Special Commercial Laws - Finals

Special Commercial Laws - Finals
EH 403 [2011 2012]

1 General Banking Secrecy of Bank Deposits PDIC Truth in Lending Anti-Money Laundering Foreign Investments Warehouse Receipts Whew

GENERAL BANKING ACT
(R.A. 8791)

The General Banking Law applies PRIMARILY to Universal and Commercial Banks
and SUPPLETORILY to Thrift Banks, Rural Banks, Cooperative Banks andIslamic
Banks.

PURPOSE AND SCOPE OF APPLICATION
(Section 2)

Section 2. Declaration Of Policy. - The State recognizes the vital role of banks in
providing an environment conducive to the sustained development of the national
economy and the fiduciary nature of banking that requires high standards of
integrity and performance. In furtherance thereof, the State shall promote and
maintain a stable and efficient banking and financial system that is globally
competitive, dynamic and responsive to the demands of a developing economy.

1. The State recognizes the vital role of banks in providing an environment
conducive to the sustained development of the National Economy.
- The bank plays either a passive or an active role:
Passive as a depositary of your millions.
Active it conducts not only banking and lending activities but
more importantly it helps in the conduct of day to day
transactions of several businesses. Banks are considered as
trusted partners of business entities.
- Banks play a vital role in the economic life of the country and for the
sustained development of the country.
Imagine if there are no banks, how would we facilitate our
transactions as individuals, as business entities and as a country in
general?

2. The State also recognizes the fiduciary nature of banks.
- Banks are impressed with public interest.
- Because of the said fiduciarynature, banks are expected to exercise
the highest standards of integrity and performance as compared to
other entities.
- The bank must not only exercise high standards of integrity and
performance, it must also ensure that its employees do likewise,
because this is the only way to ensure that the bank will comply with
its fiduciary duty.

The standard of diligence required of banks (i.e. HIGHEST STANDARDS OF
INTEGRITY AND PERFORMANCE) is exemplified in the following cases:

PCI BANK V. COURT OF APPEALSFiduciary Obligation of Bank Employees

Banks are liable for the wrongful and tortuous acts of their employees so long as
those acts were done in the course of the latters employment. The banks liability
is not merely vicarious but PRIMARY, and so, the defense of due diligence in the
selection and supervision of its employees is NOT A VALID DEFENSE.

CAST:

Citibank Drawee Bank
PCI Bank Collecting Bank; Authorized Agent Bank
Commissioner of Internal Revenue Payee

FACTS:

Ford was assessed of percentage taxes. It drew an account with Citibank, the
drawee bank, and deposited the check to PCI Bank, the authorized agent bank[In
taxation, we are allowed pay our taxes directly to authorized agent banks (AABs). In
this case, the AAB is PCI Bank.]. Ford was surprised when it received a letter of
demand for the payment of the taxes. Apparently, the CIR did not receive any
payment at all. And so Ford was compelled to pay the CIR. An investigation was
conducted and it was found out that there was a syndicate involving employees of
Ford, PCI Bank and Citibank. There was also an employee of BIR who made it
possible for the issuance of spurious receipts.

Who should be held liable?

SC: Both PCI Bank and Citibank they are equally at fault.

PCI Bank imputed fault to Ford because according to PCI Bank, its (Fords)
employee Wilfredo Rivera, is involved in the syndicate. BIRs defense was that
it was Fords fault because it failed to exercise supervision over its own
employees because it authorized its employee to make the call.

SC: it was not the fault of Ford because it was not part of the ordinary
course of its business and the Court determined that Rivera acted on his
own. Ultimately, the Court decided against PCI Bank because as a bank, PCI
Bank is expected to exercise the highest degree of diligence and should not
have allowed itself to easily fall for the machinations of the Ford employee
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without checking first with Ford. This is one of the many lapses of PCI Bank,
relying heavily on the mere call of Rivera without verifying the authority of
that person.

PCI Bank interposed the defense that although its employees are part of the
syndicate, it did not authorize such persons to do so.

SC: it does not matter whether or not such persons who worked in the
bank are authorized. So long as such persons work in the bank, the bank is
mandated to exercise due diligence. So long as they work for such bank,
they could be held liable.

What about the defense of PCI Bank that it exercised due diligence in the
selection and supervision, was it a valid defense?

NO. Such defense is not available to banks because the liability of the
banks is not vicarious but PRIMARY. Even if PCI Bank was also a victim of
the operations of the syndicate, such is also not a valid defense because
banks are liable for the wrongful and tortuous acts of its employees.

Citibank interposed a defense that it cannot be held liable because, PCI Bank,
as a collecting bank, makes certain warranties when it indorses the check for
clearing. At the back of the check, it says all indorsements are guaranteed. It
warrants that the said signatures appearing in the check are genuine.

SC: it still failed to exercise due diligence because Citibank failed to notice
that at the back of the check, there were no verifications/ initials. And so,
Citibank was not able to discover that those were not the same checks that
were issued by Ford, as the checks presented were those that have been
replaced by the syndicate. Had Citibank exercised the highest degree of
care and supervision, Citibank would have found out that the checks did
not contain initials.

Ford was not also considered entirely blameless.The penalty of Ford was a
reduced rate of interest andamount of damages. Instead of 12%, it was
reduced to 6%. Ford failed to detect the fraud. It failed to examine its
passbooks, statements of accounts and checks. But mainly, the liability falls on
the drawee bank, Citibank, and the collecting bank, PCI Bank, for failing to
exercise that highest degree of care expected of Banks.

PRUDENTIAL BANK V. CA Duty on Bank Accounts of Clients

In every case, the depositor expects the bank to treat his account with utmost
fidelity, whether such account consists only of a few hundred pesos or of millions.
The bank must record every single transaction accurately, down to the last centavo,
and as promptly as possible.

FACTS:

This case arose from a dispute between Prudential Bank and private respondent,
Francisco Valenzuela. Valenzuela opened a savings account with Prudential Bank. It
availed of the Banks service of automatic transfer of funds from his savings account
to his current accounts. What happened was when respondent deposited a check in
his saving account, it did not reflect immediately in his account. The check was
deposited on June 1. However, the bank failed to have it reflected in his account. It
was only reflected on June 24. It was posted 23 days after the check was deposited.

After depositing such check, Valenzuela issued a check against Legaspi in payment
of jewelries. Legaspi subsequently endorsed the said check to Lhuiller. Lhuiller went
to his bank and there he found out that the check was dishonored for insufficiency
of funds. After the Valenzuela knew about it, he checked with the bank and
inquired why his check was dishonored. It was there that he found out that it was
only after 23 days that the check was posted. The error was subsequently corrected
by the bank. It apologized to Valenzuela. But this was not the first time that it
happened. So, he instituted a suit against the bank.

SC:The Court said that the bank is liable because, even if malice and bad faith were
not proven, the banking business is impressed with public interest. It is expected to
exercise the highest degree of diligence regardless of the amount deposited.

The Court said that it is not enough for the bank to say sorry because in the first
place that mistake should not have been committed had the bank that degree of
care expected of them. The misposting of checks shows on the part of the bank the
lack of care and supervision. Since the bank is an entity impressed with public
interest, the accounts of the depositors should be treated with meticulous care.

Is Valenzuela here entitled to moral damages? He is entitled to moral damages for
sleepless nights, anxiety etc.

What about exemplary damages? YES. This kind of award of damages is to set an
example. The Court in effect is saying that to all banks concerned, if you fail to
exercise the degree of care, you will be held liable.

EH 403 [2011 2012]


BPI V. CA

ISSUE:

Who is at fault here? Is it the depositor who signed a blank withdrawal slip or is it
the bank who allowed the withdrawal?

The contention of the bank was that the depositor was partly at fault because he
issued a blank withdrawal slip without even indicating the amount and the name of
the payee.

SC: The Bank.

To be able to withdraw from the savings account deposit under the Philippine
foreign currency deposit system, two requisites must be presented to petitioner
bank by the person withdrawing an amount: (a) a duly filled-up withdrawal slip, and
(b) the depositor's passbook.In this case, the bank allowed the withdrawal even
without the presentation of the passbook. If it is made thru a representative, there
should be an attachment of the authority given. Normally, its in the back of the
form. Usually, if you do not withdraw yourself, you indicate who the authorized
person is. Nevertheless, it must always be accompanied by a passbook.

There is another reason, the main reason actually, why we can say that the bank
here is really at fault or negligent. That it did not exercise the required diligence, the
highest degree of care. The bank allowed the withdrawal of $2,500 even before the
check was cleared. It is SOP for most banks that it will not allow withdrawals unless
the check has already cleared. In this case, when the bank allowed the withdrawal,
the balance was only 750. But here, the bank allowed the $2,500 withdrawal
without waiting for the check to be cleared. Had the bank waited for the check to
be cleared, then, this thing would not have happened.

So these are the lapses of the bank which indicated that the bank failed to exercise
that degree of care. It failed to exerciseordinary diligence, much less the highest
degree of care.

Was the depositors signing of a blank withdrawal slip the proximate cause?

While it is true that private respondent's having signed a blank withdrawal
slip set in motion the events that resulted in the withdrawal and
encashment of the counterfeit check, the negligence of the banks
personnel in allowing the withdrawal of $2,500 without the check not
having been cleared yet was the proximate cause of the loss.

SIMEX INTL (MANILA) V. CA

ISSUE:

WON the TRB is liable.

The defense was there was no malice, bad faith on the part of Traders Royal Bank. It
was just an honest mistake.

SC:The SC held that the TRB is liable for moral damages and exemplary damages.

As to moral damages: although there was no evident bad faith on the part of the
bank, it failed to give the funds when Simex Intl would have withdrawn the check.
It failed to explain why such checks bounced. While corporations do not have
feelings like natural persons, it is still entitled to moral damagesbecause the
corporation has a good reputation to protect.

As to the exemplary damages: it is to set an example to the public.

REYES V. CAHigh Degree of Diligence Does Not Cover Transactions Outside of Bank
Deposits; There must be a Depositor-Bank Relationship (Fiduciary Relationship)

FACTS:

The Reyeses wanted to purchase a foreign exchange demand draft to be used as
payment for the registration fee in the conference in Australia. At first it was denied
because FEBTC did not have an Australian dollar account in any bank in Sydney.
They asked for another way. The arrangement would be that the foreign bank in
Australia would honor the demand draft and the foreign bank in Australia will debit
the account of FEBTC here in the Philippines. So, that was the arrangement. In that
way, the demand drafts presented by the spouses in Australia would be honored.
But what happened was, when the Reyeses were in Australia and tried to register in
this conference, they were surprised that the foreign exchange demand drafts were
dishonored. The reason given by the bank was there was no such account. So after
the dishonor, the Reyeses informed FEBTC inquiring why the demand drafts were
dishonored. They said that they were embarrassed. The registration table had so
many delegates.

FEBTC sent again a notice or reconfirmation to Westpac New York. Because FEBTC
thought at first that the reason for the dishonor was that there was no account but
FEBTC learnedthat its account was already debited by Westpac Bank New York. So
EH 403 [2011 2012]


meaning, it has been deducted already and that the demand draft should have
been honored. Again, FEBTC sent a reconfirmation to Westpac New York of its
authority to honor the demand draft. And that Westpac New Yorks is entitled to
reimbursement. But then again, despite the reconfirmation and recommunication
done by FEBTC to Westpac New York, the bank in Sydney, the demand draft was
still dishonored. The reason there was an erroneous decoding of the cable message.
Instead of Number 7, the decoder in Sydney read it as Number 1. 7 refers to
demand drafts and 1 refers to letters of credit. But there was no application of
letters of credit. That is why the Bank in Sydney dishonored the demand draft. So,
what happened? The Reyeses went back to the Philippines and sued FEBTC due to
the dishonor of the foreign exchange draft because according to them, they were
exposed to unnecessary shock, social humiliation, deep mental anguish in a foreign
country in the presence of international audience.

ISSUE:

WON FEBTC is liable under the circumstances.

SC: FEBTC is not liable because of the nature of the transaction.

What is the relationship of the bank with respect to the Reyeses?

In this case, the Court said that the relationship is NOT fiduciary in nature
meaning the sale of draft is just an ordinary commercial transaction
involving a seller and a buyer. The seller here is the bank and the Reyeses
are the buyers of the demand draft. So, there is no relationship of bank
and depositor. There is no depositor and depositary. In that case, the
relationship is not fiduciary. Thus, if the relationship is not fiduciary, the
bank is not expected to exercise the highest degree of care. The exercise of
diligence of a good father of a family is enough. In this case, such diligence
has already been exercised by FEBTC as shown by them reconfirming the
Westpac Bank by sending them a letter.

Do you agree with the SCs ruling? So, are we saying that the highest degree of
care is only expected in fiduciary transactions? Or should it apply to all
transactions of the bank?

Atty. Larrobis: We should not distinguish. The law says that banks play a
vital role. We should not distinguish that the transactions of banks are
limited only to the depositor and depositary. FEBTC should have done
more. Its difficult if you make a distinction because after all if you deal
with the bank, if the bank commits an error or mistake, it will undermine
the stability and confidence of the people in the banks. But that is the
ruling of the court.

So:
- If bank is acting in a fiduciary capacity: HIGHEST DEGREE OF CARE
- Ordinary transactions only: ORDINARY DILIGENCE

What about when you apply for a loan from the bank? What is the nature of
the transaction? Is that fiduciary in nature? Or if you apply a letter of credit? If
you go with the ruling of this court you have to distinguish whether it is
fiduciary or not. When can we say then that the transaction of the bank is
fiduciary or not?

In one case, the case of DBP, the Court said that in mortgages, as mortgagees, the
bank should also be a mortgagee in good faith. So meaning, the bank is also
expected to exercise the highest degree of care. It is saying that it is still fiduciary in
nature.

DBP V. CA Degree of Diligence Required of Banks as Lenders-Mortgagers

The principle here is that the bank as a mortgagee, must be a mortgagee in good
faith. So the Court is saying that before the bank accepts the property used as
collateral, it must first conduct an examination. In this case, what was mortgaged
was a parcel of land. It turned out that the parcel of land was already owned and
possessed by another which DBP failed to discover. DBP accepted the collateral
even without conducting an inspection. Normally, the bank conducts inspection.
Aside from examining the title, you inspect the place. In this case, the bank failed to
do that. The Court said that it is not a mortgagee in good faith.

URSAL V. CA Dealings with Registered Land

Banks cannot merely rely on certificates of title in ascertaining the status of
mortgaged properties. As their business is impressed with public interest, they are
expected to exercise more care and prudence in their dealings than private
individuals. Indeed, the rule that persons dealing with registered land can rely solely
on the certificate of title does not apply to banks.

BANKS COVERED
(Section 3)

Banks refer to entities engaged in the lending of funds obtained in the form of
deposits, and are classified as follows:
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1. Universal Banks;
2. Commercial Banks;
3. Thrift Banks (3):
- Savings and Mortgage Banks
- Stock Savings and Loan Associations
- Private Development Banks
4. Rural Banks (as defined in Rural bank Act);
- Basically, rural banks cater to those in the countryside, in the rural
areas.
- Their primary function is to extend loans or credits to farmers, fisher
folks etc.
5. Cooperative Banks (as defined in Cooperative Code);
- These banks cater to cooperatives. They extend loans and assistance
to cooperatives.
6. Islamic Banks (as defined in Charter of Al Amanah Islamic Investment
Bank of the Philippines).
- These banks cater to our Muslim brothers and sisters.
7. Other classifications of banks as determined by the Monetary Board of the
BSP.

Under the General Banking Law, you are a bankif you lend funds and these funds
are obtained from the public by way of deposits. That definition under the law
describes what classical or core banking is: deposit taking and lending of funds. But
in reality, banks do more than deposit taking and lending of funds. As will be
discussed later under Section 29 on the operations of commercial banks and
Section 53 on other banking services, it is more than just deposit taking and lending
of funds.

Note that aside from deposit taking and lending of funds, universal banks and
commercial banks are also allowed to have investments in certain enterprises. In
case of universal banks, it is allowed to invest in allied and non-allied enterprises
but in case of commercial banks, only in allied enterprises. Also a universal bank can
also act as an investment house.

AUTHORITY OF BSP
(Sections 4-7)

Section 4. Supervisory Powers. The operations and activities of banks shall be
subject to supervision of the Bangko Sentral. "Supervision" shall include the
following:
4.1. The issuance of rules of, conduct or the establishment standards of
operation for uniform application to all institutions or functions covered, taking
into consideration the distinctive character of the operations of institutions and
the substantive similarities of specific functions to which such rules, modes or
standards are to be applied;
4.2 The conduct of examination to determine compliance with laws and
regulations if the circumstances so warrant as determined by the Monetary
Board;
4.3 Overseeing to ascertain that laws and regulations are complied with;
4.4 Regular investigation which shall not be oftener than once a year from the
last date of examination to determine whether an institution is conducting its
business on a safe or sound basis: Provided, That the deficiencies/irregularities
found by or discovered by an audit shall be immediately addressed;
4.5 Inquiring into the solvency and liquidity of the institution (2-D); or
4.6 Enforcing prompt corrective action. (n)

The Bangko Sentral shall also have supervision over the operations of and exercise
regulatory powers over quasi-banks, trust entities and other financial institutions
which under special laws are subject to Bangko Sentral supervision. (2-Ca)

For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the
borrowing of funds through the issuance, endorsement or assignment with
recourse or acceptance of deposit substitutes as defined in Section 95 of Republic
Act No. 7653 (hereafter the "New Central Bank Act") for purposes of re-lending or
purchasing of receivables and other obligations. (2-Da)

We have discussed the authority of the BSP when we discussed the New
Central Bank Act.

This authority of the BSP is reiterated in the General Banking Law.

BSP has supervisory and regulatory authority over banks.
- The BSP issues rules and regulations.
- It also conducts examinations and REGULAR INVESTIGATIONS over banks,
not more than once a year.
- By way of exception, the BSP can examine a bank more than once a year if
by vote of 5 of the members of the Monetary Board. Just like when there
are cases of reported irregularities, it can conduct SPECIAL EXAMINATIONS.

BSP also has authority over quasi-banks, which are still considered financial
institutions.
- What are quasi-banks?
EH 403 [2011 2012]


o Quasi-banks are entities engaged in the borrowing of funds through
the issuance, endorsement or assignment with recourse or acceptance
of deposit substitutes.
o They obtain funds not from the regular deposits (savings, time
deposits, etc.) but from deposit substitutes (debt instruments).
o So they issue debt instruments, like promissory notes, bankers
acceptance, demand drafts etc.
o In effect, the bank is the debtor and the public, the creditor.
o These deposit substitutes have higher interest compared to savings or
time deposits etc. The higher the return, the higher the risk.
o If performed by a bank, you dont call it quasi-banking since theres
nothing quasi about it. You call it deposit substitute operations.
o It is appropriate if you apply it to a non-bankentity which is engaged
into these kinds of activities.

We also have discussed under the New Central Bank Act that the BSP, through
the Monetary Board, can place the bank under conservatorship, receivership or
liquidation. It falls under their power to inquire on the solvency and liquidity of
the institution.

Section 5. Policy Direction; Ratios, Ceilings and Limitations. - The Bangko Sentral
shall provide policy direction in the areas of money, banking and credit. (n)

For this purpose, the Monetary Board may prescribe ratios, ceilings, limitations, or
other forms of regulation on the different types of accounts and practices of banks
and quasi-banks which shall, to the extent feasible, conform to internationally
accepted standards, including of the Bank for International Settlements (BIS). The
Monetary Board may exempt particular categories of transactions from such ratios,
ceilings. and limitations, but not limited to exceptional cases or to enable a bank or
quasi-bank under rehabilitation or during a merger or consolidation to continue in
business, with safety to its creditors, depositors and the general public. (2-Ca)

Examples of those ratios, ceilings or limitations:
- Reserve requirement Banks must maintain a certain reserve requirement
vis--vis its deposit liabilities. If you fall short of you reserve requirement,
you are subject to penalties.
- Single borrowers limit Banks cannot lend more than a certain percentage
of its net worth to a single borrower.
- And many others. All these to be discussed later.

PURPOSE: To ensure that the bank will conduct its operations in a safe and
sound manner

Section 6. Authority to Engage in Banking and Quasi-Banking Functions. - No
person or entity shall engage in banking operations or quasi-banking functions
without authority from the Bangko Sentral: .Provided, however, That an entity
authorized by the Bangko Sentral to perform universal or commercial banking
functions shall likewise have the authority to engage in quasi-banking functions.
The determination of whether a person or entity is performing banking or quasi-
banking functions without Bangko Sentral authority shall be decided by the
Monetary Board. To resolve such issue, the Monetary Board may; through the
appropriate supervising and examining department of the Bangko Sentral, examine,
inspect or investigate the books and records of such person or entity. Upon
issuance of this authority, such person or entity may commence to engage in
banking operations or quasi-banking function and shall continue to do so unless
such authority is sooner surrendered, revoked, suspended or annulled by the
Bangko Sentral in accordance with this Act or other special laws.

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

Persons or entities found to be performing banking or quasi-banking functions
without authority from the Bangko Sentral shall be subject to appropriate sanctions
under the New Central Bank Act and other applicable laws. (4a)

No person or entity can engage in banking operations or quasi-banking
functions without authority (banking franchise) from the BSP.

REPUBLIC OF THE PHILIPPINES V. SECURITY CREDIT AND ACCEPTANCE CORP
(19 SCRA 68)

This entity does not have a banking franchise but it obtained funds from the public
by accepting deposits. The funds obtained from the public areloaned out to its
members with interest.

ISSUE: WON the activity of the corporation is considered as banking? If yes, a
banking license would be necessary.
EH 403 [2011 2012]


SC: The activity is banking. It is classical banking actually, obtaining funds from the
public and lend it out to the public. Since you are into banking activities without the
necessary banking franchise, then, you can be held liable. Under the law, no person
or entity can engage in banking operations or quasi-banking functions without
authority (banking franchise) from the BSP.

What are the sanctions for entities and corporations engaging into banking
without the necessary banking franchise?
- It will be subjected to penalties and a quo warranto proceeding can be
filed by the Solicitor General.
- A quo warranto proceeding is a special civil action to question the
authority, in this case, to engage into banking.
- If you do not have a banking franchise, the court can order the dissolution.

Further, take note, that in Section 64, if you are not a bank, you are not allowed
to use the words as part of your corporate name, bank, banking, trust
company, banker, quasi-banking etc. The reason of course is you are not
registered to engage into these activities.

The word quasi-banking is included because the same is mostly engaged in by
banks. There are entities, however, which are not banks but are engaged in
quasi-banking functions. That is why I said that the term is inappropriate. Some
financial institutions perform quasi-banking functions because they issue debt
instruments, they issue promissory notes. But they must have an authority
from the Central Bank.

Section 7. Examination by the Bangko Sentral. - The Bangko Sentral shall, when
examining a bank, have the authority to examine an enterprise which is wholly or
majority-owned or controlled by the bank. (2-Ba)

What is the extent of the authority?
- It can examine not only the banks but even, as we have discussed before
under the New Central Bank Act, the subsidiaries and affiliates of the bank.
- But the only difference, under the New Central Bank Act, it has limited
authority to examine to examine the subsidiary and affiliate of a bank
provided that such subsidiary and affiliate is engaged in allied enterprise.
- But here, under Sec. 7 of the General Banking Law, the power of the BSP is
much broader in the sense that it does not distinguish whether the
subsidiary or affiliate is into allied enterprise or not. The fact that you are
a subsidiary or majority owned by the bank, you can be subject to
examination by the BSP.
- The only requirement for the examination of the subsidiary or the affiliate
is that must be in connection with the examination of the bank, it must be
in the course of the examination of the bank (controlling bank). The BSP
could not directly examine the subsidiary.

CAPITAL STRUCTURE OF BANKS AND QUASI-BANKS
(Sections 8-19)

Section 8. Organization. - The Monetary Board may authorize the organization of a
bank or quasi-bank subject to the following conditions:
8.1 That the entity is a stock corporation (7);
8.2 That its funds are obtained from the public, which shall mean twenty (20)
or more persons (2-Da); and
8.3 That the minimum capital requirements prescribed by the Monetary Board
for each category of banks are satisfied. (n)

No new commercial bank shall be established within three (3) years from the
effectivity of this Act. In the exercise of the authority granted herein, the Monetary
Board shall take into consideration their capability in terms of their financial
resources and technical expertise and integrity. The bank licensing process shall
incorporate an assessment of the bank's ownership structure, directors and senior
management, its operating plan and internal controls as well as its projected
financial condition and capital base.

Can a partnership or sole proprietorship organize a bank?
- No, it cannot because of the conditions provided for under the law.

What are those conditions? (3)

1. The entity is a stock corporation
- The bank cannot be a partnership or sole proprietorship. There reason
is the capital requirement for banks.
- The law requires that the bank must be a stock corporation. There is
no non-stock, non-profit bank.
- It must also issue stocks with par value. It is not authorized to issue
stocks with no par value.
o Under the Corporation Code, there are entities which must issue
par value shares and one of them is the bank. Others include
insurance companies, public utilities etc. If you look at these
corporations, these are entities vested with public interest.
Why does it have to be with par value?
Par values have fixed value.
EH 403 [2011 2012]


2. Its funds are obtained from the public, which shall mean twenty (20) or
more persons
- The shares of stock must come from the public, meaning that the
subscribers to the shares of stock of the bank must be at least 20.
- In effect, a bank cannot be a close corporation, or a family held or
closely held corporation.
- So, if it is a close corporation, it will defeat the purpose of requiring
banks to be a stock corporation. If it is a close corporation, the
stockholders can be at the same time directors of the corporation.
- Take note that when we say 20 or more subscribers, it does not mean
that all of the 20 must be incorporators. Because then, you will violate
the limitation under the Corporation Code that the incorporators that
it must be a minimum of 5 and maximum of 15. So it means that you
can have 15 incorporators and the remaining 5 are the original
subscribers.

3. That the minimum capital requirements prescribed by the Monetary Board
for each category of banks are satisfied.
- It must comply with the minimum capital requirement, to be
prescribed by the Monetary Board.
- As a GENERAL RULE, if you put up a corporation (not a bank), there is
no minimum capital requirement which is required by the Corporation
Code. The only minimum is your paid-up capital stock or must be at
least P5,000. The SEC does not prescribe. But in case of banks, as the
EXCEPTION, there is a minimum capitalization requirement.
- Based on a circular (As of 2000. I think this has already been
amended):
o universal banks, you need at least 4.9 billion
o commercial banks, 2.4 billion
o rural banks, 26 million
o thrift banks, 325 million
- The reason why the law provides for a minimum capital requirement
for banks for the protection of the public. It has the same principle
with that of the Trust Fund Doctrine. The funds held by the
corporation are for the protection of the creditors. So, they are saying
that this requirement is to reduce the moral hazards by exposing the
money of the bank owners or the stockholders at risk. If your capital is
big, mismanagement would be less likely. Its like you have an
insurable interest. If you have an insurable interest, you are trying to
make sure that you would take care of the property. Or in this case,
you would take care of the business because a large amount of capital
is at risk. You make sure that you do not mismanage. Again this is the
trust fund doctrine.
- Take note that the SEC will not register the corporation, intending to
operate as a bank, without the certificate of authority from the
Central Bank.

Section 9. Issuance of Stocks. - The Monetary Board may prescribe rules and
regulations on the types of stock a bank may issue, including the terms thereof and
rights appurtenant thereto to determine compliance with laws and regulations
governing capital and equity structure of banks; Provided, That banks shall issue par
value stocks only.

Section 10. Treasury Stocks. - No bank shall purchase or acquire shares of its own
capital stock or accept its own shares as a security for a loan, except when
authorized by the Monetary Board: Provided, That in every case the stock so
purchased or acquired shall, within six (6) months from the time of its purchase or
acquisition, be sold or disposed of at a public or private sale. (24a)

Can a bank acquire its own shares or accept shares as security for a loan?
- NO.
- Again, this is different from ordinary corporations. As what we have
learned from ordinary corporations as far as treasury shares are
concerned, an ordinary corporation can acquire treasury shares. The only
requirement is that it must have unrestricted retained earnings.

GR:No bank shall purchase or acquire shares of its own capital stock or accept its
own shares as a security for a loan, even if there are unrestricted retained earnings.
EXCEPTION:when authorized by the Monetary Board

The reason is, if you have treasury shares, your capital structure (paid-in capital,
issued shares) will be lessened. Treasury shares are not treated as part of your
capital stock. In fact, it will be deducted from your capital stock. In a way, it will
impair your capital structure. It would defeat now the minimum capital
requirement set by the Monetary Board.

In the event that the Monetary Board allows you to acquire treasury shares,
what is the rule?
- You are only allowed to hold on to it within 6 months. After 6 months, you
have to dispose it.

