1
Letters of Credit
A. Definition and Nature of Letter of Credit
A letter of credit is a financial device developed
by merchants as a convenient and relatively safe
mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid,
and a buyer, who wants to have control of the
goods before paying. To break the impasse, the
buyer may be required to contract a bank to issue
a letter of credit in favor of the seller so that, by
virtue of the latter of credit, the issuing bank can
authorize the seller to draw drafts and engage to
pay them upon their presentment simultaneously
with the tender of documents required by the letter
of credit. The buyer and the seller agree on what
documents are to be presented for payment, but
ordinarily they are documents of title evidencing or
attesting to the shipment of the goods to the buyer.
Once the credit is established, the seller ships
the goods to the buyer and in the process secures
the required shipping documents or documents of
title. To get paid, the seller executes a draft and
presents it together with the required documents
to the issuing bank. The issuing bank redeems the
draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with
what the letter of credit requires. The bank then
obtains possession of the documents upon paying
the seller. The transaction is completed when the
buyer reimburses the issuing bank and acquires
the documents entitling him to the goods. Under
this arrangement, the seller gets paid only if he
delivers the documents of title over the goods,
while the buyer acquires said documents and
control over the goods only after reimbursing the
bank.
What characterizes letters of credit, as
distinguished from other accessory contracts, is
the engagement of the issuing bank to pay the
seller of the draft and the required shipping
documents are presented to it. In turn, this
arrangement assures the seller of prompt payment,
independent of any breach of the main sales
contract. By this so-called "independence
principle," the bank determines compliance with
the letter of credit only by examining the shipping
documents presented; it is precluded from
determining whether the main contract is actually
accomplished or not.
There would at least be three (3) parties: (a) the
buyer, who procures the letter of credit and obliges
himself to reimburse the issuing bank upon
receipts of the documents of title; (b) the bank
issuing the letter of credit, which undertakes to pay
the seller upon receipt of the draft and proper
document of titles and to surrender the documents
to the buyer upon reimbursement; and, (c) the
seller, who in compliance with the contract of sale
ships the goods to the buyer and delivers the
documents of title and draft to the issuing bank to
recover payment.
DIMAINPOGINOTES
The number of the parties, not infrequently and
almost invariably in international trade practice,
may be increased. Thus, the services of an
advising (notifying) bank may be utilized to convey
to the seller the existence of the credit; or, of a
confirming bank which will lend credence to the
letter of credit issued by a lesser known issuing
bank; or, of a paying bank, which undertakes to
encash the drafts drawn by the exporter. Further,
instead of going to the place of the issuing bank to
claim payment, the buyer may approach another
bank, termed the negotiating bank, to have the
draft discounted.
Being a product of international commerce, the
impact of this commercial instrument transcends
national boundaries, and it is thus not uncommon
to find a dearth of national law that can adequately
provide for its governance. This country is no
exception. Our own Code of Commerce basically
introduces only its concept under Articles 567-572,
inclusive, thereof. It is no wonder then why great
reliance has been placed on commercial usage and
practice, which, in any case, can be justified by the
universal acceptance of the autonomy of contract
rules. The rules were later developed into what is
now known as the Uniform Customs and Practice
for Documentary Credits ("U.C.P.") issued by the
International Chamber of Commerce. It is by no
means a complete text by itself, for, to be sure,
there are other principles, which, although part of
lex mercatoria, are not dealt with the U.C.P.
We held in Feati Bank & Trust Company v.
Court of Appeals that the concept of guarantee
vis--vis the concept of an irrevocable letter of credit
are inconsistent with each other. The guarantee
theory destroys the independence of the banks
responsibility from the contract upon which it was
opened and the nature of both contracts is
mutually in conflict with each other. In contracts of
guarantee, the guarantors obligation is merely
collateral and it arises only upon the default of the
person primarily liable. On the other hand, in an
irrevocable letter of credit, the bank undertakes a
primary obligation. We have also defined a letter of
credit as an engagement by a bank or other person
made at the request of a customer that the issuer
shall honor drafts or other demands of payment
upon compliance with the conditions specified in
the credit.
Taking into consideration our own rulings on
the nature of letters of credit and the customs and
usage developed over the years in the banking and
commercial practice of letters of credit, we hold
that except when a letter of credit specifically
stipulates otherwise, the obligation of the banks
issuing letters of credit are solidary with that of the
person or entity requesting for its issuance, the
same being a direct, primary, absolute and definite
undertaking to pay the beneficiary upon the
presentation of the set of documents required
therein. Hence, Section 6 (b) Rule 4 of the
Interim Rules of Procedure for Corporate
Rehabilitation is not applicable.

Note: In Corporate rehabilitation under FRIA, the
suspension of claim may only refer to that
guarantors/surety which are not solidary liable
with the corporation. Since the liability of the
issuing bank in a letters of credit is primary and
direct, it cannot be suspended. (MWSS vs. Daway)
B. Parties to a Letter of Credit
There are at least three parties in a Letter of
Credit Transaction:
a. The buyer – who procures the letter of
credit and obliges himself to reimburse the
issuing bank upon receipt of the documents
of title;
b. The Seller – Who in compliance with the
contract of sale ships the goods to the
buyer and delivers the documents of title
and draft to the issuing bank to recover
payment; and
c. The Issuing Bank – The bank issuing the
letter of credit. It undertakes to pay the
seller upon receipt of the draft and proper
documents of titles and to surrender the
documents to the buyer upon
reimbursement.
Other Parties that may be included:
1. Notifying bank/Advising bank, a
correspondent bank which assumes no liability
except to notify and/or transmit to the beneficiary
the existence of the letter of credit.
2. Negotiating bank, on the other hand, is a
correspondent bank which buys or discounts a
draft under the letter of credit. Its liability is
dependent upon the stage of the negotiation. If
before negotiation, it has no liability with respect to
the seller but after negotiation, a contractual
relationship will then prevail between the
negotiating bank and the seller.
3. Confirming bank, the correspondent bank
assumes a direct obligation to the seller and its
liability is a primary one as if the correspondent
bank itself had issued the letter of credit.
As advising bank, correspondent bank
assumes no liability in the letters of credit
In the case of Bank of America, NT and
SA vs. CA, wherein petitioner Bank of America
acted as a mere advising bank for the letter of
credit issued by Bank Ayudhya for the benefit of
Inter-resin Industrial Corporation for the sale of
plastic robe and agricultural tiles. Inter-Resin
made a partial availment of the Letter of Credit
after presentment of the required documents to
Bank of America. However, on the second
availment, it was discovered that the LC issued is
fraudulent. So BA sued Inter-resin for
reimbursement for its account which was debited
by Bank Ayudhya. On its answer, Inter-resin
alleged the negligence of BA for not verifying first
DIMAINPOGINOTES
2
the authenticity of LC to Bank of Ayudyha before
payment.
The SC held that it cannot seriously be
disputed, looking at this case, that Bank of
America has, in fact, only been an advising, not
confirming, bank, and this much is clearly evident,
among other things, by the provisions of the letter
of credit itself, the petitioner bank's letter of advice,
its request for payment of advising fee, and the
admission of Inter-Resin that it has paid the same.
That Bank of America has asked Inter-Resin to
submit documents required by the letter of credit
and eventually has paid the proceeds thereof, did
not obviously make it a confirming bank. The fact,
too, that the draft required by the letter of credit is
to be drawn under the account of General
Chemicals (buyer) only means the same had to be
presented to Bank of Ayudhya (issuing bank) for
payment. It may be significant to recall that the
letter of credit is an engagement of the issuing
bank, not the advising bank, to pay the draft.
As an advising or notifying bank, Bank of
America did not incur any obligation more than
just notifying Inter-Resin of the letter of credit
issued in its favor, let alone to confirm the letter of
credit. The bare statement of the bank employees,
aforementioned, in responding to the inquiry made
by Atty. Tanay, Inter-Resin's representative, on the
authenticity of the letter of credit certainly did not
have the effect of novating the letter of credit and
Bank of America's letter of advise, nor can it justify
the conclusion that the bank must now assume
total liability on the letter of credit. Indeed, Inter-
Resin itself cannot claim to have been all that free
from fault. As the seller, the issuance of the letter
of credit should have obviously been a great
concern to it. It would have, in fact, been strange if
it did not, prior to the letter of credit, enter into a
contract, or negotiated at the every least, with
General Chemicals. In the ordinary course of
business, the perfection of contract precedes the
issuance of a letter of credit.
Bringing the letter of credit to the attention
of the seller is the primordial obligation of an
advising bank. The view that Bank of America
should have first checked the authenticity of the
letter of credit with bank of Ayudhya, by using
advanced mode of business communications,
before dispatching the same to Inter-Resin finds no
real support in U.C.P. Article 18 of the U.C.P.
states that: "Banks assume no liability or
responsibility for the consequences arising out of
the delay and/or loss in transit of any messages,
letters or documents, or for delay, mutilation or
other errors arising in the transmission of any
telecommunication . . ." As advising bank, Bank of
America is bound only to check the "apparent
authenticity" of the letter of credit, which it did.
Clarifying its meaning, Webster's Ninth New
Collegiate Dictionary explains that the word
"APPARENT suggests appearance to unaided
senses that is not or may not be borne out by more
rigorous examination or greater knowledge."

