I am pleased to share with readers a June 29 note to subscribers of GlobalSource Partners (globalsourcepartners.com), a New York-based network of independent emerging market analysts. Christine Tang and I are their Philippine advisers.
At the end of its plenary on June 25, the Paris-based Financial Action Task Force (FATF) announced that it is adding the Philippines to its list of jurisdictions under increased monitoring, widely referred to as the “grey list.” The latest list contains 22 countries and includes only two other Southeast Asian nations, Cambodia and Myanmar.
Inclusion in the grey list does not carry sanctions but publicizes remaining deficiencies in the country’s efforts to combat money laundering and terrorist financing and its commitment to resolve these within agreed timeframes. Satisfactory progress in addressing the deficiencies will lead to removal from the FATF grey list while non-compliance risks landing the country in the dreaded “black list” or high-risk jurisdictions subject to countermeasures. Based on the assessment of Bangko Sentral ng Pilipinas Governor Benjamin Diokno, chairman of the Anti-Money Laundering Council (AMLC), the Philippines can expect delisting not earlier than January 2023, a good 18 months away.
The Philippines was on the FATF black list for almost five years, from 2000 to 2005, and was removed only after the Anti-Money Laundering Act (AMLA) — passed in 2001, the Act criminalized money laundering and created the AMLC — took effect. It landed on the grey list in 2010 and was removed in 2013 after various measures were taken to strengthen its anti-money laundering and countering the financing of terrorism (AML/CFT) regime, including legislation amending the CFT regime. It has since avoided the FATF’s increased scrutiny (even after the Bangladesh bank heist in 2016) through incremental improvements in its AML/CFT regime, including the coverage of casinos under the AMLA Law.
This time around, the grey listing happened after the country passed the controversial Anti-Terrorism Act last year and a stronger AMLA early this year. The former applied tougher financial sanctions on terrorism financing while the latter expanded the powers of AMLC and the law’s coverage to offshore gaming operators and real estate brokers and included tax crimes among predicate money laundering offenses. Based on the FATF summary of the Philippine action plan, remaining deficiencies are mostly implementation/operational issues, i.e., for authorities to demonstrate the various laws’ effectiveness.
The Philippine action plan to strengthen the AML/CFT regime follows:
1. demonstrating that effective risk-based supervision of designated non-financial businesses and professions (DNFBPs) is occurring;
2. demonstrating that supervisors are using AML/CFT controls to mitigate risks associated with casino junkets;
3. implementing the new registration requirements for money or value transfer services (MVTS) and applying sanctions to unregistered and illegal remittance operators;
4. enhancing and streamlining local enforcement agencies (LEA) access to beneficial ownership (BO) information and taking steps to ensure that BO information is accurate and up-to-date;
5. demonstrating an increase in the use of financial intelligence and an increase in ML investigations and prosecutions in line with risk;
6. demonstrating an increase in the identification, investigation and prosecution of terrorism financing (TF) cases;
7. demonstrating that appropriate measures are taken with respect to the non-profit organization (NPO) sector (including unregistered NPOs) without disrupting legitimate NPO activity; and,
8. enhancing the effectiveness of the targeted financial sanctions framework for both TF and proliferation financing (PF).
However, one remaining item that requires legislation is the proposed amendment to the bank secrecy law, reportedly the most restrictive in the world. Despite the backing of 26 business groups, the measure has yet to be certified as urgent by the President and appears to be languishing in both houses of Congress. In its latest Philippine Financial System Stability Assessment (FSSA), the IMF warned that the current arrangement, which limits direct access to information protected by deposit secrecy only to the AMLC, could weaken the AML/CFT regime’s effectiveness. It recommended giving direct and full access to financial sector regulators.
We agree with the Governor that it will take years, likely longer than he is expecting, for the country to be delisted, especially given the upcoming election season. Knowledgeable people we consulted think that it is unlikely the Philippines will be removed as long as: a.) the secrecy of bank deposit law is not relaxed; and, b.) the AMLC is unable to show that it can effectively investigate and act on reports of suspicious transactions submitted to it.
So far, financial markets seemed to have taken the grey listing in stride. However, given recent IMF findings that grey listing significantly affects capital flows, financial sector players are worried that an extended stay on the list would over time adversely affect remittances, starting with higher fees, and foreign investments. This would be a pity considering current efforts to liberalize foreign investment rules in order to attract foreign capital to aid the economy’s post-pandemic recovery.
Romeo L. Bernardo was Finance Undersecretary during the Cory Aquino and Fidel Ramos administrations. He serves as a Trustee/Director in the Foundation for Economic Freedom, The Management Association of the Philippines and The Finex Foundation.