Again, this is based on the trust fund doctrine. It would affect your
capitalization.
EH 403 [2011 2012]


In ordinary corporations, there is no such requirement.

Section 11. Foreign Stockholdings. - Foreign individuals and non-bank corporations
may own or control up to forty percent (40%) of the voting stock of a domestic
bank. This rule shall apply to Filipinos and domestic non-bank corporations.

The percentage of foreign-owned voting stocks in a bank shall be determined by the
citizenship of the individual stockholders in that bank. The citizenship of the
corporation which is a stockholder in a bank shall follow the citizenship of the
controlling stockholders of the corporation, irrespective of the place of
incorporation. (n)

SECOND PARAGRAPH

The second paragraph talks about the grandfather rule. The SEC, however, has done
away with the strict application of the said rule and instead applied the more
lenient control test to determine corporate nationality.

Grandfather Rule
- Under the grandfather rule, if we look at the stockholdings of the
company, we look at the grandfather

So, under the grandfather rule, the effective ownership of foreigners in Bank A is
41%
21% (ABC Foreign Corporation: 30% x 70%), plus 20% (Mr. A, Foreign
Individual) = 41%
So, you consider the citizenship of the controlling stockholders of ABC
Corporation.

But under the more lenient control test, the ownership of foreigners in Bank A is
50%. (20% + 30%)

FIRST PARAGRAPH

Can foreigners or foreign corporations own a bank?
- Yes, they can own or control up to the extent of 40% of the voting stock of
a domestic bank.
- 40% is the aggregate limit, and not the individual limit.

The second sentence states that, This rule shall apply to Filipinos and domestic
non-bank corporations. Does it mean the same 40% limit?
- It means that Filipinos and domestic non-bank corporations which are
owned by Filipinos can acquire 40% each, meaning it is an individual limit.
So Mr. A and Mr. B can acquire 40% EACH.
- It is possible that a domestic bank can be owned collectively by Filipinos by
100%, so long as the individual limit does not exceed 40%.

NOTE: Section 11 should be read together with (1) Section 73, and (2) the Act
Liberalizing the Entry of Foreign Banks

- Sec. 11 limits the equity of foreign ownership in a bank to only 40% but
actually this one is somehow amended by Sec. 73 of the General Banking
Law. It is now possible for a foreign bank to acquire 100% of the voting
stock of only 1 existing bank.

SECTION 73. Acquisition of Voting Stock in a Domestic Bank. Within
seven (7) years from the effectivity of this Act and subject to guidelines
issued pursuant to the Foreign Banks Liberalization Act, the Monetary
Board may authorize a foreign bank to acquire up to one hundred percent
(100%) of the voting stock of only one (1) bank organized under the laws
of the Republic of the Philippines.

Within the same period, the Monetary Board may authorize any foreign
bank, which prior to the effectivity of this Act availed itself of the privilege
to acquire up to sixty percent (60%) of the voting stock of a bank under the
Foreign Banks Liberalization Act and the Thrift Banks Act, to further
acquire voting shares of such bank to the extent necessary for it to own
EH 403 [2011 2012]


one hundred percent (100%) of the voting stock thereof.

- Additionally, under a different law, An Act Liberalizing the Entry of Foreign
Banks, if you are a FOREIGN OWNED CORPORATION and:
1) you are listed, OR
2) you are not listed but you existed here in the Philippines for at least
10 years already
you can acquire 100% voting stock of a domestic bank. So, Section 11 has
been amended, it is possible for A FOREIGN OWNED CORPORATION to
acquire more than 40%.

- Apparently, it would seem that a domestic bank can now be owned 100%
by foreigners. If you also look at the Foreign Investment Negative List,
there is no limitation on ownership of banks because that is regulated by
the General Banking Law.

Can Foreign Corporations own 100% of the shares of a domestic bank?
- Yes, it is possible. Under:
o (1) Section 73 of the General Banking Law, but only 1 existing bank
o (2) RA 7721 An Act Liberalizing Entry of Foreign Banks
In Section 11, only up to 40%

So, what did we learn?
- For Filipinos: the individual limit is 40%, but it can be owned by 100%
- For foreigners:
o individuals, the limit is 40%
o foreign owned corporation, it can own up to 100%.
- So, in short, a domestic bank can now be owned by 100% by foreigners.

Section 12. Stockholdings of Family Groups of Related Interests. - Stockholdings of
individuals related to each other within the fourth degree of consanguinity or
affinity, legitimate or common-law, shall be considered family groups or related
interests and must be fully disclosed in all transactions by such corporations or
related groups of persons with the bank. (12-Ba)

Section 13. Corporate Stockholdings. - Two or more corporations owned or
controlled by the same family group or same group of persons shall be considered
related interests and must be fully disclosed in all transactions by such corporations
or related group of persons with the bank. (12-Ba)

Sections 12 and 13 talk about stockholdings of family groups or related
interests. Take note that the law does not provide a limit that one family can
only own 40%. There is actually NO LIMIT. The only requirement by law is
DISCLOSURE.

So, it is possible that a family group can acquire 100% of a domestic bank for as
long as the INDIVIDUAL OWNERSHIP (of the members of the family group)
DOES NOT EXCEED 40%(Section 11)

You remember when we discussed the organizational structure of banks under
Section 8, that banks should obtain funds from the public, numbering 20
persons or more. Is it possible that these 20 persons belong to one family
group? Yes, it is possible.

The law does not provide for restrictions on ownership of family or related
interests. The only requirement is full disclosure.

Section 14. Certificate of Authority to Register. - The Securities and Exchange
Commission shall not register the articles of incorporation of any bank, or any
amendment thereto, unless accompanied by a certificate of authority issued by the
Monetary Board, under it seal. Such certificate shall not be issued unless the
Monetary Board is satisfied from the evidence submitted to it:
14.1 That all requirements of existing laws and regulations to engage in the
business for which the applicant is proposed to be incorporated have been
complied with;
14.2 That the public interest and economic conditions, both general and local,
justify the authorization; and
14.3 That the amount of capital, the financing, organization, direction and
administration, as well as the integrity and responsibility of the organizers and
administrators reasonably assure the safety of deposits and the public interest.
(9)
The Securities and Exchange Commission shall not register the by-laws of any
bank, or any amendment thereto, unless accompanied by a certificate of
authority from the Bangko Sentral. (10)

Section 15. Board of Directors. - The provisions of the Corporation Code to the
contrary notwithstanding, there shall be at least five (5), and a maximum of fifteen
(15) members of the board or directors of a bank, two (2) of whom shall be
independent directors. An "independent director" shall mean a person other than
an officer or employee of the bank, its subsidiaries or affiliates or related interests.
(n) Non-Filipino citizens may become members of the board of directors of a bank
EH 403 [2011 2012]


to the extent of the foreign participation in the equity of said bank. (Sec. 7, RA
7721) The meetings of the board of directors may be conducted through modern
technologies such as, but not limited to, teleconferencing and video-conferencing.
(n)

Number of directors in a bank?
- The number of directors must be at least 5 and a maximum of 15. Same as
that of an ordinary corporation.
- But at least 2 of them must be independent directors.
o Who is considered an independent director?
An "independent director" shall mean a person other than an
officer or employee of the bank, its subsidiaries or affiliates or
related interests.
Additionally, to be considered as an independent director, you
must also not be related by consanguinity or by affinity within the
4
th
civil degree of any of the majority of the stockholder of the
bank or any of its subsidiaries.
You must also not be a consultant, lawyer, agent etc. of the bank
or any subsidiaries or any of its majority stockholders.
You must be totally independent. That you do not have any
connection whatsoever with the bank, its subsidiaries, its officers
or its stockholders, whether you are related by consanguinity or
affinity, or you acted as a lawyer, consultant, adviser, etc.

Can a foreign individual be a director of a bank?
- Yes. Non-Filipino citizens may become members of the BOD of a bank to
the extent of the foreign participation in the equity of said bank.
- For example, 40% of the bank is owned by foreigners. So, in the seat of the
BOD, they can only occupy up to the extent of 40%. If you have 5 seats,
40% of the 5 seats is 2. And of course if it is 100%, then 5 seats.
- Under the GBL, it is possible for a bank to be 100% foreign owned (see
discussion under Section 11).
- Thus, the BOD may be 100% foreign nationals. But a majority of them have
to be residents of the Philippines.

Meetings of board of directors can be conducted thru the use of modern
technologies. This is the same rule for ordinary corporations. It is not necessary
to hold meetings in person. It can be done thru teleconferencing. Of course,
there are rules prescribed by SEC in conducting teleconferencing and
videoconferencing.

Section 16. Fit and Proper Rule. - To maintain the quality of bank management and
afford better protection to depositors and the public in general the Monetary Board
shall prescribe, pass upon and review the qualifications and disqualifications of
individuals elected or appointed bank directors or officers and disqualify those
found unfit. After due notice to the board of directors of the bank, the Monetary
Board may disqualify, suspend or remove any bank director or officer who commits
or omits an act which render him unfit for the position. In determining whether an
individual is fit and proper to hold the position of a director or officer of a bank,
regard shall be given to his integrity, experience, education, training, and
competence. (9-Aa)

FIT AND PROPER RULE

The monetary board may provide for additional qualifications for BOD members in
the bank, which has something to do with integrity, experience, education, training,
and competence.
- These qualifications set by the Monetary Board are in addition to those
prescribed in the Corporation Code on qualifications of the directors.

What are the qualifications provided in the Corporation Code?
- Must own at least 1 share of stock
- Majority must be residents of the Philippines (it does not require
citizenship; only residency)
- Must be a natural person
- Must not be convicted of a crime punishable by 6 years or the violations of
the Corporation Code committed within 1 year

Additional Qualifications for Directors based on the circular issued by the BSP
- Age: at least 25 years old
- Education: College Graduate
- Work Experience: 5 years experience in banking and other related
activiites

Qualifications for Officers
- Age: at least 21 years old
- Education: College Graduate
- Work Experience: 5 years experience in banking and other related
activiites

What is the liability of bank for the torts committed by its officers?
- We have discussed this in the case of PCI Bank vs. CA
EH 403 [2011 2012]


- Take note that the bank is liable even for wrongful and tortuous acts of its
employees.

Section 17. Directors of Merged or Consolidated Banks. - In the case of a bank
merger or consolidation, the number of directors shall not exceed twenty-one (21).
(l3a)

The only exception where the Board of Directors can exceed 15 is when there is
merger or consolidation. If a bank consolidates or merges, then, it is possible
that its Board will reach the number of 21, but not exceeding 21.

Section 18. Compensation and Other Benefits of Directors and Officers. - To
protect the finds of depositors and creditors the Monetary Board may regulate the
payment by the bark to its directors and officers of compensation, allowance, fees,
bonuses, stock options, profit sharing and fringe benefits only in exceptional cases
and when the circumstances warrant, such as but not limited to the following:
18.1. When a bank is under comptrollership or conservatorship; or
18.2. When a bank is found by the Monetary Board to be conducting business
in an unsafe or unsound manner; or
18.3. When a bank is found by the Monetary Board to be in an unsatisfactory
financial condition. (n)

What about compensation by its officers? Is there a limit?
- If you read the provision, the Monetary Board may regulate the payment
by the bank to its directors and officers of compensation xxxonly in
exceptional cases and when the circumstances warrant.

- But if you look at these exceptional cases, thats the only time when the
Monetary Board would regulate. By the time it does, it is already too late.
The regulation may prove to be too late.

- But in any case, there is a limitation provided under the Corporation Code
as far as compensation of directors is concerned. If the Monetary Board
does not provide for a limit, the Corporation Code does. After all, banks
are still considered corporations. The limit is it should not exceed 10% of
the net income before tax of the preceding year. Somehow, this will serve
as the limit.
o If the bank is not doing so good, then the directors do not deserve to
receive compensation.
o Probably,this is the reason why the compensation is based on the net
income. If the corporation is doing well, then most likely the BODs are
doing their job also. If youre saying that there is no net income, then,
they also do not have compensation. It cannot exceed 10%.

Section 19. Prohibition on Public Officials. - Except as otherwise provided in the
Rural Banks Act, no appointive or elective public official whether full-time or part-
time shall at the same time serve as officer of any private bank, save in cases where
such service is incident to financial assistance provided by the government or a
government owned or controlled corporation to the bank or unless otherwise
provided under existing laws.

GENERAL RULE: No appointive or elective official can serve as an officer of the
bank.
EXCEPTION: When the government extends financial assistance to the Bank.
Example is when the BSP or DBP (GOCC) grants financial loans or assistance to
banks. That is the only time that a public official can sit in as an officer of the
bank. The purpose is to protect the interest of the government because in this
case the government extends financial assistance.

BANK OPERATIONS
(Sections 20 22)

Section 20.Bank Branches. - Universal or commercial banks may open branches or
other offices within or outside the Philippines upon prior approval of the Bangko
Sentral. Branching by all other banks shall be governed by pertinent laws.

A bank may, subject to prior approval of the Monetary Board, use any or all of its
branches as outlets for the presentation and/or sale of the financial products of its
allied undertaking or of its investment house units. A bank authorized to establish
branches or other offices shall be responsible for all business conducted in such
branches and offices to the same extent and in the same manner as though such
business had all been conducted in the head office. A bank and its branches and
offices shall be treated as one unit.

Universal Banks and Commercial Banks are, as a rule, allowed to open
branches within and outside of the Philippines but this with prior approval of
BSP.

The operations of the branch shall be subject to the control or supervision or
responsibility of the head office. So, meaning, the branches and the head office
shall be considered or treated as one entity or one unit.

EH 403 [2011 2012]


Additionally, the bank may use its branch or any of its branches as outlet for
the sale of financial products of its allied enterprises.

Example: When you go to the bank, some banks would offer sale of insurance,
right? In case of Metrobank, there is a separate table selling AXA Insurance or
another table offering to sell you credit cards. That is allowed because banks
are allowed to use their branches as outlet for the sale of financial products of
their allied enterprises.

Insurance Companies and Credit Card Companies are considered as allied
enterprises.

Section 21.Banking Days and Hours. - Unless otherwise authorized by the Bangko
Sentral in the interest of the banking public, all banks including their branches and
offices shall transact business on all working days for at least six (6) hours a day. In
addition, banks or any of their branches or offices may open for business on
Saturdays, Sundays or holidays for at least three (3) hours a day: Provided, That
banks which opt to open on days other than working days shall report to the
Bangko Sentral the additional days during which they or their branches or offices
shall transact business. For purposes of this Section, working days shall mean
Mondays to Fridays, except if such days are holidays.

It used to be that banks operate for 6 hours only that is from 9am to 3pm. But
right now, if the bank is located in the malls, they dont follow the regular
banking hours. They are open until 7pm. (Theres even 24/7 )
The requirement is that they have to report their additional days and hours to
the BSP.

Section 22.Strikes and Lockouts. - The banking industry is hereby declared as
indispensable to the national interest and, notwithstanding the provisions of any
law to the contrary, any strike or lockout involving banks, if unsettled after seven
(7) calendar days shall be reported by the Bangko Sentral to the secretary of Labor
who may assume jurisdiction over the dispute or decide it or certify the sane to the
National Labor Relations Commission for compulsory arbitration. However, the
President of the Philippines may at any time intervene and assume jurisdiction over
such labor dispute in order to settle or terminate the same.

If theres a strike or lockout involves a bank and the strike or lockout remains
unresolved for a period of 7 days, what is the effect?
- The BSP will report the same and the Secretary of Labor shall assume
jurisdiction and decide on the dispute OR be submitted to the NLRC for
compulsory arbitration. The reason for that is that banks are indispensable
to the national interest.
- So, this is triggered by a report submitted by a bank CEO (or any bank
officer) to the BSP, who will in turn report the same to the SOLE.

UNIVERSAL BANKS

Section 23.Powers of a Universal Bank - A universal bank shall have the authority
to exercise, in addition to the powers authorized for a commercial bank in Section
29, the powers of an investment house as provided in existing laws and the power
to invest in non-allied enterprises as provided in this Act.

POWERS OF A UNIVERSAL BANK

1. Powers authorized of a commercial bank (Section 29) meaning, all
powers of commercial banks can be performed or can be done by universal
banks

2. Powers of an investment house dealing, underwriting, or selling of
securities.

Now, if a universal bank performs powers of an investment house like
underwriting, or selling securities, do they need separate license from the
SEC to sell or acquire securities for that matter?

Yes. SEC will require a universal bank to register or secure license as far as
underwriting or selling securities. But it is still under the supervision of the
BSP.

3. Power to invest in non-allied enterprises

No problem with respect to universal banks because it can invest to both,
whether allied or non-allied.
But, you have to distinguish later on when we go to commercial banks
because a commercial bank can only invest in allied enterprises.

ALLIED ENTERPRISES:

1. Financial Allied
- Credit Card Companies
- Insurance Companies (like Metrobank with AXA as subsidiary)
EH 403 [2011 2012]


- Investment House
- Financing Companies
- Another Bank as Subsidiary
- Companies engaged in stock brokerage, foreign exchange

2. Non-Financial Allied
- Safety deposit box Companies
- Warehousing Companies Under the BSP Regulation, it is considered
as allied but only non-financial.

NON-ALLIED ENTERPRISES:

- Those which are not allied. Just memorize what are allied. Those which do
not fall under allied are non-allied.
- Ex. Culturing, mining, manufacturing (of any kind), public utilities,
wholesale trade, hospitals, hotels, restaurants, transportation, etc.

EQUITY INVESTMENTS OF A UNIVERSAL BANK

Section 24.Equity Investments of a Universal Bank. - A universal bank may, subject
to the conditions stated in the succeeding paragraph, invest in the equities of allied
and non-allied enterprises as may be determined by the Monetary Board. Allied
enterprises may either be financial or non-financial. Except as the Monetary Board
may otherwise prescribe:
24.1. The total investment in equities of allied and non-allied enterprises shall
not exceed fifty percent (50%) of the net worth of the bank; and
24.2. The equity investment in any one enterprise, whether allied or non-allied,
shall not exceed twenty-five percent (25%) of the net worth of the bank.
As used in this Act, "net worth" shall mean the total of the unimpaired paid-in
capital including paid-in surplus, retained earnings and undivided profit, net of
valuation reserves and other adjustments as may be required by the Bangko
Sentral.

The acquisition of such equity or equities is subject to the prior approval of the
Monetary Board which shall promulgate appropriate guidelines to govern such
investments. (21-Ba)

LIMIT AS TO INVESTMENT

TOTAL INVESTMENT: A bank may invest whether its allied or non-allied or both
only up to 50% of its net worth. So, if the net worth of the bank is 100M, it can
invest only to the extent 50M. This is the aggregate limit.

SINGLE ENTERPRISE: In no case, shall the investment of universal bank in one
enterprise whether its allied or non-allied exceed 25%.
- The purpose is to spread your risk, to spread your investment. Dont place
all your eggs in one basket. So, to limit the exposure of universal banks in
one entity, 25%. If that investment turns out to be bad, your exposure is
only 25%. So, 25%, that would only be 25M.

If you are universal bank, you can invest in several companies (Co. A, B, C, D).
Theres no limitation. Provided, that the total investment shall not exceed 50M
and in no case shall the investment in any of these enterprises exceed 25M.

What do you understand by net worth?
- The total of the unimpaired paid-in capital including paid-in surplus,
retained earnings and undivided profit, net of valuation reserves and other
adjustments as may be required by the BSP.
- So, it is assets minus liabilities or capital stock or equity plus your retained
earnings (accumulated profits). It sometimes refers to as net assets.

Section 25.Equity Investments of a Universal Bank in Financial Allied Enterprises. -
A universal bank can own up to one hundred percent (100%) of the equity in a thrift
bank, a rural bank or a financial allied enterprise. A publicly-listed universal or
commercial bank may own up to one hundred percent (100%) of the voting stock of
only one other universal or commercial bank. (21-B; 21-Ca)

To what extent can a universal bank invest in a FINANCIAL ALLIED ENTERPRISE?
- 100% of equity.

Dont be confused with 100% and 50%.
- 50% refers to the NET WORTH of the bank but the 100% refers to the
EQUITY.
- Meaning its possible for a universal bank to acquire 100% ownership of a
financial allied enterprise like, for example, insurance. So, long as the value
of the investment (in a single enterprise) does not exceed 25% of its net
worth, and the total investment does not exceed 50% of its net worth.

EH 403 [2011 2012]


EX. The universal bank acquired 100% of the capital stock (equity) of an
insurance company,and the value of the stock is 30M, can the universal bank
make this investment if its net worth is 100M?
- No. The bank is allowed to invest up to 100% of the equity but in no case
shall the investment in a single enterprise exceed 25%.

Under the first sentence, It mentions 100% of the equity in a thrift bank, rural
bank, or financial allied enterprise. So a universal bank can own up to 100% of
the equity of another universal bank because universal banks are financial
allied enterprises.

BUT that is qualified under second sentence. If you are to invest in a financial
allied enterprise and that financial allied enterprise happens to be a UNIVERSAL
BANK OR COMMERCIAL BANK, for you to acquire 100% equity of that universal
or commercial bank, the acquiring universal bank has to be publicly listed. So,
meaning, if you are not a publicly listed universal bank, you cannot acquire
100% equity of another universal bank or commercial bank.

IN SUM:
- A UNIVERSAL BANK can own 100% of the equity in a (1) thrift bank, (2)
rural bank, or (3) financial allied enterprise [including universal banks]
- BUT, the acquiring universal bank or commercial bank must be PUBLICLY-
LISTED to acquire 100% of the equity of another universal or commercial
bank.
- IF acquiring universal or commercial bank is not publicly-listed, it can only
acquire minority interest, up to 49%.

Section 26.Equity Investments of a Universal Bank in Non-Financial Allied
Enterprises. - A universal bank may own up to one hundred percent (100%) of the
equity in a non-financial allied enterprise. (21-Ba)

Section 27.Equity Investments of a Universal Bank in Non-Allied Enterprises. - The
equity investment of a universal bank, or of its wholly or majority-owned
subsidiaries, in a single non-allied enterprise shall not exceed thirty-five percent
(35%) of the total equity in that enterprise nor shall it exceed thirty-five percent
(35%) of the voting stock in that enterprise. (21-B)

What about investment in NON-FINANCIAL ALLIED, to what extent can a
universal bank invest?
- Still, 100%.

But in case of a NON-ALLIED, what is the extent?
- It shall not exceed 35% in the total equity nor shall it exceed 35% of the
voting stock.

What is the difference between total equityand voting stock?
- Total equity refers to voting and non-voting. So, it should not exceed 35%
of the total equity or 35% of the voting stock. But take note of this, for
purposes of determining of whether or not the universal bank already
exceeds the 35% limit with respect to investments in a non-allied
enterprise, the 35% includes not only the investment of the universal bank
itself but also the investment of its wholly or majority owned subsidiaries.

Is there a difference of wholly or majority owned?
- When you say subsidiary, for that company to be considered as your
subsidiary, you must own at least majority or 51% of that enterprise. But it
can still be considered as subsidiary even if you own 100%. So, thats why,
wholly owned subsidiary or majority-owned subsidiary.

Ex. If Im a universal bank, and then lets say theres non-allied enterprise, Hotel
USC. The universal bank has a subsidiary company, Co. A. So I, universal bank,
invested in this hotel 20%. My subsidiary (majority or wholly owned) also
invested 20% in this non-allied enterprise. Is this investment allowed?
- No. Because it exceeds 35%.

For investments in NON-ALLIED ENTERPRISES, you also have to consider the
equity investment of the subsidiary (majority or wholly-owned).
So, equity investment of a UNIVERSAL BANK, plus the equity investment of the
SUBSIDIARY.
Note that the law does not say affiliate, only subsidiary. (Affiliate minority
ownership, less than 51%)
In the earlier example, if the universal bank owns only a minority interest in Co.
A, you dont consider the equity investment of Co. A in computing for the 35%
limit since Co. A is not a subsidiary.

Section 28.Equity Investments in Quasi-Banks. - To promote competitive
conditions in financial markets, the Monetary Board may further limit to forty
percent (40%) equity investments of universal banks in quasi-banks. This rule shall
also apply in the case of commercial banks.

o What about equity investment in a quasi-bank?
- Up to 40%
EH 403 [2011 2012]


COMMERCIAL BANKS

Section 29.Powers of a Commercial Bank. - A commercial bank shall have, in
addition to the general powers incident to corporations, all such powers as may be
necessary to carry on the business of commercial banking such as accepting drafts
and issuing letters of credit; discounting and negotiating promissory notes, drafts,
bills of exchange, and other evidences of debt; accepting or creating demand
deposits; receiving other types of deposits and deposit substitutes; buying and
selling foreign exchange and gold or silver bullion; acquiring marketable bonds and
other debt securities; and extending credit, subject to such rules as the Monetary
Board may promulgate. These rules may include the determination of bonds and
other debt securities eligible for investment, the maturities and aggregate amount
of such investment.

General Powers: those incident to a corporation (to sue and be sued, adopt a
corporation seal, etc.)

Specific Powers: All powers necessary to carry on the business of commercial
banking

1. accepting drafts and issuing letters of credit;
2. discounting and negotiating promissory notes, drafts, bills of exchange,
and other evidences of debt;
3. accepting or creating demand deposits;
4. receiving other types of deposits and deposit substitutes;
5. buying and selling foreign exchange and gold or silver bullion;
6. acquiring marketable bonds and other debt securities; and
7. extending credit, subject to such rules as the Monetary Board may
promulgate

These are the same powers that are also exercised by Universal Banks. We
mentioned earlier that the Universal Bank has the same powers as that of a
Commercial Bank.

Can a commercial bank engage in quasi-banking even without approval of the
BSP?
- Yes, because it says here (in the law) to receive other types of deposits
and deposit substitutes. Remember that quasi-banking is receiving,
obtaining funds from the public through issuance of deposit substitutes.
In short, that is quasi-banking. So, yes, it is within the powers of a
commercial bank.

Section 30.Equity Investments of a Commercial Bank. - A commercial bank may,
subject to the conditions stated in the succeeding paragraphs, invest only in the
equities of allied enterprises as may be determined by the Monetary Board. Allied
enterprises may either be financial or non-financial. Except as the Monetary Board
may otherwise prescribe:
30.1. The total investment in equities of allied enterprises shall not exceed
thirty-five percent (35%) of the net worth of the bark; and
30.2. The equity investment in any one enterprise shall not exceed twenty-five
percent (25%) of tile net worth of the bank. The acquisition of such equity or
equities is subject to the prior approval of the Monetary Board which shall
promulgate appropriate guidelines to govern such investment.(2lA-a; 21-Ca)

If its a commercial bank, what is the extent of the total equity investment?
- Not to exceed 35% of its net worth but only for ALLIED ENTERPRISES.

What about in a single enterprise?
- 25% of net worth but still allied.

Section 31.Equity Investments of a Commercial Bank in Financial Allied
Enterprises. - A commercial bank may own up to one hundred percent (100%) of
the equity of a thrift bank or a rural bank. Where the equity investment of a
commercial bank is in other financial allied enterprises, including another
commercial bank, such investment shall remain a minority holding in that
enterprise. (21-Aa; 21-Ca)

FIRST SENTENCE: A commercial bank may own up to 100% equity in a THRIFT BANK
or RURAL BANK. Thats a financial allied enterprise. Its the same as with universal
bank.

SECOND SENTENCE: Read carefully the 2
nd
sentence, it says there where the equity
investment of a commercial bank in other financial allied enterprise including
another bank, such investment shall remain a MINORITY HOLDING in that bank.

Can you relate that to Section 25, 2
nd
sentence?
- Sec 25: mentions of a commercial bank investing in another commercial
bank, which can acquire 100%.
- Sec 31: it says only minority.

Is there a conflict?
- Sec 31: Shall remain a minority, meaning 49%.
EH 403 [2011 2012]


- Sec 25: if publicly-listed, universal or commercial bank acquiring another
universal or commercial bank may own up to 100%.

Can a commercial bank acquire 100% equity of another commercial bank (or a
financial allied enterprise other than a thrift or a rural bank)
- Yes, provided that the commercial bank is publicly listed. If the commercial
bank is not publicly-listed, it could only acquire minority.