Likewise, in the case of Feati Bank & Trust
Company vs. CA, (The sale of 2,000 cubic meters
of lauan logs at $27.00 per cubic meter FOB made
by Villaluz to Christiansen secured by letters of
credit) the SC held that Feati is a mere notifying
bank not a confirming bank. In this case, Feati was
instructed by the issuing bank, Security Pacific
National Bank of Los Angeles to “forward the
enclosed letter of credit to the beneficiary.”
A notifying bank is not a privy to the
contract of sale between the buyer and the seller,
its relationship is only with that of the issuing
bank and not with the beneficiary to whom he
assumes no liability. It follows therefore that when
the petitioner refused to negotiate with the private
respondent, the latter has no cause of action
against the petitioner for the enforcement of his
rights under the letter.
Since the Feati was only a notifying bank,
its responsibility was solely to notify and/or
transmit the documentary of credit to the private
respondent and its obligation ends there.
At the most, when the petitioner extended
the loan to the private respondent, it assumed the
character of a negotiating bank. Even then, the
petitioner will still not be liable, for a negotiating
bank before negotiation has no contractual
relationship with the seller. Whether therefore the
petitioner is a notifying bank or a negotiating bank,
it cannot be held liable. Absent any definitive proof
that it has confirmed the letter of credit or has
actually negotiated with Feati, the refusal by the
petitioner to accept the tender of the private
respondent is justified.
C. Basic Principles of Letter of Credit
1. Doctrine of Independence
There are at least 3 distinct and independent
contracts involved in a letter of credit namely;
a. The contract of sale between the buyer and
the seller;
b. The contract of the buyer with the issuing
bank; and
c. The letter of credit proper.
Independent principle assures the seller or
benefiacry of prompt payment independent of any
breach of the main contract and precludes the
issuing bank from determining whether the main
contract is actually accomplished or not.
In the case of Transfield Phils. Inc. vs. Luzon
Hydro Corporation et al., the SC in ruling that
the arbitration proceeding pending between the
original parties is not a defense to be invoke by the
applicant (obligor) to prevent the payment by the
issuer of the face value of the LC in favor of the
beneficiary.
The SC held that in the absence of any
particular provision in the Code of Commerce,
commercial transactions shall be governed by
usages and customs generally observed. Article 3
of the UCP provides that credits, by their nature,
DIMAINPOGINOTES
3
are separate transactions from the sales or other
contract(s) on which they may be based and banks
are in no way concerned with or bound by such
contract(s), even if any reference whatsoever to
such contract(s) is included in the credit.
Consequently, the undertaking of a bank to pay,
accept and pay draft(s) or negotiate and/or fulfill
any other obligation under the credit is not subject
to claims or defenses by the applicant resulting
from his relationships with the issuing bank or the
beneficiary. A beneficiary can in no case avail
himself of the contractual relationships existing
between the banks or between the applicant and
the issuing bank.
Thus, the engagement of the issuing bank
is to pay the seller or beneficiary of the credit once
the draft and the required documents are
presented to it. The so-called independence
principle assures the seller or the beneficiary of
prompt payment independent of any breach of the
main contract and precludes the issuing bank from
determining whether the main contract is actually
accomplished or not. Under this principle, banks
assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general
and/or particular conditions stipulated in the
documents or superimposed thereon, nor do they
assume any liability or responsibility for the
description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods
represented by any documents, or for the good
faith or acts and/or omissions, solvency,
performance or standing of the consignor, the
carriers, or the insurers of the goods, or any other
person whomsoever.
The independent nature of the letter of credit
may be: (a) independence in toto where the credit is
independent from the justification aspect and is a
separate obligation from the underlying agreement
like for instance a typical standby; or (b)
independence may be only as to the justification
aspect like in a commercial letter of credit or
repayment standby, which is identical with the
same obligations under the underlying agreement.
In both cases the payment may be enjoined if in
the light of the purpose of the credit the payment
of the credit would constitute fraudulent abuse of
the credit.
In addition to the independence principle, of
course, prudence should have impelled LHC to
await resolution of the pending issues before the
arbitral tribunals prior to taking action to enforce
the Securities. But, as earlier stated, the Turnkey
Contract did not require LHC to do so and,
therefore, it was merely enforcing its rights in
accordance with the tenor thereof. Obligations
arising from contracts have the force of law
between the contracting parties and should be
complied with in good faith. More importantly,
pursuant to the principle of autonomy of contracts
embodied in Article 1306 of the Civil Code,
petitioner could have incorporated in its Contract
with LHC, a proviso that only the final
determination by the arbitral tribunals that default
had occurred would justify the enforcement of the
Securities. However, the fact is petitioner did not
do so; hence, it would have to live with its inaction.

Are issuing bank required or obligated to
investigate as to the breach of contract of the
seller/beneficiary before paying the LC in favor
of the latter?
This is the issue in the case of Bank of the
Philippine Islands vs. De Reny Fabrics
Industries Inc., wherein the SC held in the
negative.
In this case, the buyer (De Reny) (applicant
of the LC) discovered after partial payment of the
requested LC in favor of the J.B Distributing
Company, that the delivered goods of the latter are
fraudulent. The buyer refused to pay the bank.
De Reny cannot shift the burden of loss to the
Bank on account of the violation by their vendor of
its prestation. It was uncontrovertibly proven by
the Bank during the trial below that banks, in
providing financing in international business
transactions such as those entered into by the
appellants, do not deal with the property to be
exported or shipped to the importer, but deal only
with documents.
The existence of a custom in international
banking and financing circles negating any duty on
the part of a bank to verify whether what has been
described in letters of credits or drafts or shipping
documents actually tallies with what was loaded
aboard ship, having been positively proven as a
fact, the appellants are bound by this established
usage. They were, after all, the ones who tapped
the facilities afforded by the Bank in order to
engage in international business.
Under the terms of their Commercial Letter of
Credit Agreements with the Bank, the appellants
agreed that the Bank shall not be responsible for
the “existence, character, quality, quantity,
conditions, packing, value, or delivery of the
property purporting to be represented by
documents; for any difference in character, quality,
quantity, condition, or value of the property from
that expressed in documents,” or for “partial or
incomplete shipment, or failure or omission to ship
any or all of the property referred to in the Credit,”
as well as “for any deviation from instructions,
delay, default or fraud by the shipper or anyone
else in connection with the property the shippers
or vendors and ourselves [purchasers] or any of
us.” Having agreed to these terms, the appellants
have, therefore, no recourse but to comply with
their covenant.
Letters of credit constitutes the primary
obligation and not merely an accessory
contract, of the issuing bank separate from
the underlying contract that it may support.
Consequently, the beneficiary of a LC issued to
secure payment of a loan may collect on its
entirety, even if borrower claims it made
partial payments already.
This was the ruling in the case of Insular
Bank of Asia & America vs. IAC, wherein the
Mendoza obtained a loan with Philamlife, secured
with LC issued by Insular Bank of Asia and
America. Mendoza made partial payments,
however, later on defaulted. Philamlife seek to
recover the amount against IBAA for the issuance
of its LCs. IBAA refused and alleged it is a mere
DIMAINPOGINOTES
4
guarantor and that it was already discharged from
its liability by the partial payment of Mendoza.
The SC ruled that In construing the terms
of a Letter of Credit, as in other contracts, it is the
intention of the parties that must govern. Letters of
credit and contracts for the issuance of such
letters are subject to the same rules of
construction as are ordinary commercial contracts.
They are to receive a reasonable and not a
technical construction and although usage and
custom cannot control express terms in letters of
credit, they are to be construed with reference to
all the surrounding facts and circumstances, to the
particular and often varying terms in which they
may be expressed, the circumstances and
intention of the parties to them, and the usages of
the particular trade of business contemplated.
Unequivocally, the subject standby Letters
of Credit secure the payment of any obligation of
the Mendozas to Philam Life including all interests,
surcharges and expenses thereon but not to exceed
P600,000.00. But while they are a security
arrangement, they are not converted thereby into
contracts of guaranty. That would make them ultra
vires rather than a letter of credit, which is within
the powers of a bank (Section 74[e], RA 337,
General Banking Act). The standby L/Cs are, "in
effect an absolute undertaking to pay the money
advanced or the amount for which credit is given
on the faith of the instrument." They are primary
obligations and not accessory contracts. Being
separate and independent agreements, the
payments made by the Mendozas cannot be added
in computing IBAA's liability under its own
standby letters of credit. Payments made by the
Mendozas directly to Philam Life are in compliance
with their own prestation under the loan
agreements. And although these payments could
result in the reduction of the actual amount which
could ultimately be collected from IBAA, the latter's
separate undertaking under its L/Cs remains.
2. Fraud Exception Principle
It provides that the untruthfulness of a
certificate accompanying a demand for payment
under a standby letter of credit may qualify as
fraud sufficient to support an injunction against
payment. The remedy for fraudulent abuse is an
injunction, which should not be granted unless:
a. There is a clear proof of fraud;
b. Fraud constitutes fraudulent abuse of the
independent purpose of the letter of credit
and not only fraud under the main
agreement; and
c. Irreparable injury might follow if injunction
is not granted or the recovery of damages
would be seriously undermined.
3. Doctrine of Strict Compliance
The issuing bank or the confirming bank, as
the case may be, must examine the Tender
Documents and must make sure that the terms

and conditions of the LC are strictly complied with.
There is no discretion on the part of the bank to
waive any requirement. The tender documents
must not only be complete but they must on their
faces be in compliance with the terms of the Credit.
Documents that are not stipulated as tender
documents will not be examined. (Article 13 UCP)
Trust Receipt Law
A. Definition and Concept of a Trust
Receipt Transaction
A trust receipt is a commercial document
whereby the bank releases the goods in possession
of the entrustee but retains ownership thereof
while the entrustee shall sell the goods and apply
the proceeds for the full payment of his liability
with the bank. It is a security arrangement to
which bank acquires ownership of the imported
personal property. (Garcia vs. People 258 Scra
446 1996)
Trust receipts, being a contract of adhesion,
are not per se invalid and inefficacious; but the
ambiguities therein shall be strictly construed
against the bank, the party that prepared them.
(Metropolitan Bank and Trust Co. Vs. Go 538
scra 337 2007)
The true nature of a trust receipt transaction
can be found in the “whereas” clause of PD 115
which states that a trust receipt is to be utilized as
a convenient business device to assist importers
and merchants solve their financing problems. In
enacting the law, the State obviously sought to find
a way to assist importers and merchants in their
financing in order to encourage commerce in the
Philippines. (Ng. Vs. People 619 SCRA 291 2010)
A trust receipt agreement is not merely a
collateral agreement, the purpose of which is to
serve as security for a loan. P.d 115 was enacted to
safeguard commercial transaction and to offer an
additional layer of security to the lending bank –
trust receipt are indispensable contracts in
international and domestic business transactions.
(Land and Company vs. Metropolitan Bank 435
SCRA 639 2004)
Under Section 4 of the Trust Receipt Law,
the sale of goods by a person in the business of
selling goods for profit who, at the outset of the
transaction, has, as against the buyer, general
property rights in such goods, or who sells the
goods to the buyer on credit, retaining title or other
interest as security for the payment of the
purchase price, does not constitute a trust receipt
transaction and is outside the purview and
coverage of the law. (De la Cruz vs. Planters.
Product)
1. Loan/Security Feature
DIMAINPOGINOTES
5
Where debtor received goods subject of
trust receipt before trust receipt itself was entered
into, the transaction in question is a simple loan
and not a trust receipt agreement. (Colinares vs.
CA 339 SCRA 6091 2000)
Estafa in Trust Receipt
In the case of Land Bank of the
Philippines vs. Perez, wherein the parties entered
into a Omnibus Credit Line Agreement, the SC
held that:
Section 4 of P.D. 115 defines a trust receipt
transaction in this manner:
Section 4. What constitutes a trust
receipt transaction. A trust receipt transaction,
within the meaning of this Decree, is any
transaction by and between a person referred to in
this Decree as the entruster, and another person
referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or
security interests over certain specified goods,
documents or instruments, releases the same to the
possession of the entrustee upon the latter's
execution and delivery to the entruster of a signed
document called a "trust receipt" wherein the
entrustee binds himself to hold the designated
goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the
goods, documents or instruments with the obligation
to turn over to the entruster the proceeds thereof to
the extent of the amount owing to the entruster or
as appears in the trust receipt or the goods,
documents or instruments themselves if they are
unsold or not otherwise disposed of, in accordance
with the terms and conditions specified in the trust
receipt, or for other purposes substantially
equivalent to any of the following:
In the case of goods or documents, (a) to sell
the goods or procure their sale; or (b) to manufacture
or process the goods with the purpose of ultimate
sale: Provided, That, in the case of goods delivered
under trust receipt for the purpose of manufacturing
or processing before its ultimate sale, the entruster
shall retain its title over the goods whether in its
original or processed form until the entrustee has
complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or tranship or
otherwise deal with them in a manner preliminary
or necessary to their sale.
In all trust receipt transactions, both
obligations on the part of the trustee exist in
the alternative the return of the proceeds of
the sale or the return or recovery of the goods,
whether raw or processed. When both parties
enter into an agreement knowing that the
return of the goods subject of the trust receipt
is not possible even without any fault on the
part of the trustee, it is not a trust receipt
transaction penalized under Section 13 of P.D.
115; the only obligation actually agreed upon
by the parties would be the return of the
proceeds of the sale transaction. This
transaction becomes a mere loan, where the

