accounts,
whether owned by the same or different combinations of individuals, juridical
persons or entities, shall likewise be subject to the maximum insured deposit
of P500,000.00; and
(4) No owner/holder of any negotiable certificate of deposit shall be recognized
as a depositor entitled to the rights provided under the law unless his name is
registered as owner/holder thereof in the books of the issuing bank.
 7

Illustrative case:

Juan Dela Cruz has three (3) accounts, one is under his name alone (Account No. 1,
P600,000.00) and the other two are jointly maintained by him and Maria or Pedro Dela Cruz
(Account No. 2, P500,000.00 and No. 3, P800,00.00).

1. For the Savings Deposit individually-owned by Juan Dela Cruz (Account No. 1), he
is entitled to a separate deposit insurance of P 500,000.00. The uninsured deposit is
P100,000.00.

2. For the two accounts (Account Nos. 2 & 3) which are jointly maintained by him and
Maria or Pedro Dela Cruz, each joint account is considered equally shared among co-
depositors unless otherwise indicated in the deposit document. The insurance
coverage of P500,000.00 will apply to the sum of shares of each co-depositor in the
insured portion of each joint deposit account.

3. For Account No. 2, the maximum deposit insurance is P500,000.00 which shall be
divided equally between Juan and Maria. The share of Juan Dela Cruz is
P250,000.00. There is no uninsured amount.

4. For Account No. 3, the maximum deposit insurance is P500,000.00 which shall be
divided equally between Juan and Pedro. The share of Juan Dela Cruz is
P250,000.00. The uninsured amount is P300,000.00, thus, his share in the uninsured
amount is P150,000.00.

5. Thus, the insured deposits are:

Juan: P1,000,000.00
Maria: P 250,000.00
Pedro: P 250,000.00

Accounts or transactions not allowed to be insured with PDIC:

1. Investment products such as bonds, securities and trust accounts;
2. Deposit accounts which are unfunded, fictitious or fraudulent;
3. Deposit products constituting or emanating from unsafe and unsound banking
practices;
4. Deposits that are determined to be proceeds of an unlawful activity as defined under
the Anti-Money Laundering Law.

Proof of claims:
Whenever an insured bank shall have been closed by the Monetary Board, payment of the
insured deposits on such closed bank shall be made by PDIC as soon as possible either (1) by
cash or (2) by making available to each depositor a transferred deposit in another insured bank in
an amount equal to insured deposit of such depositor.
 8

PDIC, in its discretion, may require proof of claims to be filed before paying the insured
deposits, and that in any case where PDIC is not satisfied as to the viability of a claim for an
insured deposit, it may require final determination of a court of competent jurisdiction before
paying such claim. Failure to settle the claim, within six (6) months from the date of filing of
claim for insured deposit, where such failure was due to grave abuse of discretion, gross
negligence, bad faith, or malice, shall, upon conviction, subject the directors, officers or
employees of the Corporation responsible for the delay, to imprisonment from six (6) months to
one (1) year, provided the 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.

Requirements for claims:

Depositors with deposit accounts of P100,000.00 and below are not required to file
claims provided they have no obligations with the closed bank and have complete and updated
addresses in the bank records or have updated these through the Mailing Address Update Form
(MAUF) issued by the PDIC. These depositors are entitled to immediate or early payment of
deposit insurance claim as part of PDICs initiative to provide convenience to small depositors.
Payments to these depositors are sent as postal money orders to the depositors mailing address.

Claims are filed during the claims settlement operations period, as announced in the
notice to depositors. Depositors have only two (2) years from PDICs takeover of the closed
bank to file their deposit insurance claims.

Depositors required to file a claim:

1. Those with valid deposit accounts of more than P100,000.00;
2. Those who have outstanding obligations with the closed bank, regardless of the
amount of deposit;
3. Those with account balances of less than P100,000.00 but who have no updated
addresses in the bank records or who have not updated their addresses through the
MAUF issued by PDIC;
4. Those who maintain their accounts under the name of business entities, regardless
of the type of account and account balance; and
5. Those with accounts not eligible for early payment, regardless of type of account
and account balance per advice of PDIC.

Documentary requirements:
1. Original evidence of deposits such as savings passbook, certificate of time deposit,
bank statements, unused checks and ATM card;
2. Original copies of two (2) valid photo-bearing identification documents with clear
signature of depositor;
3. If the depositor is below 18 years old, a photocopy of his/her birth certificate from the
Philippine Statistics Authority or duly certified copy from the local civil registrar and
valid IDs of the parents; and
 9

4. Original copy of a notarized Special Power of Attorney (SPA) for claimants who are
not the signatories in the bank records. In case of minor depositors, the SPA must be
executed by the parent/parents.

LAW ON SECRECY OF BANK DEPOSITS

Republic Act No.1405, as amended

AN ACT PROHIBITING DISCLOSURE OF

OR INQUIRY INTO, DEPOSITS WITH
ANY BANKING INSTITUTION AND
PROVIDING PENALTY THEREFOR

Section 1. It is hereby declared to be the policy of the

Government to give encouragement to the people to deposit their
money in banking institutions and to discourage private hoarding
so that the same may be properly utilized by banks in authorized
loans to assist in the economic development of the country.

Section 2. All deposits of whatever nature with banks or

banking institutions in the Philippines including investments in
bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of
an absolutely confidential nature10 and may not be examined,
inquired or looked into by any person, government official, bureau
or office, except when the examination is made in the course of a
special or general examination of a bank and is specifically
authorized by the Monetary Board after being satisfied that there is
reasonable ground to believe that a bank fraud or serious
irregularity has been or is being committed and that it is necessary
to look into the deposit to establish such fraud or irregularity, or
when the examination is 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, or upon written permission of the
depositor, or in cases of impeachment, or upon order of a
competent court in cases of bribery or dereliction of duty of public
officials, or in cases where the money deposited or invested is the
subject matter of the litigation. (As amended by PD No.1792,
January 16, 1981)

10
RA No. 8367 (Revised Non-Stock Savings and loan Association Act of 1997) also declares that all deposits of
whatever nature with an Association in the Philippines are considered absolutely confidential in nature.
 10

Section 3. It shall be unlawful for any official or employee

of a bank to disclose to any person other than those mentioned in
Section Two hereof, or for an independent auditor hired by a bank
to conduct its regular audit to disclose to any person other than a
bank director, official or employee authorized by the bank, any
information concerning said deposits. (As amended by PD
No.1792)11

Definition of Terms:
1. Deposits refer to money or funds placed with a bank that can be withdrawn on the
depositors order or demand, such as deposit accounts in the form of savings, current
and time deposits. Deposits are characterized as being in the nature of a simple loan.
The placing of deposits in a bank creates a creditor-debtor relationship between the
depositor and the bank. As such, the bank, being the debtor, has the obligation to pay
a certain sum of money to the depositor, being the creditor.
2. Investments in Government Bonds refer to investments in bonds issued by the
Government of the Philippines, its political subdivisions and its instrumentalities.
Government bonds are debt securities which are unconditional obligations of the
State, and backed by its full taxing power. Government bonds include treasury bills,
treasury notes, retail treasury bonds, dollar linked peso notes, and other risk-free
bonds.12

Exceptions:13
Bank deposits and investments in government bonds may be examined, inquired or
looked into under limited exceptions in Republic Act No. 1405 and in other laws.

(i) Exceptions under the Law on Secrecy of Bank Deposits

Section 2 of Republic Act No. 1405 provides that bank deposits and government
bond investments may be examined, inquired and looked into in the following
instances:

(a) Upon written permission or consent in writing by the depositor. For consent to
be valid, it should be made knowingly, voluntarily and with sufficient awareness
of the relevant circumstances and likely consequences.

(b) In cases of impeachment of the President, Vice President, members of the

Supreme Court, members of the Constitutional Commission (Commission on
Elections, Civil Service Commission and Commission on Audit) and the

11
RA 8791 (The General Banking Law), RA 7906 (The Thrift Banks Act) and RA 7353 (The Rural Bank Act) likewise
prohibit any bank officer, employee or agent from disclosing any information on such funds or properties.
12
Bangko Sentral ng Pilipinas, The Laws on Secrecy of Bank Deposits, A Legal Primer, April 10, 2012 (for brevity,
BSP Legal Primer), p. 3.
13
BSP Legal Primer, pp. 5-9.
 11

Ombudsman for culpable violation of the Constitution, treason, bribery, graft and
corruption, other high crimes or betrayal of public trust. (Art. XI, Sec. 2, 1987
Philippine Constitution)

(c) Upon order of a competent court in cases of bribery or dereliction of duty of

public officials.

(d) In cases where the money deposited or invested is the subject matter of the
litigation. The money deposited should be the very thing in dispute. (Mellon
Bank, N.A. v. Magsino, 190 SCRA 633 [1990])

(ii) Exceptions under Other Laws

Bank deposits and investments may be examined, inquired or looked into as

provided for under other laws in the following instances:

(a) The Ombudsman has the power to issue subpoena and subpoena duces tecum,
take testimony in any investigation or inquiry, as well as examine and access bank
accounts and records. The power of the Ombudsman to subpoena deposit
information of a government official may be exercised when the following
conditions concur:
(1) there must be a case pending before a court of competent jurisdiction;
(2) the account must be clearly identified;
(3) the inspection must be limited to the subject matter of the pending
case; and
(4) the bank personnel and the account holder must be notified to be
present during the inspection. (Marquez v. Desierto, 359 SCRA 772
[2001])

(b) Bank deposits of a public official, his spouse and unmarried children may be
taken into consideration in the enforcement of Section 8 of The Anti-Graft and
Corrupt Practices Act (Rep. Act No. 3019).

(c) Directors, officers, stockholders and related interests who contract a loan or
any form of financial accommodation with their bank or related bank are required
to execute a written waiver of secrecy of deposits pursuant to The New Central
Bank Act. (Sec. 26, Rep. Act No. 7653)

(d) The Commissioner of Internal Revenue is authorized to inquire into bank

deposit accounts in relation to:
(1) an application for compromise of tax liability or a determination of a
decedents gross estate under The National Internal Revenue Code (Rep. Act No.
8424, as amended by Rep. Act No. 10021); and
(2) a request for tax information of specific taxpayers made by a foreign
tax authority pursuant to a tax treaty under The Exchange of Information on Tax
Matters Act of 2009 (Rep. Act No. 8424, as amended by Rep. Act No. 10021).
 12

(e) The Anti-Money Laundering Council may be authorized to examine and

inquire into bank deposits or investments with banks or nonbank financial
institutions
(1) with court order, when there is probable cause that the deposits or
investments are related to an unlawful activity or a money laundering offense
(Secs. 3[i] and 4 of Rep. Act No. 9160); and
(2) without need of court order, when probable cause exists that a
particular deposit or investment with any banking institution is related to certain
predicate crimes, such as kidnapping for ransom, violation of the Comprehensive
Dangerous Drugs Act, hijacking and other violations under Republic Act No.
6235, destructive arson and murder (Sec. 11 of Republic Act No. 9160).

(f) The Bangko Sentral is authorized to

(1) inquire into or examine bank deposits or investments in the course of a
periodic or special examination to ensure compliance with The AntiMoney
Laundering Law, in accordance with the rule of examination of the Bangko
Sentral (Sec. 11, Rep. Act No. 9160, as amended); and
(2) conduct annual testing which is limited to the determination of the
existence and true identity of the owners of numbered accounts (Sec. 9, Rep. Act
No. 9160, as amended).

(g) The Philippine Deposit Insurance Commission and the Bangko Sentral may
inquire into bank deposits when there is a finding of unsafe or unsound banking
practices. (Sec. 8, Rep. Act No. 3591, as amended)

(h) The Court of Appeals, designated as a special court, may issue an order
authorizing law enforcement officers to examine and gather information on the
deposits, placements, trust accounts, assets and records in a bank or financial
institution in connection with anti-terrorism case. (Rep. Act No. 9372)

(i) The Commission on Audit is authorized to examine and audit government

deposits pertaining to the revenue and receipts of, and expenditures or uses of
funds and properties, owned or held in trust by, or pertaining to, the Government
or any of its subdivisions, agencies or instrumentalities, including government-
owned and controlled corporations with original charters. (See Art. IX-D, 1987
Constitution and Pres. Dec. No. 1445)

(j) The Presidential Commission on Good Government, in the conduct of its

investigations to recover ill-gotten wealth accumulated by former President
Ferdinand E. Marcos, his immediate family, relatives, subordinates and close
associates, may issue subpoenas requiring the attendance and testimony of
witnesses and/or the production of books, papers, contracts, records, statement of
accounts and other documents. (Sec. 3 [e], Exec. Order No. 1 [1986])
 13

FOREIGN CURRENCY DEPOSIT ACT OF THE PHILIPPINES

(REPUBLIC ACT NO. 6426)
Section 1. Title. This act shall be known as the "Foreign
Currency Deposit Act of the Philippines."