SO,
- If PUBLICLY-LISTED up to 100%
- If NOT PUBLICLY-LISTED only a MINORITY HOLDING

Section 32.Equity Investments of a Commercial Bank in Non-Financial Allied
Enterprises. A commercial bank may own up to one hundred percent (100%) of the
equity in a non-financial allied enterprise. (21-Aa) Article III. Provisions Applicable
To All Banks, Quasi-Banks, And Trust Entities

Equity investment of a commercial bank in a non-financial allied is also 100%.
Equity investment in quasi-banks?
- Only 40% (Section 28)

RECAP:

Powers of a UNIVERSAL BANK: Powers of a COMMERCIAL BANK:
1. Powers authorized of a commercial
bank (Section 29)
1. Same
2. Powers of an investment house 2. Not available to a commercial bank
3. Power to invest in non-allied
enterprises
3. Not available to a commercial bank.
Commercial Banks can only invest in
ALLIED ENTERPRISES (Financial or
Non-Financial Allied)

LIMITATIONS ON INVESTMENTS
UNIVERSAL BANK COMMERCIAL BANK
Total Investments in ALLIED ENTERPRISES (24, 30)
50% of net worth 35% of net worth
Equity Investment in a SINGLE ENTERPRISE (24, 30)
25% of net worth 25% of net worth
Equity Investments in FINANCIAL ALLIED ENTERPRISES (25, 31)
100% of equity. A publicly-listed bank
may own up to 100% of the voting stock
of only one other UB/CB.
100% of equity of a thrift or rural bank.
In other financial allied enterprises
including another commercial bank,
investment shall remain a minority
holding.
Equity Investments in NON-FINANCIAL ALLIED ENTERPRISES (26, 32)
100% of equity 100% of equity
Equity Investments of a Universal Bank in NON-ALLIED ENTERPRISES (24, 27)
TOTAL = 50% of net worth
SINGLE ENTERPRISE = shall not exceed
thirty-five percent (35%) of the total
equity in that enterprise nor shall it
exceed thirty-five percent (35%) of the
voting stock in that enterprise
N/A
Equity Investments in Quasi-banks (28)
40% 40%

DEPOSITS, LOANS AND OTHER OPERATIONS
(Sections 33 66)

Section 33.Acceptance of Demand Deposits. - A bank other than a universal or
commercial bank cannot accept or create demand deposits except upon prior
approval of, and subject to such conditions and rules as may be prescribed by the
Monetary Board.

This section talks about authority of the bank to accept demand deposits.

Types of Deposits:

1. Time Deposit interest rates stipulated depend on the number of days,
which may be 30, 60, 90, 180, 360, or 540 days. During this period, money
deposited cannot be withdrawn. The banks use this money to lend to
others. That is why in such accounts, depositors are paid high interest rates
as compensation for the use of the money by the bank.
EH 403 [2011 2012]


2. Savings Deposits interest at say 8%. Under the fine prints, if you deposit
today, you cannot withdraw the amount not until 60 days later. The bank
can lend out such funds; that is why it pays interests on such deposits.
3. Demand Deposits or Current Accounts no interest is paid by the bank
(unlike in time and savings deposit), because the depositor can take out his
funds any time. It is called demand deposit because the depositor can
withdraw the money he deposited on the very same day he deposited it.
This involves checking or current accounts.

As a rule, with respect to demand deposits, only universal banks and commercial
banks are allowed to accept or create demand deposits. For other banks, they
require prior approval from the BSP.

SERRANO V. CENTRAL BANK

The relationship between the bank and the depositor is not that of a deposit, but
one that is called irregular deposit, which is actually a CREDITOR-DEBTOR
RELATIONSHIP, the creditor being the depositor and the debtor being the bank. This
is because the bank is not required to return the very same currency bill that was
deposited. The deposits are considered as loans or mutuum.

FACTS:

There were time deposits made by two persons in the Overseas Bank of Manila.
Serrano sued Overseas Bank and Central Bank to recover his time deposits.

So, his contention was that (first) there is solidary liability between the two banks
because Central bank was not able to supervise properly the operations of the
Overseas Bank in the sense that it allowed Overseas Bank to continue its
transaction when such bank should have been under chronic reserve deficiency
because of its unpaid advances and emergency loans from BSP and as a result, the
BSP required the Overseas Bank to put in additional collaterals. And (second) there
was a constructive trust created between him and Central Bank in the sense that
when the Central bank required Overseas Bank to put in additional collaterals, the
collaterals were from depositors money which includes his time deposits. So since
he was not paid, Central Bank is liable under constructive trust for failure to return.

Can Serrano recover?
- No. They are loans because they earned interest and all kinds of deposits
under savings or current are to be treated as loans to be covered by the
laws of Loans.
- So, failure to return the deposit is just like failure of the bank to pay loan. It
is not a breach of trust because deposits in the banks are not governed by
Contract of Deposits that if you are not able to return the thing deposited,
you are liable. But here, the failure to return the time deposit is just failure
to pay your loan obligation.

CA AGRO-INDUSTRIALDEVELOPMENT CORPORATION v. CA

The contract between the bank renting out safety deposit boxes and its customers
or clients is a contract of deposit but of a special kind, akin to a contract of bailment
(commodatum), and not a contract of lease. Thus, their relationship is that of a
bailor and bailee.

FACTS:

CA-Agro entered into a contract of sale on installment with condition upon
payment of the first installment, they will place the Certificate of Title with the
safety deposit box. There were two sets of keys, one for the bank (guard key) and
the other one is the renters key. In this case, there were two renters keys. So three
keys in all.

The third party, Mrs. Ramos, wanted to purchase the property at a higher price and
so, the renters wanted to avail the offer. So, they tried to sell it. So, they went to
the bank to get the certificate of title but when they opened the box, it was empty.
The reconstitution of the certificate of title was prolonged, so Mrs. Ramos withdrew
and so, they suffered damages. Now, they want to claim damages against the bank.

Is Security Bank liable for the lost CTCs?
- The bank is not liable.
- But first you have to discuss the relationship between the bank renting out
safety deposit box to its customers or clients? It was a contract of deposit
but of a special kind.
- It was not a contract of lease because in a contract of lease, the lessee
must have control and full possession of the lease. But in this case, cannot
because the renters cannot have full possession and control of the safety
deposit box. They cannot open it without the guards key.
- It was also not a contract of deposit because the bank does not have full
control and possession. It cannot use the things being deposited inside the
safety deposit box because it needs a renters key. So, thats why it is a
special kind of deposit and akin to a contract of bailment (contract of
commodatum), the relationship is that of a bailor and bailee.

EH 403 [2011 2012]


What provision of law do we apply now to determine the relationship, rights
and liabilities of the parties?
- Section 72 of the General Banking Act (old law)
- Under the new law, it is under Section 53 on other banking services. Under
section 53, a bank is authorized to rent out safety deposit boxes, to receive
in its custody funds, documents, etc. If the bank performs these services,
the bank shall be considered as a depositary. As a depositary, the bank
incurs liabilities. Meaning, it shall be responsible for any loss of the
contents due to fraud, negligence, etc.
- But the problem in this case was that, there was no clear showing that
Security Bank was negligent, nor was there fraud. So SC said that the bank
is not liable.
- As a general rule, if something happens to the thing deposited, the bank is
liable. But in this case, it was not proven that the bank was at fault or in
bad faith.
- If for example, I am the renter. If there was no record that I went to bank
but if the thing deposited was lost, who should be liable? It should be the
bank.

Is it valid for the bank to stipulate that it is exempt from liability in case of any
loss on the contents of the safety deposit box?
- No. It is contrary to law. The bank is liable under Section 53.

FIRESTONE TIRE v. CA

- It involves withdrawal slips that were accepted as checks.
- The bank which accepted withdrawal slips as checks was liable because it
failed to exercise the degree of care or diligence expected of banks.

PCI BANK V. CA

There was a purchase of telegraphic transfers intended to fund the account of
petitioner. Now, thinking that the telegraphic transfer was made, he issued checks.
Later on, they were dishonored because the bank failed to make the transfer, to
credit the funds to his account.

In his purchase of the telegraphic account, there was a stipulation in the contract
that the bank shall not be liable in case of loss or damage resulting from the
telegraphic transfer of funds.

ISSUE: Is it valid for the bank to stipulate that the bank is not liable for any loss or
damage relating to the purchase of telegraphic transfer of funds?

SC: No because it is contrary to law. Why? Because here, it was proven that the
bank was guilty of bad faith. There was fault or negligence on the part of the bank.
It cannot just merely make a stipulation exempting itself from liability.

BPI V. CA

This case involves a loan obtained from the bank. As security for the loan, there is
what we call as Hold-Out Agreement. You obtained a loan from the bank and you
also have a time deposit. So, normally if you want a lower interest in your loans,
you enter into a Hold-Out Agreement wherein during the period that your loan is
outstanding, you are not allowed to withdraw your time deposits.

Here, there was an application of loan and at the same time, there is a Hold-Out
Agreement. Here, when the loan matures, the bank instead of applying the hold-out
agreement (set-off the loan against the time deposit) insisted on demanding
payment.

ISSUE: is there a duty on the part of the bank to apply the time deposit as against
the outstanding loan by virtue of the agreement?

SC: In this case, the hold-out agreement is only an option, an alternative of the bank
but it is just a power not a duty. So, the bank is under no duty to make the
application. If the bank decides to collect, it means that the bank did not exercise its
privilege to offset the loan against the deposits.

ANOTHER ISSUE: Ownership of the time deposit there were two parties claiming
ownership. Despite the notice of the controversy over the ownership, the bank
released the proceeds of the time deposit to the other party, to the prejudice of the
real owners. So is the bank still obliged to pay the real owners of the time deposit
even if it had already proceeds to the other party?

According to the bank, it released the proceeds in good faith.

SC: Contention of the bank is not correct. The nature of the relationship is a
creditor-debtor relationship. And so, if the debtor pays the wrong creditor, the
effect is that it is as if there is no payment. It does not extinguish the obligation
even if the payment was made in good faith. Therefore, the bank still has the
obligation to pay the debt to the proper creditor.

EH 403 [2011 2012]


Section 34.Risk-Based Capital. - The Monetary Board shall prescribe the minimum
ratio which the net worth of a bank must bear to its total risk assets which may
include contingent accounts. For purposes of this Section, the Monetary Board may
require such ratio be determined on the basis of the net worth and risk assets of a
bank and its subsidiaries, financial or otherwise, as well as prescribe the
composition and the manner of determining the net worth and total risk assets of
banks and their subsidiaries: Provided, That in the exercise of this authority, the
Monetary Board shall, to the extent feasible conform to internationally accepted
standards, including those of the Bank for International Settlements(BIS), relating to
risk-based capital requirements: Provided further, That it may alter or suspend
compliance with such ratio whenever necessary for a maximum period of one (1)
year: Provided, finally, That such ratio shall be applied uniformly to banks of the
same category. In case a bank does not comply with the prescribed minimum ratio,
the Monetary Board may limit or prohibit the distribution of net profits by such
bank and may require that part or all of the net profits be used to increase the
capital accounts of the bank until the minimum requirement has been met The
Monetary Board may, furthermore, restrict or prohibit the acquisition of major
assets and the making of new investments by the bank, with the exception of
purchases of readily marketable evidences of indebtedness of the Republic of the
Philippines and of the Bangko Sentral and any other evidences of indebtedness or
obligations the servicing and repayment of which are fully guaranteed by the
Republic of the Philippines, until the minimum required capital ratio has been
restored. In case of a bank merger or consolidation, or when a bank is under
rehabilitation under a program approved by the Bangko Sentral, Monetary Board
may temporarily relieve the surviving bank, consolidated bank, or constituent bank
or corporations under rehabilitation from full compliance with the required capital
ratio under such conditions as it may prescribe. Before the effectivity of rules which
the Monetary Board is authorized to prescribe under this provision, Section 22 of
the General Banking Act, as amended, Section 9 of the Thrift Banks Act, and all
pertinent rules issued pursuant thereto, shall continue to be in force. (22a)

What do you understand by risk-based capital?
- Risk-based capital is the ratio of your net worth to your total risk assets.
- So, the BSP shall prescribe the minimum ratio which the net worth of a
bank must bear to its total risk assets which may include contingent
accounts.
- Take note of the equation [Net worth = Asset liabilities] or [Assets=
Liabilities + Net worth]
- The BSP will determine whether the assets are risk assets or non-risk
assets, and will then assign risk weights to those assets.

What are risk assets?
- Loans risk depends on the borrower
o If borrower is a corporation, perhaps 10% risk.
o If borrower is the government, there is 0% risk since the government
cannot become bankrupt.
- Investments depends on the investment
o If investment in treasury bonds, 0% risk since the government cannot
become insolvent.
o If investment in stocks, 20% risk.

What are non-risk assets? (0% risk)
- Cash because it is certain (0% risk)
- Loans or receivables but secured by Government issued securities like
treasury bonds because the Government cannot become insolvent
because of its inherent power of taxation.

For every risk asset that you acquire, you are required to put in additional
capital.
- If 0% risk, no need to put in additional capital.
- If 10% risk, example, if you extend a loan of Php100, you have to put in
additional capital of Php10.

What is the purpose?
- The purpose of setting a ratio is to limit the amount of loans or
investments that a bank can lend, so as to prevent the bank from over-
expanding or over-extending loans which are disproportionate to its
capital.
- Where did you get the money which you extended as loans or investments
to others? Ofcourse, from the capital first but if its only this much, you get
it from the deposits. So, some of the money which you extended as loans
or investments were taken out from deposits which are considered as your
liabilities. So you over-extended, you used the deposits, and since those
loans are risky, the collectibility of those loans is uncertain.
- The result is that your liabilities would balloon to the prejudice of your
depositors and creditors. So its just like the Trust Fund Doctrine. The law is
trying to say is that for every investment or loan you grant, or every risk
asset which you acquire, there must be a counterpart capital that will be
put up.
- So, there must be a limit. For every asset which is considered as risk, you
should put in a capital.

EH 403 [2011 2012]


What is the effect if the bank does not comply with the risk-based capital ratio?
1. The bank would not be allowed to declare dividends, instead the BSP will
require the bank to increase its capital.
o So, instead of declaring cash dividends, you declare stock dividends.
2. In the meantime, the bank cannot make major acquisitions or major
investments.

EXCEPTIONS: in cases of merger or consolidation, or when the bank is under
rehabilitation. It can be temporarily relieved.

Section 35.Limit on Loans, Credit Accommodations and Guarantees

35.1 Except as the Monetary Board may otherwise prescribe for reasons of national
interest, the total amount of loans, credit accommodations and guarantees as may
be defined by the Monetary Board that may be extended by a bank to any person,
partnership, association, corporation or other entity shall at no time exceed twenty
percent (20%) of the net worth of such bank. The basis for determining compliance
with single borrower limit is the total credit commitment of the bank to the
borrower.

35.2. Unless the Monetary Board prescribes otherwise, the total amount of loans,
credit accommodations and guarantees prescribed in the preceding paragraph may
be increased by an additional ten percent (10%) of the net worth of such bank
provided the additional liabilities of any borrower are adequately secured by trust
receipts, shipping documents, warehouse receipts or other similar documents
transferring or securing title covering readily marketable, non-perishable goods
which must be fully covered by insurance.

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

35.4. Even if a parent corporation, partnership, association, entity or an individual
who owns or controls a majority interest in such entities has no liability to the bank,
the Monetary Board may prescribe the combination of the liabilities of subsidiary
corporations or members of the partnership, association, entity or such individual
under certain circumstances, including but not limited to any of the following
situations: (a) the parent corporation, partnership, association, entity or individual
guarantees the repayment of the liabilities; (b) the liabilities were incurred for the
accommodation of the parent corporation or another subsidiary or of the
partnership or association or entity or such individual; or (c) the subsidiaries though
separate entities operate merely as departments or divisions of a single entity.

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

35.6. Loans and other credit accommodations, deposits maintained with, and usual
guarantees by a bank to any other bank or non-bank entity, whether locally or
abroad, shall be subject to the limits as herein prescribed.

35.7. Certain types of contingent accounts of borrowers may be included among
those subject to these prescribed limits as may be determined by the Monetary
Board.(23a)

What do you understand by Single Borrowers Limit or SBL?
- Its the maximum which a person may borrow from a bank or the bank
may extend to a single borrower whether it is a person, partnership or
corporation. So, there is a limit.

What is the limit?
- It shall not exceed 25% (take note in the provision above, the 20% has
been amended by virtue of a BSP Circular) of the net worth of such bank.
So, meaning, the bank cannot lend to a single person more than 25% of its
net worth.
- Lets say that the net worth of the bank is 100M. So to a single individual,
or corporation, it can only extend up to 25M.

What is the purpose of SBL?
EH 403 [2011 2012]


- To prevent granting excessive loans to a single person or to limit the
exposure of the bank to a single person.
- Again, to spread the risk. Do not place all your eggs in one basket.
- Imagine if all your receivables come from a client who cannot pay later on?

In computing the 25%, you have to consider the total credit commitment of the
bank. The total credit commitment shall include all types of loans, such as
housing loan, car loan, letters of credit perhaps, or any other kind of loan. So,
all credit commitments.

If the borrower is an individual, you consider not only this individuals loan
from the bank but you consider the loan of a corporation wherein this
individual is a majority stockholder as well. Example he is a majority
stockholder of Corporation A. So Individual plus Corporation A. In no case shall
the total (Individual + Corp A) exceed 25%.

In the case of a corporation, all liabilities to such bank of all subsidiaries in
which such corporation owns or controls a majority interest. So, again,
example Company A has two subsidiaries, B and C. So, for purposes of
determining whether it exceeds the 25% limit, consider not only the loans to
Company A but also to the subsidiaries B and C. [A+B+C]
- Lets say 25% of the net worth of the bank is 25M. If the parent company
has obtained a loan of 10M and the other subsidiary 10M, so, 20M in all.
Even if the parent company has not obtained loan but only the
subsidiaries, the loan is still imputed to the parent company. Because its
not only the corporation but includes also all of its subsidiaries.

Can the 25% limit be increased?
- YES. The 25% can be increased by another 10% provided that the
additional liabilities of any borrower are adequately secured by trust
receipts, shipping documents, warehouse receipts or other similar
documents transferring or securing title covering readily marketable, non-
perishable goods which must be fully covered by insurance.
- Take note that it only mentions adequately secured by trust receipts,
shipping documents, warehouse receipts or other similar documents
transferring or securing title covering readily marketable, non-perishable
goods. It does not mention of real estate mortgage. So, meaning, if I apply
a loan and secured by a real estate mortgage, it cannot be extended by
10%.
- What is the reason? Trust receipts, shipping documents, warehouse
receipts and other similar documents are easier to dispose. Meaning less
risky.

There are exclusions where in the loan and credit accommodations which are
not covered or not included in the computation of 25%. What are those loans
which are excluded? Those considered as non-risk.
a. loans and other credit accommodations secured by obligations of the
Bangko Sentral or of the Philippine Government:
- Treasury shares. Again, the government is not expected to go
bankrupt.
b. loans and other credit accommodations fully guaranteed by the
government as to the payment of principal and interest;
c. loans and other credit accommodations covered by assignment of
deposits maintained in the lending bank and held in the Philippines;
d. loans, credit accommodations and acceptances under letters of credit to
the extent covered by margin deposits; and
e. other loans or credit accommodations which the Monetary Board may
from time to time, specify as non-risk items.

So
- 10M loan is secured by treasury bonds issued by the government =
excluded
- 1M of the LC is covered by a margin deposit = excluded
- 10M, the 5M is covered by hold-out agreement = the 5M deposit (under
the hold-out agreement) is excluded. The exposure is the remaining
amount, the other 5M.

What about back to back deposits?
- You have a loan and at the same time deposit. The loan is secured by the
deposit. So long as there is an agreement that this deposit will be applied
to the loan, it will be excluded.

Section 36.Restriction on Bank Exposure to Directors, Officers, Stockholders and
Their Related Interests. - No director or officer of any bank shall, directly or
indirectly, for himself or as the representative or agent of others, borrow from such
bank nor shall he become a guarantor, endorser or surety for loans from such bank
to others, or in any manner be an obligor or incur any contractual liability to the
bank except with the written approval of the majority of all the directors of the
bank, excluding the director concerned: Provided, That such written approval shall
not be required for loans, other credit accommodations and advances granted to
EH 403 [2011 2012]


officers under a fringe benefit plan approved by the Bangko Sentral. The required
approval shall be entered upon the records of the bank and a copy of such entry
shall be transmitted forthwith to the appropriate supervising and examining
department of the Bangko Sentral. Dealings of a bank with any of its directors,
officers or stockholders and their related interests shall be upon terms not less
favorable to the bank than those offered to others. After due notice to the board of
directors of the bank, the office of any bank director or officer who violates the
provisions of this Section may be declared vacant and the director or officer shall be
subject to the penal provisions of the New Central Bank Act. The Monetary Board
may regulate the amount of loans, credit accommodations and guarantees that
may be extended, directly or indirectly, by a bank to its directors, officers,
stockholders and their related interests, as well as investments of such bank in
enterprises owned or controlled by said directors, officers, stockholders and their
related interests. However, the outstanding loans, credit accommodations and
guarantees which a bank may extend to each of its stockholders, directors, or
officers and their related interests, shall be limited to an amount equivalent to their
respective unencumbered deposits and book value of their paid-in capital
contribution in the bank: Provided, however, That loans, credit accommodations
and guarantees secured by assets considered as non-risk by the Monetary Board
shall be excluded from such limit: Provided, further, That loans, credit
accommodations and advances to officers in the form of fringe benefits granted in
accordance with rules as may be prescribed by the Monetary Board shall not be
subject to the individual limit. The Monetary Board shall define the term "related
interests." The limit on loans, credit accommodations and guarantees prescribed
herein shall not apply to loans, credit accommodations and guarantees extended by
a cooperative bank to its cooperative shareholders. (83a)

Restriction on bank exposure to DOSRI (Directors, Officers, Stockholders, Related
Interest)

What is the rule?
- No direct or officer of a bank shall borrow from such bank, nor shall he
become a guarantor or surety for loans from such bank to others
- UNLESS there is a written approval of majority of the directors of the bank
but excluding the director concerned.
- So its not really prohibited. You just have to comply with the requirement.

What is the limit which you can lend to a DOSRI?
- It shall be equivalent to their respective unencumbered deposits and book
value of their paid-in capital contribution in the bank.
- So, if I am a director, I can borrow from the bank where I am a director
provided there is a written approval, etc. but it shall not exceed the
unencumbered deposit.
- So, if my deposit in that bank is 100K, I can borrow only up to the extent of
100K. In short, it is secured. If I dont have a deposit, I cannot borrow.
- Or, plus the book value of your paid-in capital contribution which will apply
only if you are a stockholder. Because if you are not a stockholder, you
dont have paid-in capital contribution.
- Why unencumbered? Meaning free deposit, not held in escrow.

Do you remember the discussion we had with New Central Bank Act? There
was also a provision regarding DOSRI that if a DOSRI obtained a loan or credit
accommodation from his bank or other bank wherein a subsidiary has the same
parent with the lending bank and the bank in which he is a director, what is the
requirement under the act?
- There must be a WAIVER OF SECRECY OF BANK DEPOSITS.
- In addition to that, this is the requirement under the General Banking Law.

What is the penalty if a bank extends a loan to a DOSRI without following these
requirements?
- The position of the officer, director will be declared as vacant
- Additionally, the director, officer will be subject to the penal provisions of
the New Central Bank Act.

Take note, another principle, if a bank extends a loan to a DOSRI, the terms of
the loan should not be less favorable to the bank than those offered to others.
So, just because you are a DOSRI, the bank will grant you loan with a lower
interest. The prevailing interest rate applied to third parties must also be
applied to DOSRI. This is what you call insider lending (DOSRI borrows from
bank which he is a DOSRI).

EXCEPTIONS:
1. Fringe benefits, like when the DOSRI obtained cash advances, loans from
the bank by way of transportation allowance, travel allowancethat is not
included. So, meaning even if I have no cash deposit, I can obtain cash
advances or loans but those loans or cash advances are needed for my
travel representation allowance, under a fringe benefit plan approved by
the BSP like car loan, housing programetc. Other than those items, those
not covered by the fringe benefit plan approved by BSP, you must comply
with the requirements.

EH 403 [2011 2012]


2. Loans and credit accommodations which are secured by assets considered
again as non-risk.
- So, even if I am a director I can borrow but my loan must be secured
by non-risk assets (hold-out deposits, loans secured by government
secured securities or LC with margin deposit).

Related Interest? No definition under the law.
- What about a spouse or child of the director, are they covered by DOSRI?
Yes. So, spouse, relative within the first degree of consanguinity or affinity
are considered as DOSRI.
- A corporation or association in which the director is also a director, or the
spouse or child - that is still related interest.

What is the purpose of DOSRI limitation?
- To prevent a substantial portion of the bank funds from being borrowed by
DOSRI.
- There is a danger that instead of makingthe fundsavailable to legitimate
borrowers,those funds will all be borrowed by the DOSRI. This is what
happened to Legacy.

Take note of two things, (1) the requirements [written approval + waiver of
secrecy] and (2) the individual limit.

Section 37.Loans and Other Credit Accommodations Against Real Estate. - Except
as the Monetary Board may otherwise prescribe, loans and other credit
accommodations against real estate shall not exceed seventy-five percent (75%) of
the appraised value of the respective real estate security, plus sixty percent (60%)
of the appraised value of the insured improvements, and such loans may be made
to the owner of the real estate or to his assignees. (78a)

Section 38.Loans And Other Credit Accommodations on Security of Chattels and
Intangible Properties. - Except as the Monetary Board may otherwise prescribe,
loans and other credit accommodations on security of chattels and intangible
properties such as, but not limited to, patents, trademarks, trade names, and
copyrights shall not exceed seventy-five percent (75%) of the appraised value of the
security, an such loans and other credit accommodation may be made to the title-
holder of the chattels and intangible properties or his assignees.

Section 37 provides for a limitation on the amount of the loan that the bank may
extend if the collateral is a real property.

For how much or to what extent can the bank grant the loan?
- In case of a real estate it shall not exceed 75% of the FMV or appraised
value of the property. Ex. land.
- In case of improvements shall not exceed 60%.
- It could be lower but it could not be higher than those amounts.

Thats why if we have a collateral and it was appraised, not 100% of that will be the
loanable amount. It will only be to the extent of 75% or 60%.

Section 38.

What if secured by intangible properties?
- Now in case of intangibles, like patents, trademarks, trade names,
copyrightit shall not exceed 75% of the appraised value of the security.

SECTION 39. Grant and Purpose of Loans and Other Credit Accommodations. A
bank shall grant loans and other credit accommodations only in amounts and for
the periods of time essential for the effective completion of the operations to be
financed. Such grant of loans and other credit accommodations shall be consistent
with safe and sound banking practices. (75a)

The purpose of all loans and other credit accommodations shall be stated in the
application and in the contract between the bank and the borrower. If the bank
finds that the proceeds of the loan or other credit accommodation have been
employed, without its approval, for purposes other than those agreed upon with
the bank, it shall have the right to terminate the loan or other credit
accommodation and demand immediate repayment of the obligation.

Every time you apply for a loan, the purpose of the loan or any credit
accommodation should be stated in the application form.

Why?
- The purpose shall be considered by the bank in determining the terms or
the conditions of loan, whether they would be consistent with the purpose
for obtaining the loan.
- Is the amount to be loaned reasonablethe
termsconditionsmaturityare they reasonableetc.

If the borrower uses the proceeds of the loan different from the intended
purpose, then the bank has the right to TERMINATE the loan and require
immediate repayment. So the payment will now be accelerated.
EH 403 [2011 2012]


- Why? Because that is a breach of your contract. The purpose is stated in
the loan application form and the application form forms part of the terms
and conditions of the contract.

SECTION 40. Requirement for Grant of Loans or Other Credit Accommodations.
Before granting a loan or other credit accommodation, a bank must ascertain that
the debtor is capable of fulfilling his commitments to the bank.

Toward this end, a bank may demand from its credit applicants a statement of their
assets and liabilities and of their income and expenditures and such information as
may be prescribed by law or by rules and regulations of Monetary Board to enable
the bank to properly evaluate the credit application which includes the
corresponding financial statements submitted for taxation purposes to the Bureau
of Internal Revenue. Should such statements prove to be false or incorrect in any
material detail, the bank may terminate any loan or other credit accommodation
granted on the basis of said statements and shall have the right to demand
immediate repayment or liquidation of the obligation.

In formulating rules and regulations under this Section, the Monetary Board shall
recognize the peculiar characteristics of microfinancing, such as cash flow-based
lending to the basic sectors that are not covered by traditional collateral. (76a)

DOCUMENTARY REQUIREMENTS WHEN YOU APPLY FOR A LOAN FROM THE
BANK.

So the bank would require from you certain documents. Normally, these
documents would consist of income tax return, financial statements. If you are
an individual, a copy of your payslip or withholding tax certificate.

Aside from that, some banks, like especially if its a big loan, like a business
loan, would require you to submit a financial study or a feasibility study.
- How feasible is this project of yours? Are you sure that you can pay the
bank? What is the rate of return? What is the pay-back period? Etc.

So the bank would like to know its customer before it grants a loan.