borrower is obligated to pay the bank the
amount spent for the purchase of the goods.
Hence, since the transaction is a mere loan,
the officers cannot be prosecuted for estafa under
Article 315 par 1 (b) in relation to Section 13 of the
Trust Receipt Law. The following elements must be
established:
1. They received the subject goods in trust or
under the obligation to sell the same and to remit
the proceeds thereof to the trustor, or to return the
goods if not sold;
2. They misappropriated or converted the goods
and/or the proceeds of sale;
3. They performed such acts with abuse of
confidence to the damage and prejudice of the
trustor-bank; and
4. Demand was made on them for the remittance of
the proceeds or the return of the unsold goods.
Also in the case of Ng vs. People, the
accused was acquitted in the charge of estafa
because the contract he entered into is not a trust
receipt but a mere loan. The SC rationalized that
the goods in this case were never intended for
sale but for use in the fabrication of steel
communication towers, the trial court erred in
ruling that the agreement is a trust receipt
transaction.
To emphasize, the Trust Receipts Law was
created to "to aid in financing importers and retail
dealers who do not have sufficient funds or
resources to finance the importation or purchase of
merchandise, and who may not be able to acquire
credit except through utilization, as collateral, of
the merchandise imported or purchased." Since
Asiatrust knew that petitioner was neither an
importer nor retail dealer, it should have known
that the said agreement could not possibly apply to
petitioner.
May a restructuring agreement between
a company and a bank (allegedly for the
conversion of Trust agreement to a mere loan
agreement) creates only civil obligation for
failure of the trustee to remit the proceeds of
the sale of motor cycles funded by trust
agreement by the bank?
In the case of PNB vs. Soriano, the SC held
that. well-settled is the rule that, with respect to
obligations to pay a sum of money, the obligation is
not novated by an instrument that expressly
recognizes the old, changes only the terms of
payment, adds other obligations not incompatible
with the old ones, or the new contract merely
supplements the old one. Besides, novation does
not extinguish criminal liability. It stands to reason
therefore, that Soriano’s criminal liability under
the TR’s subsists considering that the civil
obligations under the Floor Stock Line secured by
TR’s were not extinguished by the purported
restructured Omnibus Line.
DIMAINPOGINOTES
6
Estafa as violation of Trust Receipt Law
and the doctrine of separate personality of a
corporation to its officers
In the case of Crisologo vs. People,
Crisologo as the President of Novachem
applied/granted Chinabank for 2 Letters of credit
to secure the purchase of amoxicillin trihydrate
micronized and glass containers for its products
and personally bind himself as a guarantor in the
first LC. After the receipt of the products, he
executed a trust receipt in favor of the bank.
However, when the products had been sold,
Novachem failed to remit to the bank the proceeds
to be applied to its liability. After demand,
Chinabank filed a criminal case of Estafa in
relation to violation of Trust Receipt Law against
Crisologo.
The issue in this case is WON as an officer
who has a separate personality with the
corporation may be held liable for estafa in
violating the trust receipt agreement entered on
behalf of the corporation.
Section 13 of the Trust Receipts Law
explicitly provides that if the violation or offense is
committed by a corporation, as in this case, the
penalty provided for under the law shall be
imposed upon the directors, officers, employees or
other officials or person responsible for the offense,
without prejudice to the civil liabilities arising from
the criminal offense.
Settled is the rule that debts incurred by
directors, officers, and employees acting as
corporate agents are not their direct liability but of
the corporation they represent, except if they
contractually agree/stipulate or assume to be
personally liable for the corporations debts,as in
this case. However, he is only civilly liable in the
first letters of credit issued wherein his signature
appears in the guarrantee clause. In the second
letter of credit, since it was not proven that his
signature stands in guarrantee clause, he is
thereby not liable.
2. Ownership of goods, documents and
instrument under a Trust Receipt
B. Rights of Entruster
Entruster shall be entitled to the proceeds from
the sale of the goods, documents or instruments
released under a trust receipt to the entrustee to
the extent of the amount owing to the entruster or
as appears in the trust receipt, or to the return of
the goods, documents, and instruments in case of
non-sale, and to the enforcement of all other rights
conferred on him in the trust receipt; provided
such are not contrary to the provisions of the
document. (Ching vs. Sec of Justice 481 SCRA
602 2006)
The antecedent acts in a trust receipt
transaction consist of the application and approval
of the letter of credit, the making of the marginal
deposit and the effective importation of goods
through the efforts of the importer. “The practice of

banks making borrowers sign trust receipts to
facilitate collection of loans and place them under
the threats of criminal prosecution should they be
unable to pay it may be unjust and inequitable, if
not reprehensible. Such agreements are contract of
adhesion which borrowers have no option but to
sign lest their loan be disapproved. The resort to
this scheme leaves poor and helpless borrowers at
the mercy of banks, and is prone to
misinterpretation. (Collinares vs CA 339 SCRA
609 2000)
Estafa in Trust Receipt is Malum Prohibtum;
hence, intent is immaterial
The offense punished under Estafa is in the
nature of malum prohibitum. A mere failure to
deliver the proceeds of the sale or the goods, if not
sold, constitutes a criminal offense that causes
prejudice not only to another, but more to the
public interest. Even more incredible is the
contention of private respondents that they did not
give much significance to the documents they
signed, considering the enormous value of the
transaction involved. Thus, it is highly improbable
to mistake trust receipt documents for a contract
of loan when the heading thereon printed in bold
and legible letters reads: Trust Receipts. We are
not prejudging this case on the merits. However, by
merely glancing at the documents submitted by
petitioner entitled Trust Receipts and the
arguments advanced by private respondents, we
are convinced that there is probable cause to file
the case and to hold them for trial. (Metrobank vs.
Secretary of Justice Gonzales)
State of Liquidity may be a ground for the
acquittal in Estafa
Philippine Bank vs. Ong, the SC absolved the
officers of the corporation of the charge of estafa.
In this case, no dishonesty or abuse of confidence
can be attributed to respondents. Record shows
that BMC failed to comply with its obligations upon
maturity of the trust receipts due to serious
liquidity problems, prompting it to file a Petition for
Rehabilitation and Declaration in a State of
Suspension of Payments. It bears emphasis that
when petitioner bank made a demand upon BMC
on February 11, 1994 to comply with its
obligations under the trust receipts, the latter was
already under the control of the Management
Committee created by the SEC in its Order dated
January 8, 1992. The Management Committee
took custody of all BMCs assets and liabilities,
including the red lauan lumber subject of the trust
receipts, and authorized their use in the ordinary
course of business operations. Clearly, it was the
Management Committee which could settle BMCs
obligations. Moreover, it has not escaped this
Courts observation that respondent Ong paid
P21,000,000.00 in compliance with the equity
infusion required by the MOA. The mala prohibita
nature of the offense notwithstanding,
respondent’s intent to misuse or misappropriate
DIMAINPOGINOTES
7
the goods or their proceeds has not been
established by the records.
Is there a prejudicial question between the
criminal case of estafa, and a civil case of
nullity of document (consisting of trust receipt
arrangement)?
The SC in the case of Alfredo Ching vs. CA,
rejected the idea that the civil case of nullification
is a prejudicial question to the criminal case of
estafa.
In this case, Ching alleged that the trust
receipt is a mere side document of the true
transaction; which is the loan. The nullity of the
principal transaction comes with it the nullity of
the accessory contract of trust receipt. Moreover,
petitioner contends that the transaction between
Philippine Blooming Mills (PBM) and private
respondent Allied Banking Corporation does not
fall under the category of a trust receipt
arrangement claiming that the goods were not to
be sold but were to be used, consumed and
destroyed by the importer PBM.
The SC held that a trust receipt partakes the
nature of a security transaction. It could never be a
mere additional or side document as alleged by
petitioner. Otherwise, a party to a trust receipt
agreement could easily renege on its obligations
thereunder, thus undermining the importance and
defeating with impunity the purpose of such an
indispensable tool in commercial transactions.
To our mind, petitioner's contention is a stealthy
attempt to circumvent the principle enunciated in
the case of Alied Banking Corporation vs.
Ordonez, thus:
In an attempt to escape criminal liability, private
respondent claims P.D. 115 covers goods which are
ultimately destined for sale and not goods for use in
manufacture. But the wording of Section 13 covers
failure to turn over the proceeds of the sale of the
entrusted goods, or to return said goods if unsold or
disposed of in accordance with the terms of the
trust receipts. Private respondent claims that at the
time of PBM's application for the issuance of the
LC's, it was not represented to the petitioner that
the items were intended for sale, hence, there was
no deceit resulting in a violation of the trust receipts
which would constitute a criminal liability. Again we
cannot uphold this contention. The non-payment of
the amount covered by a trust receipt is an act
violative of the entrustee's obligation to pay. There
is no reason why the law should not apply to all
transactions covered by trust receipts, except those
expressly excluded.
The Court takes judicial notice of customary
banking and business practices where trust receipts
are used for importation of heavy equipment,
machineries and supplies used in manufacturing
operations. We are perplexed by the statements in
the assailed DOJ resolution that the goods subject
of the instant case are outside the ambit of the
provisions of PD 115 albeit covered by trust receipt
agreements (17 February 1988 resolution) and that
not all transactions covered by trust receipts may be
considered as trust receipt transactions defined and
penalized under P.D. 115 (11 January 1988
resolution). A construction should be avoided when