Section 2. Authority to deposit foreign currencies. Any

person, natural or juridical, may, in accordance with the provisions
of this Act, deposit with such Philippine banks in good standing, as
may, upon application, be designated by the Central Bank for the
purpose, foreign currencies which are acceptable as part of the
international reserve, except those which are required by the
Central Bank to be surrendered in accordance with the provisions
of Republic Act Numbered two hundred sixty-five (Now Rep. Act
No. 7653).

Section 3. Authority of banks to accept foreign currency

deposits. The banks designated by the Central Bank under
Section two hereof shall have the authority:

(1) To accept deposits and to accept foreign currencies in

trust Provided, That numbered accounts for recording and
servicing of said deposits shall be allowed;
(2) To issue certificates to evidence such deposits;
(3) To discount said certificates;
(4) To accept said deposits as collateral for loans subject to
such rules and regulations as may be promulgated by the Central
Bank from time to time; and
(5) To pay interest in foreign currency on such deposits.

Section 4. Foreign currency cover requirements. Except

as the Monetary Board may otherwise prescribe or allow, the
depository banks shall maintain at all times a one hundred percent
foreign currency cover for their liabilities, of which cover at least
fifteen percent shall be in the form of foreign currency deposit with
the Central Bank, and the balance in the form of foreign currency
loans or securities, which loans or securities shall be of short term
maturities and readily marketable. Such foreign currency loans
may include loans to domestic enterprises which are export-
oriented or registered with the Board of Investments, subject to the
limitations to be prescribed by the Monetary Board on such loans.
Except as the Monetary Board may otherwise prescribe or allow,
the foreign currency cover shall be in the same currency as that of
the corresponding foreign currency deposit liability. The Central
Bank may pay interest on the foreign currency deposit, and if
 14

requested shall exchange the foreign currency notes and coins into
foreign currency instruments drawn on its depository banks. (As
amended by PD No. 1453, June 11, 1978.)

Depository banks which, on account of net worth,

resources, past performance, or other pertinent criteria, have been
qualified by the Monetary Board to function under an expanded
foreign currency deposit system, shall be exempt from the
requirements in the preceding paragraph of maintaining fifteen
percent (15%) of the cover in the form of foreign currency deposit
with the Central Bank. Subject to prior Central Bank approval
when required by Central Bank regulations, said depository banks
may extend foreign currency loans to any domestic enterprise,
without the limitations prescribed in the preceding paragraph
regarding maturity and marketability, and such loans shall be
eligible for purposes of the 100% foreign currency cover
prescribed in the preceding paragraph. (As added by PD No. 1035.)

Section 5. Withdrawability and transferability of

deposits. There shall be no restriction on the withdrawal by the
depositor of his deposit or on the transferability of the same abroad
except those arising from the contract between the depositor and
the bank.

Section 6. Tax exemption. All foreign currency deposits

made under this Act, as amended by PD No. 1035, as well as
foreign currency deposits authorized under PD No. 1034, including
interest and all other income or earnings of such deposits, are
hereby exempted from any and all taxes whatsoever irrespective of
whether or not these deposits are made by residents or nonresidents
so long as the deposits are eligible or allowed under
aforementioned laws and, in the case of nonresidents, irrespective
of whether or not they are engaged in trade or business in the
Philippines. (As amended by PD No. 1246, prom. Nov. 21, 1977.)

Section 7. Rules and regulations. The Monetary Board of

the Central Bank shall promulgate such rules and regulations as
may be necessary to carry out the provisions of this Act which
shall take effect after the publications in the Official Gazette and in
a newspaper of national circulation for at least once a week for
three consecutive weeks. In case the Central Bank promulgates
new rules and regulations decreasing the rights of depositors, rules
and regulations at the time the deposit was made shall govern.

Section 8. Secrecy of foreign currency deposits. All

foreign currency deposits authorized under this Act, as amended by
 15

PD No. 1035, as well as foreign currency deposits authorized

under PD No. 1034, are hereby declared as and considered of an
absolutely confidential nature and, except upon the written
permission of the depositor, in no instance shall foreign currency
deposits be examined, inquired or looked into by any person,
government official, bureau or office whether judicial or
administrative or legislative, or any other entity whether public or
private; Provided, however, That said foreign currency deposits
shall be exempt from attachment, garnishment, or any other order
or process of any court, legislative body, government agency or
any administrative body whatsoever. (As amended by PD No.
1035, and further amended by PD No. 1246, prom. Nov. 21, 1977.)

Section 9. Deposit insurance coverage. The deposits

under this Act shall be insured under the provisions of Republic
Act No. 3591, as amended (Philippine Deposit Insurance
Corporation), as well as its implementing rules and
regulations: Provided, That insurance payment shall be in the same
currency in which the insured deposits are denominated.

Absolute Confidentiality of Foreign Currency Deposits

All foreign currency deposits authorized under the laws are declared absolutely
confidential in nature and, except upon the written permission of the depositor, these deposits
cannot be examined, inquired, or looked into by any person, government official, bureau or
office, whether judicial or administrative or legislative, or any other private or public entity.
Foreign currency deposits are also exempt from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any administrative body
whatsoever.

Foreign currency deposits refer to funds in foreign currencies which are accepted and
held by authorized banks in the regular course of business with the obligation to return an
equivalent amount to the owner thereof, with or without interest.

Exceptions: 14
(i) Foreign currency deposits may be examined, inquired or looked into when
there is written permission of the depositor (Sec. 8, RA 6426).
(ii) Directors, officers, stockholders and related interests who contract a loan or
any form of financial accommodation with their bank or related bank are
required to execute a written waiver of secrecy of deposits pursuant to The
New Central Bank Act. (Sec. 26, Rep. Act No. 7653)

14
BSP Legal Primer, pp 13-16.
 16

(iii) The Commissioner of Internal Revenue is authorized to inquire into bank

deposit accounts in relation to: (1) an application for compromise of tax
liability or a determination of a decedents gross estate under The National
Internal Revenue Code (Rep. Act No. 8424, as amended by Rep. Act No.
10021); and (2) a request for tax information of specific taxpayers made by a
foreign tax authority pursuant to a tax treaty under The Exchange of
Information on Tax Matters Act of 2009 (Rep. Act No. 8424, as amended by
Rep. Act No. 10021).
(iv) The Anti-Money Laundering Council may be authorized to examine and
inquire into bank deposits or investments with banking or non-bank financial
institutions (1) with court order, when there is probable cause that the
deposits or investments are related to an unlawful activity or a money
laundering offense (Secs. 3(i) and 4 of Rep. Act No. 9160); and (2) without
need of court order, when probable cause exists that a particular deposit or
investment with any banking institution is related to certain predicate crimes,
such as kidnapping for ransom, violation of the Comprehensive Dangerous
Drugs Act, hijacking and other violations under Republic Act No. 623519,
destructive arson and murder (Sec. 11 of Republic Act No. 916020).
(v) The Bangko Sentral is authorized to (1) inquire into or examine bank
deposits and investments in the course of a periodic or special examination to
ensure compliance with The Anti-Money Laundering Act, in accordance with
the rules of examination of the Bangko Sentral (Sec. 11, Rep. Act No. 9160, as
amended); and (2) conduct annual testing which is limited to the determination
of the existence and true identity of the owners of numbered accounts (Sec. 9,
Rep. Act No. 9160, as amended).
(vi) The Philippine Deposit Insurance Commission and the Bangko Sentral may
inquire into bank deposits when there is a finding of unsafe or unsound
banking practices. (Sec. 8, Rep. Act No. 3591, as amended)
(vii) The Commission on Audit is authorized to examine and audit government
deposits pertaining to the revenue and receipts of, and expenditures or uses of
funds and properties, owned or held in trust by, or pertaining to, the
Government or any of its subdivisions, agencies or instrumentalities, including
government-owned and controlled corporations with original charters. (See
Art. IX-D, 1987 Constitution and Pres. Dec. No. 1445)
(viii) The Presidential Commission on Good Government, in the conduct of its
investigations to recover ill-gotten wealth accumulated by former President
Ferdinand E. Marcos, his immediate family, relatives, subordinates and close
associates, may issue subpoenas requiring the attendance and testimony of
witnesses and/or the production of books, papers, contracts, records, statement
of accounts and other documents. (Sec. 3 [e], Exec. Order No. 1 [1986])
(ix) The garnishment of a foreign currency deposit account of a non-resident alien
found guilty of raping a minor was allowed on the basis of equity. (Salvacion
v. Central Bank of the Philippines, 278 SCRA 27 [1997])
(x) A co-payee of a check who filed a suit for recovery of sum of money was
considered, in a pro hac vice ruling by the Supreme Court, as a depositor in
 17

view of the distinctive circumstances of the case. (China Banking

Corporation v. Court of Appeals, 511 SCRA 110 [2006])

UNCLAIMED BALANCES LAW

Act. No. 3936 as amended by P.D. 679

Section 1. "Unclaimed balances", within the meaning of

this Act, shall include credits or deposits of money, bullion,
security or other evidence of indebtedness of any kind, and interest
thereon with banks, buildings and loan associations, and trust
corporations, as hereinafter defined, in favor of any person known
to be dead or who has not made further deposits or withdrawals
during the preceding ten years or more. Such unclaimed balances,
together with the increase and proceeds thereof, shall be deposited
with the Treasurer of the Philippines to the credit of the
Government of the Republic of the Philippines to be used as the
National Assembly may direct.

"Banks", "building and loan associations" and "trust corporations",

within the meaning of this Act, shall refer to institutions defined
under Section two, thirty-nine and fifty-six, respectively, of
Republic Act Numbered Three Hundred Thirty Seven, otherwise
known as the General Banking Act, as amended, whether
organized under special charters or not.

Section. 2. Immediately after the taking effect of this Act

and within the month of January of every odd year, all banks,
building and loan associations, and trust corporations shall forward
to the Treasurer of the Philippines a statement, under oath, of their
respective managing officers, of all credits and deposits held by
them in favor of persons known to be dead, or who have not made
further deposits or withdrawals during the preceding ten years or
more, arranged in alphabetical order according to the names of
creditors and depositors, and showing:
(a) The names and last known place of residence or post
office addresses of the persons in whose favor such unclaimed
balances stand;
(b) The amount and the date of the outstanding unclaimed
balance and whether the same is in money or in security, and if the
latter, the nature of the same;
 18

(c) The date when the person in whose favor the unclaimed
balance stands died, if known, or the date when he made his last
deposit or withdrawal; and
(d) The interest due on such unclaimed balance, if any, and
the amount thereof.

A copy of the above sworn statement shall be posted in a

conspicuous place in the premises of the bank, building and loan
association, or trust corporation concerned for at least sixty days
from the date of filing thereof: Provided, That immediately before
filing the above sworn statement, the bank, building and loan
association, and trust corporation shall communicate with the
person in whose favor the unclaimed balance stands at his last
known place of residence or post office address.

It shall be the duty of the Treasurer of the Philippines to

inform the Solicitor General from time to time the existence of
unclaimed balances held by banks, building and loan associations,
and trust corporations.

Section 3. Whenever the Solicitor General shall be

informed of such unclaimed balances, he shall commence an action
or actions in the name of the People of the Republic of the
Philippines in the Court of First Instance of the province or city
where the bank, building and loan association or trust corporation
is located, in which shall be joined as parties the bank, building
and loan association or trust corporation and all such creditors or
depositors. All or any of such creditors or depositors or banks,
building and loan association or trust corporations may be included
in one action. Service of process in such action or actions shall be
made by delivery of a copy of the complaint and summons to the
president, cashier, or managing officer of each defendant bank,
building and loan association or trust corporation and by
publication of a copy of such summons in a newspaper of general
circulation, either in English, in Filipino, or in a local dialect,
published in the locality where the bank, building and loan
association or trust corporation is situated, if there be any, and in
case there is none, in the City of Manila, at such time as the court
may order. Upon the trial, the court must hear all parties who have
appeared therein, and if it be determined that such unclaimed
balances in any defendant bank, building and loan association or
trust corporation are unclaimed as hereinbefore stated, then the
court shall render judgment in favor of the Government of the
Republic of the Philippines, declaring that said unclaimed balances
have escheated to the Government of the Republic of the
Philippines and commanding said bank, building and loan
 19

association or trust corporation to forthwith deposit the same with

the Treasurer of the Philippines to credit of the Government of the
Republic of the Philippines to be used as the National Assembly
may direct.