Now, in relation to granting of loans, there are certain security measures,
applied by the bank to ensure that it can collect. We have what you call JSS
Practice in the banking industry, or the Joint and Solidary Signatories.
- Its common in promissory notes. I jointly and severally promise to pay.
- Whats the reason for the JSS or the joint and solidary signatories?
o Especially corporations, normally in corporations, there is an
authorized representative who will sign, either the president or the
CEO. But aside from that the bank would usually require a major
stockholder of the corporation who is a borrower to sign a surety
statement or in a JSS capacity.
o The purpose of requiring joint and solidary signatories or requiring
security statements is that in the event the assets of the corporation
would not be sufficient to pay off the loan, the bank can still go after
the other joint and several or solidary signatories. So when the assets
of the corporation are exhausted, the bank can go after the assets of
the major stockholders by virtue of the JSS or the suretyship
agreement.

SECTION 43. Authority to Prescribe Terms and Conditions of Loans and Other
Credit Accommodations. The Monetary Board may, similarly, in accordance with
the authority granted to it in Section 106 of the New Central Bank Act, and taking
into account the requirements of the economy for the effective utilization of long-
term funds, prescribe the maturities, as well as related terms and conditions for
various types of bank loans and other credit accommodations. Any change by the
Board in the maximum maturities shall apply only to loans and other credit
accommodations made after the date of such action.

The Monetary Board shall regulate the interest imposed on microfinance borrowers
by lending investors and similar lenders, such as, but not limited to, the
unconscionable rates of interest collected on salary loans and similar credit
accommodations. (78a)

INTEREST RATES

As a rule, no interest is due unless it is stipulated in writing.

Now, is it valid, this common practice of some banks to stipulate in the
promissory note these what you call escalation clauses regarding interest that
the bank has the right to increase during the period the term of the loan, the
right to increase the interest rates?
- NO. Read case below.

CASE:

There was a case involving PNB wherein in the loan agreement, there is a
stipulation or there is an escalation clause. Now pursuant to that escalation clause,
the PNB, without informing the borrower, unilaterally increased the interest rates.
EH 403 [2011 2012]


Lets say at the time the loan was entered into was 10%. After 2 years, PNB
unilaterally increased it 12%. The justification of the PNB is that in the promissory
note there is already an escalation clause. So according to PNB, it is already agreed
between the parties. During the time that the promissory note was made, there
was already an escalation clause that from time to time, PNB may increase the
interest rates. So pursuant to that, without informing the borrower, it increased the
interest rate to 12%. The borrower now comes to court alleging that increase is not
valid.

Issue: whether or not PNB has the right to unilaterally increase the interest rate
pursuant to the escalation clause stated in the promissory note without informing
the borrower

SC: NO. Whats the reason?

An escalation clause per se is valid. Although there is an escalation clause, before
PNB can apply the increase, it must first inform the borrower. It must obtain the
consent of the borrower.

The SC said that the unilateral increase in the interest rates violates the principle on
mutuality of contracts provisions in the contract cannot be left alone to the
discretion of one of the parties.

So although the escalation clause was valid, but everytime you increase in interest
rates, the bank should at least inform, or obtain the consent of the borrower. Since
you did not obtain the consent of the borrower, the increase is not valid.

If the borrower does not consent with the increase, the hands of PNB will be tied.
But not necessarily that it cannot increase because you could not also say that you
could not increase because its in the escalation clause. What is only required is that
you inform the borrower. Because you agreed that PNB has the right to increase the
interest rates.

Now also, still on interest rates, like for example the promissory note provides
that the interest rate will be 20% per annum. If a case is filed court, is it valid
for the court to say that the interest rate should only be 12%, the legal
interest? Is it valid for the court to say that it should not be 20% but it should
be the legal rate 12%?
- There is no more usury law. So the courts said that the interest rates
agreed upon by the parties is valid and binding. The only time that it will be
stricken down is when the rates are already unconscionable or shocking to
the conscience of man.
- But as long as the interest rates are valid, that is binding between the
parties. The court cannot substitute the agreement of the parties with its
own.
- If there was no stipulation, apply the legal rate of 12%.

How about time deposits?
- In time deposits, we agree on a certain period. Within a certain period, the
bank cannot increase or decrease. But after that period, ofcourse the bank
can adjust the interest rates.
- So whatever that rate you agreed at the time you placed your time
deposit, that should be applied all throughout the 120 days. If after that
the interest rates will change, then it can.

SECTION 44. Amortization on Loans and Other Credit Accommodations. The
amortization schedule of bank loans and other credit accommodations shall be
adapted to the nature of the operations to be financed.

In case of loans and other credit accommodations with maturities of more than five
(5) years, provisions must be made for periodic amortization payments, but such
payments must be made at least annually: Provided, however, That when the
borrowed funds are to be used for purposes which do not initially produce revenues
adequate for regular amortization payments therefrom, the bank may permit the
initial amortization payment to be deferred until such time as said revenues are
sufficient for such purpose, but in no case shall the initial amortization date be later
than five (5) years from the date on which the loan or other credit accommodation
is granted.

In case of loans and other credit accommodations to microfinance sectors, the
schedule of loan amortization shall take into consideration the projected cash flow
of the borrower and adopt this into the terms and conditions formulated by banks.

AMORTIZATION

For how long should the loan be amortized?
- It depends. The amortization schedule or the term of the loan should
depend on the nature of the operations to be financed. Thats why in your
application, you have to state the purpose.

GENERAL RULES:
EH 403 [2011 2012]


If the term is more than 5 years, the amortization must be at least annually.
Payment cannot be made once, or twice.
If the term is less than 5 years, is it possible for the bank to prescribe that the
amortization can be made just once, or twice?
- Yes. Theres no prohibition. If less than 5 years, it is possible for the bank to
stipulate that the payment could be made once or twice. The requirement
is only with respect to loans with maturities of more than 5 years.

EXCEPTION:

Even if the term is for more than 5 years, but the borrowed funds are to be used for
purposes which do not initially produce revenues adequate for regular amortization
payments therefrom
- Projects with long gestation period. Ex. Construction, plating trees.
- So you are allowed to defer the amortization.
- The amortization can start 3 years after, etc. But in no case shall it exceed
five (5) years from the date on which the loan or other credit
accommodation is granted.

SECTION 47. Foreclosure of Real Estate Mortgage. In the event of foreclosure,
whether judicially or extrajudicially, of any mortgage on real estate which is security
for any loan or other credit accommodation granted, the mortgagor or debtor
whose real property has been sold for the full or partial payment of his obligation
shall have the right within one year after the sale of the real estate, to redeem the
property by paying the amount due under the mortgage deed, with interest
thereon at the rate specified in the mortgage, and all the costs and expenses
incurred by the bank or institution from the sale and custody of said property less
the income derived therefrom.

However, the purchaser at the auction sale concerned whether in a judicial or
extrajudicial foreclosure shall have the right to enter upon and take possession of
such property immediately after the date of the confirmation of the auction sale
and administer the same in accordance with law. Any petition in court to enjoin or
restrain the conduct of foreclosure proceedings instituted pursuant to this provision
shall be given due course only upon the filing by the petitioner of a bond in an
amount fixed by the court conditioned that he will pay all the damages which the
bank may suffer by the enjoining or the restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant
to an extrajudicial foreclosure, shall have the right to redeem the property in
accordance with this provision until, but not after, the registration of the certificate
of foreclosure sale with the applicable Register of Deeds which in no case shall be
more than three (3) months after foreclosure, whichever is earlier. Owners of
property that has been sold in a foreclosure sale prior to the effectivity of this Act
shall retain their redemption rights until their expiration. (78a)

FORECLOSURE OF ESTATE MORTGAGE

Now under GBL, a bank can either foreclose the property judicially or
extrajudicially.

When can you go through extrajudicial foreclosure?
- You can only go through extrajudicial foreclosure if it is provided in the
agreement. The real estate mortgage should provide that in case of
default, they should go through extrajudicial foreclosure. Otherwise,
judicial foreclosure.

Now, how can a borrower get back his property?
- Extrajudicial foreclosure RIGHT OF REDEMPTION
- Judicial foreclosure EQUITY OF REDEMPTION

Extrajudicial foreclosure RIGHT OF REDEMPTION

In extrajudicial foreclosure, you go to court and the court will order the borrower to
pay. If the borrower is able to pay the amount of the loan within that period, then
he can get back the property and the foreclosure will not proceed.

In case of right of redemption, the right to redeem the property is within 1 year
from registration of certificate of sale, and not from sale.

Judicial foreclosure EQUITY OF REDEMPTION

By paying the amount due within a period of not less than 90 nor more than 120
daysfrom the entry of the final judgment.

Rules that we should keep in mind:

GENERAL RULE: in judicial foreclosure, there is no right of redemption, only
EQUITY OF REDEMPTION.
EXCEPTION: if the mortgagee is a bank or a banking institution, there is a RIGHT
OF REDEMPTION even if it is a judicial foreclosure.
- So, within 1 year from date of registration of certificate of sale.
EH 403 [2011 2012]


- So here, the mortgagee is the bank.

GENERAL RULE:in right of redemption (extrajudicial foreclosure), period to
redeems is 1 year from the registration of the certificate of sale.
EXCEPTION:if the mortgagor is a juridical person, then the period for the
mortgagor to exercise the right of redemption is shortened, that is, until, but
not after, the registration of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case shall be more than three (3)
months after foreclosure, whichever is earlier.
- So here, the mortgagor is a juridical person.
- If non-juridical person, like individual, we go back to 1 year.
- Reckoning point: 1 year from the REGISTRATION OF THE CERTIFICATE OF
SALE 3 months AFTER FORECLOSURE [SALE].
- 1 year from registration, not sale, because the court still has to confirm the
foreclosure sale. So it must be registration of the certificate of sale for the
general rule.

What is difference between the REGISTRATION of the certificate of sale and the
CONFIRMATION of the certificate of sale?
- It is the court who confirms the sale. The point there is not from the sale
but from the confirmation of the sale. Because it is still possible that
although there is already a foreclosure, that the sale will be annulled
because there are grounds to annul the foreclosure sale, e.g. the
foreclosure sale was not valid, like there was no proper notice, the bidding
was not proper etc. So thats why you need confirmation of sale.
- So from the time of confirmation of sale, that is also the time of
registration of sale or the issuance of the certificate of sale. So registration
of sale comes after the confirmation of sale.

TAKE NOTE: whichever is earlier
- the registration of the certificate of foreclosure sale with the applicable
Register of Deeds which in no case shall be more than three (3) months
after foreclosure,whichever is earlier
- You cannot redeem it after registration of foreclosure sale
- If registration of the certificate is done 1 month after the foreclosure sale,
then you can no longer redeem. You must redeem it BEFORE the
registration, or in 3 months, whichever is earlier.
- So, if you are the buyer and the borrower is a juridical person, register
immediately so that you can consolidate your ownership.

SECTION 47. Foreclosure of Real Estate Mortgage. xxx by paying the amount due
under the mortgage deed, with interest thereon at the rate specified in the
mortgage, and all the costs and expenses incurred by the bank or institution from
the sale and custody of said property less the income derived therefrom. xxx

REDEMPTION PRICE

As to the redemption price, what would govern is the general banking law if the
mortgagee again is a bank.

Under the GBL, the redemption price is equivalent to the amount due,
interests, costs and expenses from the sale and custody of said property less
the income derived therefrom

It says, interest thereon at the rate specified in the mortgage. If the mortgage
specifies for penalties and surcharge, then that is included.

SECTION 47. Foreclosure of Real Estate Mortgage. xxx
However, the purchaser at the auction sale concerned whether in a judicial or
extrajudicial foreclosure shall have the right to enter upon and take possession of
such property immediately after the date of the confirmation of the auction sale
and administer the same in accordance with law. Any petition in court to enjoin or
restrain the conduct of foreclosure proceedings instituted pursuant to this provision
shall be given due course only upon the filing by the petitioner of a bond in an
amount fixed by the court conditioned that he will pay all the damages which the
bank may suffer by the enjoining or the restraint of the foreclosure proceeding.
Xxx

POSSESSION PRIOR TO REDEMPTION

Prior to redemption, who has possession?
- The provision states that the PURCHASER shall have the right to enter
upon and take possession of the property immediately after the date of
the confirmation of the auction sale and administer the same in
accordance with law.
- The point is the purchaser has the right to enter and take possession of the
property.

Is this different from your ordinary foreclosure?
- Yes. In ordinary foreclosure, the possession remains with the mortgagor.
- Here, the purchaser shall have the right to enter and take possession of
the property immediately after the confirmation of the auction sale. So
EH 403 [2011 2012]


thats the difference. The purchaser has the right to take possession of the
property.

So what if its a bank? Whats so special with banks?
- The purchaser is given a better right compared to a purchaser in an
ordinary foreclosure not involving banks so as to encourage bidders in
foreclosures of properties from banks.
- If we apply GBL, the mortgagee will always be a bank.

SECTION 51. Ceiling on Investments in Certain Assets. Any bank may acquire
real estate as shall be necessary for its own use in the conduct of its business:
Provided, however, That the total investment in such real estate and improvements
thereof, including bank equipment, shall not exceed fifty percent (50%) of
combined capital accounts: Provided, further, That the equity investment of a bank
in another corporation engaged primarily in real estate shall be considered as part
of the bank's total investment in real estate, unless otherwise provided by the
Monetary Board.

CEILING ON INVESTMENTS IN CERTAIN ASSETS

RULE: the bank can acquire real property which is necessary for the conduct of
its business.
- It can acquire land and building on which its operations are conducted.
BUT in no case shall the total investment in a bank in real estate exceed 50% of
the combined capital accounts.
- Combined capital accounts refer to your net worth: capital, equity,
retained earnings, etc.

Now take note in computing 50% limit, you also have to include the equity
investment of a bank in another corporation engaged primarily in real estate.
- So aside from his own ownership of real estate, if the bank also makes an
investment in another entity which is engaged primarily in real estate, that
should be considered in the computation of 50%.

SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims.
Notwithstanding the limitations of the preceding Section, a bank may acquire, hold
or convey real property under the following circumstances:
52.1. Such as shall be mortgaged to it in good faith by way of security for debts;
52.2. Such as shall be conveyed to it in satisfaction of debts previously
contracted in the course of its dealings; or
52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or
trust deeds held by it and such as it shall purchase to secure debts due it. Any
real property acquired or held under the circumstances enumerated in the
above paragraph shall be disposed of by the bank within a period of five (5)
years or as may be prescribed by the Monetary Board: Provided, however, That
the bank may, after said period, continue to hold the property for its own use,
subject to the limitations of the preceding Section.

Under Section 52, these are the instances wherein the bank can acquire real
property or real estate although this is not used in the conduct of its business.
a. When the property is mortgaged as a security of debts; or
b. When the property is conveyed in satisfaction of debts; or
c. In case of purchases at sales under judgment, decrees, mortgages or trust
deeds held by it.

For example in a foreclosure sale, there is no other bidder, only the bank. In that
way, the bank acquires the real property.

Now what is the requirement if a bank acquires real property under these
circumstances?
1. The bank must, within a period of 5 years, dispose the same.
- If you go to a bank you can see there a list of acquired real properties.
These are properties acquired by the bank by way of foreclosure or in
payment of debt.
- They say if you want to buy real properties which are cheaper, you go
to the list of foreclosed properties of the bank because it is cheaper.
- But the bank MUST dispose these properties within a period of 5
years.
- If it cannot dispose it within 5 years, it can continue to hold the
property but it will now be subject to the limitation of the preceding
section.
- Meaning it is now included in the computation of the 50% limit (ceiling
on investments).
2. Another requirement is that the bank must post at all times in conspicuous
places a list of these acquired properties.

SECTION 53. Other Banking Services. In addition to the operations specifically
authorized in this Act, a bank may perform the following services:
53.1. Receive in custody funds, documents and valuable objects;
53.2. Act as financial agent and buy and sell, by order of and for the account of
their customers, shares, evidences of indebtedness and all types of securities;
53.3. Make collections and payments for the account of others and perform
EH 403 [2011 2012]


such other services for their customers as are not incompatible with banking
business;
53.4. Upon prior approval of the Monetary Board, act as managing agent,
adviser, consultant or administrator of investment
management/advisory/consultancy accounts; and
53.5. Rent out safety deposit boxes. The bank shall perform the services
permitted under Subsections 53.1, 53.2, 53.3 and 53.4 as depositary or as an
agent. Accordingly, it shall keep the funds, securities and other effects which it
receives duly separate from the bank's own assets and liabilities.
The Monetary Board may regulate the operations authorized by this Section in
order to ensure that such operations do not endanger the interests of the
depositors and other creditors of the bank.
In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a
bank holiday, or in any manner suspends the payment of its deposit liabilities
continuously for more than thirty (30) days, the Monetary Board may summarily
and without need for prior hearing close such banking institution and place it under
receivership of the Philippine Deposit Insurance Corporation.

These are the other income generating activities of banks aside from the usual
deposit taking and lending activities.

o Receive in custody funds, documents and valuable objects;

o Act as financial agent and buy and sell, by order of and for the account of their
customers, shares, evidences of indebtedness
- Now it mentioned shares. So if the bank acts as a financial agent in buying
and selling shares, it is like it is being a broker.
- So if the bank acts as a security broker, does it need SEC license? YES
o It will buy or sell. It will not issue. So like a broker.
o There is amemorandum of agreement between the BSP and the
SECwhich states that if a bank acts as a broker, (buying and selling
securities) it needs license from the SEC. The bank is under the
supervision of the BSP but it still needs to get a license.

3. Make collections and payments for the account of others and perform such
other services for their customers as are not incompatible with banking
business
- You go to a bank, the bank now would accept payments for your
bills(PLDT, VECO, etc.)
- Now what does the bank get in accepting payments from other entities?
o They dont charge us service charges. But there is an agreement
between, lets say PLDT, VECO, MERALCO, that there will be a service
charge.
o Aside from that, the bank gets cash. They can use the money. Its not
when someone pays for PLDT, they will immediately remit to PLDT.
There is a certain period of time. Like 1 week, that is long actually if
they loan the money. They already get interest.

3. Upon prior approval of the Monetary Board, act as managing agent, adviser,
consultant or administrator of investment management/advisory/consultancy
accounts; and

4. Rent out safety deposit boxes. The bank shall perform the services permitted
under Subsections 53.1, 53.2, 53.3 and 53.4 as depositary or as an agent.
Accordingly, it shall keep the funds, securities and other effects which it
receives duly separate from the bank's own assets and liabilities.
- Take note, the bank can rent out safety deposit boxes.

In Section 53.1 53.4, the bank here in performing these services is considered
as a depositary or as an agent. And take note, these services are performed by
the bank in a fiduciary character. These are still fiduciary in nature.
- Meaning the bank must exercise the highest degree of diligence.

SECTION 54. Prohibition to Act as Insurer. A bank shall not directly engage in
insurance business as the insurer.

So, the bank cannot insure.

Can it INVEST in an insurance company?
- Yes because that is an allied enterprise. But directly, he cannot be an
insurer.

Why?
- The risk involved in insurance is far greater than banking the
capitalization requirements, the policies, etc.
- We dont have what we call, unlike in other countries, bank cashsurance, a
bank at the same time insurance. Here, that cannot be.
- But ofcourse you can invest in an insurance company.

SECTION 55. Prohibited Transactions.
55.1. No director, officer, employee, or agent of any bank shall
EH 403 [2011 2012]


(a) Make false entries in any bank report or statement or participate in any
fraudulent transaction, thereby affecting the financial interest of, or causing
damage to, the bank or any person;
(b) Without order of a court of competent jurisdiction, disclose to any unauthorized
person any information relative to the funds or properties in the custody of the
bank belonging to private individuals, corporations, or any other entity: Provided,
That with respect to bank deposits, the provisions of existing laws shall prevail;
(c) Accept gifts, fees or commissions or any other form of remuneration in
connection with the approval of a loan or other credit accommodation from said
bank;
(d) Overvalue or aid in overvaluing any security for the purpose of influencing in any
way the actions of the bank or any bank; or
(e) Outsource inherent banking functions.

PROHIBITED TRANSACTIONS

No director, officer, employee, or agent of any bank shall

1. Make false entries in any bank report or statement.
- Of course, because that would distort the true financial condition of the
bank.
- Ex. Alteration of the figures to show that the loans are not past due.

2. Without court order of competent jurisdiction, disclose to any unauthorized
person any information relative to funds or properties.
- Now this refers now to secrecy of bank deposits.
- GR: you cannot disclose. EXCEPTION: when there is a court order.
o Of course there are more exceptions when we discuss later on law on
secrecy of bank deposits.
o So just an overview what are some of these exceptions?
a. There is consent
b. Impeachment
c. In case of public official being sued for bribery and dereliction.
d. When it is the subject matter of litigation
e. In case of violation of AMLA
f. Anti-graft and corrupt practices act
g. In the conduct of the BSP of examination of banks.disclose
h. In BIR cases, the commissioner of internal revenue can inquire in
these instances:
i. if you apply for compromise on the ground of financial
incapacity
ii. In estate tax, the commissioner can examine deposits to
determine gross estate
iii. In case of dormant accounts which has been dormant for
atleast 10 years. The bank is required to report the same to the
treasurer of the RP.
Why? (escheat) If there are no heirs, in the order of intestate
succession, if it is dormant for 10 years meaning nobody is
interested, there are no heirs, it goes to the state.

3. A bank officer shall not accept gifts, fees or commissions in connection with
the approval of a loan.
- The reason is that the loan should be approved based on objective
considerations. To avoid conflict of interest.

4. A bank officer should not overvalue or aid in overvaluing any security.

5. A bank officer and the bank itself cannot outsource inherent banking functions.
- What are considered inherent banking functions that you cannot
outsource?
o Tellering services, the handling of deposit transactions, those are what
we call inherent banking functions. So under the law these functions
cannot be outsourced.
- Can you outsource janitorial or security services?
o Yes. You can even outsource your IT system, printing of checks,
printing of bank documents.
o Those can be outsourced. Only those inherent banking functions
cannot be outsourced.
- Whats the purpose?
o To uphold the secrecy of bank deposits.
o Imagine your tellers are casual, every 5 months they are changed, so
there is a tendency that there is disclosure of bank deposits.
You know Mr. so and so has large amount of deposit or Mr. so
and so always draw checks that will bounce.
Although we have the secrecy of bank deposits but have you tried
calling a bank and you ask about your bank account, they actually
answer you.
Ex: I would like to ask if my allowance was credited to my
account already? Or whether this check is already cleared?
So they entertain inquiries. How do we uphold secrecy of
bank deposits now?
As a rule, it is not among the exceptions. The only exception
is there is a written consent.
EH 403 [2011 2012]


But why do some bank personnel entertain calls over the
phone? But before they do that they ask you some personal
information.

55.2. No borrower of a bank shall
(a) Fraudulently overvalue property offered as security for a loan or other credit
accommodation from the bank;
(b) Furnish false or make misrepresentation or suppression of material facts for the
purpose of obtaining, renewing, or increasing a loan or other credit accommodation
or extending the period thereof;
(c) Attempt to defraud the said bank in the event of a court action to recover a loan
or other credit accommodation; or
(d) Offer any director, officer, employee or agent of a bank any gift, fee,
commission, or any other form of compensation in order to influence such persons
into approving a loan or other credit accommodation application.

We have Section 55.2, prohibited acts of borrowers this time.
If you will look at the prohibited acts basically the same on the prohibited acts
of directors and officers because they say it takes two to tango.
So if the officer is prohibited, the borrower must be prohibited as well.

55.3. No examiner, officer or employee of the Bangko Sentral or of any department,
bureau, office, branch or agency of the Government that is assigned to supervise,
examine, assist or render technical assistance to any bank shall commit any of the
acts enumerated in this Section or aid in the commission of the same. (87-Aa)
The making of false reports or misrepresentation or suppression of material facts by
personnel of the Bangko Sentral ng Pilipinas shall constitute fraud and shall be
subject to the administrative and criminal sanctions provided under the New
Central Bank Act.

And of course, if the bank officers and borrowers are prohibited, the BSP
officers (the regulators)must also be prohibited.

55.4. Consistent with the provisions of Republic Act No. 1405, otherwise known as
the Banks Secrecy Law, no bank shall employ casual or nonregular personnel or too
lengthy probationary personnel in the conduct of its business involving bank
deposits.

Section 55.4, still in upholding the secrecy of bank deposits, the bank is
prohibited from employing casual or non-regular personnel, or too lengthy
probationary personnel in the conduct of its business involving bank deposits.

So again, same discussion in the inherent banking functions. Bank tellers must
be regular employees, not casual.

Reason? Regular employees are presumed to be more loyal and more trust
worthy than casual employees. If casual, there is a tendency that they would
disclose bank secrets.

SECTION 56. Conducting Business in an Unsafe or Unsound Manner. In
determining whether a particular act or omission, which is not otherwise prohibited
by any law, rule or regulation affecting banks, quasi-banks or trust entities, may be
deemed as conducting business in an unsafe or unsound manner for purposes of
this Section, the Monetary Board shall consider any of the following circumstances:
56.1. The act or omission has resulted or may result in material loss or damage,
or abnormal risk or danger to the safety, stability, liquidity or solvency of the
institution;
56.2. The act or omission has resulted or may result in material loss or damage
or abnormal risk to the institution's depositors, creditors, investors,
stockholders or to the Bangko Sentral or to the public in general;
56.3. The act or omission has caused any undue injury, or has given any
unwarranted benefits, advantage or preference to the bank or any party in the
discharge by the director or officer of his duties and responsibilities through
manifest partiality, evident bad faith or gross inexcusable negligence; or
56.4. The act or omission involves entering into any contract or transaction
manifestly and grossly disadvantageous to the bank, quasi-bank or trust entity,
whether or not the director or officer profited or will profit thereby.
Whenever a bank, quasi-bank or trust entity persists in conducting its business in an
unsafe or unsound manner, the Monetary Board may, without prejudice to the
administrative sanctions provided in Section 37 of the New Central Bank Act, take
action under Section 30 of the same Act and/or immediately exclude the erring
bank from clearing, the provisions of law to the contrary notwithstanding.

CONDUCTING BUSINESS IN AN UNSAFE AND UNSOUND MANNER

So the bank must at all times conduct its business in a safe and sound manner.

So when will it be considered as an unsafe and unsound manner?
- If you violate any of the provisions of the GBL, it will result to a loss or
damage, etc. It will involve liquidity or solvency problems.It is very general.
- Failing to maintain the ratio. Or exceeding the prescribed limits.

EH 403 [2011 2012]


SECTION 57. Prohibition on Dividend Declaration. No bank or quasi-bank shall
declare dividends greater than its accumulated net profits then on hand, deducting
therefrom its losses and bad debts. Neither shall the bank nor quasi-bank declare
dividends, if at the time of declaration:
57.1 Its clearing account with the Bangko Sentral is overdrawn; or
57.2 It is deficient in the required liquidity floor for government deposits for five (5)
or more consecutive days; or
57.3 It does not comply with the liquidity standards/ratios prescribed by the Bangko
Sentral for purposes of determining funds available for dividend declaration; or
57.4 It has committed a major violation as may be determined by the Bangko
Sentral. (84a)

PROHIBITION ON DECLARATION OF DIVIDENDS

To what extent can a bank declare dividends?
- It shall not be greater than its accumulated net profits on hand after
deducting its losses and bad debts.
- Basically the same as that in the corporation code. The provision under
corporation code says it can only declare dividends to the extent of its
unrestricted retained earnings.

When we say accumulated net profits, we refer to the retained earnings. So
basically the same principle. You must have accumulated net profits.

And even if you have accumulated net profits, it cannot declare dividends if at
the time of the dividend declaration, the bank is violating or is under the
following circumstances:
1. Its clearing account with the Bangko Sentral is overdrawn; or
2. It is having deficiency in its liquidity requirements for 5 or more
consecutive days; or
3. It does not comply with the liquidity standards/ratios
- Those different ratios that we have discussed before, the percentages.
4. It has committed a major violation as determined by the BSP.

SECTION 58. Independent Auditor. The Monetary Board may require a bank,
quasi-bank or trust entity to engage the services of an independent auditor to be
chosen by the bank, quasi-bank or trust entity concerned from a list of certified
public accountants acceptable to the Monetary Board. The term of the engagement
shall be as prescribed by the Monetary Board which may either be on a continuing
basis where the auditor shall act as resident examiner, or on the basis of special
engagements, but in any case, the independent auditor shall be responsible to the
bank's, quasi-bank's or trust entity's board of directors. A copy of the report shall be
furnished to the Monetary Board. The Monetary Board may also direct the board of
directors of a bank, quasi-bank, trusty entity and/or the individual members
thereof, to conduct, either personally or by a committee created by the board, an
annual balance sheet audit of the bank, quasi-bank or trust entity to review the
internal audit and control system of the bank, quasi-bank or trust entity and to
submit a report of such audit. (6-Da)

INDEPENDENT AUDITOR

This is the same requirement as that of an ordinary corporation that at the end of
the year you must hire an independent auditor.

