AML / CFT: new Philippines law makes weak draft even weaker

The Philippines was one of the countries on the original NCCT list published by the Financial Action Task Force. It produced a law that was, in some respects, stronger than those in some FATF member countries but and it scraped past the monitors at the FATF. But against current measures, it was in many respects woefully inadequate.

President Aquino is the latest in a line of leaders to try to get the law updated - a task that has proved surprisingly difficult, even more surprisingly given that a major part of the amendment had to do with terrorist financing. The Philippines has a serious problem with terrorism in the south of the country.

Vested interests, a country with an economy dependent on remittances and a serious corruption problem that seems to always just fail to hit the headlines have conspired to make the drafting of a good law a minefield of negotiation.

But, yesterday, it all looked like it was going in the right direction: new measures added to the list of reporting institutions to include non-financial sector businesses such as pawnshops (surprisingly missing from the laws of many countries).

But the measures to freeze assets were weak: the Anti Money Laundering Council does not have the power to freeze assets, despite attempts by some members of the House of Representatives to include the power in the Bill. This is a normal provision in the vast majority of countries. By compromise, the Bill was drafted to include that assets could be frozen if the AMLC presented, ex parte, a prima facie case to a Court. But the court chosen was not at first instance: it was the Court of Appeals, leading to the prospect of a delay in even getting an application before the Court.

However, even that measure was in trouble and, at the last minute, an amendment was tabled which emasculated the whole process. After negotiation, the original draft measure was reinstated but with the proviso that the application is no longer ex parte. Or at least not on the face of the law. It remains open, under the general law, for AMLC to make an ex parte application and then follow it up with an on-notice hearing. But, similarly, it remains open to the Court to say that it will not entertain an ex parte application.

But far more damaging is the process under which AMLC can even examine accounts. Under the law as approved in the House last night, the AMLC can examine financial records, including bank accounts, only "after due notice and hearing."

Therefore, the combined effect of the two modifications is that AMLC cannot restrain assets without notice pending investigation and, worse, it must inform the target that the accounts are of interest and obtain a court order to examine accounts.

Representative Rufus Rodriguez told local media that "We have lost the essence of the entire amendment, which practically makes the Anti-Money Laundering Law ineffective and the AMLC toothless." Rodriguez was one of those who had proposed the original provision that an ex parte order should be sought.

In other countries, the freezing of an account (even if only short term pending an application to the Court) is by an administrative order by the FIU or other authorised department. And while a search warrant is necessary to examine bank etc. records, in most countries the application is made to a court of first instance or, even, made by a senior officer in the FIU.

For financial institutions, there now arises the problem over what to do with funds about which a suspicious transaction report has been filed. If they deal with the funds, they are exposed to the risk of a money laundering prosecution. If they don't, they run the risk that a customer will sue them for improperly failing to act on instructions.