At the time of issuing summons in the action above

provided for, the clerk of court shall also issue a notice signed by
him, giving the title and number of said action, and referring to the
complaint therein, and directed to all persons, other than those
named as defendants therein, claiming any interest in any
unclaimed balance mentioned in said complaint, and requiring
them to appear within sixty days after the publication or first
publication, if there are several, of such summons, and show cause,
if they have any, why the unclaimed balances involved in said
action should not be deposited with the Treasurer of the
Philippines as in this Act provided and notifying them that if they
do not appear and show cause, the Government of the Republic of
the Philippines will apply to the court for the relief demanded in
the complaint. A copy of said notice shall be attached to, and
published with the copy of, said summons required to be published
as above, and at the end of the copy of such notice so published,
there shall be a statement of the date of publication, or first
publication, if there are several, of said summons and notice. Any
person interested may appear in said action and become a party
thereto. Upon the publication or the completion of the publication,
if there are several, of the summons and notice, and the service of
the summons on the defendant banks, building and loan
associations or trust corporations, the court shall have full and
complete jurisdiction in the Republic of the Philippines over the
said unclaimed balances and over the persons having or claiming
any interest in the said unclaimed balances, or any of them, and
shall have full and complete jurisdiction to hear and determine the
issues herein, and render the appropriate judgment thereon.

Section 4. If the president, cashier or managing officer of

the bank, building and loan association, or trust corporation
neglects or refuses to make and file the sworn statement required
by this action, such bank, building and loan association, or trust
corporation shall pay to the Government the sum of five hundred
pesos a month for each month or fraction thereof during which
such default shall continue.

Section 5. Any bank, building and loan association or trust

corporation which shall make any deposit with the Treasurer of the
Philippines in conformity with the provisions of this Act shall not
thereafter be liable to any person for the same and any action
 20

which may be brought by any person against in any bank, building

and loan association, or trust corporation for unclaimed balances so
deposited with the Treasurer of the Philippines shall be defended
by the Solicitor General without cost to such bank, building and
loan association or trust corporation.

Definition of Terms:
1. Unclaimed Balances shall include credits or deposits of money, bullion, security or
other evidence of indebtedness of any kind, and interest thereon with banks in favor
of any person known to be dead or who has not made further deposits or withdrawal
during the preceding ten (10) years or more.15

2. Escheat proceedings refer to the judicial process in which the state, by virtue of its
sovereignty, steps in and claims abandoned, left vacant, or unclaimed property,
without there being an interested person having a legal claim thereto.

In the case of dormant accounts, the state inquires into the status, custody, and
ownership of the unclaimed balance to determine whether the inactivity was brought
about by the fact of death or absence of or abandonment by the depositor. If after the
proceedings the property remains without a lawful owner interested to claim it, the
property shall be reverted to the state to forestall an open invitation to self-service by
the first comers. However, if interested parties have come forward and laid claim to
the property, the courts shall determine whether the credit or deposit should pass to
the claimants or be forfeited in favor of the state.

Escheat is not a proceeding to penalize depositors for failing to deposit to or withdraw

from their accounts. It is a proceeding whereby the state compels the surrender to it of
unclaimed deposit balances when there is substantial ground for a belief that they
have been abandoned, forgotten, or without an owner.16

ANTI-MONEY LAUNDERING ACT (AMLA) OF 2001

RA No. 9160, as amended by RA Nos. 9194 and 10365

Money laundering has been generally defined by the International Criminal Police
Organization `as any act or attempted act to conceal or disguise the identity of illegally obtained
proceeds so that they appear to have originated from legitimate sources. Even before the
passage of the AMLA, the problem was addressed by the Philippine government through the
issuance of various circulars by the Bangko Sentral ng Pilipinas. Yet ultimately, legislative

15
Treasury Circular No. 01-2010, April 8, 2010.
16
Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation et al., G.R. No. 192413, June 13,
2012.
 21

proscription was necessary, especially with the inclusion of the Philippines in the Financial
Action Task Forces list of non-cooperative countries and territories in the fight against money
laundering.

Money laundering is a crime whereby the proceeds of an unlawful activity as defined in

the law are transacted thereby making them appear to have originated from legitimate sources.17

Persons Covered by AMLA:

Covered persons, natural or juridical, refer to:

(1) banks, non-banks, quasi-banks, trust entities, foreign exchange dealers, pawnshops,
money changers, remittance and transfer companies and other similar entities and all other
persons and their subsidiaries and affiliates supervised or regulated by the Bangko Sentral ng
Pilipinas (BSP);
(2) insurance companies, pre-need companies and all other persons supervised or
regulated by the Insurance Commission (IC);
(3) (i) securities dealers, brokers, salesmen, investment houses and other similar persons
managing securities or rendering services as investment agent, advisor, or consultant, (ii) mutual
funds, close-end investment companies, common trust funds, and other similar persons, and (iii)
other entities administering or otherwise dealing in currency, commodities or financial
derivatives based thereon, valuable objects, cash substitutes and other similar monetary
instruments or property supervised or regulated by the Securities and Exchange Commission
(SEC);
(4) jewelry dealers in precious metals, who, as a business, trade in precious metals, for
transactions in excess of One million pesos (P1,000,000.00);
(5) jewelry dealers in precious stones, who, as a business, trade in precious stones, for
transactions in excess of One million pesos (P1,000,000.00);
(6) company service providers which, as a business, provide any of the following services
to third parties:

(i) acting as a formation agent of juridical persons;

(ii) acting as (or arranging for another person to act as) a director or corporate
secretary
of a company, a partner of a partnership, or a similar position in relation to other
juridical persons;
(iii) providing a registered office, business address or accommodation, correspondence
or administrative address for a company, a partnership or any other legal person
or arrangement; and
(iv) acting as (or arranging for another person to act as) a nominee shareholder for
another person; and

(7) persons who provide any of the following services:

17
Republic of the Philippines rep. by AMLC vs. Velasco, et al., G.R. No. 174629, February 14, 2008.
 22

(i) managing of client money, securities or other assets;

(ii) management of bank, savings or securities accounts;
(iii) organization of contributions for the creation, operation or management of
companies; and
(iv) creation, operation or management of juridical persons or arrangements, and buying
and selling business entities.

The term covered persons however excludes lawyers and accountants acting as
independent legal professionals in relation to information concerning their clients or where
disclosure of information would compromise client confidences or the attorney-client
relationship provided these lawyers and accountants are authorized to practice in the Philippines
and continue to be subject to the provisions of their respective codes of conduct and/or
professional responsibility or any of its amendments.[Section 3(a), AMLA]

Unlawful Activities under AMLA

Unlawful activity refers to any act or omission or series or combination thereof
involving or having direct relation to the following:

(1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
(2) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of Republic Act No. 9165,
otherwise known as the Comprehensive Dangerous Drugs Act of 2002;
(3) Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended,
otherwise known as the Anti-Graft and Corrupt Practices Act;
(4) Plunder under Republic Act No. 7080, as amended;
(5) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the
Revised Penal Code, as amended;
(6) Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602;
(7) Piracy on the high seas under the Revised Penal Code, as amended and Presidential
Decree No. 532;
(8) Qualified theft under Article 310 of the Revised Penal Code, as amended;
(9) Swindling under Article 315 and Other Forms of Swindling under Article 316 of the
Revised Penal Code, as amended;
(10) Smuggling under Republic Act Nos. 455 and 1937;
(11) Violations of Republic Act No. 8792, otherwise known as the Electronic Commerce
Act of 2000;
(12) Hijacking and other violations under Republic Act No. 6235; destructive arson and
murder, as defined under the Revised Penal Code, as amended;
(13) Terrorism and conspiracy to commit terrorism as defined and penalized under
Sections 3 and 4 of Republic Act No. 9372;
(14) Financing of terrorism under Section 4 and offenses punishable under Sections 5, 6,
7 and 8 of Republic Act No. 10168, otherwise known as the Terrorism Financing Prevention and
Suppression Act of 2012:
 23

(15) Bribery under Articles 210, 211 and 211-A of the Revised Penal Code, as amended,
and Corruption of Public Officers under Article 212 of the Revised Penal Code, as amended;
(16) Frauds and Illegal Exactions and Transactions under Articles 213, 214, 215 and 216
of the Revised Penal Code, as amended;
(17) Malversation of Public Funds and Property under Articles 217 and 222 of the
Revised Penal Code, as amended;
(18) Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169 and 176 of the
Revised Penal Code, as amended;
(19) Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise known as the
Anti-Trafficking in Persons Act of 2003;
(20) Violations of Sections 78 to 79 of Chapter IV, of Presidential Decree No. 705,
otherwise known as the Revised Forestry Code of the Philippines, as amended;
(21) Violations of Sections 86 to 106 of Chapter VI, of Republic Act No. 8550, otherwise
known as the Philippine Fisheries Code of 1998;
(22) Violations of Sections 101 to 107, and 110 of Republic Act No. 7942, otherwise
known as the Philippine Mining Act of 1995;
(23) Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act No. 9147, otherwise
known as the Wildlife Resources Conservation and Protection Act;
(24) Violation of Section 7(b) of Republic Act No. 9072, otherwise known as the
National Caves and Cave Resources Management Protection Act;
(25) Violation of Republic Act No. 6539, otherwise known as the Anti-Carnapping Act
of 2002, as amended;
(26) Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866, as amended,
otherwise known as the decree Codifying the Laws on Illegal/Unlawful Possession,
Manufacture, Dealing In, Acquisition or Disposition of Firearms, Ammunition or Explosives;
(27) Violation of Presidential Decree No. 1612, otherwise known as the Anti-Fencing
Law;
(28) Violation of Section 6 of Republic Act No. 8042, otherwise known as the Migrant
Workers and Overseas Filipinos Act of 1995, as amended by Republic Act No. 10022;
(29) Violation of Republic Act No. 8293, otherwise known as the Intellectual Property
Code of the Philippines;
(30) Violation of Section 4 of Republic Act No. 9995, otherwise known as the Anti-Photo
and Video Voyeurism Act of 2009;
(31) Violation of Section 4 of Republic Act No. 9775, otherwise known as the Anti-Child
Pornography Act of 2009;
(32) Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of Republic Act
No. 7610, otherwise known as the Special Protection of Children Against Abuse, Exploitation
and Discrimination;
(33) Fraudulent practices and other violations under Republic Act No. 8799, otherwise
known as the Securities Regulation Code of 2000; and
(34) Felonies or offenses of a similar nature that are punishable under the penal laws of
other countries. [Section 3(i), AMLA]

Money Laundering Offense

 24

Money laundering is committed by any person who, knowing that any monetary
instrument or property represents, involves, or relates to the proceeds of any unlawful activity:

(a) transacts said monetary instrument or property;

(b) converts, transfers, disposes of, moves, acquires, possesses or uses said monetary
instrument or property;
(c) conceals or disguises the true nature, source, location, disposition, movement or
ownership of or rights with respect to said monetary instrument or property;
(d) attempts or conspires to commit money laundering offenses referred to in paragraphs
(a), (b) or (c);
(e) aids, abets, assists in or counsels the commission of the money laundering offenses
referred to in paragraphs (a), (b) or (c) above; and
(f) performs or fails to perform any act as a result of which he facilitates the offense of
money laundering referred to in paragraphs (a), (b) or (c) above.

Money laundering is also committed by any covered person who, knowing that a covered
or suspicious transaction is required under this Act to be reported to the Anti-Money Laundering
Council (AMLC), fails to do so. [Sec. 4, AMLA]

Suspicious Transactions:
Transaction refers to any act establishing any right or obligation or giving rise to any
contractual or legal relationship between the parties thereto. It also includes any movement of
funds by any means with a covered institution.

Covered Transaction is a transaction in cash or other equivalent monetary instrument

involving a total amount in excess of five hundred thousand pesos (Php500,000.00) within one
(1) banking day.