What is the purpose of an independent auditor?
- Of course banks have internal auditors.
- These independent auditors are your external auditors.
- Every year a corporation has to hire an external auditor because you have
reportorial requirements to the BIR and to the SEC.
- But in case of a bank, an independent auditor does more than that. He has
a wider scope of responsibility. Because an independent auditor hired by a
bank has to report to the BSP. He has to submit a report to the BSP any
matter adversely affecting the condition of the bank or soundness of the
bank.
- And take note, if that independent auditor fails to report to the BSP any
irregularities involving the bank, there is a possibility that that independent
auditor will be blacklisted by the BSP. BSP has a list of independent
auditors whichcan be hired by banks.

If a bank fails, the public normally blames the BSP. Since the BSP conducts
examinations only once a year, its not an assurance that the BSP would make a
timely discovery of the irregularities made by the bank. By the time the BSP
discovers, it might already be too late. So to help BSP, they require the banks to
hire an independent auditor who is tasked to submit a report to the BSP if ever
he discovers irregularities.

So the BSP is trying to share the burden or the blame with the independent
auditor.

SECTION 60. Financial Statements. Every bank, quasi-bank or trust entity shall
submit to the appropriate supervising and examining department of the Bangko
Sentral financial statements in such form and frequency as may be prescribed by
EH 403 [2011 2012]


the Bangko Sentral. Such statements, which shall be as of a specific date designated
by the Bangko Sentral, shall show the actual financial condition of the institution
submitting the statement, and of its branches, offices, subsidiaries and affiliates,
including the results of its operations, and shall contain such information as may be
required in Bangko Sentral regulations. (n)

SECTION 61. Publication of Financial Statements. Every bank, quasi-bank or
trust entity, shall publish a statement of its financial condition, including those of its
subsidiaries and affiliates, in such terms understandable to the layman and in such
frequency as may be prescribed by the Bangko Sentral, in English or Filipino, at least
once every quarter in a newspaper of general circulation in the city or province
where the principal office, in the case of a domestic institution, or the principal
branch or office in the case of a foreign bank, is located, but if no newspaper is
published in the same province, then in a newspaper published in Metro Manila or
in the nearest city or province. The Bangko Sentral may by regulation prescribe the
newspaper where the statements prescribed herein shall be published.
The Monetary Board may allow the posting of the financial statements of a bank,
quasi-bank or trust entity in public places it may determine, in lieu of the
publication required in the preceding paragraph, when warranted by the
circumstances.
Additionally, banks shall make available to the public in such form and manner as
the Bangko Sentral may prescribe the complete set of its audited financial
statements as well as such other relevant information including those on
enterprises majority-owned or controlled by the bank, that will inform the public of
the true financial condition of a bank as of any given time.
In periods of national and/or local emergency or of imminent panic which directly
threaten monetary and banking stability, the Monetary Board, by a vote of at least
five (5) of its members, in special cases and upon application of the bank, quasi-
bank or trust entity, may allow such bank, quasibank or trust entity to defer for a
stated period of time the publication of the statement of financial condition
required herein. (n)

FINANCIAL STATEMENTS

Just like any other corporation, a bank or a quasi-bank must submit financial
statements to the BSP.

Whats the purpose of the financial statement?
- To show the actual financial condition of the institution, its offices,
subsidiaries and affiliates.

These financial statements also need to be published at least once every
quarter in a newspaper of general circulation in the city or province where the
principal office (in the case of a domestic institution) or the principal branch or
office (in the case of a foreign bank) is located, but if no newspaper is published
in the same province, then in a newspaper published in Metro Manila or in the
nearest city or province

SECTION 62. Publication of Capital Stock. A bank, quasi-bank or trust entity
incorporated under the laws of the Philippines shall not publish the amount of its
authorized or subscribed capital stock without indicating at the same time and with
equal prominence, the amount of its capital actually paid up.
No branch of any foreign bank doing business in the Philippines shall in any way
announce the amount of the capital and surplus of its head office, or of the bank in
its entirety without indicating at the same time and with equal prominence the
amount of the capital, if any, definitely assigned to such branch. In case no capital
has been definitely assigned to such branch, such fact shall be stated in, and shall
form part of the publication. (82)

PUBLICATION OF CAPITAL STOCK Just read

Sec. 63. Settlement of Disputes. The provisions of any law to the contrary
notwithstanding, the Bangko Sentral shall be consulted by other government
agencies or instrumentalities in actions or proceedings initiated by or brought
before them involving controversies in banks, quasi-banks or trust entities arising
out of and involving relations between and among their directors, officers or
stockholders, as well as disputes between any or all of them and the bank, quasi-
bank or trust entity of which they are directors, officers or stockholders.

SETTLEMENT OF DISPUTES

In the resolution of disputes, the BSP shall be consulted by other government
agencies or instrumentalities.

SECTION 64. Unauthorized Advertisement or Business Representation. No
person, association, or corporation unless duly authorized to engage in the business
of a bank, quasi-bank, trust entity, or savings and loan association as defined in this
Act, or other banking laws, shall advertise or hold itself out as being engaged in the
business of such bank, quasi-bank, trust entity, or association, or use in connection
with its business title, the word or words "bank", "banking", "banker", "quasi-bank",
"quasibanking", "quasi-banker", "savings and loan association", "trust corporation",
"trust company" or words of similar import or transact in any manner the business
EH 403 [2011 2012]


of any such bank, corporation or association. (6)

As discussed earlier, if you are not a bank, you are not allowed to use the word
"bank", "banking", "banker", "quasi-bank".
Except if you are a blood bank or a sperm bank.

Sections 67, 68, 69, 70,talk about conservatorship, liquidation and receivership.
These are the same things that we have discussed under the New Central Bank Act.
As you can see, these provisions make reference to the provisions of the New
Central Bank Act.

FOREIGN BANKS
(Sections 72 78)

SECTION 73. Acquisition of Voting Stock in a Domestic Bank. Within seven (7)
years from the effectivity of this Act and subject to guidelines issued pursuant to
the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign
bank to acquire up to one hundred percent (100%) of the voting stock of only one
(1) bank organized under the laws of the Republic of the Philippines.
Within the same period, the Monetary Board may authorize any foreign bank,
which prior to the effectivity of this Act availed itself of the privilege to acquire up
to sixty percent (60%) of the voting stock of a bank under the Foreign Banks
Liberalization Act and the Thrift Banks Act, to further acquire voting shares of such
bank to the extent necessary for it to own one hundred percent (100%) of the
voting stock thereof.
In the exercise of this authority, the Monetary Board shall adopt measures as may
be necessary to ensure that at all times the control of seventy percent (70%) of the
resources or assets of the entire banking system is held by banks which are at least
majority-owned by Filipinos.
Any right, privilege or incentive granted to a foreign bank under this Section shall be
equally enjoyed by and extended under the same conditions to banks organized
under the laws of the Republic of the Philippines. (Secs. 2 and 3, RA 7721)

SECTION 74. Local Branches of Foreign Banks. In the case of a foreign bank
which has more than one (1) branch in the Philippines, all such branches shall be
treated as one (1) unit for the purpose of this Act, and all references to the
Philippine branches of foreign banks shall be held to refer to such units. (68)

If a foreign bank, or any foreign corporation for that matterwould like to
transact business in the Philippines, it must first obtain a license from SEC.

Aside from that, if you will open a bank, you need to obtain a license from the
Bangko Sentral.

So, license from the SEC and Bangko Sentral.

Now in case a foreign bank has more than 1 branch in the Philippines, all such
branches shall be treated as 1 unit. Of course we have this principle that the
branch and head office are treated as one. That principle is called the single
entity concept.

Acquisition of voting stock in a domestic bank
- This is what we discussed previously regarding foreign ownership of a
domestic bank. (See discussion under Section 11)
- So under Section 73, it is possible now for a foreign bank to acquire up to
100% of a voting stock of only 1 bank organized under the Philippines.

SECTION 75

Who guarantees the liabilities of a branch of a foreign bank in the Philippines?
- The Head office

Residents and citizens of the Philippines who are creditors of a branch in the
Philippines of a foreign bank shall have preferential rights to the assets of such
branch in accordance with existing laws.

SECTION 76

If there is a branch here of a foreign bank, to whom shall you serve the
summons?
- To the designated resident agent. RFCs are required to have resident
agents.
- The agent can be a Filipino or an alien for as long as he is a resident.

SECTION 78

When can you revoke the license of a foreign bank?
- If the bank is insolvent or in imminent danger thereof or that its
continuance in business will involve probable loss to those transacting
business with it.

TRUST OPERATIONS
(Sections 79 93)
EH 403 [2011 2012]


SECTION 80. Conduct of Trust Business. A trust entity shall administer the funds
or property under its custody with the diligence that a prudent man would exercise
in the conduct of an enterprise of a like character and with similar aims.
No trust entity shall, for the account of the trustor or the beneficiary of the trust,
purchase or acquire property from, or sell, transfer, assign or lend money or
property to, or purchase debt instruments of, any of the departments, directors,
officers, stockholders, or employees of the trust entity, relatives within the first
degree of consanguinity or affinity, or the related interests, of such directors,
officers and stockholders, unless the transaction is specifically authorized by the
trustor and the relationship of the trustee and the other party involved in the
transaction is fully disclosed to the trustor or beneficiary of the trust prior to the
transaction.
The Monetary Board shall promulgate such rules and regulations as may be
necessary to prevent circumvention of this prohibition or the evasion of the
responsibility herein imposed on a trust entity. (56)

Trust has something to do with the relationship between the trustor and the
trustee, wherein the trustee holds the funds or properties of the trustor for the
benefit of the latter.
- So, you invest, you put money to that trust and they would invest it,
manage it safely. Make it grow for the benefit of the beneficiary or of the
trustor.
- Example: retirement plan of corporations being managed by Trustee
Banks.
- There are banks engaged in trust operations.

Who is authorized to engage in trust business?
- It must be a stock corporation, not a sole proprietor nor a partnership.

What is the degree of care expected of those engaged in trust operations?
- A trust entity shall administer the funds or property under its custody with
the diligence that a prudent man would exercise in the conduct of an
enterprise of a like character and with similar aims.
- This is similar to diligence of a good father of a family.
- This is the standard of care prescribed by law.

What are the prohibited transactions in case of trust operations?
- No trust entity shall, for the account of the trustor or the beneficiary of the
trust, purchase or acquire property from, or sell, transfer, assign or lend
money or property to, or purchase debt instruments of, any of the
departments, directors, officers, stockholders, or employees of the trust
entity, relatives within the first degree of consanguinity or affinity, or the
related interests, of such directors, officers and stockholders
- Unless:
1. such transaction is specifically authorized by the trustor and
2. the relationship of the trustee and the other party involved in the
transaction is fully disclosed to the trustor or beneficiary of the trust
prior to the transaction.
- This is to avoid conflict of interest.

The bank cannot also commingle the funds from its banking business with the
funds from its trust operations.

Trust operations are not covered by PDIC.

SECTION 83. Powers of a Trust Entity. A trust entity, in addition to the general
powers incident to corporations, shall have the power to:
83.1. Act as trustee on any mortgage or bond issued by any municipality,
corporation, or any body politic and to accept and execute any trust consistent with
law;
83.2. Act under the order or appointment of any court as guardian, receiver,
trustee, or depositary of the estate of any minor or other incompetent person, and
as receiver and depositary of any moneys paid into court by parties to any legal
proceedings and of property of any kind which may be brought under the
jurisdiction of the court;
83.3. Act as the executor of any will when it is named the executor thereof;
83.4. Act as administrator of the estate of any deceased person, with the will
annexed, or as administrator of the estate of any deceased person when there is no
will;
83.5. Accept and execute any trust for the holding, management, and
administration of any estate, real or personal, and the rents, issues and profits
thereof; and
83.6. Establish and manage common trust funds, subject to such rules and
regulations as may be prescribed by the Monetary Board. (58)

Just read.

EH 403 [2011 2012]


LAW ON SECRECYOF BANKDEPOSITS
(R.A. 1405, as amended)

Section 1. It is hereby declared to be the policy of the Government to give
encouragement to the people to deposit their money in banking institutions and to
discourage private hoarding so that the same may be properly utilized by banks in
authorized loans to assist in the economic development of the country.

Whats the purpose of the law?
- To encourage people to deposit and to discourage hoarding

Whats the effect if the people will hoard their money instead of depositing it in
the bank?
- The money will not circulate.
- By encouraging people to deposit, the bank would be able to acquire more
funds which it could lend to the public.
- Bottom line, the effect is that it could affect the economy. It could spur
economic activity.

Section 2. All deposits of whatever nature with banks or banking institutions in the
Philippines including investments in bonds issued by the Government of the
Philippines, its political subdivisions and its instrumentalities, are hereby considered
as of an absolutely confidential nature and may not be examined, inquired or
looked into by any person, government official, bureau or office, except upon
written permission of the depositor, or in cases of impeachment, or upon order of a
competent court in cases of bribery or dereliction of duty of public officials, or in
cases where the money deposited or invested is the subject matter of the litigation.

What are covered under RA 1405?
- It covers all kinds of deposits, whatever the nature of these deposits,
whether these are savings, time, current deposits, with banks or banking
institutions and not only deposits but it also includes investments in bonds
issued by the government of the Philippines or its political subdivisions.

What about trust funds, are they covered?
- Yes. It covers deposits of whatever nature. Those deposits are covered by
the law on secrecy.

What about if a bank rents out a safety deposit box and you placed something
there?
- YES, because its still considered as deposits with the banks so long as it is
placed or it is made in the bank or banking institutions.
- But if you make investment in investment house, not in a bank, then, that
is not covered.

The deposit must be made with a BANK or BANKING INSTITUTION for it to be
covered by the bank secrecy law.

Section 3. It shall be unlawful for any official or employee of a banking institution to
disclose to any person other than those mentioned in Section two hereof any
information concerning said deposits.

GENERAL RULE: bank deposits shall be kept absolutely confidential.

Prohibitions:
1. Bank employees and officers are prohibited from disclosing, sabotage
information concerning all deposits of whatever nature to any
unauthorized person
- Take note that the prohibition applies only to a bank officer or
employee.
- If you are not a bank officer or employee and you made a disclosure,
you would not be held liable under the bank secrecy law but probably
under another law.
2. Bank deposits shall not be subject to an examination or inquiry of
whatever nature. It cannot be looked into by any person, individual,
government office, bureau, etc.

EXCEPTIONS:

4 Exceptions under RA 1405:

1. Written consent of the depositor
- EXAMPLE: This would apply in a case of a corporation during annual
audit wherein the auditor would check the bank deposits of the
corporation. Normally, they would require the corporation to sign a
request for a bank to confirm their deposits. The bank is allowed to
disclose because there is a written permission from the depositor.

2. In cases of impeachment
- So if it talks about impeachment, this would apply to public officers or
public officials.

EH 403 [2011 2012]


3. Upon order of a competent court in cases of bribery or dereliction of duty
by public officials

4. Upon order of a competent court in case when the money deposited is the
subject matter of litigation.
- If theres a pending case in court and theres an order of a competent
court, and the subject matter of the case is the money deposited.
- Ex. Plaintiff was swindled, and the proceeds were deposited with BDO.
Plaintiff now files a case to recover the amount that was swindled. So,
the court issued an order to subpoena the bank officer and to bring
with him the records of the swindlers bank deposits. That is allowed
since the subject matter is the money deposited.

Other exceptions provided under other special laws:

1. RA 3019 or the Anti-Graft and Corrupt Practices Act (unexplained wealth +
public official)
- It must be a case for unexplained wealth as held in the case of PNB VS
GANCAYCO and BANCO FILIPINO VS PURISIMA.
- So take note, the violation under RA 3019 must be for unexplained
wealth.
- The person subject of the examination must be a public official.
- There must also be a pending case in court per RA 3019 (Provision
under RA 3019 in conflict with SC ruling in PNB v. GANCAYCO. SC in
that case allowed disclosure even if there was no pending case in
court.)

2. NIRC authorizes the CIR to inquire into bank deposits of:
a. A decedent to determine his gross estate; and
b. If the TP has filed for a compromise on his tax liability on the ground of
financial capacity
- In this case, normally, the TP would be required to sign a waiver of
his privilege under RA 1405.

3. Anti-Money Laundering Act (AMLA)
- Upon order of a competent court when theres a probable cause that
has been established that the deposits or the money involved are
related to money laundering activities
- Under AMLA, the bank is required to report to the AMLA Council in
case of a single or series or combination of transactions involving the
amount in excess of 500k or an equivalent amount in foreign currency,
especially if the transaction is not supported by any legitimate
purpose.
o So in that case, the bank is not violating the law on secrecy of
bank deposits if it discloses such transaction or such deposit
involving that amount of money to the AMLA Council because
thats provided under the AMLA. Thats an exception provided
under AMLA.

4. Unclaimed Balances Act
- This pertains to dormant accounts for a period of 10 years wherein the
bank is required to make a disclosure to the treasurer of the
Philippines.
- The proceeds of the deposits will be escheated in favor of the
government.

5. Human Security Act
- If you are suspected of committing terrorism then your bank accounts
may be inquired into.

There are also other laws which complement or support RA 1405:

1. Foreign Currency Deposit Act (FCDA)
- FC deposits are also absolutely confidential.
- In fact, there is only ONE EXCEPTION, and that is upon written consent
of the depositor.
- This is stricter because there is only 1 exception.
- Reason: at the time the law was enacted, the purpose of the framers
of the law is to encourage FCD. Aside from the confidentiality, they
also provide for tax exemptions on interest income from FCD.

- Other exceptions to the FCDA:

CHINA BANKING CORPORATION V. CA
GR 140687, 18 December 2006

Case for the recovery of funds which were misappropriated. The case
was filed by the father against the daughter. The daughter allegedly
withdrew funds from the bank. But the father was a co-depositor or a
co-payee of the check. Disclosure was allowed in this case because the
one filing the case was a co-depositor, a co-payee. When he filed the
case for the subpoena of the bank deposit, it is in effect a WRITTEN
PERMISSON by the depositor.
EH 403 [2011 2012]


At the end of the decision the court went on and said that because of
the distinctive circumstances of the case and in the interest of justice
and rudiments of fairplay, it is better to allow a disclosure.

SALVACION V. CENTRAL BANK
278 SCRA 27

Thisis a case involving a foreign national who was accused of being a
pedophile. There is an issue now on WON the FCD of that foreign
national who is a fugitive from HK, can be subject to garnishment. The
SC said YES as an exception, in the interest of equity and justice. So,
the court said that this was an exception to the FCDA because of the
peculiar circumstances of the case.

2. General Banking Law (GBL)
a. No bank shall employ casual or non-regular personnel or too lengthy
probationary personnel in the conduct of its business involving bank
deposits
b. Banks are prohibited from outsourcing inherent banking functions
c. No director, officer, employee, or agent of any bank shall, without
court order, disclose to any unauthorized person any information
relative to the funds or properties in the custody of the bank
belonging to private individuals, corporations, or any other entity;
Provided, that with respect to bank deposits, the provisions of existing
laws shall prevail

3. New Central Bank Act (NCBA)
a. DOSRI loans if a DOSRI would like to obtain a loan from a bank
wherein he is a director, stockholder, or officer, he can do so provided
that he executes a waiver of his rights under the secrecy of bank
deposits.
b. In case of examination by the BSP of a bank, the bank will be required
to disclose bank deposits.
c. In case theres an examination by an independent auditor of a bank,
the bank will be required to disclose to the independent auditor such
information.

Section 5. Any violation of this law will subject offender upon conviction, to an
imprisonment of not more than five years or a fine of not more than twenty
thousand pesos or both, in the discretion of the court.

What are the penalties for violation?
- Imprisonment of not more than five years or a fine of not more than
twenty thousand pesos or both, in the discretion of the court

TAKE NOTE: Only bank officers and bank employees can be penalized under this
law. Others may be held liable not under this law but under a different law,
probably the Civil Code, on Torts.

CHINA BANKING CORPORATION V. ORTEGA

This case involves a collection of money. A judgment was rendered and to satisfy
such judgment, a writ of garnishment was issued against the debtor.When the writ
of garnishment was served on the cashier of the bank, the bank cashier refused to
disclose by invoking the provisions of RA 1405.

ISSUE: WON the bank can disclose or can be compelled to disclose, or WON the
bank can invoke the provisions of RA 1405 by refusing the writ of garnishment.

So does the writ of garnishment violate RA 1405?
- NO, because a writ of garnishment itself does not require the bank to
disclose exactly how much is the deposit but it simply requires the bank to
inform the court WON there exists a deposit. If there is, it shall hold such
deposit for the benefit of the creditor and it shall not to allow withdrawal.
- If ever information as to the amount of deposits will be disclosed, it is only
incidental to the execution process.
- But per se, the writ of garnishment does not violate RA 1405.

ONATE V. ABROGAR

This is a complaint for sum of money with writ of attachmentfiled by Sunlife against
its debtors.

APPLICATION OF THE EXCEPTION that the money deposited was the subject
matter of litigation.

- There was fraud established.
- There was this check from Sunlife issued to petitioner and the check was
supposed to be in payment for a certain transaction.
- It turned out that this transaction was fraudulent, and the same check was
deposited in a bank by the petitioner. So thats why the proceeds of the check
which Sunlife sought to recover was the same money that it would like to
recover. So thats why that money became the subject matter of litigation.
EH 403 [2011 2012]


- It was not just a simple case for collection of money, but really to recover that
same money covered by the check that was issued by Sunlife to petitioner.

MARQUEZ V. DESIERTO

- Marquez was the branch manager of Union bank. Desierto was the
Ombudsman.
- The investigation was all about the violation of certain provisions under RA
3019, specifically Sec. 3 (e) and (g) relative to a joint venture agreement, but
not about unexplained wealth.
- Bottomline: Marquez doesnt want to disclose by invoking the provisions of RA
1405.
- Take note here, we have a case which is still pending with Ombudsman and not
with the court.
- The Office of the Ombudsman issued a subpoena.

ISSUE: Can the Ombudsman, in a pending case, compel the bank to make the
disclosure?

SC: NO. In the decision, the court enumerated the 4 exceptions under RA 1405. It
added 1 additional exception, which is Sec. 8 of RA 3019. This exception refers to
cases of unexplained wealth as decided in the case of PNB V. GANCAYCO.

This case according to the court does not fall under any of those exceptions
enumerated because there was no written consent, it was not a case for
impeachment, there was no pending case in court, it was only a pending
investigation. In fact, the court said that whatthe Ombudsman did was just a fishing
expedition. Therefore, since it does not fall under any of the exceptions, Marquez
cannot be compelled to make the disclosure.

So, there must be a pending case in court, not just an investigation.

BANCO FILIPINO V. PURISIMA

Disclosure in cases for unexplained wealth are not limited only to those properties
registered under the name of the public official but also to those properties
registered under the name of his spouse, children, relatives, etc.

Still, this is about an investigation for unexplained wealth. But this time, it involves
the Tanodbayans intention to subpoena duces tecumagainst the bank records or
transactions in the name of the wife, children, and friends. The public official was a
special agent of the BOC. He was charged for having allegedly acquired properties
manifestly out of proportion to his salary or lawful income.

ISSUE: WON the cases in unexplained wealth are limited only to those bank records
registered in the name of the public official.

SC: NO. It is not limited to the bank records registered in the name of the public
official.It covers properties in the name of the spouse, children, friends, etc.

NOTE that RA 3019 requires that there be a pending case in court. The point in this
case is that the disclosure is not just limited to the public officials bank records, but
also extends to his wifes, etc.

EH 403 [2011 2012]


PHILIPPINE DEPOSITINSURANCE CORPORATIONACT
(R.A. 3591, as amended)

The act provides for the creation of the PDIC, a government corporation, financed
solely by the BSP, acting with the basic policy to promote and safeguard the
interests of the depositing public by way of providing permanent and continuing
insurance coverageon all insured deposits.

The term insured deposit means the amount due to any bona fide depositor for
legitimate deposits in an insured bank net of any obligation of the depositor to the
insured bank as of the date of closure, but not to exceed Five Hundred Thousand
Pesos (P500,000.00).

1. DEPOSIT LIABILITIES REQUIRED TO BE INSURED WITH PDIC

PDIC covers all deposit liabilities of the bank.
It covers all kinds of deposits, whether savings, checking, current, or anything
evidenced by a passbook or certificate.
To be covered under PDIC, the requirement is that there must be a deposit
made.
Under the PDIC law, the term deposit means the unpaid balance ofmoney or
its equivalent received by a bank in the usual course of business and for which
it has given or is obliged to give credit to a commercial, checking, savings, time
or thrift account, or issued in accordance with Bangko Sentral rules and
regulations and other applicable laws, together with such other obligations of a
bank, which, consistent with banking usage and practices,

What about if the bank has a branch located outside of the Philippines? Is the
deposit liability of that branch outside of the Philippines covered by PDIC? Like
for example, I am a depositor of BDO Branch in HK or in the US, am I covered by
PDIC?
- GENERAL RULE: obligations of the bank located outside or payable outside
of the Philippines, shall not be covered by PDIC.
- EXCEPTION: theres an option on the part of the bank that with the
consent or with the approval of the BODs of PDIC, those liabilities can be
insured. So, its up to the bank provided that its approved by the PDIC,
that its deposit liabilities for branches located outside of the Philippines be
covered by PDIC. But general rule is limited only to liabilities located within
the Philippines.

The liability of the PDIC is statutory, in the sense that its liability is created by
law. Since it is statutory, its liability rests primarily on the existence of the
deposit, and not on the negotiability or non-negotiability of any certificate
evidencing deposit. So, even if you are a holder in due course of a certificate of
deposit, it is not a guarantee that you would be entitled to PDIC coverage.

- Example: Mr. A placed a time deposit with a bank, and in exchange, the
bank issued to him a certificate of time deposit. Assuming the CTD is
negotiable, Mr. A negotiated it with Mr. B. Now Mr. B is a holder in due
course of the CTD. After the CTD was negotiated, Mr. A went to the bank
and declared that his CTD was lost. So upon an issuance of an affidavit of
loss, Mr. A was issued another CTD covering exactly the same deposit.
Later on, Mr. A preterminated the time deposit and withdrew the funds
covered by the CTD. Subsequently, the bank was placed under
receivership.

Mr. B, the holder, filed a claim with the PDIC to recover the value of the
deposit as evidenced by a CTD. Can Mr. B recover?

No. Even if we say that Mr. B is a holder in due course of the CTD, he could
no longer from PDIC. The basis of the liability of PDIC is the existence of
deposit.

- PDIC v. CA
GR 118917, 22 December 1997

This case involves certain individuals who made money market placements
with a certain financing company. The financing company issued
promissory notes and checks. When these individuals tried to encash their
investment, the financing company referred them to a particular bank. So
they went to the bank, and in exchange, the bank issued them CTD
corresponding to the value of their investment made with that financing
company. The CTD were supposedly funded by the checks issued by the
financing company. Subsequently, the bank was placed under receivership.
Now PDIC, as the statutory receiver of banks, prepared an inventory or a
list of the deposit liabilities of the bank. That CTD was not included in the
list. So when they filed a claim against PDIC, their claims were denied as
they were not in the list of deposit liabilities of the bank.

The individuals contended that they are entitled because they are holders
in due course of the CTD issued by the bank. However, it was determined
that the checks issued by the financing company which supposedly funded
EH 403 [2011 2012]


the deposit were dishonored because of insufficiency of funds. It turned
out that the CTD was not really funded. So the SC said that there was really
NO DEPOSIT MADE, even if the individuals were holders in due course of
the CTD, they cannot recover from PDIC because there was in fact no
deposit made.

Since were talking about insurance, who pays for the premiums? The depositor
or the bank?
- The bank. Although it benefits the depositor, the bank is the one who pays
the premiums in the form of an assessment.
- So every year, the bank is assessed by PDIC for a certain amount which
assessment later on forms part of the guaranty fund of the PDIC. The
guaranty fund will be used by PDIC in paying its liabilities later on.

2. COMMENCEMENT OF LIABILITY

When would the liability of PDIC accrue or commence?
- When the PDIC takes over a closed bank.

NOTE: The moment PDIC takes over a closed bank, it must publish a notice once a
week for 3 consecutive weeks in a newspaper of general circulation. And normally,
they will post a notice outside the bank premises. Of course, theres publication and
PDIC will send notices to the depositors.

