DIRTY MONEY
Turning a blind eye to corruption can hurt legitimate businesses, as a Filipino bank discovered to its cost.
By Steven Crane

The International Monetary Fund (IMF) estimates that between 2 and 5 percent of global GDP may be involved in money laundering, making it the world's largest industry. The United Nations estimates that anywhere from US$100 billion to US$1 trillion in dirty money is funneled through the international banking system annually, with Asia accounting for at least US$100 billion to US$200 billion.

But the real figure, says Stephen Tarrant, Hong Kong's Superintendent of Police, Organized Crime and Triad Bureau, is likely much larger. "The original target for money laundering investigations," he says, "was drug money. That's expanded to include dirty money from smuggling, commercial fraud, false invoicing, tax evasion, gambling, you name it. With about HK$4 billion (US$513 million) a week in legal and illegal gambling bets alone, the amount of money laundered through a major financial center like Hong Kong is impossible to peg."

And very difficult to trace and prosecute. Hong Kong has 474,000 companies formed under offshore financial center laws that require a minimum of information to register and almost no public disclosure of ownership or shareholders. Even with the cooperation of legitimate financial institutions, getting a conviction isn't easy. Since 1997, says Tarrant, banks reported more than 20,000 suspicious transactions, resulting in just 2,600 investigations, only 61 prosecutions, and a paltry 36 convictions.

Currently, Tarrant says investigators are working on 120 cases involving about US$640 million in dirty money. But based on past experience, he complains bitterly, the likelihood of many convictions is small. "In four years, only about a dozen of the reports came from legal and accounting professionals," he says. "Even though we offer complete anonymity, they just won't cooperate."

The Asian Connection

The Asia Pacific region is a magnet for money laundering activities for two reasons: first, it houses several large financial hubs including Hong Kong, Tokyo and Singapore. Second, in many Asian countries, money laundering isn't perceived as a serious crime. "Until recently," says Leonilo Coronel, executive director of the Banker's Association of the Philippines (BAP), "the corporate and banking culture here hasn't discriminated against money laundering. The attitude has been money is money."

That attitude may be changing. Many multinational corporations and international institutions are realizing the damaging effects of money laundering and are tightening up practices that let corruption flourish. Singapore-based Rupert Utley, a risk consultant at Arthur Andersen, implements anti-money-laundering programs and provides advice to financial institutions. He says: "There has to be a rational explanation for any transaction. If companies have been set up with no apparent commercial purpose, or a subsidiary is set up in a country where it does not appear necessary to the business, red flags should obviously pop up."

Finance managers, says Utley's colleague in Manila, risk consultant Joseph Quiazon, then have to stop and ask: "Do we really want this business?" In Quiazon's experience, money laundering risk rarely figures in the due diligence process. Companies that don't place money laundering firmly on the risk agenda will find themselves targeted by money launderers and suffer the damages as a result, be they financial, criminal or to their reputation. "Unfortunately," he says, "no one is interested until the proverbial shit hits the fan. Then executives fly in from headquarters for damage control, and money and resources are poured in to clean things up."

Few companies have suffered more damage that that of the Philippines' third-largest bank, Equitable PCI. Deposits fell 9 percent in the first quarter of this year to 147 billion pesos (US$2.9 billion) compared to the same period last year. The bank's net income plummeted 53 percent, to US$2.8 million from US$6 million and total assets shrank 4 percent, or US$197 million, to US$5.3 billion, mainly due to the reduction in its loan portfolio. In addition, Equitable was forced to obtain a US$591 million loan from the central bank to maintain its capital adequacy levels and liquidity after the withdrawals.

Why? In December last year, prosecutors at the impeachment trial of former President Joseph Estrada linked several accounts opened under the name Jose Velarde at the bank to what one member of the prosecution team called "a classic case of money laundering." With typical Filipino humor, street hawkers cashed in on the then unnamed account holder by hawking T-shirts in Manila stating: ÔI am the real Jose Velarde'.

For Equitable's management, though, it was no joke. For weeks, Estrada's lawyers reportedly pressured bank officials not to reveal any information. Prosecutors and the anti-Estrada public suspected the bank of stonewalling efforts by the authorities to access bank records. Once the authorities issued a subpoena for the records of "Jose Velarde and related accounts" Equitable's customers started pulling out their cash and many went elsewhere for loans. Most were concerned that their details would be disclosed next. The bank's reputation sank like pair of concrete shoes.