it affords an opportunity to defeat compliance with
the terms of a statute.
The penal provision of P.D. 115 encompasses
any act violative of an obligation covered by the
trust receipt; it is not limited to transactions in
goods which are to be sold (retailed), reshipped,
stored or processed as a component of a product
ultimately sold.
An examination of P.D. 115 shows the growing
importance of trust receipts in Philippine business,
the need to provide for the rights and obligations of
parties to a trust receipt transaction, the study of
the problems involved and the action by monetary
authorities, and the necessity of regulating the
enforcement of rights arising from default or
violations of trust receipt agreements. The
legislative intent to meet a pressing need is clearly
expressed.
In fine, we reiterate that the civil action for
declaration of nullity of documents and for
damages does not constitute a prejudicial question
to the criminal cases for estafa filed against
petitioner Ching.
Trust Receipt must be made prior to the
purchase and delivery of the goods/material,
otherwise, it is a simple loan.
In the case Colinares vs. CA, Colinares and
Veloso contracted Carmelita Sisters for the
renovation of its convent. After the order of the
materials needed, they applied for commercial
letter of credit before Philippine Banking
Corporation, after it was approved they were also
required to sign a trust receipt as security.
The SC in ruling that the transaction was a
mere simple loan explained that, there are two
possible situations in a trust receipt transaction.
1. First is covered by the provision which refers to
money received under the obligation involving the
duty to deliver it (entregarla) to the owner of the
merchandise sold.
2. Second is covered by the provision which refers
to merchandise received under the obligation to
return it (devolvera) to the owner.
Failure of the entrustee to turn over the
proceeds of the sale of the goods, covered by the
trust receipt to the entruster or to return said
goods if they were not disposed of in accordance
with the terms of the trust receipt shall be
punishable as estafa under Article 315 (1) of the
Revised Penal Code, without need of proving intent
to defraud.
A thorough examination of the facts obtaining
in the case at bar reveals that the transaction
intended by the parties was a simple loan, not a
trust receipt agreement.
Petitioners received the merchandise from CM
Builders Centre on 30 October 1979. On that day,
ownership over the merchandise was already
transferred to Petitioners who were to use the
materials for their construction project. It was only a
DIMAINPOGINOTES
8
day later, 31 October 1979, that they went to the
bank to apply for a loan to pay for the merchandise.
Does the penal provision of PD 115 (Trust
Receipts Law) apply when the goods covered by
a Trust Receipt do not form part of the
finished products which are ultimately sold
but are instead, utilized/used up in the
operation of the equipment and machineries of
the entrustee-manufacturer?
The court ruled that the penal provision of
PD 115 encompasses any act violative of an
obligation covered by the trust receipt; it is not
limited to transactions in goods which are to be
sold (retailed), reshipped, stored or processed as a
component of a product ultimately sold. (Allied
Banking vs. Ordoñez)
Is the acquittal in criminal case of Estafa (no
misappropriation) extinguished the underlying
loan?
No. In the case of Vintola vs. Insular Bank of
Asia and America, the SC held that the acquittal
of the VINTOLAS in the Estafa case is no bar to the
institution of a civil action for collection. It is
inaccurate for the VINTOLAS to claim that the
judgment in the estafa case had declared that the
facts from which the civil action might arise, did
not exist, for, it will be recalled that the decision of
acquittal expressly declared that "the remedy of the
Bank is civil and not criminal in nature." This
amounts to a reservation of the civil action in
IBAA's favor, for the Court would not have dwelt on
a civil liability that it had intended to extinguish by
the same decision. The VINTOLAS are liable ex
contractu for breach of the Letter of Credit — Trust
Receipt, whether they did or they did not
"misappropriate, misapply or convert" the
merchandise as charged in the criminal case.
1. Validity of the Security Interest as
against the creditors of the
entrustee/Innocent purchasers for value
Section 11. Rights of purchaser for value and in
good faith. Any purchaser of goods from an
entrustee with right to sell, or of documents or
instruments through their customary form of
transfer, who buys the goods, documents, or
instruments for value and in good faith from the
entrustee, acquires said goods, documents or
instruments free from the entruster's security
interest.
Section 12. Validity of entruster's security interest
as against creditors. The entruster's security
interest in goods, documents, or instruments
pursuant to the written terms of a trust receipt shall
be valid as against all creditors of the entrustee for
the duration of the trust receipt agreement.
C. Obligation and Liabilities of Entrustee

1. Payment/Delivery of Proceeds of Sale or
Disposition of Goods, Documents or
Instruments
2. Return of Goods, Documents or
Instruments in case of Sale
3. Liability for loss of Goods, Documents or
instruments
A trust receipt transaction is one where the
entrustee has the obligation to deliver to the
entruster the price of the sale, or if the
merchandise is not sold, to return the merchandise
to the entruster. (Hur Tin Yang vs People 703
SCRA 606 2013)
In the case of Ching vs. Secretary of Justice
481 SCRA 602 2006, the SC enumerated the
obligation of entrustee. Entrustee is one having or
taking possession of goods, documents, or
instruments under a trust receipt transaction, and
any successor in interest of such person for
purpose of payment specified in trust receipt
agreement. Entrustee is obliged to:
1. Hold goods, documents or instruments in
trust for entruster and shall dispose of
them strictly in accordance with terms and
conditions of trust receipt;
2. Receive proceeds in trust for entruster and
turn over same to entruster to extent of
amount owing to entruster or as appears on
trust receipt;
3. Insure goods for their total value against
loss from fire, theft, pilferage, or other
casualties;
4. Keep said goods or proceeds thereof
whether in money or whatever form,
separate, and capable of identification as
property of entruster
5. Return goods, documents, or instruments
in the event of non-sale or upon demand of
entruster; and
6. Observe all other terms and conditions of
trust receipt no contrary to provision of P.D
115
Who bears the risk in case the goods were
destroyed subject of the trust receipt
agreement (the bank, entrustor or the
applicant or the entrustee?)
In the case Rosario Textile Corporation vs.
Home Bankers Savings and Trust Co., wherein
the entrustee, RTMC, upon the discovery that the
goods imported did not complied with the
manufacturing requirement, tender the same to
the bank which the latter refused to accept. Later
on, a fire gutted, destroying the said goods.
Petitioner claiming that under the doctrine of Res
DIMAINPOGINOTES
9
Perit Domino on sale, the owner shall bear the risk
of loss; since, in a trust receipt agreement, the
bank is the owner, the obligation of the RTCM is
already extinguished.
The SC however ruled in favor of the bank. If
under the trust receipt, the bank is made to appear
as the owner, it was but an artificial expedient,
more of legal fiction than fact, for if it were really
so, it could dispose of the goods in any manner it
wants, which it cannot do, just to give consistency
with purpose of the trust receipt of giving a
stronger security for the loan obtained by the
importer. To consider the bank as the true
owner from the inception of the transaction
would be to disregard the loan feature thereof.
Thus, petitioners cannot be relieved of their
obligation to pay their loan in favor of the bank. At
the risk of being repetitious, we stress that the
contract between the parties is a loan. What
respondent bank sought to collect as creditor was
the loan it granted to petitioners. Petitioner’s
recourse is to sue their supplier, if indeed the
materials were defective.
Note: In other words, trust receipt law is one of the
exceptions of the principle Res Perit Domino on law
on sales.
4. Penal sanctions if offender is a
corporation
Section 13. Penalty clause. The failure of an
entrustee to turn over the proceeds of the sale of the
goods, documents or instruments covered by a trust
receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they
were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime
of estafa, punishable under the provisions of Article
Three hundred and fifteen, paragraph one (b) of Act
Numbered Three thousand eight hundred and
fifteen, as amended, otherwise known as the
Revised Penal Code. If the violation or offense is
committed by a corporation, partnership,
association or other juridical entities, the
penalty provided for in this Decree shall be
imposed upon the directors, officers,
employees or other officials or persons therein
responsible for the offense, without prejudice
to the civil liabilities arising from the criminal
offense.
D. Remedies available
1. Right to cancel the trust and take possession
of the goods
2. Third party claim or separate civil action
Demand by the entrustor to the entrustee is
not necessary to set-up any of the remedies
under the trust receipts. In case of default by
entrustee under trust receipt agreement, it is not
absolutely necessary that entruster cancel the
 10

trust and take possession of the goods to be able to
enforce his rights thereunder. “Significantly, the
law uses the word “may” in granting to the
entruster the right to cancel the trust and take
possession of the goods. Consequently. The
entrustor has the discretion to avail of such right
or seek any alternative action, such as third party
claim or a separate civil action which it deems best
to protect its rights, at any time upon default or
failure of the entrustee to comply with any of the
terms and conditions of the trust agreement.
(South City Homes Inc. vs. BA Finance Corp)
In a trust receipts transaction, can entruster
who has teken actual and juridical possession
of the goods subsequently avail of the right to
demand from entrustee the deficiency of the
amount covered by the trust receipt?
Yes. This was the ruling in the case of
Landl and Company vs. Metropolitan Bank 435
SCRA 639 2004, trust receipts agreements being
only a security for the loan agreement, the full
turn-over of the goods subject of the trust receipt
does not suffice to divest debtors of their
obligations to repay principal amount of their loan.
Section 7 of PD 115 expressly provides that
entrustee shall be liable to entruster for any
deficiency.
1. Remedies for the enforcement of lien
a. To refuse to deliver the goods until his lien
is satisfied, pursuant to Section 31 of the
Warehouse Receipt Law;
b. To sell the goods and apply the proceeds
thereof to the value of the lien pursuant to
Sections 33 and 34 of the Warehouse
Receipts Law; and
c. By other means allowed by law to a creditor
against his debtor, for the collection from
the depositor of all charges and advances
which the depositor expressly or impliedly
contracted with the warehouseman to pay
under Section 32 of the Warehouse Receipt
Law; or such other remedies allowed by law
for the enforcement of a lien against
personal property under Section 35 of said
law. The third remedy is sought judicially
by suing for the unpaid charges. (PNB vs.
Sayo Jr.)
2. Sale under Section 33 and 34;
Requirements – to satisfy lien or when the
goods is perishable:
a. Give notice by personal service or
registered mail to depositor;

No option to abandon goods to set-off b. Publication once a week for 2

loan. If under trust receipt, bank is made to consecutive weeks; and
appear as owner, it was but an artificial expedient,
more of legal fiction than fact, for if it were really c. Sale at public auction
so, it could dispose of the goods in any manner it
wants, which it cannot do, just to give consistency
with purpose of the trust receipt of giving a
3. Lien When Lost
stronger security for the loan obtained by the
importer. Thus, the entrustee-borrower cannot be It is lost either by surrender of goods or by
relieved of his obligation to pay the loan simply by refusal to deliver the goods when demand is
abandoning property with the bank. (Rosario proper.
Textile Mills vs. Home Bankers Savings 462
SCRA 88 2005)

Acquittal does not extinguish the

underlying loan. A trust receipt arrangement with
a bank for the importation of goods, does not make
the bank an investor in the venture as to
extinguish the lender-creditor relationship, and the
acquittal of the entrustee in the criminal charge of
estafa doe not dissolved the civil liability arising
from the trust receipt arrangement. The trustee
cannot extinguish his civil obligation under the
trust receipts by surrendering the goods if the
lender is not willing to accept them. (Vintola vs.
Insural Bank 159 SCRA 140 1988)

E. Warehouseman Liens (Warehouse

Receipts Act)

The rule is that, warehouseman, by issuing the

receipt, is estopped from setting up any title or
right to the possession of the goods, except when it
pertains to enforcement of his lien. However, Anti-Money Laundering Act (RA no. 9160 as
warehouseman has a lien on goods deposited or amended by RA no. 9194) –CODAL
the proceeds thereof in his hands, for all lawful
Jurisdiction over AMCLA cases
charges and fees.
DIMAINPOGINOTES
 11

GR: all cases on money laundering shall be and other similar monetary instruments or
within the jurisdiction of Regional Trial Court. properties, supervised or regulated by the SEC.