3. DEPOSIT ACCOUNTS NOT ENTITLED TO PAYMENT

What deposits are excluded from the PDIC coverage?
1. Investment products such as bonds and securities, trust accounts, and
other similar instruments;
2. Deposit accounts or transactions which are unfunded, or that are fictitious
or fraudulent;
3. Deposit accounts or transactions constituting, and/or emanating from,
unsafe and unsound banking practice/s, as determined by the Corporation,
in consultation with the BSP, after due notice and hearing, and publication
of a cease and desist order issued by the Corporation against such deposit
accounts or transactions; and
4. Deposits that are determined to be the proceeds of an unlawful activity as
defined under Republic Act 9160, as amended.

Does PDIC cover all types of risks, like robbery?
- NO. What type of risk is covered by PDIC?
o Only risk of loss arising from bank closure.
Closure, in a sense that the bank is already in a state of inability to
pay its deposits.
Maybe, bank closure because it was ordered closed by the
Monetary Board, not just voluntary closure, for reasons of
insolvency, or whatever, unsound banking practice
o Bank closure could be by reason of bankruptcy, insolvency, etc.
o NOTE: PDIC has the right to terminate a bank from the coverage of
insurance. Just like any other insurer, if the insured becomes
uninsurable. There are instances which will be discussed later.

4. EXTENT OF LIABILITY

Php 500,000.00 is the maximum coverage.

5. DETERMINATION OF INSURED DEPOSITS

How do we determine how much is the insured deposit? Like for example, I
have a deposit of 1m. I have a loan with the bank of 700k. So how do I
determine now the 500k? How much can I recover from PDIC?
- Law says, the amount due to the depositor less any outstanding obligation
to the bank at the time of closure.
- So meaning, if I have deposit of 1m, the loan or any outstanding obligation
for that matter will be deducted first, so the net amount due me is 300k
(1m 700k), so its still within the limit of 500k.

6. CALCULATION OF LIABILITY
a. Per depositor, per capacity rule
b. Joint accounts

Rules to be observed in the calculation of liability (6):

In determining the amount due to any depositor, there shall be added together all
deposits in the bank maintained in the same right and capacity for his benefit either
in his own name or in the name of others. (same right, same capacity rule)

1. If a depositor has 2 or more accounts with the same bank, add all deposits of
an individual in the same right and in the same capacity.

Example:

Savings Account 400k
EH 403 [2011 2012]


Current Account 200k
Time Deposit 300k
Total (same bank) 900k (all under Mr. As name)

How much can Mr. A recover?
- 500k for all accounts. All deposits maintained in the same capacity and in
the same right. Although the total deposit is 900k, but the maximum that
Mr. A can recover from PDIC is only 500k. All the deposits shall be added
together so long as they are maintained in the same right and in the same
capacity.

2. Coverage is on a per bank basis. (not on a per branch basis)

Even if you made deposits in different branches but still with the same bank,
those deposits shall be added and shall be considered as under the same right
and same capacity.
Example: Mr. A had the following deposits in BDO:

Branch 1 300k
Branch 2 1.5M
Branch 3 800k
Total 2.6M

- Still 500k. So each account will not be entitled to a separate coverage.

However, a subsidiary bank is different from the parent bank. Both have
different personalities.
- Example, you have a deposit in BPI and another deposit in BPI Savings
Bank, which is a thrift bank. Both banks are different and distinct entities.

3. Individual accounts shall be insured separately from joint accounts.

Example: Mr. A has an individual account, and Mr. A also has a joint account
with Mr. B (Mr. A and/or Mr. B).

Mr. A (individual account) Mr. A and/or Mr. B (joint
account)
Savings Account 200k 200k
Current Account 300k 300K
Time Deposit 400k 400K
Total 900k 900K

For Mr. As individual account, he can recover to the extent of 500k.
For Mr. As joint account with Mr. B, another 500k (Follow the rule under
number 4 in the absence of a sharing scheme, the 500k shall be divided
equally between Mr. A&B, so 250k each).

What do you mean by capacity?
- Either in an individual or in a joint capacity. So these are the 2 capacities
individual or joint. For the joint account, regardless of the conjunction
used, whether it is [AND] or [OR] or [AND/OR] they are all considered as
one joint account.

4. If the account is held jointly by two or more natural persons, or by two or
more juridical persons or entities, the maximum insured deposit shall be
divided into as many equal shares as there are individuals, juridical persons
or entities, unless a different sharing is stipulated in the document of deposit.

Mr. A and Mr. B a joint account involving all individuals = 700
Corp. A and Corp. B a joint account involving all juridical persons = 800k

What is the maximum coverage?

For Mr. A & Mr. Bs joint account, 500k.
In the absence of stipulation, it is presumed to be equal. So 250k each for Mr. A
and Mr. B.

For Corp. A & Corp. Bs joint account, 500k.
In the absence of stipulation, Corp. A and Corp. B can recover 250k each.

5. If the account is held by a juridical person or entity jointly with one or more
natural persons, the maximum insured deposit shall be presumed to belong
entirely to such juridical person or entity.

If the joint account is between an individual and a corporation, the
presumption is that it belongs entirely to the juridical person. But this is only a
presumption. You can present evidence to the contrary.
Example: Mr. A has a joint account with Corporation A amounting to 700k. In
that case, it is presumed that it belongs entirely to Corporation A.

EH 403 [2011 2012]


6. The aggregate of the interest of each co-owner over several joint accounts,
whether owned by the same or different combinations of individuals, juridical
persons or entities, shall likewise be subject to the maximum insured deposit
of Five Hundred Thousand Pesos (P500,000.00).

Your share in each of those joint accounts shall be added together, and in no case
shall it exceed 500k.

MR. As INDIVIDUAL ACCOUNTS
Savings Account 400k
Current Account 200k
Time Deposit 300k
Total (same bank) 900k (all under Mr. As name)

MR. As JOINT
ACCOUNTS
DEPOSIT LIMIT (500k) MR. As
share
Co-owners
share
Mr. A and Mr. B 400k 400k 200k 200k (Mr. B)
Mr. A and Mr. C 700k*** 500k 250k 250k (Mr. C)
Mr. A and Mr. D 300k 300k 150k 150k (Mr. D)
Mr. A and Mr. E 800k*** 500k 250k 250k (Mr. E)
Total 850k

- 1M
- For Mr. As individual account, 500k
- For Mr. As joint account, 500k. His aggregate interest shall not exceed
500k.
- Remember, rule #3, individual accounts shall be insured separately from
joint accounts.

***You still have to subject these amounts to the 500k limit. You dont divide them
outright. As a rule, the 500k limit applies to each account.

c. Mode of Payment

How would the PDIC pay you?
- In the form of cash or transfer deposit
o Transfer deposit your deposits will be transferred to another bank,
which is likewise insured by PDIC.
For example, BDO was closed. In payment of your insured deposit,
another account in your name will be opened in BPI. Thats
transfer deposit. Of course, its still a bank insured by PDIC.

What if theres a deficiency? Deficiency in the sense that your deposit is 1m,
but the coverage, of course, is only 500k. What happens to the other 500k? Can
you still recover the other 500k?
- YES, you can recover such amount against the bank during liquidation. But
that is if the banks still has remaining assets.
- So youre insured up to 500k, if there is a deficiency, you can still recover
it. But this time, not with PDIC but with the bank.

d. Effect of Payment of insured deposit

1. The PDIC will be discharged from liability.
2. After payment, as in insurance, the PDIC is subrogated to all the rights of
the depositor against the closed bank, to the extent of such payment.
- So, it is PDIC now who can go after the assets of the bank.

e. Payments of insured deposits as preferred credits under Article 2244,
CC
f. Failure to settle claim of insured depositor

What if theres a failure on the part of PDIC to settle the claims of insured-
depositors? Within how many months is PDIC required to settle the claim of
insured-depositor?
- GENERAL RULE: Under the law, PDIC must settle all claims of insured-
depositors within 6 months from the date of filing of the claim.
- EXCEPTION: However, the 6-month period will not apply if the validity of
the claim still requires the resolution of issues and facts.
o So, when PDIC still has to determine the veracity of your claim, the
legitimacy of your claim.

And if theres a failure to settle that claim within 6 months and the failure was
due to grave abuse of discretion, gross negligence, bad faith, malice, upon
conviction, the Board of Directors, officers, and employees of PDIC, shall be
subject to imprisonment for 6 months to 1 year.

g. Failure of depositor to claim insured deposit

So, the liability of the PDIC commences the moment PDIC takes over the
closure of the bank. Now, within what period must the depositor file his claim?
EH 403 [2011 2012]


- Within 2 years or within 24 months from actual takeover.

When will the claim of the depositor be barred?
1. if the depositor in the closed bank shall fail to claim his insured deposits
with the Corporation within two (2) years from actual takeover of the
closed bank by the receiver; or
2. if he does not enforce his claim filed with the corporation within two (2)
years after the two-year period to file a claim as mentioned hereinabove
o you have filed within 2 years, but after 2 years from the time you filed
your claim, you did not enforce your claim, you lost interest

- The effect is that all rights of the depositor against the PDIC with respect to
the insured deposit shall be barred.
- So, either you failed to file within 2 years or even if you filed, you did not
enforce your claim within 2 years after youve already filed your claim,
then, the effect is that your claim against PDIC will be forever barred, and
therefore, PDIC is discharged from liability.
- But of course, your right to recover against the bank still subsists.

EXAMINATION OF BANKS AND DEPOSIT ACCOUNTS

Can the PDIC conduct examination of an insured bank?
- YES, with prior approval from the Monetary Board.

PROHIBITION AGAINST SPLITTING OF DEPOSITS

Splitting of deposits (within the same bank) is prohibited. Take note that the
prohibition applies only to deposits within the same bank. Nothing can stop
you from having as many bank accounts in as many banks as you want. After
all, the insurance coverage is on a per bank basis.

Splitting of deposits occurs whenever a deposit account with an outstanding
balance of more than the statutory maximum amount of insured deposit
maintained under the name of natural or juridical persons is broken down and
transferred into two (2) or more accounts in the name/s of natural or juridical
persons or entities who have no beneficial ownership on transferred deposits
in their names within one hundred twenty (120) days immediately preceding
or during a bank declared bank holiday, or immediately preceding a closure
order issued by the Monetary Board of the BSP for the purpose of availing of
the maximum deposit insurance coverage.

Like for example, theres a presumption under the law that the splitting of
accounts was illegal or not valid if made within a period of 120 days
immediately preceding the bank closure or bank holiday.
- If you split the accounts 120 days immediately preceding the bank closure,
that is, 4 months there is a presumption under the law that you did the
splitting of accounts in order to avoid the maximum limit.
o ILLUSTRATION: Mr. A has 1m in deposit. But he heard from his friends
in BSP (insider information) that this bank is in the brink of
insolvency. Lets just say, if the splitting was done 4 months
immediately prior to the closure of the bank, theres a presumption
that the splitting was done to avoid being subject to the maximum
coverage of 500k. So Mr. A distributed 1m to Mr. B, C and D. And it is
proven that B, C and D have no beneficial interest or ownership over
those accounts. Thats prohibited. Thats what we call splitting of
accounts.

PROHIBITION AGAINST ISSUANCES OF TROs, etc.

No court, except the Court of Appeals, shall issue any temporary restraining
order, preliminary injunction or preliminary mandatory injunction against the
Corporation for any action under the PDIC Act.

This prohibition shall apply in all cases, disputes or controversies instituted by a
private party, the insured bank, or any shareholder of the insured bank.

The Supreme Court may issue a restraining order or injunction when the matter
is of extreme urgency involving a constitutional issue, such that unless a
temporary restraining order is issued, grave injustice and irreparable injury will
arise. The party applying for the issuance of a restraining order or injunction
shall file a bond in an amount to be fixed by the Supreme Court, which bond
shall accrue in favor of the Corporation if the court should finally decide that
the applicant was not entitled to the relief sought.

Any restraining order or injunction issued in violation of this Section is void and
of no force and effect and any judge who has issued the same shall suffer the
penalty of suspension of at least sixty (60) days without pay.

What if the PDIC determines that this bank is already conducting its business in
an unsafe and unsound manner? Can PDIC terminate the coverage of this
bank?
- GENERAL RULE: compulsory insurance for all banks.
EH 403 [2011 2012]


- BUT, PDIC could terminate the coverage:
a. If the PDIC determines that the bank continues to conduct its business
in an unsafe and unsound manner
Of course, thats a right of PDIC because if the bank is conducting
its business in an unsafe and unsound manner, the probability
that there would be a bank run or closure is great, so in effect
PDIC would be liable.
b. If the insured bank fails to pay what we call the assessment fees
within 30 days after written notice was given to it, PDIC may also
discontinue such bank in the insurance coverage.
So the assessment fees refer to the premiums paid by the bank.

Bank rehabilitation can the PDIC rehabilitate a bank?
- YES. The basis of this is that if the PDIC determines that it would be more
cost-efficient to rehabilitate the bank, to give financial assistance to the
bank,rather than to close the bank.
- It says in the law that if it is proven that it is less costly than closure.
- PDIC will determine WON a bank can still be rehabilitated within 90 days.

As receiver of a closed bank
- If the bank is placed under receivership, PDIC is designated as the statutory
receiver. Effective upon PDIC takeover as receiver, the powers, functions
and duties, as well as allowances, remunerations and perquisites of the
directors, officers and stockholders, as well as relevant provisions of the
articles and by-laws, are immediately suspended.

TRUTH IN LENDINGACT
(R.A. 3765)

Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to
protect its citizens from a lack of awareness of the true cost of credit to the user by
assuring a full disclosure of such cost with a view of preventing the uninformed use
of credit to the detriment of the national economy.

Whats the purpose?
a. To protect the debtor from lack of awareness of the true cost of the credit;
and
b. To assure full disclosure

TILA applies to all credits.

(2) "Credit" means any loan, mortgage, deed of trust, advance, or discount; any
conditional sales contract; any contract to sell, or sale or contract of sale of
property or services, either for present or future delivery, under which part or all of
the price is payable subsequent to the making of such sale or contract; any rental-
purchase contract; any contract or arrangement for the hire, bailment, or leasing of
property; any option, demand, lien, pledge, or other claim against, or for the
delivery of, property or money; any purchase, or other acquisition of, or any credit
upon the security of, any obligation of claim arising out of any of the foregoing; and
any transaction or series of transactions having a similar purpose or effect.

There are 2 categories mentioned in the law:
1. Loans of money
2. Sale on installment of property and other allied transactions

Section 4. Any creditor shall furnish to each person to whom credit is extended,
prior to the consummation of the transaction, a clear statement in writing setting
forth, to the extent applicable and in accordance with rules and regulations
prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of
credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
EH 403 [2011 2012]


(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.

Whats the requirement under the law?
- That the creditor shall furnish to each person to whom credit is extended
prior to the consummation of the transaction a clear statement in writing
setting forth the following:
1. Cash price;
2. Amounts credited as down payment and/or trade-in;
3. Difference between the amounts in cash price and amounts credited
as down payment or trade-in
4. Charges not incident to the extension of credit
5. Total amount to be financed
6. Finance charges
o Example: Interest, service fees, discounts, appraisal fee
(collateral), investigation fee, documentation fee (C.I.), processing
fee
7. Percentage of the finance charge to amount financed
o Example: Total finance charge is 30k. The total amount of loan is
100k. So, percentage is 30%.

Section 6. (a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any regulation
issued thereunder shall be liable to such person in the amount of P100 or in an
amount equal to twice the finance charged required by such creditor in connection
with such transaction, whichever is the greater, except that such liability shall not
exceed P2,000 on any credit transaction. Action to recover such penalty may be
brought by such person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. In any action under this subsection
in which any person is entitled to a recovery, the creditor shall be liable for
reasonable attorney's fees and court costs as determined by the court.
(b) Except as specified in subsection (a) of this section, nothing contained in this Act
or any regulation contained in this Act or any regulation thereunder shall affect the
validity or enforceability of any contract or transactions.
(c) Any person who willfully violates any provision of this Act or any regulation
issued thereunder shall be fined by not less than P1,00 or more than P5,000 or
imprisonment for not less than 6 months, nor more than one year or both.
(d) No punishment or penalty provided by this Act shall apply to the Philippine
Government or any agency or any political subdivision thereof.
(e) A final judgment hereafter rendered in any criminal proceeding under this Act to
the effect that a defendant has willfully violated this Act shall be prima facie
evidence against such defendant in an action or proceeding brought by any other
party against such defendant under this Act as to all matters respecting which said
judgment would be an estoppel as between the parties thereto.

Whats the consequence if the creditor did not disclose or did not comply with
the disclosure requirement under the TILA?
1. The debtor is authorized to recover any interest payments made.
2. The creditor will be liable for double the finance charge plus attorneys
fees.
3. The creditor can be held criminally liable.
- The seller/lender if convicted, may be imposed a fine ranging from 1k
to 5k or imprisonment from 6 mos. to 1 year or both.
Prescriptive period within what period?
- Within 1 year from the date of violation

DBP V. ARCILLA

Arcilla was a lawyer. He used to work with DBP and he applied for a housing loan.
Later on, when DBP demanded for payment, he contended that he was not duly
informed of the finance charges and that DBP failed to disclose the information
required in the disclosure statement (but such information was disclosed in the
promissory note).

But the SC said that NO, the information were adequately disclosed in the
promissory note. So there was sufficient compliance with the requirements under
the TILA.

And secondly, as a lawyer, he is supposed to be knowledgeable. It would have been
different if the borrower was an ordinary employee.

CONSOLIDATED BANK V. CA

It talks about handling charges being imposed by the bank.

The court said that since the handling charges were not fully disclosed in the
promissory note, therefore, the bank has no right to collect and impose those
charges pursuant to the TILA.

NEW SAMPAGUITA V. PNB

EH 403 [2011 2012]


This case talks about a promissory note with an escalation clause and the bank,
pursuant to the escalation clause, unilaterally, increased the interest rates without
obtaining the consent of the borrower.

The court said that the increase in interest rates is not valid. It violates mutuality of
contracts because it was done without the consent of the borrower.

And second, it also violates the TILA because it was not disclosed in the disclosure
statement how much the interest rates were.

ANTI-MONEYLAUNDERING ACT OF 2001
(R.A. 9160, as amended by R.A. 9194)

POLICY OF THE LAW

1. Protect and preserve the integrity and confidentiality of bank accounts, to
ensure that the Philippines shall not be used as site for unlawful money
laundering activities; and
2. Pursue the states foreign policy to extend cooperation in transnational
investigations and prosecutions on money laundering activities.

What is money laundering?
- Money laundering is a crime whereby the proceeds of an unlawful activity
are transacted, thereby making them appear to have originated from
legitimate sources.
- You are making dirty money clean. So you launder, you wash it, you
cleanse it. You make money coming from illegal sources appear as coming
from legitimate sources.

COVERED INSTITUTIONS

"Covered institution" refers to:

1. banks, non-banks, quasi-banks, trust entities, and all other institutions and
their subsidiaries and affiliates supervised or regulated by the BSP;
2. insurance companies and all other institutions supervised or regulated by
the Insurance Commission; and
3. SEC supervised/regulated:
a. securities dealers, brokers, salesmen, investment houses and other
similar entities managing securities or rendering services as
investment agent, advisor, or consultant,
b. mutual funds, close-end investment companies, common trust funds,
pre-need companies and other similar entities,
c. foreign exchange corporations, money changers, money payment,
remittance, and transfer companies and other similar entities, and
d. other entities administering or otherwise dealing in currency,
commodities or financial derivatives based thereon, valuable objects,
cash substitutes and other similar monetary instruments or property
supervised or regulated by Securities and Exchange Commission and
Exchange Commission

EH 403 [2011 2012]


- These are the institutions which the launderers would most likely go to.
- Launderers used to go to banks but since banks are now highly regulated,
theywould go to these institutions and make investments either in the
form of securities or stocks or insurance. That is why aside from banks, the
list includes not only insurance companies but also persons or entities
under the SEC supervision, such as security dealers, brokers, investment
houses, mutual funds, foreign exchange corporations, money changers,
etc.
- So basically, entities under the BSP, Insurance Commission and SEC. These
are institutions which have the obligation monitor and report under the
AMLA any suspected money laundering activities.

OBLIGATIONS OF COVERED INSTITUTIONS

SEC. 9. Prevention of Money Laundering; Customer Identification Requirements
and Record Keeping.
(a) Customer Identification. - Covered institutions shall establish and record the
true identity of its clients based on official documents. They shall maintain a system
of verifying the true identity of their clients and, in case of corporate clients, require
a system of verifying their legal existence and organizational structure, as well as
the authority and identification of all persons purporting to act on their behalf.
The provisions of existing laws to the contrary notwithstanding, anonymous
accounts, accounts under fictitious names, and all other similar accounts shall be
absolutely prohibited.
Peso and foreign currency non-checking numbered accounts shall be allowed. The
BSP may conduct annual testing solely limited to the determination of the existence
and true identity of the owners of such accounts.
(b) Record Keeping. - All records of all transactions of covered institutions shall be
maintained and safely stored for five (5) years from the dates of transactions. With
respect to closed accounts, the records on customer identification, account files
and business correspondence, shall be preserved and safely stored for at least five
(5) years from the dates when they were closed.
(c) Reporting of Covered Transactions. - Covered institutions shall report to the
AMLC all covered transactions within five (5) working days from occurrence thereof,
unless the Supervising Authority concerned prescribes a longer period not
exceeding ten (10) working days.
When reporting covered transactions to the AMLC, covered institutions and their
officers, employees, representatives, agents, advisors, consultants or associates
shall not be deemed to have violated Republic Act No. 1405, as amended; Republic
Act No. 6426, as amended; Republic Act No. 8791 and other similar laws, but are
prohibited from communicating, directly or indirectly, in any manner or by any
means, to any person the fact that a covered transaction report was made, the
contents thereof, or any other information in relation thereto. In case of violation
thereof, the concerned officer, employee, representative, agent, advisor, consultant
or associate of the covered institution, shall be criminally liable. However, no
administrative, criminal or civil proceedings, shall lie against any person for having
made a covered transaction report in the regular performance of his duties and in
good faith, whether or not such reporting results in any criminal prosecution under
this Act or any other Philippine law.
When reporting covered transactions to the AMLC, covered institutions and their
officers, employees, representatives, agents, advisors, consultants or associates are
prohibited from communicating, directly or indirectly, in any manner or by any
means, to any person, entity, the media, the fact that a covered transaction report
was made, the contents thereof, or any other information in relation thereto.
Neither may such reporting be published or aired in any manner or form by the
mass media, electronic mail, or other similar devices. In case of violation thereof,
the concerned officer, employee, representative, agent, advisor, consultant or
associate of the covered institution, or media shall be held criminally liable.

1. Customer identification
- The covered institution must establish and maintain a record of the true
identity of its clients based on official documents.
- One way of laundering money is through false identities. So before they
would accept any transaction from any individual or entity for that matter,
they must establish the true identity of that person.
- If you open an account with a bank, the bank is very strict. They would
require you to submit 2 IDs, and not just any ID but government-issued ID.
Also in case of corporations or juridical entities, they require you to submit
your AOI or SEC registration papers. In addition to that, the bank would
require you to submit a resolution from the board designating the
authorized person or representative of the corporation. The purpose of all
these is to establish the true identity of the client.
- What are the prohibitions?
o Opening anonymous accounts, accounts under fictitious names, and
all other similar accounts
As an EXCEPTION under the Anti-Alias Law, if you are a movie star,
you can use your screen name. You can open an account under
your screen name. What is important is that as far as the bank is
concerned, the identity of the person behind that screen name is
established.
Some banks also open an account under a numbered account.
Why numbered account? Maybe for confidentiality reasons.
Numbered accounts are allowed but only for savings or non-
checking accounts, because it is difficult for checking accounts.
EH 403 [2011 2012]


Even if it is a numbered account, the bank still knows who owns
that numbered account. The bank must still establish the identity
behind that numbered account.

2. Record keeping
- All records of all transactions shall be maintained and safely stored for 5
years from the date of transactions.
- For closed accounts, 5 years from the dates when they were closed.

3. Reporting of covered and suspicious transactions
- The more important obligation of covered institutions
- They shall report to the AMLA Council (AMLC) within 5 working days from
the occurrence of the covered and/or suspicious transaction, unless the
Supervising Authority prescribes a longer period not exceeding 10 working
days.
- If a transaction is determined to be both a covered and suspicious
transaction, it shall be reported as a suspicious transaction.
- If a bank would report to the AMLC, it is not considered to have violated
the Law on Secrecy of Bank Deposits. We have discussed that, it is one of
the exceptions. But what is exempt is the disclosure or reporting to the
AMLC. If the bank would disclose that a report was made to the AMLC, that
is no longer covered under the exception. In fact if the bank would disclose
this to an unauthorized person, that is criminally punishable. Also, you
should not disclose such reporting to the media.

COVERED TRANSACTIONS

Threshold Transactions (Covered Transactions) transaction in cash or other
equivalent monetary instrument in EXCESS OF Five Hundred Thousand Pesos (Php
500,000.00) within one banking day.

Take note it says within a single banking day, not a single transaction.
Example: Mr. A made the following deposits in one day: P200,000 in savings
account, P350,000 in time deposit and P100,000 in current account. The bank is
required to report these transactions to AMLC because the total deposits
exceed P500,000 in 1 banking day.

Savings Account 200K
Time Deposit 350K
Current Account 100K
TOTAL (one banking day) 650K

HOWEVER, if within a period of 5 days I deposit P150,000 per day(a total of
P750,000 in 5 days) the bank is not required to report this transaction because
in a single day it did not exceed P500,000, UNLESS it falls under suspicious
transactions.
So regardless of the purpose, source or destination of the money, so long as it
exceeds P500,000 it is already a covered transaction.
When we say report, it does not mean that a case will automatically be filed
against you for violation of AMLA. Its just an administrative matter, so for
purposes of reporting. It is for AMLC now to determine which of these
transactions are considered money laundering activities.

SUSPICIOUS TRANSACTIONS

Transactions with covered institutions, regardless of the amounts involved, where
any of the following circumstances exist:

a. There is no underlying legal or trade obligation, purpose or economic
justification;

b. The client is not properly identified;

c. The amount involved is not commensurate with the business or financial
capacity of the client;

d. Taking into account all known circumstances, it may be perceived that the
clients transaction is structured in order to avoid being the subject of
reporting requirements under the Act;
- Example: Series of deposits below 500k, like 100k a day for several
days. It may not fall under covered transactions, but it could be a
suspicious transaction. It may be said that it was structured in such a
way as to avoid reporting.

e. Any circumstance relating to the transaction which is observed to deviate
from the profile of the client and/or the clients past transactions with the
covered institution;
- Example: If your bank account is always at the maintaining balance or
even below, and then suddenly you make a deposit of P50,000 every
month. So that deviates from the normal pattern or normal client
transaction.

EH 403 [2011 2012]


f. The transaction is in any way related to an unlawful activity or offense
under this Act that is about to be, is being or has been committed; or

g. Any transaction that is similar or analogous to any of the foregoing.

To fall under suspicious transaction, it is not necessary that you made the
transaction within 1 day, because there is no threshold amount. Regardless of
the amount for as long as these circumstances exist.

It is said that because of these suspicious transactions, the covered institutions
must act as if they were detectives. They are expected to know the lifestyle,
spending habits and financial capacity of their client. They are supposed to
have a comprehensive profile of their clients. So that if a client makes this
deposit and they sense that something is amiss based on the information that
they have, then they report it to AMLC, under suspicious transaction.

No problem with covered transactions because theyonly require an objective
identification. But if you look at suspicious transactions, they are subjective,
they are based on the evaluation of the covered institution.So WON a
transaction is a suspicious transaction, it is up to the covered institution to
decide.

The client also cannot sue the bank for reporting his transaction under
suspicious transaction. Because as discussed earlier, the fact that you were
reported does not necessarily mean that you are into money laundering. These
are just bases for the AMLC to make further investigation. In fact it is also
under the law that the covered institution shall not be held administratively
liable. But there is also a provision under malicious reporting which will be
discussed later.

When will the obligation to make a report arise?

1. Under covered transactions, if the amount exceeds 500K, within ONE
BANKING DAY
2. Under suspicious transactions, regardless of the amount

So take note of this: when is it a covered transaction and when is it a suspicious
transaction.

There are 3 stages in the money-laundering.
1. Placement.
2. Layering.
3. Final stage is integration. You integrate the money to legitimate activities.

WHEN IS MONEY LAUNDERING COMMITTED

Money laundering is a crime whereby the proceeds of an unlawful activity are
transacted, thereby making them appear to have originated from legitimate
sources. It is committed by the following:

a. Any person knowing that any monetary instrument or property
represents, involves, or relates to, the proceeds of any unlawful activity,
transacts or attempts to transact said monetary instrument or property.