Suspicious Transaction is a transaction, regardless of amount, where any of the

following circumstance exists:

(a) there is no underlying legal or trade obligation, purpose or economic justification;

(b) the client is not properly identified;
(c) the amount involved is not commensurate with the business or financial capacity of
the client;
(d) taking into account all known circumstances, it may be perceived that the clients
transaction is structured in order to avoid being the subject of reporting requirements under the
act;
(e) any circumstance relating to the transaction which is observed to deviate from the
profile of the client and/or the clients past transactions with the covered institution;
(f) the transaction is in any way related to an unlawful activity or any money laundering
activity or offense under the AMLA, as amended, is being or has been committed; and
 25

(g) any transaction that is similar, analogous or identical to any of the foregoing. 18

Period of Reporting Covered Transactions and Suspicious Transactions:

Covered institutions shall report to the AMLC all covered transactions and suspicious
transactions within five (5) working days19 from occurrence thereof, unless the supervising
authority concerned prescribes a longer period not exceeding ten (10) working days.

Should a transaction be determined to be both a covered and a suspicious transaction, the

covered institution shall report the same as a suspicious transaction.

The Covered Transaction Report (CTR) and the Suspicious Transaction Report (STR)
shall be in the forms prescribed by the AMLC.

Covered transaction reports and suspicious transaction reports shall be submitted in a

secured manner to the AMLC in electronic form.20

Functions of the Anti-Money Laundering Council (AMLC):

The Anti-Money Laundering Council is composed of the Governor of the Bangko Sentral
ng Pilipinas as chairman, the Commissioner of the Insurance Commission and the Chairman of
the Securities and Exchange Commission as members. The AMLC shall act unanimously in the
discharge of its functions as defined hereunder:

(1) to require and receive covered transaction reports from covered institutions;
(2) to issue orders addressed to the appropriate Supervising Authority or the covered
institution to determine the true identity of the owner of any monetary instrument or property
subject of a covered transaction 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;
(3) to institute civil forfeiture proceedings and all other remedial proceedings through the
Office of the Solicitor General;
(4) to cause the filing of complaints with the Department of Justice or the Ombudsman
for the prosecution of money laundering offenses;
(5) to initiate investigations of covered transactions, money laundering activities and
other violations of this Act;
(6) to freeze any monetary instrument or property alleged to be proceeds of any unlawful
activity;
(7) to implement such measures as may be necessary and justified under this Act to
counteract money laundering;

18
Rule 3.g., Implementing Rules and Regulations, AMLA
19
See AMLC Resolution 61,0 Series of 2016
20
Rule 9.c., ibid.
 26

(8) to receive and take action in respect of, any request from foreign states for assistance
in their own anti-money laundering operations provided in this Act;
(9) to develop educational programs on the pernicious effects of money laundering, the
methods and techniques used in money laundering, the viable means of preventing money
laundering and the effective ways of prosecuting and punishing offenders; and
(10) to enlist the assistance of any branch, department, bureau, office, agency or
instrumentality of the government, including government-owned and -controlled corporations, in
undertaking any and all anti-money laundering operations, which may include the use of its
personnel, facilities and resources for the more resolute prevention, detection and investigation
of money laundering offenses and prosecution of offenders (Sec. 7, AMLA).

Freeze order:

Upon verified ex parte petition by the AMLC and after determination that probable cause
exists that any monetary instrument or property is in any way related to an unlawful activity as
defined in Section 3(i) hereof, the Court of Appeals may issue a freeze order, which shall be
effective immediately. The freeze order shall be for a period of twenty (20) days unless extended
by the court. In any case, the court should act on the petition to freeze within twenty-four (24)
hours from filing of the petition. If the application is filed a day before a nonworking day, the
computation of the twenty-four (24)-hour period shall exclude the nonworking days.

A person whose account has been frozen may file a motion to lift the freeze order and the
court must resolve this motion before the expiration of the twenty (20)-day original freeze order
(Sec. 10, AMLA).

A freeze order is an extraordinary and interim relief issued by the CA to prevent the
dissipation, removal, or disposal of properties that are suspected to be the proceeds of, or related
to, unlawful activities as defined in Section 3(i) of RA No. 9160, as amended. The primary
objective of a freeze order is to temporarily preserve monetary instruments or property that are in
any way related to an unlawful activity or money laundering, by preventing the owner from
utilizing them during the duration of the freeze order. The relief is pre-emptive in character,
meant to prevent the owner from disposing his property and thwarting the State's effort in
building its case and eventually filing civil forfeiture proceedings and/or prosecuting the
owner.21

The General Banking Law (GBL) of 2000

REPUBLIC ACT NO. 8791

AN ACT PROVIDING FOR THE REGULATION OF THE

ORGANIZATION AND OPERATIONS OF BANKS, QUASI-
BANKS, TRUST ENTITIES AND FOR OTHER PURPOSES
21
Republic of the Philippines vs. First Pacific Network, Inc., GR No. 156646, November 19, 2014.
 27

Definition and classification of banks:

Banks refer to entities engaged in the lending of funds obtained in the form of deposits
(Sec. 3, GBL). It is a moneyed institution, founded to facilitate the borrowing, lending and
safekeeping of money and to deal in notes, bills of exchange, and credits.22

Banks shall be classified into:

(a) Universal banks;

(b) Commercial banks;
(c) Thrift banks, composed of:
(i) Savings and mortgage banks,
(ii) Stock savings and loan associations, and
(iii) Private development banks, as defined in Republic Act No. 7906 (hereafter
the "Thrift Banks Act");
(d) Rural banks, as defined in Republic Act No. 7353 (hereafter the "Rural Banks Act");
(e) Cooperative banks, as defined in Republic Act No. 6938 (hereafter the "Cooperative
Code");
(f) Islamic banks as defined in Republic Act No. 6848, otherwise known as the "Charter
of Al Amanah Islamic Investment Bank of the Philippines"; and
(g) Other classifications of banks as determined by the Monetary Board of the Bangko
Sentral ng Pilipinas.

Nature of banking business:

Banking business is so impressed with public interest where the trust and confidence of
the public in general is of paramount importance such that the appropriate standard of diligence
must be very high, if not the highest degree of diligence. A banks liability as obligor is not
merely vicarious but primary, wherein the defense of exercise of due diligence in the selection
and supervision of its employees is of no moment.

Consequently, the diligence required of banks is more than that of a Roman pater
familias or a good father of a family. The highest degree of diligence is expected. In handling
loan transactions, banks are under obligation to ensure compliance by the clients with all the
documentary requirements pertaining to the approval and release of the loan applications.

Banks handle daily transactions involving millions of pesos. By the very nature of their
works the degree of responsibility, care and trustworthiness expected of their employees and

22
Philippine Law Dictionary, Francisco B. Moreno, Third Edition.
 28

officials is far greater than those of ordinary clerks and employees. Banks are expected to
exercise the highest degree of diligence in the selection and supervision of their employees. 23

Section 2 of Republic Act No. 8791 (GBL of 2000) expressly imposes this fiduciary duty
on banks when it declares that the State recognizes the fiduciary nature of banking that requires
high standards of integrity and performance. This statutory declaration merely echoes the
pronouncement of the Supreme Court requiring banks to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship. This fiduciary
relationship means that the banks obligation to observe high standards of integrity and
performance is deemed written into every deposit agreement between a bank and its depositor.

The fiduciary nature of banking requires banks to assume a degree of diligence higher
than that of a good father of a family. The business of banking is imbued with public interest.
The stability of banks largely depends on the confidence of the people in the honesty and
efficiency of banks. In every case, the depositor expects the bank to treat his account with the
utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The
bank must record every single transaction accurately, down to the last centavo, and as promptly
as possible. This has to be done if the account is to reflect at any given time the amount of
money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to
whomever he directs.24

Authority from the Bangko Sentral ng Pilipinas (BSP) under the GBL:

Section 6. Authority to Engage in Banking and Quasi-Banking

Functions. - No person or entity shall engage in banking operations or
quasi-banking functions without authority from the Bangko Sentral:
Provided, however, That an entity authorized by the Bangko Sentral to
perform universal or commercial banking functions shall likewise have the
authority to engage in quasi-banking functions.

The determination of whether a person or entity is performing banking

or quasi-banking functions without Bangko Sentral authority shall be
decided by the Monetary Board. To resolve such issue, the Monetary Board
may; through the appropriate supervising and examining department of the
Bangko Sentral, examine, inspect or investigate the books and records of
such person or entity. Upon issuance of this authority, such person or entity
may commence to engage in banking operations or quasi-banking function
and shall continue to do so unless such authority is sooner surrendered,
revoked, suspended or annulled by the Bangko Sentral in accordance with
this Act or other special laws.

The department head and the examiners of the appropriate supervising

and examining department are hereby authorized to administer oaths to any
23
Far East Bank and Trust Company vs. Tentmakers Group, Inc. et al., G.R. No. 171050, July 4, 2012
24
Philippine Banking Corporation vs. Court of Appeals et al., G.R. No. 127469, January 15, 2004.
 29

such person, employee, officer, or director of any such entity and to compel
the presentation or production of such books, documents, papers or records
that are reasonably necessary to ascertain the facts relative to the true
functions and operations of such person or entity. Failure or refusal to
comply with the required presentation or production of such books,
documents, papers or records within a reasonable time shall subject the
persons responsible therefore to the penal sanctions provided under the New
Central Bank Act.

Persons or entities found to be performing banking or quasi-banking

functions without authority from the Bangko Sentral shall be subject to
appropriate sanctions under the New Central Bank Act and other applicable
laws. (GBL)

This provision of the GBL is consistent with Sections 17 and 46 of the Corporation Code
which provide that the SEC shall not accept or approve articles of incorporation, by-laws, or
amendment to articles of incorporation and/or by-laws of banks unless accompanied by a
favorable recommendation of the appropriate government agency, i.e. the BSP, to the effect that
such articles, by-laws or amendment is in accordance with law.

History of the Philippine Central Bank:25

On January 3, 1949, Congress created the Central Bank of the Philippines (Central Bank)
as a corporate body with the primary objective of (i) maintaining the internal and external
monetary stability in the Philippines; and (ii) preserving the international value and the
convertibility of the peso. In line with these broad objectives, the Central Bank was empowered
to issue rules and regulations "necessary for the effective discharge of the responsibilities and
exercise of the powers assigned to the Monetary Board and to the Central Bank." Specifically,
the Central Bank is authorized to organize (other) departments for the efficient conduct of its
business and whose powers and duties "shall be determined by the Monetary Board, within the
authority granted to the Board and the Central Bank" under its original charter.

With the 1973 Constitution, the then Central Bank was constitutionally made as the
countrys central monetary authority until such time that Congress shall have established a
central bank. The 1987 Constitution continued to recognize this function of the then Central
Bank until Congress, pursuant to the Constitution, created a new central monetary authority
which later came to be known as the Bangko Sentral ng Pilipinas.

Under the New Central Bank Act (R.A. No. 7653), the BSP is given the responsibility of
providing policy directions in the areas of money, banking and credit; it is given, too, the
primary objective of maintaining price stability, conducive to a balanced and sustainable growth

25
Bank of Commerce vs. Planters Development Bank, et al., G.R. No. 154470-71, September 24, 2012.
 30

of the economy, and of promoting and maintaining monetary stability and convertibility of the
peso.

The Constitution expressly grants the BSP, as the countrys central monetary authority,
the power of supervision over the operation of banks, while leaving with Congress the authority
to define the BSPs regulatory powers over the operations of finance companies and other
institutions performing similar functions. Under R.A. No. 7653, the BSPs powers and functions
include (i) supervision over the operation of banks; (ii) regulation of operations of finance
companies and non-bank financial institutions performing quasi banking functions; (iii) sole
power and authority to issue currency within the Philippine territory; (iv) engaging in foreign
exchange transactions; (v) making rediscounts, discounts, loans and advances to banking and
other financial institutions to influence the volume of credit consistent with the objective of
achieving price stability; (vi) engaging in open market operations; and (vii) acting as banker and
financial advisor of the government.

On the BSPs power of supervision over the operation of banks, Section 4 of R.A. No.
8791 (GBL of 2000) elaborates as follows:

CHAPTER II
AUTHORITY OF THE BANGKO SENTRAL

SECTION 4. Supervisory Powers. The operations and activities of

banks shall be subject to supervision of the Bangko Sentral. "Supervision"
shall include the following:

4.1. The issuance of rules of conduct or the establishment of standards

of operation for uniform application to all institutions or functions covered,
taking into consideration the distinctive character of the operations of
institutions and the substantive similarities of specific functions to which
such rules, modes or standards are to be applied;

4.2. The conduct of examination to determine compliance with laws

and regulations if the circumstances so warrant as determined by the
Monetary Board;

4.3. Overseeing to ascertain that laws and regulations are complied

with;

4.4. 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: Provided, That the
deficiencies/irregularities found by or discovered by an audit shall be
immediately addressed;

4.5. Inquiring into the solvency and liquidity of the institution (2-D); or
 31

4.6. Enforcing prompt corrective action.

The Bangko Sentral shall also have supervision over the operations of
and exercise regulatory powers over quasi-banks, trust entities and other
financial institutions which under special laws are subject to Bangko Sentral
supervision.