Exn: Those committed by public officers, iv. The following Designated Non-Financial
and private persons in conspiracy with such public Businesses and Professions (DNFBPs):
officers, shall be within the jurisdiction of
Sandiganbayan. a. Jewelry dealers, dealers in precious metals,
and dealers in precious stones.
1. Policy of the Law (Rule 2)
b. Company service providers which, as a
a. To protect and preserve the integrity and
business, provide any of the following services to
confidentiality of bank accounts and to
third parties:
ensure that the Philippines shall not be
used as a money laundering site for the
i. acting as a formation agent of juridical
proceeds of any unlawful activity; and
persons;
b. To extend cooperation in transnational
investigations and prosecutions of persons ii. acting as (or arranging for another person to
involved in money laundering activities act as) a director or corporate secretary of a
wherever committed. company, a partner of a partnership, or a similar
position in relation to other juridical persons;
2. Covered Institution
iii. providing a registered office; business address
or accommodation, correspondence or
i. Persons supervised or regulated by BSP, such
administrative address for a company, a
as:
partnership or any other legal person or
a. Banks; arrangement; and
b. Non-banks;
c. Quasi-banks; iv. acting as (or arranging for another person to
d. Trust entities; act as) a nominee shareholder for another person.
e. Pawnshops;
c. Persons, including lawyers and accountants,
f. Non-stock savings and loan associations;
who provide any of the following services:
g. Electronic money issuers; and
h. All other persons and their subsidiaries and
i. Managing of client money, securities or other
affiliates supervised or regulated by the BSP
assets;
ii. Persons supervised or regulated by IC, such
as: ii. Management of bank, savings, securities or
other assets;
a. Insurance companies;
b. Pre-need companies; iii. Organization of contributions for the creation,
c. Insurance agents; operation or management of companies; and
d. Insurance brokers;
e. Professional reinsurers; iv. Creation, operation or management of
f. Reinsurance brokers; juridical persons or arrangements, and buying and
g. Holding companies; selling business entities.
h. Holding company systems;
Note: “Covered Person” shall exclude lawyers and
i. Mutual benefit associations; and
accountants acting as independent legal
j. All other persons and their subsidiaries and
professionals in relation to information concerning
affiliates supervised or regulated by the IC.iii. SEC
their clients or where disclosure of information
supervised/regulated:
would compromise client confidence or the
iii. Persons supervised or regulated by SEC, attorney-client relationship.
such as:
3. Obligations of Covered Institutions

a. Securities dealers, brokers, salesmen, a. Covered persons shall establish and record
investment houses, and other similar persons the true identity of their clients,, including
managing securities or rendering services, such as the legal existence and organizational
investment agents, advisors, or consultants. structure of a corporate client and their
representatives based on official
b. mutual funds or open-end investment documents; (Rule 9 A)
companies, close-end investment companies or
issuers, and other similar entities; b. Keep records for 5 years;

c. other entities, administering or otherwise c. Report Covered Transactions and

dealing in commodities, or financial derivatives Suspicious Transactions to AMLC within 5
based thereon, valuable objects, cash substitutes, working days from occurrence, unless the
AMLC prescribes a different period not
DIMAINPOGINOTES

exceeding 15 working days, which thereby
shall not be violation of the Secrecy of Bank
Deposit Act, FCDU Law, and the General
Banking Law of 2000; but cannot,
otherwise communicate to any person or
media fact of report of covered transaction,
or the contents of report.
Fact of reporting to AMLC cannot also be
published/aired by mass media, electronic
mail, or other similar devices.
d. They are also prohibited from maintaining
anonymous accounts, accounts under
fictitious names, and all other similar
accounts. However, numbered accounts
allowed, except for checking account;
What is Malicious Reporting?
It is committed by any person who, with
malice, or in bad faith, reports or file a completely
unwarranted of false information relative to money
laundering transaction against any person.
A penalty of 6 months to 4 years
imprisonment and fine of not less than 100k but
not more than 500k, at the discretion of the court
may be imposed.
Note: The BSP may conduct annual testing solely
limited to the determination of the existence and
true identity of account owners.
4. Covered Transactions (Rule 2 G)
a. A transaction in cash or other equivalent
monetary instrument exceeding Five
Hundred Thousand pesos (Php500,000.00);
and
b. A transaction exceeding One Million pesos
(Php1,000,000.00) in cases of jewelry
dealers, dealers in precious metals and
dealers in precious stones.
5. Suspicious Transaction - refers to a
transaction, regardless of amount, where
any of the following circumstances exists:
(Rule 2 H)
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
client’s transaction is structured in order to
avoid being the subject of reporting
requirements under the AMLA;
DIMAINPOGINOTES
12
e. any circumstance relating to the
transaction which is observed to deviate
from the profile of the client and/or the
client’s past transactions with the covered
person;
f. the transaction is in any way related to an
unlawful activity or any money laundering
activity or offense that is about to be
committed, is being or has been committed;
or
g. any transaction that is similar, analogous
or identical to any of the foregoing.
6. Money Laundering; How Committed
(Rule 4)
It is committed by ANY person who, knowing
that any monetary instrument or property
represents, involves, or relates to the proceeds of
an “Unlawful Activity”:
a. Transacts said monetary instrument or
property;
b. Converts, transfer, 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 monetary
laundering offenses refered to in A, B and
C;
e. Aids, abets, assists in or counsels the
commission of money laundering offences
in A, B and C; and
f. Performs or fails to perform any act as a
result of which he facilitates the offense of
money laundering referred to in items A, B,
and C.
Note: The prosecution of any offense or violation of
AMLA shall proceed independently of any
proceeding relating to the Unlawful Activity.
However, unlawful activity shall be given
precedence over money laundering charge, without
prejudice to freezing and other remedies provided
by the AMLA (Villanueva)
Note: The law provides for Policy Against
Political Harassment which provides that “No
money-laundering case can be filed, nor can there
be a freeze of account, against any candidate for
public office during an election campaign.”
7. Unlawful Activities or Predicate Crimes -
Unlawful Activity” refers to any act or
omission, or series or combination thereof,
 13

involving or having direct relation, to the

following: (Rule 2 T) 16. “Frauds and Illegal Exactions and
Transactions” under Articles 213, 214, 215 and 216
1. “Kidnapping for Ransom” under Article 267 of of the Revised Penal Code, as amended;
Act No. 3815, otherwise known as the Revised
Penal Code, as amended; 17. “Malversation of Public Funds and Property”
under Articles 217 and 222 of the Revised Penal
2. Sections 4, 5, 6, 8, 9, 10, 11, 12,13, 14, 15 and Code, as amended;
16 of Republic Act No. 9165, otherwise known as
the “Comprehensive Dangerous Drugs Act of 2002”; 18. “Forgeries” and “Counterfeiting” under
Articles 163, 166, 167, 168, 169 and 176 of the
3. Section 3 paragraphs b, c, e, g, h and i of Revised Penal Code, as amended;
Republic Act No. 3019, as amended, otherwise
known as the “Anti-Graft and Corrupt Practices 19. Violations of Sections 4 to 6 of Republic Act
Act”; No. 9208, otherwise known as the “Anti-Trafficking
in Persons Act of 2003, as amended”;
4. “Plunder” under Republic Act No. 7080, as
amended; 20. Violations of Sections 78 to 79 of Chapter IV of
Presidential Decree No. 705, otherwise known as
5. “Robbery” and “Extortion” under Articles 294, the “Revised Forestry Code of the Philippines, as
295, 296, 299, 300, 301 and 302 of the Revised amended”;
Penal Code, as amended;
21. Violations of Sections 86 to 106 of Chapter IV
6. “Jueteng” and “Masiao” punished as illegal of Republic Act No. 8550, otherwise known as the
gambling under Presidential Decree No. 1602; “Philippine Fisheries Code of 1998”;

7. “Piracy on the High Seas” under the Revised 22. Violations of Sections 101 to 107, and 110 of
Penal Code, as amended, and Presidential Decree Republic Act No. 7942, otherwise known as the
No. 532: “Philippine Mining Act of 1995”;

8. “Qualified Theft” under Article 310 of the 23. Violations of Section 27(c), (e), (f), (g) and (i) of
Revised Penal Code, as amended; Republic Act No. 9147, otherwise known as the
“Wildlife Resources Conservation and Protection
9. “Swindling” under Article 315 and “Other Act”;
Forms of Swindling” under Article 316 of the
Revised Penal Code, as amended: 24. Violations of Section 7(b) of Republic Act No.
9072, otherwise known as the “National Caves and
10. “Smuggling” under Republic Act No. 455, and Cave Resources Management Protection Act”;
Republic Act No. 1937, as amended, otherwise
known as the “Tariff and Customs Code of the 25. Violation of Republic Act No. 6539, otherwise
Philippines”; known as the “Anti-Carnapping Act of 2002, as
amended”;
11. Violations under Republic Act No. 8792,
otherwise known as the “Electronic Commerce Act 26. Violation of Sections 1, 3, and 5 of Presidential
of 2000”; Decree No. 1866, as amended, otherwise known as
the decree “Codifying the Laws on Illegal/Unlawful
12. “Hijacking” and other violations under Possession, Manufacture, Dealing In, Acquisition or
Republic Act No. 6235, otherwise known as the Disposition of Firearms, Ammunition or Explosives”;
“Anti-Hijacking Law”; “Destructive Arson”; and
“Murder”, as defined under the Revised Penal Code, 27. Violation of Presidential Decree No. 1612,
as amended; otherwise known as the “Anti-Fencing Law”;

13. “Terrorism” and “Conspiracy to Commit 28. Violation of Section 6 of Republic Act No. 8042,
Terrorism” as defined and penalized under Sections otherwise known as the “Migrant Workers and
3 and 4 of Republic Act No. 9372; Overseas Filipinos Act of 1995, as amended”;