- Letter A refers to a person transacting or attempting to transact.
- Example: I am the money launderer, I know that this money comes
from gambling or illegal source, I attempt to make a placement in the
bank, or I already made a placement with the bank. So I am therefore
liable for money laundering.

b. Any person knowing that any monetary instrument or property involves
the proceeds of any unlawful activity, performs or fails to perform any act
as a result of which he facilitates the offense of money laundering referred
to in paragraph (a) above.

- Even if you are not the one who transacted or attempted to transact,
but you performed or you failed to perform any act, as a result of
which you facilitated the offense.
- Example: X is the money launderer. Y has an account with the bank
and he has already established a record with the bank. X then asks Y if
he could deposit the money in the latters account, and Y acceded to
his request, knowing that the proceeds come from an unlawful
activity.

c. Any person knowing that any monetary instrument or property is required
under this Act to be disclosed and filed with the Anti-Money Laundering
Council (AMLC), fails to do so.

- There was no money laundering but there was a failure on the part of
the covered institution to report to the AMLA Council a covered or
suspicious transaction.

What are the elements of money laundering?
EH 403 [2011 2012]


1. There wasa transaction or an attempted transaction
2. The proceeds comes from an unlawful activity or a predicate crime
3. Knowledgethat the proceeds comes from an unlawful activity or a
predicate crime

Is it necessary in money laundering to prove that there was intent to make it
appear that the proceeds have originated from legitimate sources?

- No need to prove intent otherwise it would be easy for that person to deny
intent. In intent, we could not fathom the sanctuaries of a person as it is
very personal to him.
- There are only 3 elements. Intent is not one of them.
- Intent is not a valid defense. Money laundering is malum prohibitum,
intent is not necessary.

What if I am a money launderer. I have money from gambling, then I made a
placement or investment in shares of stock. I have no intention to launder the
money, but I have an intention to make an investment, to make my money
grow, or to place it in an insurance. Will I still be liable for money laundering
even if I only wanted to make an investment?

- Yes, it is still money laundering. You dont have to prove that the person
had the intention to make it appear clean. What is important is that you
make a transaction, and the transaction proceeds from an unlawful activity
and you have knowledge that the proceeds comes from an unlawful
activity (the 3 elements of the crime).

Do you need to prove actual knowledge?

- No, because otherwise it would just be easy to say that I have no
knowledge. You need not prove actual knowledge. There is a presumption
of knowledge on the part of the person laundering the money. You take
into account the attendant circumstances. But you dont need to prove
actual knowledge.

Examples of money laundering:

- Mere opening of an account with a bank the person opening an account
has knowledge that the proceeds came from kidnapping. That person is
already liable for money laundering.
- A teller who assists in the opening of an account and that teller has
knowledge that the proceeds came from unlawful activities would also be
liable for money laundering.

UNLAWFUL ACTIVITIES OR PREDICATE CRIMES

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

1. Kidnapping for ransom under Article 267 of Act No. 3815, otherwise
known as the Revised Penal Code, as amended;
2. Sections 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;
3. Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as
amended; otherwise known as the Anti-Graft and Corrupt Practices Act;
4. Plunder under Republic Act No. 7080, as amended;
5. Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302
of the Revised Penal Code, as amended;
6. Jueteng and Masiao punished as illegal gambling under Presidential
Decree No. 1602;
7. Piracy on the high seas under the Revised Penal Code, as amended and
Presidential Decree No. 532;
8. Qualified theft under Article 310 of the Revised Penal Code, as amended;
- Not just theft, but QUALIFIED THEFT
9. Swindling under Article 315 of the Revised Penal Code, as amended;
10. Smuggling under Republic Act Nos. 455 and 1937;
11. Violations under Republic Act No. 8792, otherwise known as the Electronic
Commerce Act of 2000;
12. Hijacking and other violations under Republic Act No. 6235; destructive
arson and murder, as defined under the Revised Penal Code, as amended,
including those perpetrated by terrorists against non-combatant persons
and similar targets;
- Hijacking, destructive arson, murder
13. Fraudulent practices and other violations under Republic Act No. 8799,
otherwise known as the Securities Regulation Code of 2000;
14. Felonies or offenses of a similar nature that are punishable under the
penal laws of OTHER COUNTRIES.

This is an exclusive enumeration. To constitute money laundering, the proceeds
must come from any of the above-listed activities. Otherwise, it would not be
money laundering.

EH 403 [2011 2012]


Take note, the law enumerates 14 unlawful activities or predicate crimes.
Actually these are just the general categorization. If you look at the
implementing rules, there are 100+ something. But you need not memorize
those 100, just take note of the general categorizations.

Now if you look at these crimes, these are crimes whereinhuge amounts of
money are involved.
- Thats probably why rape and homicide are not included. (Murder is
included, under number 12)

Whats the reason why the law specifies that only those activities would
constitute money laundering? Why not just any crime?
- These are serious crimes. If you include petty crimes, that would most
likely be used by the enforcement agencies as probing commissions to
arrest just anybody for money laundering. So the law limits the predicate
crimes so that they could focus on these crimes.

Examples of crimes which do not give rise to money laundering:
- Carnapping
- Tax evasion
- Prostitution
- Human trafficking
- Illegal recruitment
- Voyeurism

ANTI-MONEY LAUNDERING COUNCIL

The Anti-Money Laundering Council (AMLA Council) is the agency is tasked for the
enforcement of the anti-money laundering act.

COMPOSITION OF THE AMLA COUNCIL:

1. Governor of the BSP (chairman)
2. Commissioner of the Insurance Commission (member)
3. Commissioner of the SEC (member)

FUNCTIONS OF THE AMLC:

1. to require and receive covered transaction reports from covered
institutions;
2. to issue orders addressed to the appropriate Supervising Authority or the
covered institution to determine the true identity of the owner of any
monetary instrument or property subject of a covered transaction report
or request for assistance from a foreign State, or believed by the Council,
on the basis of substantial evidence, to be, in whole or in part, wherever
located, representing, involving, or related to, directly or indirectly, in any
manner or by any means, the proceeds of an unlawful activity;
3. to institute civil forfeiture proceedings and all other remedial proceedings
through the Office of the Solicitor General;
4. to cause the filing of complaints with the Department of Justice or the
Ombudsman for the prosecution of money laundering offenses;
5. to initiate investigations of covered transactions, money laundering
activities and other violations of this Act;
6. to freeze any monetary instrument or property alleged to be proceeds of
any unlawful activity;
7. to implement such measures as may be necessary and justified under this
Act to counteract money laundering;
8. to receive and take action in respect of, any request from foreign states
for assistance in their own anti-money laundering operations provided in
this Act;
9. to develop educational programs on the pernicious effects of money
laundering, the methods and techniques used in money laundering, the
viable means of preventing money laundering and the effective ways of
prosecuting and punishing offenders; and
10. to enlist the assistance of any branch, department, bureau, office, agency
or instrumentality of the government, including government-owned and -
controlled corporations, in undertaking any and all anti-money laundering
operations, which may include the use of its personnel, facilities and
resources for the more resolute prevention, detection and investigation of
money laundering offenses and prosecution of offenders.

FREEZING OF MONETARY INSTRUMENT OR PROPERTY

SEC. 10. Authority to Freeze. Upon determination that probable cause exists that
any deposit or similar account is in any way related to an unlawful activity, the
AMLC may issue a freeze order, which shall be effective immediately, on the
account for a period not exceeding fifteen (15) days. Notice to the depositor that
his account has been frozen shall be issued simultaneously with the issuance of the
freeze order. The depositor shall have seventy-two (72) hours upon receipt of the
notice to explain why the freeze order should be lifted. The AMLC has seventy-two
(72) hours to dispose of the depositors explanation. If it fails to act within seventy-
two (72) hours from receipt of the depositors explanation, the freeze order shall
automatically be dissolved. The fifteen (15)-day freeze order of the AMLC may be
extended upon order of the court, provided that the fifteen (15)-day period shall be
EH 403 [2011 2012]


tolled pending the courts decision to extend the period.

No court shall issue a temporary restraining order or writ of injunction against any
freeze order issued by the AMLC except the Court of Appeals or the Supreme Court.

The AMLA council upon EX PARTE APPLICATION can file with the COURT OF
APPEALS after determination of PROBABLE CAUSE for a freeze order.
- Freeze order effective immediately and it shall be for a period of 20 days.
- Effect money cannot be withdrawn.

It is a provisional remedy because it does not require that there be a case filed
for violation of the anti-money laundering law. Even if it is still in the process of
investigation, for as long as the AMLC can establish probable cause, then it can
apply for a freeze order with the COURT OF APPEALS.

AUTHORITY TO INQUIRE INTO BANK DEPOSITS

SEC. 11. Authority to Inquire into Bank Deposits. Notwithstanding the provisions
of Republic Act No. 1405, as amended; Republic Act 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 involved are in any way related to a money laundering offense:
Provided, That this provision shall not apply to deposits and investments made prior
to the effectivity of this Act.

The AMLA council may inquire into any bankor banking institution as to the
bank deposits when there is a probable cause that the bank deposits is related
or are related to unlawful activities.
This is an exception to the law on secrecy of bank deposits.

Requirements:
1. AMLC must establish that there is PROBABLE CAUSE that the deposits
arose from the unlawful activity
2. There must be a COURT ORDER.
- EXC: AMLC by virtue of a resolution can immediately inquire into bank
deposits without need of court order, if they can establish that the
proceeds arose from certain predicate crimes such as:
a. KIDNAPPING,
b. VIOLATION of the COMPREHENSIVE DANGEROUS DRUGS ACT,
c. HIJACKING,
d. DESTRUCTIVE ARSON,
e. MURDER.
- In these instances, no need for a court order. Just a resolution from
the AMLC.

SEC. 5. Jurisdiction of Money Laundering Cases. The regional trial courts shall
have jurisdiction to try all cases on money laundering. Those committed by public
officers and private persons who are in conspiracy with such public officers shall be
under the jurisdiction of the Sandiganbayan.

JURISDICTION OVER MONEY LAUNDERING CASES

- GENERAL RULE: The RTC has jurisdiction to try all cases on money
laundering.
- EXCEPT: the SANDIGANBAYAN has jurisdiction of those committed by
public officers and private persons who are in conspiracy with such public
officers.
- Note that the CA has the right to issue freeze orders.

SEC. 6. Prosecution of Money Laundering.
(a) Any person may be charged with and convicted of both the offense of money
laundering and the unlawful activity as herein defined.
(b) Any proceeding relating to the unlawful activity shall be given precedence over
the prosecution of any offense or violation under this Act without prejudice to the
freezing and other remedies provided.

So you can be both charged and convicted of:
1. money laundering and
2. at the same time for the unlawful activity

- These are 2 separate offenses. Money laundering is NOT a continuing
offense of the unlawful activity. They have separate elements.

The proceeding relating to the unlawful activity shall be given precedence
over the prosecution of any offense or violation of this act.

Is it necessary that there must be a prior conviction of the unlawful activity or
the predicate crime before you can be charged for money laundering?
- No! Because the elements of money laundering are different from the
elements of the unlawful activity. If you look at also the implementing
EH 403 [2011 2012]


rules it specifically states that it is not necessary to prove beyond
reasonable doubt that you committed the unlawful activity before you can
be convicted of money laundering.
- Prior conviction of unlawful act is not also necessary. Prosecution for
money laundering activities can proceed independently of the predicate
crime because the reason is that they have different elements.
- If you are acquitted for the unlawful activity you can still be tried for the
money laundering.

What if the tenor of the judgment in the trial for the predicate crime is that this
person is truly innocent, that this person did not commit the crime? What
would be the effect?
- That would have a great weight on the pending case for money laundering.
If in the predicate crime you are acquitted because you truly did not
commit the crime (not just on mere reasonable doubt), then you cannot
establish the other elements.
- The case for the predicate crime shall not be a prejudicial question to the
casefor money laundering. But take note Section 6(b).

PENAL PROVISIONS

IMPRISONMENT FINE
(a) Penalties for the Crime
of Money Laundering.

- a. transacts or attempts
to transact
7 14 years

(imprisonment AND fine)
Not less than 3M but
not more than twice
the value of the
monetary instrument or
property involved in the
offense

- b. facilitates the
commission
4 7 years

1.5M 3M

-c. failure to disclose
6 months 4 years

(imprisonment AND/OR
fine)
100k 500k
(b) Penalties for Failure to
Keep Records.

6 months 1 year

(imprisonment AND/OR
fine)
100k 500k
(c) Malicious Reporting
- may include the covered
institution, especially in
suspicious transactions
(wherein it is subjective).
But the covered institution
would not be liable if it
was in good faith
- includes any public
official or employee who is
called upon to testify and
refuses to do the same or
purposely fails to testify
6 months 4 years

100k 500k
(d) Breach of
Confidentiality.

- under Section 9(c)
3 8 years

500k 1M

MUTUAL ASSISTANCE AMONG STATES

a. Request for Assistance from a Foreign State. - Where a foreign State
makes a request for assistance in the investigation or prosecution of a
money laundering offense, the AMLC may execute the request or refuse to
execute the same and inform the foreign State of any valid reason for not
executing the request or for delaying the execution thereof. The principles
of mutuality and reciprocity shall, for this purpose, be at all times
recognized.

b. Powers of the AMLC to Act on a Request for Assistance from a Foreign
State. - The AMLC may execute a request for assistance from a foreign
State by: (1) tracking down, freezing, restraining and seizing assets alleged
to be proceeds of any unlawful activity under the procedures laid down in
this Act; (2) giving information needed by the foreign State within the
procedures laid down in this Act; and (3) applying for an order of forfeiture
of any monetary instrument or property in the court: Provided, That the
court shall not issue such an order unless the application is accompanied
by an authenticated copy of the order of a court in the requesting State
ordering the forfeiture of said monetary instrument or property of a
person who has been convicted of a money laundering offense in the
requesting State, and a certification or an affidavit of a competent officer
of the requesting State stating that the conviction and the order of
forfeiture are final and that no further appeal lies in respect of either.
EH 403 [2011 2012]


c. Obtaining Assistance from Foreign States. - The AMLC may make a
request to any foreign State for assistance in (1) tracking down, freezing,
restraining and seizing assets alleged to be proceeds of any unlawful
activity; (2) obtaining information that it needs relating to any covered
transaction, money laundering offense or any other matter directly or
indirectly related thereto; (3) to the extent allowed by the law of the
foreign State, applying with the proper court therein for an order to enter
any premises belonging to or in the possession or control of, any or all of
the persons named in said request, and/or search any or all such persons
named therein and/or remove any document, material or object named in
said request: Provided, That the documents accompanying the request in
support of the application have been duly authenticated in accordance
with the applicable law or regulation of the foreign State; and (4) applying
for an order of forfeiture of any monetary instrument or property in the
proper court in the foreign State: Provided, That the request is
accompanied by an authenticated copy of the order of the regional trial
court ordering the forfeiture of said monetary instrument or property of a
convicted offender and an affidavit of the clerk of court stating that the
conviction and the order of forfeiture are final and that no further appeal
lies in respect of either.

d. Limitations on Requests for Mutual Assistance. - The AMLC may refuse to
comply with any request for assistance where the action sought by the
request contravenes any provision of the Constitution or the execution of a
request is likely to prejudice the national interest of the Philippines unless
there is a treaty between the Philippines and the requesting State relating
to the provision of assistance in relation to money laundering offenses.

e. Requirements for Requests for Mutual Assistance from Foreign States. - A
request for mutual assistance from a foreign State must (1) confirm that an
investigation or prosecution is being conducted in respect of a money
launderer named therein or that he has been convicted of any money
laundering offense; (2) state the grounds on which any person is being
investigated or prosecuted for money laundering or the details of his
conviction; (3) give sufficient particulars as to the identity of said person;
(4) give particulars sufficient to identify any covered institution believed to
have any information, document, material or object which may be of
assistance to the investigation or prosecution; (5) ask from the covered
institution concerned any information, document, material or object which
may be of assistance to the investigation or prosecution; (6) specify the
manner in which and to whom said information, document, material or
object obtained pursuant to said request, is to be produced; (7) give all the
particulars necessary for the issuance by the court in the requested State
of the writs, orders or processes needed by the requesting State; and (8)
contain such other information as may assist in the execution of the
request.

f. Authentication of Documents. - For purposes of this Section, a document
is authenticated if the same is signed or certified by a judge, magistrate or
equivalent officer in or of, the requesting State, and authenticated by the
oath or affirmation of a witness or sealed with an official or public seal of a
minister, secretary of State, or officer in or of, the government of the
requesting State, or of the person administering the government or a
department of the requesting territory, protectorate or colony. The
certificate of authentication may also be made by a secretary of the
embassy or legation, consul general, consul, vice consul, consular agent or
any officer in the foreign service of the Philippines stationed in the foreign
State in which the record is kept, and authenticated by the seal of his
office.

g. Extradition. - The Philippines shall negotiate for the inclusion of money
laundering offenses as herein defined among extraditable offenses in all
future treaties.
- Money laundering is not yet an extraditable offense

IMPORTANT TOPICS IN AMLA:
1. Covered transactions
2. Suspicious transactions
3. Predicate crimes
4. Manner by which you commit money laundering (3)

EH 403 [2011 2012]


FOREIGNINVESTMENTS ACT
(R.A. 7042)

POLICY OF THE LAW

SEC. 2. Declaration of Policy. - It is the policy of the State to attract, promote and
welcome productive investments from foreign individuals, partnerships,
corporations, and governments, including their political subdivisions, in activities
which significantly contribute to national industrialization and socio-economic
development to the extent that foreign investment is allowed in such activity by the
Constitution and relevant laws. Foreign investments shall be encouraged in
enterprises that significantly expand livelihood and employment opportunities for
Filipinos; enhance economic value of farm products; promote the welfare of Filipino
consumers; expand the scope, quality and volume of exports and their access to
foreign markets; and/or transfer relevant technologies in agriculture, industry and
support services. Foreign investments shall be welcome as a supplement to Filipino
capital and technology in those enterprises serving mainly the domestic market.

As a general rule, there are no restrictions on extent of foreign ownership of export
enterprises. In domestic market enterprises, foreigners can invest as much as one
hundred percent (100%) equity except in areas included in the negative list. Foreign
owned firms catering mainly to the domestic market shall be encouraged to
undertake measures that will gradually increase Filipino participation in their
businesses by taking in Filipino partners, electing Filipinos to the board of directors,
implementing transfer of technology to Filipinos, generating more employment for
the economy and enhancing skills of Filipino workers.

Basically the purpose is to encourage FOREIGN INVESTMENTS because that would
translate to the creation of jobs, etc. In other words, it has a multiplier effect.

DEFINITION OF TERMS

SEC. 3. Definitions. As used in this Act:

a) the term Philippine National shall mean a citizen of the Philippines or a
domestic partnership or association wholly owned by citizens of the Philippines; or
a corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines or a corporation organized abroad and registered
as doing business in the Philippines under the Corporation Code of which one
hundred percent (100%) of the capital stock outstanding and entitled to vote is
wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own
stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least
sixty percent (60%) of the capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of the Philippines and at
least sixty percent (60%) of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order that the corporation shall
be considered a Philippine national; (as amended by R.A. 8179).

b) the term investment shall mean equity participation in any enterprise
organized or existing under the laws of the Philippines;

c) the term foreign investment shall mean an equity investment made by a non-
Philippine national in the form of foreign exchange and/or other assets actually
transferred to the Philippines and duly registered with the Central Bank which shall
assess and appraise the value of such assets other than foreign exchange;

xxxxxxx

e) the term export enterprise shall mean an enterprise wherein a manufacturer,
processor or service (including tourism) enterprise exports sixty percent (60%) or
more of its output, or wherein a trader purchases products domestically and
exports sixty percent (60%) or more of such purchases;

f) the term domestic market enterprise shall mean an enterprise which products
goods for sale, or renders services to the domestic market entirely or if exporting a
portion of its output fails to consistency export at least sixty percent (60%) thereof;
and

g) the term Foreign Investments Negative List or Negative List shall mean a list
of areas of economic activity whose foreign ownership is limited to a maximum of
forty percent (40%) of the equity capital of the enterprises engaged therein.

EH 403 [2011 2012]


I. EXPORT ENTERPRISE: at least 60% of its production or output is exported

GENERAL RULE: There are no restrictions on extent of foreign ownership (can be
100% owned by foreigners)
- Regardless of the capitalization, for as long as you are into export, you can
be 100% owned by foreigners.
EXCEPTION: If they are engaged in activities wherein ownership is limited or
restricted in the negative list

II. DOMESTIC ENTERPRISE: less than 60% of its production or output is exported

GENERAL RULE: At least 60% Filipinos; at most 40% Foreigners. Cannot be 100%
foreign owned.
EXCEPTIONS: 100% foreign ownership if:
1. Paid-up capital of at least $200,000; or
2. Involved in advanced technology as certified by the DOST (capital must be
at least $100,000); or
3. Minimum of 50 employees (capital must be at least $100,000).

Examples:

1. 55% export. Paid-up capital is only $150k. 50 employees. Can I be 100%
foreign-owned?
- YES. Although you are a domestic enterprise, but you employ 50
people (and the capital is more than $100k). Exception #3.

2. 75% export. Paid-up capital of $50k. 30 employees. Can I be 100% foreign-
owned?
- YES. Because you are an export enterprise. Regardless of the
capitalization, an export enterprise can be 100% foreign owned for as
long as it is not engaged in activities where ownership limited in the
negative list.

TAKE NOTE of the items in the 8
TH
FOREIGN INVESTMENT NEGATIVE LIST

So:
1. See if it is in the negative list.
2. If not, follow the rules on foreign ownership above

When is a corporation considered as a Philippine national?
- When at least 60% of the outstanding capital stock is owned by Filipinos.
- If the percentage of Filipino ownership in the corporation is less than 60%,
only the number of shares corresponding to such percentage shall be
considered as of Philippine nationality and the other shares shall be
recorded as belonging to aliens.

SEC. 3. Definitions. As used in this Act:
xxxxxxx
d) the phrase doing business shall include soliciting orders, service contracts,
opening offices, whether called liaison offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totaling one hundred eighty (180)
days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act
or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of
some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business organization:
Provided, however, That the phrase doing business shall not be deemed to
include mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as such
investor; nor having a nominee director or officer to represent its interests in such
corporation; nor appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account;

What are the requirements if already doing business in the Philippines?
- You have to get a license from the SEC, appoint a resident agent etc.

What are the consequences if youre doing business without the necessary
permit?
- GENERAL RULE: Cannot sue but can be sued.
- EXCEPTION: ESTOPPEL.
o Merryl Lynche case: FC tried to sue DC. DC raised the defense that it
cannot be sued because FC is doing business without license.
o SC: DC already estopped from questioning the personality of FC.
Estoppel also applies to domestic corporations dealing with foreign
corporations without license.

Can a former natural born Filipino now a naturalized US citizen acquire land in
the Philippines?
- YES Under the FIA but limited only to a certain number of hectares (5,000
sqm for urban and 3,000 sqm for rural)

EH 403 [2011 2012]


DOING BUSINESS:

1. soliciting orders, service contracts, opening offices, whether called
liaison offices or branches;
2. appointing representatives or distributors domiciled in the Philippines or
who in any calendar year stay in the country for a period or periods
totaling one hundred eighty (180) days or more;
3. participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines; and
4. any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the purpose and object
of the business organization
- so, not isolated

NOT DOING BUSINESS:

1. not be deemed to include mere investment as a shareholder by a foreign
entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor
2. having anominee director or officer to represent its interests in such
corporation; nor
3. appointing a representative or distributor domiciled in the Philippines
which transacts business in its own name and for its own account;

REGISTRATION OF INVESTMENTS OF NON-PHILIPPINE NATIONALS

SEC. 5. Registration of Investments of Non-Philippine Nationals. Without need of
prior approval, a non-Philippine national, as that term is defined in Section 3 a), and
not otherwise disqualified by law may, upon registration with the Securities and
Exchange Commission (SEC), or with the Bureau of Trade Regulation and Consumer
Protection (BTRCP) of the Department of Trade and Industry in the case of single
proprietorships, do business as defined in Section 3 d) of this Act or invest in a
domestic enterprise up to one hundred percent (100%) of its capital, unless
participation of non-Philippine nationals in the enterprise is prohibited or limited to
a smaller percentage by existing law and/or under the provisions of this Act. The
SEC or BTRCP, as the case may be, shall not impose any limitations on the extent of
foreign ownership in an enterprise additional to those provided in this Act:
Provided, however, That any enterprise seeking to avail of incentives under the
Omnibus Investment Code of 1987 must apply for registration with the Board of
Investments (BOI), which shall process such application for registration in
accordance with the criteria for evaluation prescribed in said Code: Provided,
finally, That a non-Philippine national intending to engage in the same line of
business as an existing joint venture, in which he or his majority shareholder is a
substantial partner, must disclose the fact and the names and addresses of the
partners in the existing joint venture in his application for registration with SEC.
During the transitory period as provided in Section 15 hereof, SEC shall disallow
registration of the applying non-Philippine national if the existing joint venture

FOREIGN INVESTMENTS IN EXPORT ENTERPRISES

SEC. 6. Foreign Investment in Export Enterprises. Foreign investment in export
enterprises whose products and services do not fall within Lists A and B of the
Foreign Investment Negative List provided under Section 8 hereof is allowed up to
one hundred percent (100%) ownership.

Export enterprises which are non-Philippine nationals shall register with BOI and
submit the reports that may be required to ensure continuing compliance of the
export enterprise with its export requirement. BOI shall advise SEC or BTRCP, as the
case may be, of any export enterprise that fails to meet the export ratio
requirement. The SEC or BTRCP shall thereupon order the non-complying export
enterprise to reduce its sales to the domestic market to not more than forty
percent (40%) of its total production; failure to comply with such SEC or BTRCP
order, without justifiable reason, shall subject the enterprise to cancellation of SEC
or BTRCP registration, and/or the penalties provided in Section 14 hereof.