For the purposes of this Act, "quasi-banks" shall refer to entities

engaged in the borrowing of funds through the issuance, endorsement or
assignment with recourse or acceptance of deposit substitutes as defined in
Section 95 of Republic Act No. 7653 (hereafter the "New Central Bank
Act") for purposes of relending or purchasing of receivables and other
obligations.

Powers of a universal bank:

A universal bank shall have the authority to exercise, in addition to the powers authorized
for a commercial bank, the powers of an investment house as provided in existing laws and the
power to invest in non-allied enterprises (Sec. 23, GBL). A universal bank may, subject to the
conditions prescribed by law, invest in the equities of allied and non-allied enterprises as may be
determined by the Monetary Board. Allied enterprises may either be financial or non-financial
(Sec. 24, GBL).

A bank other than a universal or commercial bank cannot accept or create demand
deposits except upon prior approval of, and subject to such conditions and rules as may be
prescribed by the Monetary Board. (Sec. 33, GBL)

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, such as
accepting drafts and issuing letters of credit; discounting and negotiating promissory notes,
drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits;
receiving other types of deposits and deposit substitutes; buying and selling foreign exchange
and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending
credit, subject to such rules as the Monetary Board may promulgate. These rules may include the
determination of bonds and other debt securities eligible for investment, the maturities and
aggregate amount of such investment (Sec. 29, GBL).

A commercial bank may, subject to the conditions prescribed by law, invest only in the
equities of allied enterprises as may be determined by the Monetary Board. Allied enterprises
may either be financial or non-financial (Sec. 30, GBL).

Contract of bank deposit:

 32

Bank deposits are in the nature of irregular deposits. They are really loans because they
earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as
loans and are to be covered by the law on loans. Current and savings deposit are loans to a bank
because it can use the same.26

The contract between the bank and its depositor is governed by the provisions of the Civil
Code on simple loan. Article 1980 of the Civil Code expressly provides that savings deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple
loan. There is a debtor-creditor relationship between the bank and its depositor. The bank is the
debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees
to pay the depositor on demand. The savings deposit agreement between the bank and the
depositor is the contract that determines the rights and obligations of the parties.27

In Far East Bank and Trust Company vs. Estrella O. Querimit, G.R. No. 148582,
January 16, 2002, a certificate of deposit was explained:

A certificate of deposit is defined as a written

acknowledgment by a bank or banker of the receipt of a sum of
money on deposit which the bank or banker promises to pay to the
depositor, to the order of the depositor, or to some other person or
his order, whereby the relation of debtor and creditor between the
bank and the depositor is created. The principles governing other
types of bank deposits are applicable to certificates of deposit, as
are the rules governing promissory notes when they contain an
unconditional promise to pay a sum certain of money
absolutely. The principle that payment, in order to discharge a
debt, must be made to someone authorized to receive it is
applicable to the payment of certificates of deposit. Thus, a bank
will be protected in making payment to the holder of a certificate
indorsed by the payee, unless it has notice of the invalidity of
the indorsement or the holders want of title. A bank acts at its peril
when it pays deposits evidenced by a certificate of deposit, without
its production and surrender after proper indorsement. As a rule,
one who pleads payment has the burden of proving it. Even where
the plaintiff must allege non-payment, the general rule is that the
burden rests on the defendant to prove payment, rather than on the
plaintiff to prove payment. The debtor has the burden of showing
with legal certainty that the obligation has been discharged by
payment.

26
Serrano vs. Central Bank, L-30511, February 14, 1980, 96 SCRA 102.
27
Consolidated Bank and Trust Corporation vs. Court of Appeals, G.R. No. 138569, September 11, 2003, 410 SCRA
562, 574-575.
 33

In this case, the certificates of deposit were clearly marked

payable to bearer, which means, to the person in possession of an
instrument, document of title or security payable to bearer or
indorsed in blank. Petitioner should not have paid respondents
husband or any third party without requiring the surrender of the
certificates of deposit.

The banking system is an indispensable institution in the modern world and plays a vital
role in the economic life of every civilized nation. Whether as mere passive entities for the
safekeeping and saving of money or as active instruments of business and commerce, banks have
become an ubiquitous presence among the people, who have come to regard them with respect
and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not
hesitated to entrust his lifes savings to the bank of his choice, knowing that they will be safe in
its custody and will even earn some interest for him. The ordinary person, with equal faith,
usually maintains a modest checking account for security and convenience in the settling of his
monthly bills and the payment of ordinary expenses. As for business entities, the bank is a
trusted and active associate that can help in the running of their affairs, not only in the form of
loans when needed but more often in the conduct of their day-to-day transactions like the
issuance or encashment of checks.

In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must record
every single transaction accurately, down to the last centavo and as promptly as possible. This
has to be done if the account is to reflect at any given time the amount of money the depositor
can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he
directs.

The point is that as a business affected with public interest and because of the nature of
its functions, the bank is under obligations to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship.28

Kinds of deposits:
1. Demand deposits;
2. Savings deposits;
3. Negotiable order of withdrawal (NOW) account;29
4. Time deposits;
5. Deposit substitute operations (quasi-banking function);
6. Foreign currency deposits;
7. Anonymous and numbered accounts.30

28
Land Bank of the Philippines vs. Emmanuel Onate, G.R. No. 192371, January 15, 2014.
29
NOW accounts are interest-bearing deposit accounts that combine the payable on demand feature of checks
and investment feature of savings accounts.
30
In foreign currency deposits, numbered accounts are allowed but the bank should ensure that the client is
identified in an official or identifying documents.
 34

BSP Circular No. 753, Series of 2012 however enumerates the different kinds of deposit
and deposit substitute31 liabilities:

Subsection X253.1 Required reserves against deposit and deposit

substitute liabilities. The rates of required reserves against deposit
and deposit substitute liabilities in local currency of banks shall be
as follows:

UBs/KB TB RBs/Coo
Account
s s p Banks
a. Demand Deposits 18 6 4
b. "NOW" Accounts 18 6 4
c. Savings Deposits 18 6 2
d. Time Deposits,
Negotiable CTDs, Long-
18 6 2
Term Non- Negotiable
Tax Exempt CTDs
e. Long-term
Negotiable Certificate of
3 3 3
Time Deposits
(LTNCTDs)
f. Deposit substitutes
18 6 n.a
(DS)
g. DS evidenced by
2 2 n.a
repo agreements
h. IBCL (Sec. X343) 0 0 0
i. Bonds 4 4 n.a.
j. Mortgage/CHM
n.a. 4 n.a.
Certificates
k. Peso deposits lodged
n.a
under Due to foreign 18 n.a.
.
banks
l. Peso deposits lodged
under Due to Head
Office/Branches/Agenci n.a
18 n.a.
es Abroad (Philippine .
branch of a foreign
bank)

Item g refers to deposit substitutes evidenced by repo

agreements32 covering government securities up to the amount

31
The term "deposit substitutes" is defined as an alternative form of obtaining funds from the public, other
than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's
own account, for the purpose of relending or purchasing of receivables and other obligations. These
instruments may include, but need not be limited to, bankers acceptances, promissory notes, participations,
certificates of assignment and similar instruments with recourse, and repurchase agreements (Section 95,
The New Central Bank Act [RA 7653]).
32
The BSP purchases government securities from a bank with a commitment to sell it back at a specified
future date at a predetermined rate. In effect, a repo transaction expands the level of money supply as it
increases the banks level of reserves. Under a reverse repo, the BSP acts as the seller of government
securities, thus, the banks payment reduces its reserve account resulting in a contraction in the systems
money supply. For both repos, the BSP can only affect the level of money supply temporarily, given that the
parties involved commit to reverse the transaction at an agreed future date (see www.bsp.gov.ph).
 35

equivalent to the adjusted Tier 1 capital of the bank: Provided,

That such rate shall apply only to repo agreements, the
documentation of which conforms with, and were delivered to a
BSP-accredited third-party custodian as required under existing
BSP regulations.
Items k and l refer to peso deposits, except those utilized as
capital, of foreign banks (including Head
Office/Branches/Agencies abroad of local branches of foreign
banks) booked under the Due to Foreign Banks and Due to
Head Office/Branches/Agencies Abroad accounts.

Demand deposits:

Under Section 58 of the New Central Bank Act, the term "demand deposits" means all
those liabilities of the Bangko Sentral and of other banks which are denominated in Philippine
currency and are subject to payment in legal tender upon demand by the presentation of checks.

Only banks duly authorized to do so may accept funds or create liabilities payable in
pesos upon demand by the presentation of checks, and such operations shall be subject to the
control of the Monetary Board in accordance with the powers granted it with respect thereto
under the NCBA (Sec. 59, NCBA).

Checks representing demand deposits do not have legal tender power and their
acceptance in the payment of debts, both public and private, is at the option of the creditor
provided, however, that a check which has been cleared and credited to the account of the
creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount
credited to his account (Sec. 60, NCBA).

Loans:

Credit Exposure Limits to a Single Borrower.33

Consistent with national interest, the total amount of loans, credit accommodations and
guarantees that may be extended by a bank to any person, partnership, association, corporation or
other entity shall at no time exceed twenty five percent (25%) of the net worth of such bank. The
basis for determining compliance with the single borrowers limit (SBL) is the total credit
commitment of the bank to or on behalf of the borrower (Sec. 35.1, GBL).

The total amount of loans, credit accommodations and guarantees prescribed in the first
paragraph may be increased by an additional ten percent (10%) of the net worth of such bank:
provided that the additional liabilities are adequately secured by trust receipts, shipping
documents, warehouse receipts or other similar documents transferring or securing title covering

33
BSP Circular No. 425, Series of 2004
 36

readily marketable, non-perishable goods which must be fully covered by insurance (Sec. 35.2,
GBL).

Exceptions:

1. The Monetary Board may otherwise prescribe for reasons of national interest;
2. Deposits of rural banks and cooperative banks (RBs/Coop Banks) with government-
owned or controlled financial institutions like the Land Bank of the Philippines and the
Development Bank of the Philippines shall not be covered by the SBL imposed under R.
A. No. 8791; and
3. In municipalities and cities where there are no government banks, the deposits of
RBs/Coop Banks in private banks in said areas shall not be subject to the SBL. Deposits
in private banks located in other municipalities/cities shall be covered by the SBL.

The above prescribed ceilings shall include:

(a) the direct liability of the maker or acceptor of paper

discounted with or sold to such bank and the liability of a general
endorser, drawer or guarantor who obtains a loan or other credit
accommodation from or discounts paper with or sells papers to
such bank;
(b) in the case of an individual who owns or controls a majority
interest in a corporation, partnership, association or any other
entity, the liabilities of said entities to such bank;
(c) in the case of a corporation, all liabilities to such bank of all
subsidiaries in which such corporation owns or controls a majority
interest; and
(d) in the case of a partnership, association or other entity, the
liabilities of the members thereof to such bank (Sec. 35.3, GBL).

Loans, other credit accommodations and guarantees shall exclude:

(a) loans and other credit accommodations secured by obligations

of the Bangko Sentral or of the Philippine Government:
(b) loans and other credit accommodations fully guaranteed by the
government as to the payment of principal and interest;
(c) loans and other credit accommodations covered by assignment
of deposits maintained in the lending bank and held in the
Philippines;
(d) loans, credit accommodations and acceptances under letters of
credit to the extent covered by margin deposits; and
(e) other loans or credit accommodations which the Monetary
Board may from time to time, specify as non-risk items (Sec. 35.5,
GBL)
 37

Restriction on Bank Exposure to Directors, Officers, Stockholders and Their Related Interests
(DOSRI)34

No director or officer of any bank shall, directly or indirectly, for himself or as the
representative or agent of others, borrow from such bank nor shall he become a guarantor,
endorser or surety for loans from such bank to others, or in any manner be an obligor or incur
any contractual liability to the bank except with the written approval of the majority of all the
directors of the bank, excluding the director concerned.

Exception:

Loans, other credit accommodations and advances granted to officers under a fringe
benefit plan approved by the Bangko Sentral. The required approval shall be entered upon the
records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate
supervising and examining department of the Bangko Sentral and dealings of a bank with any of
its directors, officers or stockholders and their related interests shall be upon terms not less
favorable to the bank than those offered to others.