14. “Financing of Terrorism” under Section 4 and 29. Violation of Republic Act No. 8293, otherwise
offenses punishable under Sections 5, 6, 7 and 8 of known as the “Intellectual Property Code of the
Republic Act No. 10168, otherwise known as the Philippines, as amended”;
“Terrorism Financing Prevention and Suppression
Act of 2012”; 30. Violation of Section 4 of Republic Act No. 9995,
otherwise known as the “Anti-Photo and Video
15. “Bribery” under Articles 210, 211 and 211-A Voyeurism Act of 2009”;
of the Revised Penal Code, as amended, and
“Corruption of Public Officers” under Article 212 of 31. Violation of Section 4 of Republic Act No. 9775,
the Revised Penal Code, as amended; otherwise known as the “Anti-Child Pornography
DIMAINPOGINOTES

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”;
34. Felonies or offenses of a nature similar to the
aforementioned unlawful activities that are
punishable under the penal laws of other countries.
8. Anti-Money Laundering Council - Rule 7.
The Anti-Money Laundering Council. - The
AMLC is composed of the Governor of the
BSP as Chairperson, and the Commissioner
of the IC and the Chairperson of the SEC,
as Members
Unanimous Decision. - The AMLC shall act
unanimously in the discharge of its functions. In
case of incapacity, absence, or disability of any
member, the officer duly designated or authorized
to discharge the functions of the Governor of the
BSP, the Commissioner of the IC, and the
Chairperson of the SEC, as the case may be, shall
act in his stead in the AMLC.
9. Functions
1. to require and receive covered or suspicious
transaction reports from covered persons;
2. to issue orders addressed to the appropriate
Supervising Authority or the covered person to
determine the true identity of the owner of any
monetary instrument or property subject of a
covered or suspicious transaction report, or
request for assistance from a foreign State, or
believed by the AMLC, on the basis of substantial
evidence, to be, in whole or in part, wherever
located, representing, involving, or related to,
directly or indirectly, in any manner or by any
means, the proceeds of any unlawful activity;
3. to institute civil forfeiture proceedings and all
other remedial proceedings through the Office of
the Solicitor General;
4. to file complaints with the Department of
Justice or the Office of the Ombudsman for the
prosecution of money laundering offenses and
other violations under the AMLA;
5. to investigate suspicious transactions and
covered transactions deemed suspicious after
investigation by the AMLC, money laundering
activities and other violations of the AMLA;
6. to file with the Court of Appeals, ex parte,
through the Office of the Solicitor General:
DIMAINPOGINOTES
14
a. a petition for the freezing of any monetary
instrument or property that is in any way related
to an unlawful activity; or
b. an application for authority to inquire into or
examine any particular deposit or investment,
including related accounts, with any banking
institution or non-bank financial institution.
7. to formulate and implement such measures as
may be necessary and justified under the AMLA to
counteract money laundering.
8. to receive and take action in respect of any
request from foreign states for assistance in their
own anti-money laundering operations as provided
in the AMLA.
9. to develop educational programs, including
awareness campaign on the pernicious effects, the
methods and techniques used, and the viable
means of preventing money laundering and the
effective ways of prosecuting and punishing
offenders;
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.
11. to impose administrative sanctions for the
violation of laws, rules, regulations, orders, and
resolutions issued pursuant thereto.
12. to require the Land Registration Authority
and all its Registries of Deeds to submit to the
AMLC, reports on all real estate transactions
involving an amount in excess of Five Hundred
Thousand Pesos (Php500,000.00) within fifteen
(15) days from the date of registration of the
transaction, in a form to be prescribed by the
AMLC. The AMLC may also require the Land
Registration Authority and all its Registries of
Deeds to submit copies of relevant documents of
all real estate transactions.
10. Freezing of Monetary Instrument or
Property
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. (Retire Lt. Gen. Hacito
Ligot vs. Republic)
Procedure
a. A ex parte verified petition shall be first
filed by the AMLC through OSG with the
Presiding/Executive Justice of Court of
Appeals for freeze order;
b. Raffle on the same day
c. All members of the division of CA to which
assigned justice belongs shall act on
petition within 24 hours after filing. If a
member of the division is not available,
assigned justice and other justice present
shall act on the petition. If only the
assigned justice is present, he shall act
alone.
d. If probable exist that any monetary
instrument or property is in any way
related to an unlawful activity, the court
shall issue ex parte a freeze order which
shall be effective immediately for 20 day
period.
e. The court shall conduct summary hearing
with notice to parties, to determine whether
or not to modify or lift freeze order, or
extend its effectivity upon motion for good
cause which effectivity shall not exceed 6
months.
The notice shall be served personally upon
the respondent or any person acting in his
behalf and such covered institution or
government agency concerned.
Upon receipt of the copy of the freeze order,
respondent, covered institution or
government agency shall immediately desist
from and not allow any transaction,
withdrawal, deposit, or transfer, removal,
conversion, other movement, or
concealment of the account representing,
involving or relating to the subject
monetary instrument, property, proceeds,
or its related web of accounts.
Note: Any party aggrieved by decision or ruling of
the CA granting or denying the petition may appeal
by petition to the Supreme Court under Rule 45 of
the Rules of Court, which shall not stay the
enforcement of subject decision or final order
unless SC directs otherwise.
Which Court has jurisdiction to extend the
effectivity of a freeze order?
Under SEC. 10 or RA 9160. Freezing of
Monetary Instrument or Property. – The Court of
DIMAINPOGINOTES
15
Appeals, upon application ex parte 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
Sec. 3(i) hereof, 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 the case of Republic vs. Cabrini Green and
Ross Inc., the SC held that the authority to extend
the freeze order for AML cases belongs to the Court
of Appeals.
Congress enacted RA 9194 (An Act Amending
Republic Act No. 9160, Otherwise Known as the
"Anti-Money Laundering Act of 2001"). Section 12 of
RA 9194 further provides:
SEC 12. Transitory Provision. – Existing freeze
orders issued by the AMLC shall remain in force for
a period of thirty (30) days after the effectivity of
this Act, unless extended by the Court of Appeals.
The amendment by RA 9194 of RA 9160 erased
any doubt on the jurisdiction of the CA over the
extension of freeze orders. As the law now stands,
it is solely the CA which has the authority to issue
a freeze order as well as to extend its effectivity. It
also has the exclusive jurisdiction to extend
existing freeze orders previously issued by the
AMLC vis-à-vis accounts and deposits related to
money-laundering activities.
f. Authority to Inquire Into Bank Deposits
– Additional exception to Bank Secrecy
Law and Foreign Currency Deposit Act
The AMLC may inquire into or examine any
particular deposit or investment, including related
accounts with prior order from any competent
court. Such order should be based on the ex-parte
application of the AMLC. The order extends not
only to the principal account but also to other
related accounts.
Related account as defined by the law as
accounts, the funds and source of which originated
from and/or materially linked to the monetary
instrument/s or property/ies subject of the freeze
order/s.
The prior order requirement from the court
for the inquiry is not necessary if the unlawful
activity is:
a. Kidnapping for ransom under Article 267 of
Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
b. Sections 3, 4, 5, 7, 8 and 9 of Article Two of
Republic Act No. 6425, as amended,
otherwise known as the Dangerous Drugs
Act of 1972; and
c. “Hijacking” and other violations under
Republic Act No. 6235, otherwise known as
the “Anti-Hijacking Law”; “Destructive
Arson”; and “Murder”, as defined under the
Revised Penal Code, as amended;

d. “Terrorism” and “Conspiracy to Commit
Terrorism” as defined and penalized under
Sections 3 and 4 of Republic Act No. 9372;
and
e. Felonies or offenses of a nature similar to
those mentioned in A, B, and C which are
punishable under the penal laws of other
countries.
Is there a need of pre-existing case of Money
Laundering offense before the Bank Inquiry be
granted?
No. In the case of Republic vs. Eugenio,
the SC ruled that to require the pre-existing case of
Money Laundering before the inquiry to the Books
of account. If the contrary position is adopted, then
the bank inquiry order would be limited in purpose
as a tool in aid of litigation of live cases, and wholly
inutile as a means for the government to ascertain
whether there is sufficient evidence to sustain an
intended prosecution of the account holder for
violation of the AMLA. Should that be the
situation, in all likelihood the AMLC would be
virtually deprived of its character as a discovery
tool, and thus would become less circumspect in
filing complaints against suspect account holders.
After all, under such set-up the preferred strategy
would be to allow or even encourage the
indiscriminate filing of complaints under the AMLA
with the hope or expectation that the evidence of
money laundering would somehow surface during
the trial. Since the AMLC could not make use of
the bank inquiry order to determine whether there
is evidentiary basis to prosecute the suspected
malefactors, not filing any case at all would not be
an alternative. Such unwholesome set-up should
not come to pass. Thus Section 11 cannot be
interpreted in a way that would emasculate the
remedy it has established and encourage the
unfounded initiation of complaints for money
laundering.
There is no ex parte application for Authority
to inquire into Books Deposit unlike Freeze
Order.
In the same case of Eugenio, the SC rule
that even if the bank inquiry order may be availed
of without need of a pre-existing case under the
AMLA, it does not follow that such order may be
availed of ex parte. There are several reasons why
the AMLA does not generally sanction ex parte
applications and issuances of the bank inquiry
order
It is evident that Section 11 does not
specifically authorize, as a general rule, the
issuance ex parte of the bank inquiry order. We
quote the provision in full:
SEC. 11. Authority to Inquire into Bank
Deposits. ― Notwithstanding the provisions of
Republic Act No. 1405, as amended, Republic Act
DIMAINPOGINOTES
16
No. 6426, as amended, Republic Act No. 8791, and
other laws, the AMLC may inquire into or examine
any particular deposit or investment with any
banking institution or non-bank financial institution
upon order of any competent court in cases of
violation of this Act, when it has been established
that there is probable cause that the deposits or
investments are related to an unlawful activity as
defined in Section 3(i) hereof or a money laundering
offense under Section 4 hereof, except that no court
order shall be required in cases involving unlawful
activities defined in Sections 3(i)1, (2) and (12).
To ensure compliance with this Act, the
Bangko Sentral ng Pilipinas (BSP) may inquire into
or examine any deposit of investment with any
banking institution or non-bank financial
institution when the examination is made in the
course of a periodic or special examination, in
accordance with the rules of examination of the
BSP.
In the instances where a court order is
required for the issuance of the bank inquiry order,
nothing in Section 11 specifically authorizes that
such court order may be issued ex parte. It might
be argued that this silence does not preclude the
ex parte issuance of the bank inquiry order since
the same is not prohibited under Section 11. Yet
this argument falls when the immediately
preceding provision, Section 10, is examined.
SEC. 10. Freezing of Monetary Instrument or
Property. ― The Court of Appeals, upon application
ex parte 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, 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.
Although oriented towards different
purposes, the freeze order under Section 10 and
the bank inquiry order under Section 11 are
similar in that they are extraordinary provisional
reliefs which the AMLC may avail of to effectively
combat and prosecute money laundering offenses.
Crucially, Section 10 uses specific language to
authorize an ex parte application for the
provisional relief therein, a circumstance absent in
Section 11. If indeed the legislature had intended
to authorize ex parte proceedings for the issuance
of the bank inquiry order, then it could have easily
expressed such intent in the law, as it did with the
freeze order under Section 10.
That the AMLA does not contemplate ex
parte proceedings in applications for bank inquiry
orders is confirmed by the present implementing
rules and regulations of the AMLA, promulgated
upon the passage of R.A. No. 9194. With respect to
freeze orders under Section 10, the implementing
rules do expressly provide that the applications for
freeze orders be filed ex parte, but no similar
clearance is granted in the case of inquiry orders
under Section 11. These implementing rules were
promulgated by the Bangko Sentral ng Pilipinas,
the Insurance Commission and the Securities and
Exchange Commission, and if it was the true belief
of these institutions that inquiry orders could be
issued ex parte similar to freeze orders, language to
that effect would have been incorporated in the