FOREIGN INVESTMENT IN DOMESTIC MARKET ENTERPRISES

SEC. 7. Foreign Investment in Domestic Market Enterprises. Non-Philippine
nationals may own up to one hundred percent (100%) of domestic market
enterprises unless foreign ownership therein is prohibited or limited by the
Constitution existing law or the Foreign Investment Negative List under Section 8
hereof. (As amended by R.A. 8179)

EH 403 [2011 2012]


EIGHTH REGULAR FOREIGN INVESTMENT NEGATIVE LIST
LIST A: FOREIGN OWNERSHIP IS LIMITED BY MANDATE OF THE CONSTITUTION AND SPECIFIC LAWS
No Foreign Equity
1. Mass Media except recording
2. Practice of all professions

a. Engineering
i. Aeronautical engineering
ii. Agricultural engineering
iii. Chemical engineering
iv. Civil engineering
v. Electrical engineering
vi. Electronics and Communication engineering
vii. Geodetic engineering
viii. Mechanical engineering
ix. Metallurgical engineering
x. Mining engineering
xi. Naval Architecture and Marine engineering
xii. Sanitary engineering

b. Medicine and Allied Professions
i. Medicine
ii. Medical Technology
iii. Dentistry
iv. Midwifery
v. Nursing
vi. Nutrition and Dietetics
vii. Optometry
viii. Pharmacy
ix. Physical and Occupational Therapy
x. Radiologic and X-ray Technology
xi. Veterinary Medicine

c. Accountancy
d. Architecture
e. Criminology
f. Chemistry
g. Customs Brokerage
h. Environmental Planning
i. Forestry
j. Geology
k. Interior Design
l. Landscape Architecture
m. Law
n. Librarianship
o. Marine Deck Officers
p. Marine Engine Officers
q. Master Plumbing
r. Sugar Technology
s. Social Work
t. Teaching
u. Agriculture
v. Fisheries
w. Guidance counseling

3. Retail trade enterprises with paid-up capital of less than US$2,500,000
- Mentioned repeatedly. Take note.

4. Cooperatives
5. Private Security Agencies
6. Small-scale Mining
7. Utilization of Marine Resources in archipelagic waters, territorial sea,
andexclusive economic zone as well as small-scale utilization of natural
resources inrivers, lakes, bays, and lagoons
8. Ownership, operation and management of cockpits
9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons
10. Manufacture, repair, stockpiling and/or distribution of biological, chemical
andradiological weapons and anti-personnel mines (Various treaties to which
thePhilippines is a signatory and conventions supported by the Philippines)
11. Manufacture of firecrackers and other pyrotechnic devices

EH 403 [2011 2012]


Up to Twenty Percent(20%) Foreign Equity
12. Private radio communications network

Up to Twenty-Five Percent(25%) Foreign Equity
13. Private recruitment, whether for local or overseas
employment

14. Contracts for the construction and repair of
locally-funded public works except:
a. Infrastructure/development projects;
and
b. Projects which are foreign funded or
assisted and required to undergo
international competitive bidding

15. Contracts for the construction of defense related
structures

Up to Thirty Percent (30%) Foreign Equity
16. Advertising
Up to Forty Percent (40%) Foreign Equity
17. Exploration, development and utilization of
natural resources

18. Ownership of private lands

19. Operation and management of public utilities

20. Ownership/establishment and administration
of educational institutions

21. Culture, production, milling, processing, trading
excepting retailing, of rice and corn and
acquiring, by barter, purchase or otherwise,
rice and corn and the by-products thereof

22. Contracts for the supply of materials, goods
and commodities to government-owned
orcontrolled corporation, company, agency or
municipal corporation

23. Project Proponent and Facility Operator of a
BOT project requiring a public utilitiesfranchise

24. Operation of deep sea commercial fishing
vessels

25. Adjustment Companies

26. Ownership of condominium units where the
common areas in the condominium project are
co-owned by the owners of the separate units
or owned by a corporation
Up to Sixty Percent (60%) Foreign Equity
27. Financing companies regulated by the
Securities and Exchange Commission

28. Investment houses regulated by the SEC

EH 403 [2011 2012]


LIST B: FOREIGN OWNERSHIP IS LIMITED FOR REASONS OF SECURITY, DEFENSE,RISK TO HEALTH AND MORALS AND PROTECTION OF SMALL- AND
MEDIUMSCALEENTERPRISES
Up to Forty Percent (40 %) Foreign Equity
1. Manufacture, repair, storage, and/ordistribution of products and/or
ingredientsrequiring Philippine National Police (PNP) clearance:

a) Firearms (handguns to shotguns), parts of firearms and ammunition
therefor,instruments or implements used or intended to be used in the
manufactureof firearms
b) Gunpowder
c) Dynamite
d) Blasting supplies
e) Ingredients used in making explosives:
i. Chlorates of potassium and sodium
ii. Nitrates of ammonium, potassium, sodium, barium, copper (11), lead
(11), calcium and cuprite
iii. Nitric acid
iv. Nitrocellulose
v. Perchlorates of ammonium, potassium and sodium
vi. Dinitrocellulose
vii. Glycerol
viii. Amorphous phosphorus
ix. Hydrogen peroxide
x. Strontium nitrate powder
xi. Toluene
f) Telescopic sights, sniper scope and other similar devices

However, the manufacture or repair of these items may be authorized by the Chief of
the PNP to non-Philippine nationals; Provided that a substantial percentage of output,
as determined by the said agency, is exported. Provided further that the extent of
foreign equity ownership allowed shall be specified in the said authority/clearance
2. Manufacture, repair, storage and/or distribution of products requiring
Department of National Defense (DND) clearance:

a) Guns and ammunition for warfare
b) Military ordnance and parts thereof (e.g., torpedoes, depth charges, bombs,
grenades, missiles)
c) Gunnery, bombing and fire control systems and components
d) Guided missiles/missile systems and components
e) Tactical aircraft (fixed and rotary-winged), parts and components thereof
f) Space vehicles and component systems
g) Combat vessels (air, land and naval) and auxiliaries
h) Weapons repair and maintenance equipment
i) Military communications equipment
j) Night vision equipment
k) Stimulated coherent radiation devices, components and accessories
l) Armament training devices
m) Other as may be determined by the Secretary of the DND

However, the manufacture or repair of theseitems may be authorized by the Secretary
of theDND to non-Philippine nationals; Provided that asubstantial percentage of
output, as determinedby the said agency, is exported. Provided further that the extent
of foreign equity ownershipallowed shall be specified in the said authority/clearance
3. Manufacture and distribution of dangerous drugs

4. Sauna and steam bathhouses, massage clinics and other like activities regulated
by law because of risks posed to public health and morals

5. All forms of gambling, except those covered byinvestment agreements with
PAGCOR operating within special economic zones administered by the Philippine
Economic Zone Authority

6. Domestic market enterprises with paid-in equity capital of less than the
equivalent ofUS$200,000
- If 200k or more, 100%
7. Domestic market enterprises which involve advanced technology or employ at
least fifty (50) direct employees with paid-in-equity capital of less than the
equivalent ofUS$100,000
- If 100k or more, 100%
EH 403 [2011 2012]


THE WAREHOUSERECEIPTS LAW
(ACT NO. 2137)

Applicable only to receipts issued by a warehouseman.
If the receipt is not issued by a warehouseman, then the warehouse receipts
law is not applicable but the pertinent provisions under the Civil Code
regarding documents of title.
Warehouse Receipt it is written acknowledgement by a warehouseman that
he has received and holds certain goods therein described in his warehouse for
the person to whom it is issued.

Essentially a warehouse receipt is a document of title to goods, and it serves
two functions:
1. It is a CONTRACT simple contract evidencing the underlying contract of
deposit or of carriage
2. Evidence of RECEIPT of goods.

The beauty of the warehouse receipt is that it can be negotiated or it can be
transferred, such that whoever is the purchaser, the indorsee or the transferee
could acquire title over the goods without the manual or physical delivery of
the good. Just by virtue of the warehouse receipt.

Under Section 1, only a warehouseman may issue a warehouse receipt.

Who is a warehouseman?
- A person lawfully engaged in the business of storing goods for profit.

What type of goods can be a subject of a warehouse receipt?
- Goods here refer to anything that can be traded, whether it is fungible or
non-fungible. So normally, rice, copra, corn, grains. It may also include
cement, canned goods, cars, paints, oil, fuel, lubricant, etc.
- So, practically all goods which can be traded.

FORM OF RECEIPTS

The law does not require a specific form. So it could be printed, written, or
whatever.
Although the law under section 2 provides that a warehouse receipt should
contain essential terms.

What are the (9) essential terms that must be embodied in the warehouse
receipt?

a. The location of the warehouse where the goods are stored,
- So that the holder would know where the goods are stored. Especially
if the warehouseman has two or more warehouses.

b. The date of the issue of the receipt,
- The date is prima facie the date of the perfection of the contract of
deposit. It is also important to determine when the charges of the
deposit would begin to arise.

c. The consecutive number of the receipt,
- Again, for identification purposes. To distinguish one receipt from the
other.

d. A statement whether the goods received will be delivered to the bearer, to
a specified person or to a specified person or his order,
- This will now determine whether the warehouse receipt is negotiable
or not.

e. The rate of storage charges,
- The consideration of the warehouseman. If the rate is not indicated,
the warehouseman can still be paid reasonable fees.

f. A description of the goods or of the packages containing them,
- Again for identification purposes. So that whoever makes a deposit
has some form of assurance that he will get the same item back.

g. The signature of the warehouseman which may be made by his authorized
agent,
- The signature is the best evidence that he has received the goods and
that he assumes the obligations in relation to the issuance of the
warehouse receipts.

h. If the receipt is issued for goods of which the warehouseman is owner,
either solely or jointly or in common with others, the fact of such
ownership, and
- If applicable. Not in all cases.

i. A statement of the amount of advances made and of liabilities incurred for
which the warehouseman claims a lien. If the precise amount of such
EH 403 [2011 2012]


advances made or of such liabilities incurred is, at the time of the issue of,
unknown to the warehouseman or to his agent who issues it, a statement
of the fact that advances have been made or liabilities incurred and the
purpose thereof is sufficient.
- We are talking here of the warehousemans lien. The advances and
the liabilities incurred.

What is the effect if one or two or three items are omitted?

- The omission of any of the terms will not affect the validity of the
warehouse receipt.
- So the warehouse receipt is still valid but the warehouseman shall be
liable to any person for all damages caused by the omission of any of the
terms.
- Example the name was not properly indicated and as a result, there was a
misdelivery, so the warehouseman would be liable for damages.

A warehouseman may insert in a receipt issued by him any other terms and
conditions provided that such terms and conditions shall not:

a. Be contrary to the provisions of this Act.
b. In any wise impair his obligation to exercise that degree of care in the
safe-keeping of the goods entrusted to him which is reasonably careful
man would exercise in regard to similar goods of his own.
- So you cannot lessen the degree of care required.
- Any stipulation which would exempt the warehouseman from liability
for negligence, such as goods were deposited for the account of and
for the risk of the depositor shall be VOID.

KINDS OF WAREHOUSE RECEIPTS

A. NEGOTIABLE WAREHOUSE RECEIPT

a. Deliverable to the order of a specified person
b. Deliverable to bearer

- A provision in a NEGOTIABLE warehouse receipt that the instrument is
NON-NEGOTIABLE is VOID. So the warehouse receipt would still
remain negotiable.

- When more than one negotiable receipt is issued for the same goods,
the word Duplicate shall be plainly placed upon the face of every
receipt, EXCEPT the first one issued.
o A warehouseman shall be liable for all damages caused by his
failure to do so to any one who purchased the subsequent
receipt for value supposing it to be an original, even though the
purchase is made AFTER the delivery of the goods by the
warehouseman to the holder of the original receipt.
o Example: A warehouseman issued the original to X, and there
were other copies. The other copies were not stamped with the
word Duplicate. The duplicate receipt was subsequently
negotiated to Y. Y can hold the warehouseman liable provided
that Y acquired the warehouse receipt in good faith and for value.

B. NON-NEGOTIABLE WAREHOUSE RECEIPT

- The goods received will be delivered to the depositor or to any
specified person.
- The receipt should be stamped on its face non-negotiable,
otherwise, a holder believing it to be negotiable may treat the receipt
as negotiable. The holder has to be a purchaser in good faith and for
value.

With respect to markings,
- If negotiable, it is not necessary that you stamp the word negotiable. Even
in the absence of the word negotiable, it is still considered as negotiable if
it contains words ofnegotiability.
- In case of non-negotiable, it must be stamped with the word non-
negotiable.

NEGOTIATION AND TRANSFER OF WAREHOUSE RECEIPTS


1. How negotiated:

a. By delivery
- deliverable to BEARER
- initially deliverable to a specified person or order but the latter
indorses it in BLANK or BEARER

b. Indorsement coupled with delivery
EH 403 [2011 2012]


- deliverable to the ORDER OF A SPECIFIED PERSON
- initially deliverable to bearer but there is a SPECIAL
INDORSEMENT
- NOTE that if a negotiable warehouse receipt deliverable to bearer
is indorsed specially, it will be converted into a receipt deliverable
to order and can only be negotiated further by indorsement and
delivery.
o This is not the case with negotiable instruments because if a
negotiable instrument is originally payable to bearer, it will
always remain so payable regardless of the way it is
endorsed, whether specially or in blank

What are the effects if a negotiable warehouse receipt deliverable to the order
of a specified person is only delivered but there was no indorsement? (3)
- The transferee acquires title against the transferor;
- There is no direct obligation of the warehouseman; and
- The transferee can compel the transferor to complete the negotiation by
indorsing the instrument. Negotiation takes effect on the date of
indorsement only.

For purposes of determining when you acquired a valid title, that is only on
the date of the indorsement.
But prior to the indorsement, there is no direct obligation of the
warehouseman to hold the goods in your favor. So you are just like an
assignee or a transferee of a non-negotiable warehouse receipt.
o Indorsee of a NEGOTIABLE Warehouse Receipt: Direct obligation of
the warehouseman to hold possession of the goods for him as if the
warehouseman directly contracted with him.
o Transferee of a NON-NEGOTIABLE Warehouse Receipt: prior to the
actual indorsement, you do not have the direct obligation of the
warehouseman. So meaning, it can be defeated by a levy or
attachment or execution, or by the right of an unpaid seller.

2. Who may negotiate

a. The owner;
b. By the person to whom possession of receipt was entrusted by the
owner;
- This applies only if deliverable to bearer. If not deliverable to
bearer, you need the indorsement of the person to whom the
warehouse receipt is issued.

3. Effects of Negotiation:

a. Negotiation of the document has the effect of manual delivery so as
to constitute the transferee the owner of the goods.
b. Negotiation carries with it both the title to and possession of the
property.

4. Rights Acquired by Indorsee:

a. Such title to the goods as the person negotiating had or such title as
the depositor had the ability to convey to a purchaser in good faith for
value.
b. The direct obligation of the warehouseman to hold possession of the
goods for him.

Example: X (thief) stole the goods and deposited them in the warehouse. The
warehouseman issued to him a negotiable warehouse receipt. Then X
negotiated the warehouse receipt to Y. The real owner now files an action to
recover title and possession of the goods deposited with the warehouseman.
Who has a better right over the goods?

Is it Y, the indorsee of a negotiable warehouse receipt, or the real owner?

- The real owner has a better right. Y only acquired the title of the person
negotiating the receipt. Since X is only a thief, he practically has no right
over the goods. As between Y and the real owner, it is the real owner who
has a better right.
- Later on, when we speak of the obligations of the warehouseman, the
warehouseman will not be held liable for his refusal to deliver the goods to
Y.

5. Warranties on Sale of Warehouse Receipts:

A person who, for value, negotiates or transfers a receipt by indorsement
or delivery, including one who assigns for value a claim secured by a
receipt, unless a contrary intention appears, warrants:
a. That the receipt is GENUINE;
b. He has LEGAL RIGHT to negotiate or transfer it;
c. He has no KNOWLEDGE of defects that may impair the validity or
worth of the receipt;
d. He has a RIGHT TO TRANSFER TITLE to the goods and that the goods
are MERCHANTABLE or fit for a particular purpose whenever such
EH 403 [2011 2012]


warranties would have been implied, if the contract of the parties had
been to transfer without a receipt of the goods represented thereby.

However, the indorser DOES NOT WARRANT that the warehouseman
will comply with his duties.
- Unlike in a negotiable instrument, it is possible that an indorsee
could warrant that the party primarily liable undertakes to pay, or
that the instrument be accepted or paid or both.

If the warehouseman does not comply with his duties, can the indorsee go back
to the indorser and hold him liable?
- NO. Unless there is a breach of those warranties.
- In warehouse receipts, there is no such thing as secondary liability. You
cannot go back to the indorser, unless there is a breach of those
warranties.
- Recall in NIL that if upon default of the party primarily liable, you can go
back to the party secondary liable.


A non-negotiable warehouse receipt cannot be negotiated but it can be transferred
or assigned by delivery to the transferee accompanied by a deed of assignment.
You only deliver it, no need to indorse. If the receipt is indorsed, the transferee
acquires no additional right.

Rights of the assignee of a non-negotiable warehouse receipt
- You merely step into the shoes of the assignor. So you only acquire rights
pertaining to the assignor.

Do you acquire the direct obligation of the warehouseman to hold the goods
for you?
- No. But not in all cases. You can acquire the direct obligation of the
warehousemanonly after you have notified the warehouseman that a
transfer of the warehouse receipt has been made.
- Prior to the notification, you do not have the direct obligation of the
warehouseman. The effect of that is that your right over the goods could
be defeated by a levy, attachment, execution or claim of an unpaid
creditor.
- So if you are the transferee of a non-negotiable warehouse receipt, the
first thing that you should do is to immediately notify the warehouseman
so that you would have the direct obligation of the warehouseman to hold
the goods in your favor. It could no longer be defeated by the lien an
unpaid seller.

NEGOTIABLE WAREHOUSE RECEIPT NON-NEGOTIABLE WAREHOUSE
RECEIPT
May be acquired through negotiation May be acquired only through transfer
or assignment
Rights of the person to whom it is
negotiated (holder):
1. Title to the goods of the person
negotiating the receipt and title
of the person to whose order
the goods were to be delivered;
2. Direct obligation of the
warehouseman to hold
possession of the goods for him
as if the warehouseman
directly contracted with him.
Rights of the transferee:
1. Title of the goods, as against
the transferor;
- You only step into the shoes.
Same with negotiable WR.
Difference between negotiable
WR and non-negotiable WR is
#2 (direct obligation)
2. Right to notify the
warehouseman of the transfer;
and acquire the direct
obligation of the
warehouseman to hold the
goods for him (only after
notification).
Negotiation defeats the lien of the seller
of the goods.

Goods represented cannot be subject to
attachment or levy by execution, unless
in proper circumstances.
Goods represented can be subject to
attachment or levy by execution.

EXAMPLE: S sold the goods to B. B failed to pay S. B subsequently deposited the
goods with a warehouseman W. A warehouse receipt was issued to B, which was
then transferred to Mr. X. The unpaid seller S now seeks to recover from
warehouseman W the goods. Who has a better right, seller S or Mr. X?

It depends on the kind of warehouse receipt.
- If negotiable, Mr. X has a better right.
- If non-negotiable, it depends on whether the claim made by seller S was
made before or after the notification of the transfer.
o If claim by the unpaid seller was made before B notified W of the
transfer of the goods, S seller has a better right.
o If claim by the unpaid seller was made after notification to W, Mr. X
has a better right.
EH 403 [2011 2012]


RULES ON ATTACHMENT/EXECUTION OF GOODS DEPOSITED


The goods cannot be attachedor levied in execution UNLESS:

a. The receipt is first surrendered; or
- Of course, if it is with you, it cannot be attached. You have to
surrender it first.
b. Its negotiation is enjoined; or
c. The receipt is impounded by the court

Why cant the goods be attached?
- To hold otherwise, the right of the indorsee would be defeated because he
has already acquired the direct obligation of the warehouseman to hold
possession of the goods for him as if the warehouseman directly
contracted with him.

Creditors (Unpaid Sellers) Remedies:

a. seek ATTACHMENT of the receipt; or
b. compel the debtor to deliver the receipt by INJUNCTION or otherwise

- The unpaid seller could not go directly to the warehouseman and claim
possession over the goods.
- But he can go to the court and avail of the remedies provided by the law.
- As a rule, the right of an indorsee is preferred over that of an unpaid seller
or creditor.

Not Applicable (still subject to execution or attachment):

a. If the depositor is not the owner of the goods (thief) or one who has no
right to convey title to the goods binding upon the owner;
- Thief versus real owner. Real owner has a better right.
b. Actions for recovery or manual delivery of goods by the real owner; or
- This contemplates of a scenario where the claim is filed by the real
owner of the goods, and the person who negotiated the warehouse
receipt is not the owner.
- Remember that you only acquire the title of the person negotiating
the warehouse receipt and if that person negotiating the receipt is a
thief, you acquire no right at all. There is no such thing as a holder in
due course in warehouse receipts.
- In NIL, there is such an animal as a holder in due course. Thus, it is
possible for the subsequent holder (if he is a holder in due course) to
acquire rights better than that of a transferor.
- In a warehouse receipt, you only acquire the title of the person who
negotiated the warehouse receipt to you.
c. Where attachment is made prior to the issuance of receipt.

ILLUSTRATION:

Thief B stole the goods and deposited them to W. He was issued a warehouse
receipt. B negotiated the warehouse receipt to A. Assuming the warehouse
receipt is negotiable. In short, A was an indorsee of a warehouse receipt. The
real owner this time claims ownership over the goods? Who has better right,
the owner or A (indorsee)?
- The owner. Even if A was the indorser, his right is only that of the person
negotiating he receipt. So his right can be defeated by the real owner.
- If non-negotiable and there was prior notification to the warehouseman,
the real owner would still have better rights.

This time, if it was not a thief but a buyer (B) who deposited the goods with W.
B was issued a warehouse receipt. B subsequently negotiated it to A. S, unpaid
seller, is now claiming possession over the goods. Who has a better right, the
unpaid seller or indorsee (A)?
- A, as indorsee of a negotiable warehouse receipt, has a better right. He
acquired title of the person negotiating the receipt. B has title although he
has not paid his obligation. He also has the direct obligation of the
warehouseman. His right cannot be defeated by an unpaid seller.
- If this is a non-negotiable receipt, it depends on whether the claim made
by unpaid seller S was made before or after the notification of the transfer.
o If claim by the unpaid seller was made before W was notified of the
transfer of the goods, S seller has a better right. The right of A can be
defeated by the claim of an unpaid seller.
o If claim by the unpaid seller was made after notification to W, A,
indorsee, has a better right.


The goods can be attached, provided it is done prior to the notification of the
warehouseman of the transfer.
EH 403 [2011 2012]


- Reason: Absent such notice, both the warehouseman and the sheriff have
a right to assume that the goods are still owned by the person whose
name appears in the receipt.

RIGHTS AND OBLIGATIONS OF THE WAREHOUSEMAN

Rights:

1. To be paid;
2. In case of non-payment, to exercise his lien on the goods deposited; and
3. To refuse delivery in proper legal circumstances.

Obligations:

1. To issue a warehouse receipt in the required form for goods received;
2. To take care of the goods deposited with ordinary and reasonable
diligence;
3. To deliver the goods to the person lawfully entitled;
4. Not to commingle the goods deposited, unless the goods are fungible and
of the same kind and grade, giving rise to co-ownership over commingled
mass;
- If not fungible, he is not supposed to commingle.
- He may commingle fungible goods if there is an agreement, or if it is
customary.
- If commingled, then there is now co-ownership.
5. To insure the goods in proper circumstances;
6. To mark a non-negotiable warehouse receipt as such;
7. To mark as such the duplicates of a negotiable warehouse receipts
8. To give the proper notice in case of sale of the goods as provided in the
warehouse receipts law; and
9. To take up and cancel the warehouse receipt when the goods are
delivered.

Duty to Deliver:

Upon a DEMAND made by the holder of a receipt or by the depositor, unless there
is a legal excuse; if such demand is accompanied with: (Section 8)
1. Offer to satisfy the warehousemans lien; and
2. Offer to surrender the receipt, if negotiable, with such indorsement as
would be necessary for the negotiation of the receipt; and
- It is important for the warehouseman to get back the warehouse receipt
because he needs to cancel it. Otherwise, if he did not take it back and
cancel it, and it is subsequently negotiated to a purchaser for value and in
good faith, he would incur liabilities.
3. Readiness and willingness to sign an acknowledgement when the goods
are delivered, if such signature is requested by the warehouseman.

If these 3 conditions are not complied with, then the warehouseman is justified in
refusing to deliver the goods.

GENERAL RULE: a demand should be made on the warehouseman in order that the
duty to deliver the goods will arise.
EXCEPTION: when the warehouseman has rendered it beyond his power to deliver
the goods, demand may be dispensed with.

Person to whom goods must be delivered:

1. Person lawfully entitled to possession of goods or his agent (person to
whom a competent court has ordered delivery of goods; attaching
creditor; purchaser);
- Person ordered by a competent court. Example. Adverse claim. If
there are adverse claims, if you are the warehouseman, you should
ask the adverse claimants to interplead and whoever the court orders
as the lawful owner, then you must make delivery to him.
- In case of loss or destroyed warehouse receipt, there is a procedure,
and the court would issue an order as to who is entitled to the goods.
- Attaching creditor
- Purchaser
2. Person entitled to delivery under a non-negotiable receipt or with written
authority; or
3. Person in possession of a negotiable receipt.

Instances when a warehouseman may legally refuse to deliver goods:

1. When the holder of the receipt does not satisfy the conditions prescribed
in Section 8
- 3 conditions under section 8
2. When the warehouseman has legal title in himself on the goods, such title
or right being derived directly or indirectly from the transfer made by the
depositor at the time or subsequent to the deposit for storage or from the
warehousemans lien;
3. If the warehouseman had been requested by a person lawfully entitled to
a right of property or possession in the goods not to make delivery to any
person;
EH 403 [2011 2012]


4. If he had information that the delivery to be made was one not lawfully
entitled to the possession of the goods;
5. Where the goods have already been lawfully sold to 3
rd
persons to satisfy
the warehousemans lien or disposed of because of their perishable or
hazardous nature;
6. In case of adverse claimants;
- You would ask the adverse claimants to interplead
7. In the valid exercise of the warehousemans lien;
8. Delivery to a claimant with a better right;
9. Attachment or levy of the goods by a creditor where the document is
surrendered or its negotiation is enjoined or the document is impounded;
10. Where the document of title is attached by a creditor;
11. Failure was not due to any fault on the part of the warehouseman

Instances when a warehouseman is liable for conversion:

Conversion is an unauthorized assumption and exercise of the right of ownership
over goods belonging to another through the alteration of their condition or the
exclusion of the owners rights. So in short, there is misdelivery of goods you
deliver goods to persons not lawfully entitled.

1. Where the delivery is otherwise than as authorized by subsections (b) and
(c) of Section 9.
- You should deliver to the persons to whom goods must be delivered. 3
persons mentioned above.

2. Even if delivered to persons entitled under Section 9, he may still be liable
for conversion if prior to delivery:
a. He had been requested not to make such delivery; or
b. He had received notice of the adverse claim or title of a third person.

Example: I am in possession of a negotiable warehouse receipt deliverable to
bearer. I went to the warehouseman and demanded for the delivery of the goods.
Somebody else notified the warehouseman not to make delivery to me because he
claims ownership over the goods. So if you are the warehouseman, you are not
supposed to make delivery. Here, you would not be liable even if the receipt is
deliverable to bearer because you are JUSTIFIED in refusing to make delivery until
you are given reasonable time to ascertain the validity of the adverse claim, or to
initiate legal proceedings to compel the claimants to interplead.

Effects of Alteration:

ALTERATION EFFECT
Immaterial Whether fraudulent or not, authorized or not,
warehouseman is liable on the altered receipt according
to its ORIGINAL TENOR.
Material but authorized Liable according to its terms as ALTERED.
Material alteration
innocently made
Liable according to its ORIGINAL TENOR.
Material alteration
fraudulently made
Liable according to the ORIGINAL TENOR to a purchaser
of receipt for value without notice and even to the
alterer, and subsequent purchasers with notice (except
that liability with respect to the alterer and subsequent
purchasers with notice is limited only to delivery as he is
excused from any liability).

Material and fraudulent: the quantity of the goods, the name of the person.

Lost or destroyed warehouse receipts:

Where a negotiable receipt has been lost or destroyed, a court of competent
jurisdiction may order the delivery of the goods only:
1. Upon proof of the lossor destruction of the receipt; and
2. Upon the giving of a bond with sufficient sureties to be approved by the
court.

What if Mr. A claims that the warehouse receipt issued to him is lost, but it was not
actually lost but was only negotiated to Mr. B, a purchaser for value and in good
faith. What is the liability of the warehouseman to Mr. B?
- Warehouseman is not relieved of his liability to Mr. B because
Warehouseman can always go after the bond.
- As far as his obligation to Mr. B is concerned, he is not relieved from
liability. If he refuses to deliver, or he could no longer deliver because the
goods were already released to Mr. A upon his filing with the court, the
warehouseman would still be liable to Mr. B. But then again,
warehouseman could always go after the bond. The bond would answer
for whatever liability the warehouseman would incur to a purchaser for
value and without notice.

Extent of the Warehousemans lien:

1. All lawful charges for storage and preservation of the goods;
2. All lawful claims for money advanced; and
EH 403 [2011 2012]


3. All reasonable charges and expenses for notice and advertisement of the
sale, and the sale of the goods

Enforcement of Warehousemans lien:

1. By refusing to deliver the goods until his lien is satisfied; or
2. By causing extrajudicial sale of the property and applying the proceeds to
the value of the lien;
3. By the other means allowed by law to a creditor against his debtor; OR
such other remedies allowed by law for the enforcement of a lien against
personal property.

Loss of Lien:

1. By surrendering possession thereof; or
2. By refusing to deliver the goods when a demand is made with which he is
bound to comply.

What warehouseman can do in case of adverse claimants:

1. REFUSE to deliver the goods to anyone of them until he has had
reasonable time to ascertain the validity of the various claims; he is not
excused from liability in case he makes a mistake.
2. Original action or counterclaim for INTERPLEADER, whichever is
appropriate. In such case, the warehouseman will be relieved from liability
in delivering the goods to the person found by the court to have a better
right.

NEGOTIABLE INSTRUMENT NEGOTIABLE WAREHOUSE RECEIPT
SUBJECT
Money Merchandise
OBJECT OF VALUE
Instrument itself Goods deposited
LIABILITY OF INTERMEDIATE PARTIES
Secondary None (for failure to deliver the goods)
EFFECT OF DELIBERATE ACTION
Null and void Valid, but enforceable only in
accordance with its original tenor
CONVERSION FROM BEARER TO ORDER
If a negotiable instrument is originally
payable to bearer, it will always remain
so payable regardless of the way it is
indorsed, whether specially or in blank.
If a negotiable warehouse receipt
deliverable to bearer is indorsed
specially, it will be converted into a
receipt deliverable to order and can
only be negotiated further by
indorsement and delivery.
SIGNIFICANCE OF HOLDER IN DUE COURSE
A holder in due course may be able to
obtain a title better than that which the
party who negotiated the instrument to
him had.
The indorsee, even if holder in due
course, obtains only such title as the
person negotiating had over the goods.

Special Commercial Laws - Finals

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EH 403 [2011 2012]

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