Penalty for violation:

After due notice to the board of directors of the bank, the office of any bank director or
officer who violates the provisions of this Section may be declared vacant and the director or
officer shall be subject to the penal provisions of the New Central Bank Act.

Power of the Monetary Board over DOSRI accounts:

The Monetary Board may regulate the amount of loans, credit accommodations and
guarantees that may be extended, directly or indirectly, by a bank to its directors, officers,
stockholders and their related interests, as well as investments of such bank in enterprises owned
or controlled by said directors, officers, stockholders and their related interests. However, the
outstanding loans, credit accommodations and guarantees which a bank may extend to each of its
stockholders, directors, or officers and their related interests, shall be limited to an amount
equivalent to their respective unencumbered deposits and book value of their paid-in capital
contribution in the bank: Provided, however, That loans, credit accommodations and guarantees
secured by assets considered as non-risk by the Monetary Board shall be excluded from such
limit: Provided, further, That loans, credit accommodations and advances to officers in the form
of fringe benefits granted in accordance with rules as may be prescribed by the Monetary Board
shall not be subject to the individual limit. The Monetary Board shall define the term "related
interests." The limit on loans, credit accommodations and guarantees prescribed herein shall not
apply to loans, credit accommodations and guarantees extended by a cooperative bank to its
cooperative shareholders.

Definition of terms:

34
Section 36, GBL.
 38

A. Directors shall include: (1) directors who are named as such in the articles of
incorporation; (2) directors duly elected in subsequent meetings of the stockholders or
those appointed by virtue of the charter of government-owned banks; and (3) those
elected to fill vacancies in the board of directors.35

B. Officers shall include the (1) president, executive vice president, senior vice-president,
vice president, general manager, treasurer, secretary, trust officer and others mentioned as
officers of the bank, or those whose duties as such are defined in the by-laws, or are
generally known to be the officers of the bank (or any of its branches and offices other
than the head office) either through announcement, representation, publication or any
kind of communication made by the bank; (2) person holding the position of chairman or
vice chairman of the board or another position of the board and performing functions of
management such as those ordinarily performed by regular officers; and (3) members of a
group or committee, including sub-groups or subcommittees, whose duties include
functions of management such as those ordinarily performed by regular officers, and are
not purely recommendatory or advisory.36

C. Stockholder shall refer to any stockholder of record in the books of the bank, acting
personally, or through an attorney-in-fact, or any other person duly authorized by him.
Stockholder shall also refer to a juridical person such as corporation, association or firm.

D. Substantial Stockholder shall mean a person, or group of persons whether natural or

juridical, owning such number of shares that will allow such person or group to elect at
least one (1) member of the board of directors of a bank or who is directly or indirectly
the registered or beneficial owner of more than ten percent (10%) of any class of its
equity security.

E. Related Interest shall refer to any of the following:

(1) Spouse or relative within the first degree of consanguinity or

affinity, or relative by legal adoption, of a director, officer or
stockholder of the bank;
(2) Partnership of which a director, officer, or stockholder of a
bank or his spouse or relative within the first degree of
consanguinity or affinity, or relative by legal adoption, is a general
partner;
(3) Co-owner with the director, officer, stockholder or his spouse
or relative within the first degree of consanguinity or affinity, or
relative by legal adoption, of the property or interest or right
mortgaged, pledged or assigned to secure the loans or other credit
accommodations, except when the mortgage, pledge or assignment
covers only said co-owner's undivided interest;

35
Subsection X141.1, BSP Manual of Regulations for Banks.
36
Subsection X142.1, ibid.
 39

(4) Corporation, association, or firm of which a director or officer

of the bank, or his spouse is also a director or officer of such
corporation, association or firm, except (a) where the securities of
such corporation, association or firm are listed and traded in the
big board or commercial and industrial board of domestic stock
exchanges and less than fifty percent (50%) of the voting stock
thereof is owned by any one person or by persons related to each
other within the first degree of consanguinity or affinity; or (b)
where the director, officer or stockholder of the bank sits as a
representative of the bank in the board of directors of such
corporation: Provided, That the bank representative shall not have
any equity interest in the borrower corporation except for the
minimum shares required by law, rules and regulations, or by the
by-laws of the corporation: Provided, further, that the borrowing
corporation is not among those mentioned in items (5), (6), (7) and
(8) below;
(5) Corporation, association or firm of which any or a group of
directors, officers, stockholders of the lending bank and/or their
spouses or relatives within the first degree of consanguinity or
affinity, or relative by legal adoption, hold or own at least twenty
percent (20%) of the subscribed capital of such corporation, or of
the equity of such association or firm;
(6) Corporation, association or firm wholly or majority-owned or
controlled by any related entity or a group of related entities
mentioned in Items (2), (4) and (5) above.
(7) Corporation, association or firm which owns or controls
directly or indirectly whether singly or as part of a group of related
interest at least twenty percent (20%) of the subscribed capital of a
substantial stockholder of the lending bank or which controls
majority interest of the bank; and
(8) Corporation, association or firm in which the lending bank
and/or its parent/subsidiary holds or owns at least twenty percent
(20%) of the subscribed capital of such corporation, or in the
equity of such association or firm, or has an existing management
contract or any similar arrangement with the lending bank or its
parent/subsidiary.

F. Subsidiary shall refer to a corporation or firm more than fifty percent (50%) of the
outstanding voting stock of which is directly or indirectly owned, controlled or held with
power to vote by its parent corporation.37

Requirement for grant of loans or other credit accommodations:

37
BSP Circular No. 423, Series of 2004.
 40

Before granting a loan or other credit accommodation, a bank must ascertain that the
debtor is capable of fulfilling his commitments to the bank. Toward this end, a bank may demand
from its credit applicants a statement of their assets and liabilities and of their income and
expenditures and such information as may be prescribed by law or by rules and regulations of the
Monetary Board to enable the bank to properly evaluate the credit application which includes the
corresponding financial statements submitted for taxation purposes to the Bureau of Internal
Revenue. Should such statements prove to be false or incorrect in any material detail, the bank
may terminate any loan or other credit accommodation granted on the basis of said statements
and shall have the right to demand immediate repayment or liquidation of the obligation. In
formulating rules and regulations under this Section, the Monetary Board shall recognize the
peculiar characteristics of micro financing, such as cash flow-based lending to the basic sectors
that are not covered by traditional collateral. (Sec. 40, GBL)

Conducting business in an unsafe or unsound manner:

In determining whether a particular act or omission, which is not otherwise prohibited by

any law, rule or regulation affecting banks, quasi-banks or trust entities, may be deemed as
conducting business in an unsafe or unsound manner, the Monetary Board shall consider any of
the following circumstances:

1. 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 institution;
2. The act or omission has resulted or may result in material
loss or damage or abnormal risk to the institution's depositors,
creditors, investors, stockholders or to the Bangko Sentral or to the
public in general;
3. The act or omission has caused any undue injury, or has
given any unwarranted 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 partiality, evident bad
faith or gross inexcusable negligence; or
4. The act or omission involves entering into any contract
or transaction manifestly and grossly disadvantageous to the bank,
quasi-bank or trust entity, whether or not the director or officer
profited or will profit thereby.

Whenever a bank, quasi-bank or trust entity persists in conducting its business in an

unsafe or unsound manner, the Monetary Board may, without prejudice to the administrative
sanctions provided under the New Central Bank Act, take action under the same Act and/or
immediately exclude the erring bank from clearing, the provisions of law to the contrary
notwithstanding. (Sec. 56, GBL)

Conservatorship:
 41

Grounds and procedures:

The grounds and procedures for placing a bank under conservatorship, as well as, the
powers and duties of the conservator appointed for the bank shall be governed by the provisions
of Section 29 and the last two paragraphs of Section 30 of RA 7653 or the New Central Bank
Act (NCBA): Provided, That this Section shall also apply to conservatorship proceedings of
quasi-banks. (Sec. 67, GBL)

Section 29 of the NCBA provides:

Section 29. Appointment of Conservator. - Whenever, on

the basis of a report submitted by the appropriate supervising or
examining department, the Monetary Board finds that a bank or a
quasi-bank is in a state of continuing inability or unwillingness to
maintain a condition of liquidity deemed adequate to protect the
interest of depositors and creditors, the Monetary Board may
appoint a conservator with such powers as the Monetary Board
shall deem necessary to take charge of the assets, liabilities, and
the management thereof, reorganize the management, collect all
monies and debts due said institution, and exercise all powers
necessary to restore its viability. The conservator shall report and
be responsible to the Monetary Board and shall have the power to
overrule or revoke the actions of the previous management and
board of directors of the bank or quasi-bank.

The conservator should be competent and knowledgeable

in bank operations and management. The conservatorship shall not
exceed one (1) year.

The conservator shall receive remuneration to be fixed by

the Monetary Board in an amount not to exceed two-thirds (2/3) of
the salary of the president of the institution in one (1) year, payable
in twelve (12) equal monthly payments: Provided, That, if at any
time within one-year period, the conservatorship is terminated on
the ground that the institution can operate on its own, the
conservator shall receive the balance of the remuneration which he
would have received up to the end of the year; but if the
conservatorship is terminated on other grounds, the conservator
shall not be entitled to such remaining balance. The Monetary
Board may appoint a conservator connected with the Bangko
Sentral, in which case he shall not be entitled to receive any
remuneration or emolument from the Bangko Sentral during the
conservatorship. The expenses attendant to the conservatorship
shall be borne by the bank or quasi-bank concerned.
 42

The Monetary Board shall terminate the conservatorship

when it is satisfied that the institution can continue to operate on its
own and the conservatorship is no longer necessary. The
conservatorship shall likewise be terminated should the Monetary
Board, on the basis of the report of the conservator or of its own
findings, determine that the continuance in business of the
institution would involve probable loss to its depositors or
creditors, in which case the provisions of Section 30 shall apply.

The actions of the Monetary Board taken under the NCBA shall be final and executory,
and may not be restrained or set aside by the court except on petition for certiorari on the ground
that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to
amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the
stockholders of record representing the majority of the capital stock within ten (10) days from
receipt by the board of directors of the institution of the order directing receivership, liquidation
or conservatorship.

The designation of a conservator or the appointment of a receiver under the NCBA shall
be vested exclusively with the Monetary Board. Furthermore, the designation of a conservator is
not a precondition to the designation of a receiver (Sec. 30, NCBA)

The purpose of these provisions is to enable the Central Bank, as the entity charged with
the responsibility of maintaining the stability of the banking and monetary systems of the
country, to take the necessary steps against any banking institution whose continued operation
may cause prejudice to its depositors and creditors, and the general public as well.38 It must be
noted that R.A. No. 10142 or the Financial Rehabilitation and Insolvency Act (FRIA) of 2010
excludes banks and insurance companies from its coverage.

Capital and liquidity compared:

Capital and liquidity are distinct but related concepts. Each plays an essential role in
understanding a bank's viability and solvency.

Liquidity is a measure of the ability and ease with which assets can be converted to cash.
Liquid assets are those that can be converted to cash quickly if needed to meet financial
obligations; examples of liquid assets generally include cash, central bank reserves, and
government debt. To remain viable, a financial institution must have enough liquid assets to meet
its near-term obligations, such as withdrawals by depositors.

Capital acts as a financial cushion to absorb unexpected losses and is the difference
between all of a firm's assets and its liabilities. To remain solvent, the value of a firm's assets
must exceed its liabilities.39

38
Philippine Veterans Bank Employees Union-NUBE, et al., vs. The Philippine Veterans Bank, et al., G.R. No.
67125, August 24, 1990.
39
www.federalreserve.gov
 43

Test of insolvency:

Insolvent shall refer to the financial condition of a debtor that is generally unable to pay
its or his liabilities as they fall due in the ordinary course of business or has liabilities that are
greater than its or his assets.40

The test of insolvency laid down in Section 29 of the Central Bank Act is measured by
determining whether the realizable assets of a bank are less than its liabilities. Hence, a bank is
solvent if the fair cash value of all its assets, realizable within a reasonable time by a reasonable
prudent person, would equal or exceed its total liabilities exclusive of stock liability; but if such
fair cash value so realizable is not sufficient to pay such liabilities within a reasonable time, the
bank is insolvent. (Gillian v. State, 194 N.E. 360, 363, 207 Ind. 661). Stated in other words, the
insolvency of a bank occurs when the actual cash market value of its assets is insufficient to pay
its liabilities, not considering capital stock and surplus which are not liabilities for such purpose
(Exley v. Harris, 267 p. 970, 973,126 Kan. 302; Alexander v. Llewellyn, Mo. App., 70 S.W. 2n
115,117).41

CESSATION OF BANKING BUSINESS

Nature of a liquidation proceeding:

A liquidation proceeding resembles the proceeding for the settlement of estate of

deceased persons under Rules 73 to 91 of the Rules of Court. The two have a common purpose:
the determination of all the assets and the payment of all the debts and liabilities of the insolvent
corporation or the estate. The liquidator and the administrator or executor are both charged with
the assets for the benefit of the claimants. In both instances, the liability of the corporation and
the estate is not disputed. The court's concern is with the declaration of creditors and their
rights and the determination of their order of payment

A liquidation proceeding is a single proceeding which consists of a number of cases

properly classified as "claims." It is basically a two-phased proceeding. The first phase is
concerned with the approval and disapproval of claims. Upon the approval of the petition
seeking the assistance of the proper court in the liquidation of a closed entity, all money claims
against the bank are required to be filed with the liquidation court. This phase may end with the
declaration by the liquidation court that the claim is not proper or without basis. On the other
hand, it may also end with the liquidation court allowing the claim. In the latter case, the claim
shall be classified whether it is ordinary or preferred, and thereafter included Liquidator. In either
case, the order allowing or disallowing a particular claim is final order, and may be appealed by
the party aggrieved thereby.