said Rules. This is stressed not because the
implementing rules could authorize ex parte
applications for inquiry orders despite the absence
of statutory basis, but rather because the framers
of the law had no intention to allow such ex parte
applications.
Even the Rules of Procedure adopted by
this Court in A.M. No. 05-11-04-SC to enforce the
provisions of the AMLA specifically authorize ex
parte applications with respect to freeze orders
under Section 10 but make no similar
authorization with respect to bank inquiry orders
under Section 11.
The Court could divine the sense in allowing ex
parte proceedings under Section 10 and in
proscribing the same under Section 11. A freeze
order under Section 10 on the one hand is aimed
at preserving monetary instruments or property in
any way deemed related to unlawful activities as
defined in Section 3(i) of the AMLA. The owner of
such monetary instruments or property would
thus be inhibited from utilizing the same for the
duration of the freeze order. To make such freeze
order anteceded by a judicial proceeding with
notice to the account holder would allow for or lead
to the dissipation of such funds even before the
order could be issued.
On the other hand, a bank inquiry order
under Section 11 does not necessitate any form of
physical seizure of property of the account holder.
What the bank inquiry order authorizes is the
examination of the particular deposits or
investments in banking institutions or non-bank
financial institutions. The monetary instruments or
property deposited with such banks or financial
institutions are not seized in a physical sense, but
are examined on particular details such as the
account holders record of deposits and
transactions. Unlike the assets subject of the
freeze order, the records to be inspected under a
bank inquiry order cannot be physically seized or
hidden by the account holder. Said records are in
the possession of the bank and therefore cannot be
destroyed at the instance of the account holder
alone as that would require the extraordinary
cooperation and devotion of the bank.
Without doubt, a requirement that the
application for a bank inquiry order be done with
notice to the account holder will alert the latter
that there is a plan to inspect his bank account on
the belief that the funds therein are involved in an
unlawful activity or money laundering offense.
Still, the account holder so alerted will in fact be
unable to do anything to conceal or cleanse his
bank account records of suspicious or anomalous
transactions, at least not without the whole-
hearted cooperation of the bank, which inherently
has no vested interest to aid the account holder in
such manner.
Civil Forfeiture – NOT INCLUDED IN THE
SYLLABUS
a. A verified ex parte petition filed by AMLC
through OSG to the Executive judge of RTC
where the monetary instrument, property,
or proceeds representing, involving, or
relating to an unlawful activity or to a
money laundering offense is located upon
DIMAINPOGINOTES
17
determination of probable cause that any
monetary instrument or property is in any
way related to an unlawful activity or a
money laundering offense. However, if
located outside the Philippines, the petition
may be filed in RTC of Manila or the judicial
region where any such portion is located.
In the case of Republic vs. Glasgow Credit
and Collection Services Inc., the SC ruled that
the filing of the case before the RTC of Manila
where the bank is located at Pasig, is sufficient to
satisfy the rule on venue. Under Section 3, Title II
of the Rule of Procedure in Cases of Civil
Forfeiture, therefore, the venue of civil forfeiture
cases is any RTC of the judicial region where the
monetary instrument, property or proceeds
representing, involving, or relating to an unlawful
activity or to a money laundering offense are
located. Pasig City, where the account sought to be
forfeited in this case is situated, is within the
National Capital Judicial Region (NCJR). Clearly,
the complaint for civil forfeiture of the account may
be filed in any RTC of the NCJR. Since the RTC
Manila is one of the RTCs of the NCJR, it was a
proper venue of the Republic’s complaint for civil
forfeiture of Glasgow’s account.
b. Upon the petition duly filed, the court shall
notify the parties concern and the serve the
copy of the petition, and mandate the
respondent to comment or oppose the
petition.
c. The respondent must file a
comment/opposition within 15 days from
service or 30 days from publication;
d. If not opposition or comment was made
within the reglementary period, the court
shall hear the case ex parte and render
such judgment as may be warranted by
facts alleged in petition and its supporting
documents.
e. Pre-trial – same rule in Civil Procedure
f. Trial and Judgment – No prior criminal
charge, pendency of or conviction for any
unlawful activity or money laundering
offense is necessary for commencement or
resolution of civil forfeiture petition.
VII. Securities and Regulation Code RA no.
8799
Stock market transactions affect the
general public and the national economy. The rise
and fall of stock market indices reflect to a
considerable degree the state of the
economy. Trends in stock prices tend to herald
changes in business conditions. Consequently,
securities transactions are impressed with public
interest, and are thus
subjectto public regulation. In particular, the laws

and regulations requiring payment of traded
shares within specified periods are meant to
protect the economy from excessive stock market
speculations, and are thus mandatory. (Abacus
Securites Corp. Vs. Ampil 483 SCRA 315 2006)
A. State Policy, Purpose
The Securities Regulation Code is termed as a
“Blue Sky Law” enacted to protect the public from
unscrupulous promoters, who stake business or
venture claims which have no real basis, and sells
shares or interests therein to investors, who are
then left holding securities representing nothing
more than a claim to a square of the blue sky.
Section 2 of the SRC provides that the State shall:
1. Establish a socially conscious, free market
that regulates itself;
2. Encourage the widest participation of
ownership in enterprises;
3. Enhance the democratization of wealth,
promote the development of the capital
market;
4. Protect investors, ensure full and fair
disclosure about securities; and
5. Minimize if not totally eliminate insider
trading and other fraudulent or
manipulative devices and practices which
create distortions in the free market.
Securities Act as the “Truth in Securities”
Act, is designed to provide investors with adequate
information upon which to base their decisions to
buy and sell securities, and also to protect
legitimate businesses seeking capital through
honest presentation, against competition from
crooked promoters and prevent fraud in sales of
securities. The intended effects of Securities Act
are chiefly the following
1. Prevention of excesses and fraudulent
transactions, merely by requiring that their
details be revealed;
2. Placing in the market during the early
stages of offering of a security, a body of
information, which operating indirectly
through investment services and expert
investors, will tend to produce a more
accurate appraisal of a security. (PSE vs.
CA 281 SCRA 232 1997)
B. Definition of Securities
Shares, participation or interest in a
corporation, or in a commercial enterprise, or
profit-making venture, and evidenced by a
certificate, contract, instrument, whether written
or electronic in character,” and include:
a. Debt instruments: bond, debentures,
notes, and other evidences of indebtedness,
asset-backed securities;
b. Equity Instrument: shares of stock,
certificate of interest or participation in a
profit sharing agreement, certificates of
deposit for a future subscription;
DIMAINPOGINOTES
18
proprietary or non-proprietary membership
certificates in corporations;
c. Investment instruments: investment
contracts, fractional undivided interest in
oil, gas or other mineral rights;
d. Derivatives; like options and warrants
e. Trust Instrument: certificates of
assignments, certificates of participation,
trust certificates, voting trust certificates or
similar certificates;
f. Other instrument as may in the future be
determined by the SEC.
Customer Contract
A customer contract is an investment
contract that falls within the definition of
“securities” under Section 2 of RSA, when it
involved is a foreign exchange trading transaction
essentially is one whereby an investor is relatively
informed, and turns over his money to others,
essentially depending upon their representations
and their honesty and skill in managing it. (People
vs. Petralba 439 SCRA 158 2004)
Investment Contract (HOWEY TEST)
An investment contract is a contract,
transaction or scheme where a person invests his
money in a common enterprise and is led to expect
profits primarily from the efforts of others. The U.S
SC held in Securities and Exchange Commission
vs. W.J Howey Co., that, for an investment
contract to exist, the following elements, referred to
as the Howey Test must concur:
1. A contract, transaction, or scheme;
2. An investment of money;
3. Investment is made in a common
enterprise;
4. Expectation of profits; and
5. Profits arising primarily from the efforts of
others.
It was held in the case of Gabionza vs. CA
565 SCRA 38 2008, it is one thing for a
corporation to issue checks to satisfy isolated
individual obligations, and another for a
corporation to execute an elaborate scheme where
it would comport itself to the public as a pseudo-
investment house and issue postdated checks
instead of stocks or traditional securities to
evidence the investments of its patron. Such
scheme is an attempt to circumvent the RSA,
which requires a prior license to sell or deal in
securities.
C. Kinds of Securities
General Rule: Securities shall not be sold or
offered for sale or distribution within the
Philippines without registration statement duly
filed with and approved by the SEC, and prior to
such sale, information on the securities, in such
form and with such substance as SEC may
prescribe, shall be made available to each
prospective purchaser.