Under heavy pressure from the public and the court, compounded by allegations of cronyism, Equitable's chairman and an old friend of Estrada, George Go, whose family owns 30 percent of the bank, quit. A number of the bank's senior managers, including the finance director, also bailed out.

Eventually, under court orders, an Equitable senior vice-president gave evidence that it was Estrada, using the name Jose Velarde, who opened at least a dozen accounts at the bank, hiding up to US$40 million of his ill-gotten wealth.

Hardly Equitable

Under the Philippines' notorious Bank Secrecy Law, opening anonymous accounts on behalf of customers isn't illegal and bank authorities aren't obliged to report suspicious transactions. "We didn't break any laws," says one bank employee on condition on anonymity, "because there weren't any laws to break."

The scandal has handed the Philippines the unwanted distinction of being one of three Asian countries, including Indonesia and Myanmar, on the Financial Action Task Force on Money Laundering's (FATF) list of 15 non-cooperative countries.

The FATF is a Paris-based group set up by the Organization for Economic Cooperation and Development to frame international anti-money laundering policies. Its blacklist targets countries it deems money-laundering havens. Most on the list are island tax havens such as Bahamas and Cayman Islands, with the exception of Russia, Lebanon, Israel and Panama. The Philippines being named to the list is a major blow to the nation's reputation and a serious disadvantage in the competition for foreign investment.

The governor of the Philippines' central bank, Bangko Sentral ng Pilipinas (BSP), Rafael Buenaventura, says he doubts the Philippines will be taken off the black list this year unless two crucial measures are passed by the legislature: an amendment to the bank secrecy law and the passing of a new law making laundering a criminal act. "We were singled out [by the FATF] primarily because of the bank secrecy law," he admits.

Hong Kong-based Mimi Lee, the acting president of FATF, agrees that unless the laws are beefed up, criminals will continue to bend the rules. Prosecuting money-laundering crimes is difficult, she says, "because we have to prove the professionals involved in facilitating the crime knew or had grounds to believe money laundering took place." But they all hide behind confidentiality and privilege of information shields, she says. "What they don't realize is that corruption breeds corruption. In the long run that causes a loss of confidence, a breakdown in law and order, a loss of investment, and the takeover of legitimate businesses by criminals."

Goodness Takes Time

While Buenaventura admits that tightening up the laws is necessary, he says that the legislation may take time because bankers are concerned that new laws will provide too much disclosure. "Our concern is to draft new legislation to prevent international syndicates from using the Philippines, while safeguarding the privacy of legitimate businesses," he says.

As for Equitable, a new management team will start in July, says its current chairman, Antonio Go, who took over the post from his brother Peter Go, who took over from "retired" brother George. Much like the bank's customers, Antonio Go prefers to keep a low profile. "In the Philippines," he says, "there's a fine balance we have to strike between being open and transparent in the business and protecting the confidentiality of our customers. Secrecy is part of the culture here. People don't want others to know how much they're worth."

For now, Go's balancing act includes rebuilding the bank's worth by re-capitalizing its reserves and winning back depositors spooked by the notion of too much transparency. During the trial, he explains, our customers had the perception that we'd open all our accounts to public scrutiny and we didn't address their concerns effectively. The Estrada case, he says, was exceptional. "If you're asked by the President to do something, you have to have a lot of good reasons for saying no," says Go.

In February, the bank launched a new media campaign to win back old customers by emphasizing the bonds of loyalty. Go claims the campaign has resulted in the recovery of 30 percent of its pre-scandal customers.

"For the first time in the Philippines," says BAP's Coronel, "the Equitable case has demonstrated what can happen to a company if it's used as an instrument of money laundering. The theme of the new administration, like any other administration, is to combat graft and corruption. The best way to curb it is to go after its fruits through anti-money-laundering legislation.

Coronel points out another reason the government is keen to combat money-laundering practices. "National pride is at stake," he insists. "This time," he says, "we have to show we mean business."

Steven Crane is executive editor of CFO Asia based in Singapore.