40
Section 4(p), RA No. 10142 (FRIA).
41
Banco Filipino Savings and Mortgage Bank vs. The Monetary Board, et al., G.R. No. 70054, December 11,
1991.
 44

The second phase involves the approval by the Court of the distribution plan prepared by
the duly appointed liquidator. The distribution plan specifies in detail the total amount available
for distribution to creditors whose claims were earlier allowed. The Order finally disposes of the
issue of how much property is available for disposal. Moreover, it ushers in the final phase of the
liquidation proceeding - payment of all allowed claims in accordance with the order of legal
priority and the approved distribution plan.42

Grounds and procedures for placing a bank under receivership or liquidation:

Sections 68 and 69 of the GBL provide:

Section 68. Voluntary Liquidation. - In case of voluntary

liquidation of any bank organized under the laws of the
Philippines, or of any branch or office in the Philippines of a
foreign bank, written notice of such liquidation shall be sent to the
Monetary Board before such liquidation shall be sent to the
Monetary Board before such liquidation is undertaken, and the
Monetary Board shall have the right to intervene and take such
steps as may be necessary to protect the interests of creditors. (86)

Section 69. Receivership and Involuntary Liquidation. -

The grounds and procedures for placing a bank under receivership
or liquidation, as well as the powers and duties of the receiver or
liquidator appointed for the bank shall be governed by the
provisions of Sections 30, 31, 32, and 33 of the New Central Bank
Act: Provided, That the petitioner or plaintiff files with the clerk or
judge of the court in which the action is pending a bond, executed
in favor of the Bangko Sentral, in an amount to be fixed by the
court. This Section shall also apply to the extent possible to the
receivership and liquidation proceedings of quasi-banks. (n)

Sections 30, 31, 32 and 33 of the NCBA state:

Section 30. Proceedings in Receivership and

Liquidation. - Whenever, upon report of the head of the
supervising or examining department, the Monetary Board finds
that a bank or quasi-bank:

(a) is unable to pay its liabilities as they become due in the

ordinary course of business: Provided, That this shall not include
inability to pay caused by extraordinary demands induced by
financial panic in the banking community;

42
Pacific Banking Corporation Employees Organization, et al. vs. Honorable Court of Appeals, et al., GR No.
109373, March 20, 1995.
 45

(b) has insufficient realizable assets, as determined by the Bangko

Sentral, to meet its liabilities; or

(c) cannot continue in business without involving probable losses

to its depositors or creditors; or

(d) has willfully violated a cease and desist order under Section 37
that has become final, involving acts or transactions which amount
to fraud or a dissipation of the assets of the institution; in which
cases, the Monetary Board 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.

For a quasi-bank, any person of recognized competence in

banking or finance may be designed as receiver.

The receiver shall immediately gather and take charge of

all the assets and liabilities of the institution, administer the same
for the benefit of its creditors, and exercise the general powers of a
receiver under the Revised Rules of Court but shall not, with the
exception of administrative expenditures, pay or commit any act
that will involve the transfer or disposition of any asset of the
institution: Provided, That the receiver may deposit or place the
funds of the institution in non-speculative investments. The
receiver shall determine as soon as possible, but not later than
ninety (90) days from take over, whether the institution may be
rehabilitated or otherwise placed in such a condition so that it may
be permitted to resume business with safety to its depositors and
creditors and the general public: Provided, That any determination
for the resumption of business of the institution shall be subject to
prior approval of the Monetary Board.

If the receiver determines that the institution cannot be

rehabilitated or permitted to resume business in accordance with
the next preceding paragraph, the Monetary Board shall notify in
writing the board of directors of its findings and direct the receiver
to proceed with the liquidation of the institution. The receiver
shall:

(1) file ex parte with the proper regional trial court, and without
requirement of prior notice or any other action, a petition for
assistance in the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine Deposit Insurance
Corporation for general application to all closed banks. In case of
 46

quasi-banks, the liquidation plan shall be adopted by the Monetary

Board. Upon acquiring jurisdiction, the court shall, upon motion by
the receiver after due notice, adjudicate disputed claims against the
institution, assist the enforcement of individual liabilities of the
stockholders, directors and officers, and decide on other issues as
may be material to implement the liquidation plan adopted. The
receiver shall pay the cost of the proceedings from the assets of the
institution.

(2) convert the assets of the institutions to money, dispose of the

same to creditors and other parties, for the purpose of paying the
debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code of the
Philippines and he may, in the name of the institution, and with the
assistance of counsel as he may retain, institute such actions as
may be necessary to collect and recover accounts and assets of, or
defend any action against, the institution. The assets of an
institution under receivership or liquidation shall be deemed in
custodia legis in the hands of the receiver and shall, from the
moment the institution was placed under such receivership or
liquidation, be exempt from any order of garnishment, levy,
attachment, or execution.

The actions of the Monetary Board taken under this section

or under Section 29 of this Act shall be final and executory, and
may not be restrained or set aside by the court except on petition
for certiorari on the ground that the action taken was in excess of
jurisdiction or with such grave abuse of discretion as to amount to
lack or excess of jurisdiction. The petition for certiorari may only
be filed by the stockholders of record representing the majority of
the capital stock within ten (10) days from receipt by the board of
directors of the institution of the order directing receivership,
liquidation or conservatorship.

The designation of a conservator under Section 29 of this

Act or the appointment of a receiver under this section shall be
vested exclusively with the Monetary Board. Furthermore, the
designation of a conservator is not a precondition to the
designation of a receiver.

Section 31. Distribution of Assets. - In case of liquidation

of a bank or quasi-bank, after payment of the cost of proceedings,
including reasonable expenses and fees of the receiver to be
allowed by the court, the receiver shall pay the debts of such
institution, under order of the court, in accordance with the rules
 47

on concurrence and preference of credit as provided in the Civil

Code.

Section 32. Disposition of Revenues and Earnings. - All

revenues and earnings realized by the receiver in winding up the
affairs and administering the assets of any bank or quasi-bank
within the purview of this Act shall be used to pay the costs, fees
and expenses mentioned in the preceding section, salaries of such
personnel whose employment is rendered necessary in the
discharge of the liquidation together with other additional expenses
caused thereby. The balance of revenues and earnings, after the
payment of all said expenses, shall form part of the assets available
for payment to creditors.

Section 33. Disposition of Banking Franchise. - The

Bangko Sentral may, if public interest so requires, award to an
institution, upon such terms and conditions as the Monetary Board
may approve, the banking franchise of a bank under liquidation to
operate in the area where said bank or its branches were previously
operating: Provided, That whatever proceeds may be realized from
such award shall be subject to the appropriate exclusive disposition
of the Monetary Board.

Exclusive jurisdiction of the Monetary Board:

On the strength of these provisions, it is the Monetary Board that exercises exclusive
jurisdiction over proceedings for receivership of banks.

Crystal clear in Section 30 is the provision that says the appointment of a receiver under
this section shall be vested exclusively with the Monetary Board. The term exclusively connotes
that only the Monetary Board can resolve the issue of whether a bank is to be placed under
receivership and, upon an affirmative finding, it also has authority to appoint a receiver. This is
further affirmed by the fact that the law allows the Monetary Board to take action summarily and
without need for prior hearing.

And, as a clincher, the law explicitly provides that actions of the Monetary Board taken
under this section or under Section 29 of this Act shall be final and executory, and may not be
restrained or set aside by the court except on a petition for certiorari on the ground that the
action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to
lack or excess of jurisdiction.43

There is no doubt that the Central Bank Act vests authority upon the Central Bank and
Monetary Board to take charge and administer the monetary and banking system of the country
and this authority includes the power to examine and determine the financial condition of banks
43
Ana Maria A. Koruga vs. Teodoro O. Arcenas, Jr., et al., GR Nos. 168332 and 169053, June 19, 2009.
 48

for purposes provided for by law, such as for the purpose of closure on the ground of insolvency
stated in Section 29 of the Central Bank Act. But express grants of power to public officers
should be subjected to a strict interpretation, and will be construed as conferring those powers
which are expressly imposed or necessarily implied (Floyd Mechem, Treatise on the Law of
Public Offices and Officers, p. 335).44

Concept of insolvency:

In Banco Filipino Savings and Mortgage Bank case, supra, the Supreme Court held:

In this case, there can be no clearer explanation of the

concept of insolvency than what the law itself states. Sec. 29 of the
Central Bank Act provides that insolvency under the Act, shall be
understood to mean that "the realizable assets of a bank or a non-
bank financial intermediary performing quasi-banking functions as
determined by the Central Bank are insufficient to meet its
liabilities."

Hence, the contention of the Central Bank that a bank's true

financial condition is synonymous with the terms "unimpaired
capital and surplus," "combined capital accounts" and net worth
after deducting valuation reserves from the capital, surplus and
unretained earnings, citing Sec. 5 of RA 337 is misplaced.

Firstly, it is clear from the law that a solvent bank is one in

which its assets exceed its liabilities. It is a basic accounting
principle that assets are composed of liabilities and capital. The
term "assets" includes capital and surplus" (Exley v. Harris, 267 p.
970, 973, 126 Kan., 302).

On the other hand, the term "capital" includes common and

preferred stock, surplus reserves, surplus and undivided profits.
(Manual of Examination Procedures, Report of Examination on
Department of Commercial and Savings Banks, p. 3-C). If
valuation reserves would be deducted from these items, the result
would merely be the networth or the unimpaired capital and
surplus of the bank applying Sec. 5 of RA 337 but not the total
financial condition of the bank.

Secondly, the statement of assets and liabilities is used in

balance sheets. Banks use statements of condition to reflect the
amounts, nature and changes in the assets and liabilities. The
Central Bank Manual of Examination Procedures provides a
44
Banco Filipino Savings and Mortgage Bank, supra.
 49

format or checklist of a statement of condition to be used by

examiners as guide in the examination of banks. The format
enumerates the items which will compose the assets and liabilities
of a bank. Assets include cash and those due from banks, loans,
discounts and advances, fixed assets and other property owned or
acquired and other miscellaneous assets. The amount of loans,
discounts and advances to be stated in the statement of condition as
provided for in the manual is computed after deducting valuation
reserves when deemed necessary.

On the other hand, liabilities are composed of demand

deposits, time and savings deposits, cashier's, manager's and
certified checks, borrowings, due to head office, branches; and
agencies, other liabilities and deferred credits (Manual of
Examination Procedure, p. 9). The amounts stated in the balance
sheets or statements of condition including the computation of
valuation reserves when justified, are based however, on the
assumption that the bank or company will continue in business
indefinitely, and therefore, the networth shown in the statement is
in no sense an indication of the amount that might be realized if the
bank or company were to be liquidated immediately (Prentice Hall
Encyclopedic Dictionary of Business Finance, p. 48). Further,
based on respondents' submissions, the allowance for probable
losses on loans and discounts represents the amount set up against
current operations to provide for possible losses arising from non-
collection of loans and advances, and this account is also referred
to as valuation reserve (p. 9, Objections to Santiago report).

Clearly, the statement of condition which contains a

provision for recommended valuation reserves should not be used
as the ultimate basis to determine the solvency of an institution for
the purpose of termination of its operations.