1. Exempt Securities – Securities sold or
offered for sale exempt from the registration
requirements. These are enumerated in
Section 10 of SRC.
Although shares of stock of banking institution
are exempt from the registration requirements
under RSA, a bank whose shares are listed in the
stock market is covered by the RSA and the IRR on
the reportorial requirements of the listed
companies. But nowhere does it state or even
imply that a bank as listed corporation is exempt
from complying with reports required by RSA and
its IRR. (Union Bank vs. SEC 358 SCRA 479
2001)
2. Exempt Transactions
The language of Section 6 a 4 now section
10 (i) of RSA exempting from registration
“issuance of additional capital stock” must
be interpreted to cover only issuance of
shares of stock as part of and in the course
of increasing the authorized capital stock of
a corporation. It does not cover issuances of
shares from already authorized but still un-
issued capital stock. (Nestle Philippines.
Vs CA 203 Scra 504 1991)
3. Non Exempt
Procedure for Registration of Securities
Section 8. Requirement of Registration of
Securities.– 8.1. Securities shall not be sold or
offered for sale or distribution within the
Philippines, without a registration statement duly
filed with and approved by the Commission. Prior
to such sale, information on the securities, in such
form and with such substance as the Commission
may prescribe, shall be made available to each
prospective purchaser.
8.2. The Commission may conditionally approve
the registration statement under such terms as it
may deem necessary.
8.3. The Commission may specify the terms and
conditions under which any written
communication, including any summary
prospectus, shall be deemed not to constitute an
offer for sale under this Section.
8.4. A record of the registration of securities shall
be kept in Register Securities in which shall be
recorded orders entered by the Commission with
respect such securities. Such register and all
documents or information with the respect to the
securities registered therein shall be open to public
inspection at reasonable hours on business days.
8.5. The Commission may audit the financial
statements, assets and other information of firm
applying for registration of its securities whenever
it deems the same necessary to insure full
disclosure or to protect the interest of the investors
and the public in general.
DIMAINPOGINOTES
19
Prohibition on Fraud, Manipulation and Insider
Trading
An investment agreement that violates
SEC’s Revised Rules and Regulations on
Commodity Futures Trading which prohibits any
unlicensed person to engage in, solicit or accept
orders in futures contract, may be declared void by
the SEC. Consequently, no remedy will be afforded
under the void contract for being in pari delicto.
(Queensland-Tokyo Commodities Inc. Vs.
George 630 SCRA 304 2010)
Trading of stockholder of securities for the
account of others without the necessary license
from SEC is clearly in violation of Section 19 of
RSA which provides that no broker shall sell any
securities, unless he is registered with SEC. The
purpose of the statute requiring the registration of
brokers selling securities and the filing of data
regarding securities which they propose to sell, is
to protect the public, and strengthen the securities
mechanism. Hence, whatever possible
compensation for the service rendered of
unlicensed broker cannot be recovered. (Nicolas
vs. CA 288 SCRA 307 1998)
There are two essential requirements that
must be complied with by the SEC before it may
issue a cease and desist order: First, it must
conduct proper investigation or verification;
and Second, there must be a finding that the act or
practice, unless restrained, will operate as a fraud
on investors or is otherwise likely to cause grave or
irreparable injury or prejudice to the investing
public. Before a cease and desist order may be
issued by the SEC, there must be a showing that
the act or practice sought to be restrained will
operate as a fraud on investors or is likely to cause
grave, irreparable injury or prejudice to the
investing public. Such requirement implies that
the act to be restrained
has beendetermined after conducting the proper
investigation/verification. (SEC vs. Performance
Foreign Exchange Corp. GR no. 154131 July
2016)
1. Manipulation of Security Prices
Price Manipulation
Any fraudulent act or series of fraudulent
actions designed to alter the true prices of
security/ies through the malevolent pegging,
fixing, or stabilizing the price of such security.
There is price manipulation when a person
acting for himself or through a dealer or broker,
directly or indirectly:
a. In order to create a false or misleading
appearance of active trading in any listed
security traded in an Exchange or any other
trading market.
b. To affect, alone or with others, a securities
or transactions in securities that: (I) Raises

their price to induce the purchase of a
security, whether of the same or a different
class of the same issuer or of controlling,
controlled, or commonly controlled
company by others; or (iii) Creates active
trading to induce such a purchase or sale
through manipulative devices such as
marking the close, painting the tape,
squeezing the float, hype and dump, boiler
room operations and such other similar
devices.
c. To circulate or disseminate information that
the price of any security listed in an
Exchange will or is likely to rise or fall
because of manipulative market operations
of any one or more persons conducted for
the purpose of raising or depressing the
price of the security for the purpose of
inducing the purpose of sale of such
security.
d. To make false or misleading statement with
respect to any material fact, which he knew
or had reasonable ground to believe was so
false or misleading, for the purpose of
inducing the purchase or sale of any
security listed or traded in an Exchange
e. To effect, either alone or others, any series
of transactions for the purchase and/or
sale of any security traded in an Exchange
for the purpose of pegging, fixing or
stabilizing the price of such security; unless
otherwise allowed by this Code or by rules
of the Commission.
2. Fraudulent Transactions
Section 26. Fraudulent Transactions. – It shall
be unlawful for any person, directly or indirectly,
in connection with the purchase or sale of any
securities to:
26.1. Employ any device, scheme, or artifice to
defraud;
26.2. Obtain money or property by means of any
untrue statement of a material fact of any omission
to state a material fact necessary in order to make
the statements made, in the light of the
circumstances under which they were made, not
misleading; or
26.3. Engage in any act, transaction, practice or
course of business which operates or would
operate as a fraud or deceit upon any person.
3. Insider Trading
Who is an “insider”? – In the USA, the
obligation to disclose or abstain has been
traditionally imposed on corporate “insiders”,
particularly officers, directors, or controlling
stockholders, but that definition has since been
expanded. The term “insiders” now includes:
DIMAINPOGINOTES
20
a. Persons whose relationship or former
relationship to the issuer gives or gave
them access to a fact of special significance,
about the issuer or the security that is not
generally available; and
b. One who learns such a fact from an insider
knowing that the person from whom he
learns the fact is such an insider. (SEC vs.
Interport Resources Corp. 567 SCRA
354)
Sec.30 of RSA explains in simple terms that the
insider's misuse of non-public and undisclosed
information is the gravamen of illegal conduct. The
intent of the law is the protection of investors
against fraud, committed when an insider, using
secret information, takes advantage of an
uninformed investor. Insiders are obligated to
disclose material information to the other party or
abstain from trading the shares of his
corporation. This duty to disclose or abstain is
based on two factors: first, the existence of a
relationship giving access, directly or indirectly, to
information intended to be available only for a
corporate purpose and not for the personal benefit
of anyone; and second, the inherent unfairness
involved when a party takes advantage of such
information knowing it is unavailable to those with
whom he is dealing. (SEC vs. Interport Resources
Corp. 567 SCRA 354)
Exns:
1. When the insider proves that the
information was not gained from such
relationship;
2. If the other party selling to or buying from
the insider or his agent is identified, the
insider proves:
a. That he disclosed the information to the
other party, or
b. That he had reason to believe that the other
party otherwise is also in possession of the
information
F. Protection of Investors
1. Tender Offer Rule
A “tender offer” is a publicly announced
intention by a person acting alone or in concert
with other persons to acquire equity securities of a
public company one listed on an exchange, among
others. The term is also defined as “an offer by the
acquiring person to stockholders of a public
company for them to tender their shares therein on
terms specified in the offer.” (Osmena III. Vs SSS
of the Philippines 533 SCRA 313 2007)
The coverage of the mandatory tender offer rule
covers not only direct acquisition but also indirect
acquisition or “any type of acquisition.” The rule in
this jurisdiction is that the construction given to a
statute by an administrative agency charged with

the interpretation and application of that statute is
entitled to great weight by the courts. The
legislative intent of Sec. 19 of the SRC on
mandatory tender offers is to regulate activities
relating to acquisition of control of the listed
company and for the purpose of protecting the
minority stockholders of a listed corporation.
(Cemco Holdings vs. National Life Insurance
Co. 529 SCRA 355 2007)
2. Rules on Proxy Solicitation
Section 20. Proxy solicitations. - 20.1. Proxies
must be issued and proxy solicitation must be
made in accordance with rules and regulations to
be issued by the Commission;
20.2. Proxies must be in writing, signed by the
stockholder or his duly authorized representative
and file before the scheduled meeting with the
corporate secretary.
20.3. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which it is
intended. No proxy shall be valid only for the
meting for which it is intended. No proxy shall be
valid and effective for a period longer than five (5)
years at one time.
20.4. No broker or dealer shall give any proxy,
consent or any authorization, in respect of any
security carried for the account of the customer, to
a person other than the customer, without written
authorization of such customer.
20.5. A broker or dealer who holds or acquire the
proxy for at least ten percent (10%) or such
percentage as the commission may prescribe of the
outstanding share of such issuer, shall submit a
report identifying the beneficial owner of ten days
after such acquisition, for its own account or
customer, to the issuer of security, to the exchange
where the security is traded and to the
Commission.
Section 21. Fees of Tender Offers and
Certain Proxy Solicitations. – At the time of filling
with the Commission of any statement required
under Section 19 for any tender offer or Section
72.2 for issuer purchases, or Section 20 for proxy
or consent solicitation, The Commission may
require that the person making such filing pay a
fee of not more than one-tenth (1/10)(1%) of;
21.1. The propose aggregate purchase price in the
case of a transaction under Section 20 or 72.2; or
21.2. The proposed payment in cash, and ion value
of any securities or property to be transferred in
the acquisition, merger or consolidating, or the
cash and value of any securities proposed to be
received upon the sale disposition of such assets in
the case of a solicitation under Section 20. The
Commission shall prescribe by rule diminishing
fees in inverse proportion to the value of the
aggregate price of the offering.
DIMAINPOGINOTES
21
3. Disclosure Rule
Section 30 and 36 of RSA promoted full
disclosure in the securities market and prevent
unscrupulous individuals, who by their positions
obtain on-public information, from taking
advantage of an uninformed public. No individual
would invest in a market which can be
manipulated by a limited number of corporate
insiders. Such reaction would stifle, if not stunt,
the growth of the securities market. To avert the
occurrence of such event, SEC 30, prevented the
unfair use of non-public information in securities
transactions, while Sec 36 allowed SEC to monitor
the transactions entered into by corporate officers
and directors as regards the securities of their
companies. (SEC vs. Interport Resources Corp.
567 SCRA 354 2008)
FULL DISCLOSURE VS. MERIT SYSTEM
Under the policy of “full material
disclosure” all companies, listed or applying for
listing, are required to divulge truthfully and
accurately, all material information about
themselves and the securities they sell, for the
protection of the investing public under the pain of
administrative, criminal and civil sanctions.
Furthermore, it is the intention of the
Congress to make the registration and issuance of
securities dependent to a certain extent, on the
merits of the securities themselves, and of the
issuer, to be determined by SEC. Hence, full
disclosure and the merits of the securities must be
present. (PSE vs. CA 281 SCRA 232 1997)
Civil Liability
To constitute a violation of the RSA that
can warrant an imposition of a fine under the RSA,
fraud or deceit, not mere negligence, on the part of
the offender must be clearly established. (SEC vs.
CA 246 SCRA 738)
A criminal charge for violation of the
Securities Regulation Code is a specialized dispute.
Hence, it must first be referred to an
administrative agency of special competence –
SEC. Under the doctrine of primary jurisdiction,
court will not determine a controversy involving a
question within the jurisdiction of the
administrative tribunal, where the question
demands the exercise of knowledge and expertise
of said administrative tribunal to determine
technical and intricate matters of fact. (Baviera
vs. Paglinawan Gr no. 168380 2007)
a. Civil liabilities on account of False
Registration Statement (Sec.56)
b. Civil liabilities arising from in connection
with prospectus, communications and
reports (Sec. 57)
c. Civil liabilities arising from Fraud in
connection with securities transactions
(Sec. 58)
 22

d. From manipulation of Security Prices

(Sec.59)
e. With respect to commodity Futures
contracts and Pre-need plans (Sec.60)
f. On account of Insider Trading (Sec.61)

DIMAINPOGINOTES