Respondents acknowledge that under the said CB manual,

CB examiners must recommend valuation reserves, when
warranted, to be set up against the corresponding asset account (p.
8, Objections to Santiago report). Tiaoqui himself, as author of the
report recommending the closure of petitioner bank admits that the
valuation reserves should still be discussed with the petitioner bank
in compliance with standard examination procedure. Hence, for the
Monetary Board to unilaterally deduct an uncertain amount as
valuation reserves from the assets of a bank and to conclude
therefrom without sufficient basis that the bank is insolvent, would
be totally unjust and unfair.

Liquidation under the Corporation Code and New Central Bank Act:
 50

Section 30 of the New Central Bank Act lays down the proceedings for receivership and
liquidation of a bank. The said provision is silent as regards the securing of a tax clearance from
the BIR. The omission, nonetheless, cannot apply by analogy the tax clearance requirement of
the SEC, as stated in Section 52(C) of the Tax Code of 1997 and BIR-SEC Regulations No. 1,
since, again, the dissolution of a corporation by the SEC is a totally different proceeding from the
receivership and liquidation of a bank by the BSP.

It should be noted that there are substantial differences in the procedure for involuntary
dissolution and liquidation of a corporation under the Corporation Code, and that of a banking
corporation under the New Central Bank Act, so that the requirements in one cannot simply be
imposed in the other.

Under the Corporation Code, the SEC may dissolve a corporation, upon the filing of
a verified complaint and after proper notice and hearing, on grounds provided by existing laws,
rules, and regulations. Upon receipt by the corporation of the order of suspension from the SEC,
it is required to notify and submit a copy of the said order, together with its final tax return, to the
BIR.The SEC is also required to furnish the BIR a copy of its order of suspension. The BIR is
supposed to issue a tax clearance to the corporation within 30 days from receipt of the foregoing
documentary requirements. The SEC shall issue the final order of dissolution only after the
corporation has submitted its tax clearance; or in case of involuntary dissolution, the SEC may
proceed with the dissolution after 30 days from receipt by the BIR of the documentary
requirements without a tax clearance having been issued. The corporation is allowed to continue
as a body corporate for three years after its dissolution, for the purpose of prosecuting and
defending suits by or against it, to settle and close its affairs, and to dispose of and convey its
property and distribute its assets, but not for the purpose of continuing its business. The
corporation may undertake its own liquidation, or at any time during the said three years, it may
convey all of its property to trustees for the benefit of its stockholders, members, creditors, and
other persons in interest.

In contrast, the Monetary Board may summarily and without need for prior hearing,
forbid the banking corporation from doing business in the Philippines, for causes enumerated in
Section 30 of the New Central Bank Act; and appoint the PDIC as receiver of the bank. PDIC
shall immediately gather and take charge of all the assets and liabilities of the closed bank and
administer the same for the benefit of its creditors. The summary nature of the procedure for the
involuntary closure of a bank is especially stressed in Section 30 of the New Central Bank Act,
which explicitly states that the actions of the Monetary Board under the said Section or Section
29 shall be final and executory, and may not be restrained or set aside by the court except on a
Petition for Certiorari filed by the stockholders of record of the bank representing a majority of
the capital stock. PDIC, as the appointed receiver, shall file ex parte with the proper RTC, and
without requirement of prior notice or any other action, a petition for assistance in the
liquidation of the bank. The bank is not given the option to undertake its own liquidation.45

45
In Re: Petition for Assistance in the Liquidation of the Rural Bank of Bokod (Benguet), Inc. Philippine Deposit
Insurance Corporation vs. Bureau of Internal Revenue, GR No. 158261, December 18, 2006.
 51

THE NEW CENTRAL BANK ACT (NCBA)

Republic Act No. 7653

BSP as the central monetary authority:

The State shall maintain a central monetary authority that shall function and operate as an
independent and accountable body corporate in the discharge of its mandated responsibilities
concerning money, banking and credit. In line with this policy, and considering its unique
functions and responsibilities, the central monetary authority established under the NCBA, while
being a government-owned corporation, shall enjoy fiscal and administrative autonomy (Sec. 1,
NCBA). The independent central monetary authority, a body corporate, shall be known as the
Bangko Sentral ng Pilipinas [BSP] (Sec. 2, NCBA).
.
The capital of the Bangko Sentral shall be Fifty billion pesos (P50,000,000,000), to be
fully subscribed by the Government of the Republic (ibid).

Responsibility and primary objective:

The Bangko Sentral shall provide policy directions in the areas of money, banking, and
credit. It shall have supervision over the operations of banks and exercise such regulatory powers
over the operations of finance companies and non-bank financial institutions performing quasi-
banking functions (quasi-banks), and institutions performing similar functions.

The primary objective of the Bangko Sentral is to maintain price stability conducive to a
balanced and sustainable growth of the economy. It shall also promote and maintain monetary
stability and the convertibility of the peso (Sec. 3, NCBA).

Corporate powers of BSP:

The Bangko Sentral is authorized to adopt, alter, and use a corporate seal which shall be
judicially noticed; to enter into contracts; to lease or own real and personal property, and to sell
or otherwise dispose of the same; to sue and be sued; and otherwise to do and perform any and
all things that may be necessary or proper to carry out the purposes of NCBA.

The Bangko Sentral may acquire and hold such assets and incur such liabilities in
connection with its operations authorized by the provisions of the NCBA, or as are essential to
the proper conduct of such operations.

The Bangko Sentral may compromise, condone or release, in whole or in part, any claim
of or settled liability to the Bangko Sentral, regardless of the amount involved, under such terms
 52

and conditions as may be prescribed by the Monetary Board to protect the interests of the
Bangko Sentral (Sec. 5, NCBA).

Composition of the Monetary Board:

The powers and functions of the Bangko Sentral shall be exercised by the Bangko Sentral
Monetary Board, hereafter referred to as the Monetary Board, composed of seven (7) members
appointed by the President of the Philippines for a term of six (6) years.

The seven (7) members are:

(a) the Governor of the Bangko Sentral, who shall be the Chairman of the Monetary
Board. The Governor of the Bangko Sentral shall be head of a department and his appointment
shall be subject to confirmation by the Commission on Appointments. Whenever the Governor is
unable to attend a meeting of the Board, he shall designate a Deputy Governor to act as his
alternate: Provided, That in such event, the Monetary Board shall designate one of its members
as acting Chairman;

(b) a member of the Cabinet to be designated by the President of the Philippines.

Whenever the designated Cabinet Member is unable to attend a meeting of the Board, he shall
designate an Undersecretary in his Department to attend as his alternate; and

(c) five (5) members who shall come from the private sector, all of whom shall serve full-
time (Sec. 6, NCBA).

Monetary Board is a quasi-judicial agency:

The nature of the BSP Monetary Board as a quasi-judicial agency, and the character of its
determination of whether or not appropriate sanctions may be imposed upon erring banks, as an
exercise of quasi-judicial function, have been recognized by the court.

Undoubtedly, the BSP Monetary Board is a quasi-judicial agency exercising quasi-

judicial powers or functions. The BSP Monetary Board is an independent central monetary
authority and a body corporate with fiscal and administrative autonomy, mandated to provide
policy directions in the areas of money, banking, and credit. It has the power to issue subpoena,
to sue for contempt those refusing to obey the subpoena without justifiable reason, to administer
oaths and compel presentation of books, records and others, needed in its examination, to impose
fines and other sanctions and to issue cease and desist order. Section 37 of Republic Act No.
7653, in particular, explicitly provides that the BSP Monetary Board shall exercise its discretion
in determining whether administrative sanctions should be imposed on banks and quasi-banks,
which necessarily implies that the BSP Monetary Board must conduct some form of
investigation or hearing regarding the same.46

46
The Honorable Monetary Board, et al. vs. Philippine Veterans Bank, GR No. 189571, January 21, 2015.
 53

Exercise of authority by the Monetary Board:

In the exercise of its authority, the Monetary Board shall:

(a) issue rules and regulations it considers necessary for the effective discharge of the
responsibilities and exercise of the powers vested upon the Monetary Board and the Bangko
Sentral. The rules and regulations issued shall be reported to the President and the Congress
within fifteen (15) days from the date of their issuance;

(b) direct the management, operations, and administration of the Bangko Sentral,
reorganize its personnel, and issue such rules and regulations as it may deem necessary or
convenient for this purpose. The legal units of the Bangko Sentral shall be under the exclusive
supervision and control of the Monetary Board;

(c) establish a human resource management system which shall govern the selection,
hiring, appointment, transfer, promotion, or dismissal of all personnel. Such system shall aim to
establish professionalism and excellence at all levels of the Bangko Sentral in accordance with
sound principles of management.

(d) adopt an annual budget for and authorize such expenditures by the Bangko Sentral as
are in the interest of the effective administration and operations of the Bangko Sentral in
accordance with applicable laws and regulations; and

(e) indemnify its members and other officials of the Bangko Sentral, including personnel
of the departments performing supervision and examination functions against all costs and
expenses reasonably incurred by such persons in connection with any civil or criminal action,
suit or proceedings to which he may be, or is, made a party by reason of the performance of his
functions or duties, unless he is finally adjudged in such action or proceeding to be liable for
negligence or misconduct (Sec. 15, NCBA).

Exclusive issue power of BSP:

The Bangko Sentral shall have the sole power and authority to issue currency47, within
the territory of the Philippines. No other person or entity, public or private, may put into
circulation notes, coins or any other object or document which, in the opinion of the Monetary
Board, might circulate as currency, nor reproduce or imitate the facsimiles of Bangko Sentral
notes without prior authority from the Bangko Sentral.

47
Currency means all Philippine notes and coons issued or circulating in accordance with the NCBA (Sec. 49,
NCBA).
 54

The Monetary Board may issue such regulations as it may deem advisable in order to
prevent the circulation of foreign currency or of currency substitutes as well as to prevent the
reproduction of facsimiles of Bangko Sentral notes.

The Bangko Sentral shall have the authority to investigate, make arrests, conduct
searches and seizures in accordance with law, for the purpose of maintaining the integrity of the
currency.

Violation of this provision or any regulation issued by the Bangko Sentral pursuant
thereto shall constitute an offense punishable by imprisonment of not less than five (5) years but
not more than ten (10) years. In case the Revised Penal Code provides for a greater penalty, then
that penalty shall be imposed (Sec. 50, NCBA).

Liability for notes and coins:

Notes and coins issued by the Bangko Sentral shall be liabilities of the Bangko Sentral
and may be issued only against, and in amounts not exceeding, the assets of the Bangko Sentral.
Said notes and coins shall be a first and paramount lien on all assets of the Bangko Sentral.

The Bangko Sentral's holdings of its own notes and coins shall not be considered as part
of its currency issue and, accordingly, shall not form part of the assets or liabilities of the Bangko
Sentral (Sec. 51, NCBA).

Legal tender power:

All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the
Government of the Republic of the Philippines and shall be legal tender in the Philippines for all
debts, both public and private (Sec. 52, NCBA).

Pursuant to Section 52 of Republic Act No. 7653 and Monetary Board Resolution No.
862 dated 6 July 2006, the maximum amount of coins to be considered as legal tender is adjusted
as follows:

1. One thousand pesos (P1,000.00) for denominations of 1-Piso, 5-Piso and 10-Piso coins;
and
2. One hundred pesos (P100.00) for denominations of 1-sentimo, 5-sentimo, 10-sentimo,
and 25-sentimo coins (BSP Circular No. 537, Series of 2006).

Characteristics of the currency:

The Monetary Board, with the approval of the President of the Philippines, shall
prescribe the denominations, dimensions, designs, inscriptions and other characteristics of notes
issued by the Bangko Sentral, provided, however, that said notes shall state that they are
 55

liabilities of the Bangko Sentral and are fully guaranteed by the Government of the Republic of
the Philippines. Said notes shall bear the signatures, in facsimile, of the President of the
Philippines and of the Governor of the Bangko Sentral.

Similarly, the Monetary Board, with the approval of the President of the Philippines, shall
prescribe the weight, fineness, designs, denominations and other characteristics of the coins
issued by the Bangko Sentral. In the minting of coins, the Monetary Board shall give full
consideration to the availability of suitable metals and to their relative prices and cost of minting
(Sec. 53, NCBA).

Interconvertibility of currency:
The Bangko Sentral shall exchange, on demand and without charge, Philippine currency
of any denomination for Philippine notes and coins of any other denomination requested. If for
any reason the Bangko Sentral is temporarily unable to provide notes or coins of the
denominations requested, it shall meet its obligations by delivering notes and coins of the
denominations which most nearly approximate those requested (Se. 55, NCBA).