Arthur Angelo R.

Ramos
4FM1

AMLA CASE AND ITS POTENTIAL HAZARD

Introduction
According to a study conducted by the United Nations Office on Drug and
Crime, criminal proceeds amounted to 3.6% of global GDP in the year 2009,
with 2.7% (or USD 1.6 trillion) being laundered. With that being said, this
recent financial scandal in the Philippines is somehow miniscule compared to
the average USD 4.4 billion of money being laundered every day. This
scandal might have been the first time for the Philippine financial industry
since the countrys laws against money laundering are somehow strong or
is it?
2013 An amendment was passed to exclude casinos from AMLA (AntiMoney Laundering Act). The lawmakers argued that the gaming industry is
just in its infancy in the Philippines. By removing those (casinos) from AMLA,
it would be an incentive for these casinos to do business in the Philippines.
However, this exclusion of casinos from AMLA has worsened the loopholes
that were already present in the countrys laws.
Money laundering is the generic term used to describe the process by which
criminals disguise the original ownership and control of the proceeds of
criminal conduct by making such proceeds appear to have derived from a
legitimate source.
Money launderers are always keen to look for loopholes. Therefore, laws
should be comprehensive enough to prevent such activities from happening
in the country. However, the Philippine laws on money laundering were
deemed lacking, due to the exclusion of casinos and real estate from AMLA,
strict banking secrecy law, and the level of corruption in the government.
In February, hackers allegedly sent 35 orders from Swift financial messaging
system to transfer $951 million out of Bangladesh Banks account at the New
York Fed to a number of private accounts around the world. The New York Fed
allegedly executed five of the orders, transferring $101 million to four
accounts in the Philippines and one in Sri Lanka. New York Post

$81 million was diverted to the Philippines through RCBC, a local bank. After
a couple of days, the funds were sent to different fictitious accounts. The
funds in dollars were converted to pesos via PhilRem before being
transferred, withdrawn, and slowly being integrated through the casinos into
the Philippine financial system as clean money.

Many people would agree that the concern here is to catch those who are
involved and return the funds stolen to Bangladesh Bank. However, the
probability of tracing the money grows smaller as days pass by due to the
fact that the money might have been transacted a couple of times already.

Catching the culprits wont prevent this from happening again. The real case
here is that with the countrys current laws, it makes itself a hot target of
money laundering. Ranking 53rd among countries around the world and
having a score of 6.4 out of 10, Philippines is relatively prone to money
laundering. This puts the country at risk of being blacklisted by the Financial
Action Task Force (FATF).

Risk Identification
In the point of view of the Anti-Money Laundering Council (AMLC),
particularly the BSP, these are the risk factors that contribute to the overall
susceptibility of the country to potential money laundering activities (ML/TF
Risk):
FACTORS
Client Base

DESCRIPTION
As banks here in the Philippines also cater to foreign
nationals, ML/TF risk gets higher since client identity is
difficult to confirm especially for international clients.
Products and Most banks in the Philippines provide personal banking for
Services
high net worth individuals. These kinds of services could be
exploited by money launderers.
Channels
Widespread use of wireless transfers and other non face to
face transactions in the industry exposes the financial
system to money launderers.
Geographies The Philippines has a lot of transactions with different
countries. In fact, most Filipino banks abroad are based in
the Middle East. This puts the Philippine financial system
exposed to potential money launderers around the globe.
Other
The level of corruption in the government and technological
Qualitative insufficiencies in the financial system makes it easier for
Factors
money launderers to commit such acts in the Philippines.

And these are the risks that arise when a money laundering scandal happens
(such as the case with RCBC scandal):
RISK
Reputational
Risk
Operational
Risk
Legal Risk

DEFINITION
The risk that a company or country will lose potential
business because its character or quality has been called
into question.
The risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events.
The expenses of litigation of a company.

Risk Appetite and Risk Tolerance

Since one of the Philippine governments priorities was the development of a

gaming industry in the country, it can be interpreted as a sign that the
government has a high risk appetite since it wants to attract an industry
exposed to extreme scrutiny.
However, since the Philippine economy is still considered as a developing
economy, together with its economic ranking as 39 th relative to other
national economies, it can be assumed that the Philippines have a lower
level of risk tolerance. Its economy is still growing and its growth partially
relies on Foreign Direct Investments (FDIs). FDIs and other contributions are
sensitive to the reputation of the country. Thus, the Philippines cannot afford
the risk of tarnishing its hard-earned good reputation and good credit rating.
Risk Appetite: HIGH
Risk Tolerance: LOW

Risk Metrics
Since the country is exposed to reputational risk due to the recent RCBC
money laundering scandal, it is important to measure the potential impact of
this scandal in economic terms.
Looking at past data taken from a study by JC Sharman, 2009, these are the
consequences of the following countries that were blacklisted by the FATF.

Country
St. Kitts and Nevis
Vanuatu
Cook Islands
Liechtenstein

Growth of a
Particular Sector Affected by
Particular
the Blacklisting
Sector per
Annum*
IBCs/Trust (Offshore Finance)
-9.84%
Government
Revenue
from -8.67%
Offshore Industry
Government
Revenue
from -17.86%
Offshore Industry
Income of Banks plus Taxes
-27.32%

*Note that actual data does not have uniform time horizon. The data
presented has been annualized for comparability and uniformity purposes.
The risk metric that would be used is the Discounted Maximum Loss, also
known as Worst-case Risk Measure, which takes the maximum loss from a
set of possible outcomes and discounts it to present value.
In 2015, there are over 10 million OFWs around the world that contributes to
remittances totaling USD 25.8 Billion coming from around the globe. OFW
Remittances is the identified sector that would be affected if the country
becomes blacklisted.
The maximum loss per annum among the given data would be -27.32%,
which is what happened to the income of Liechtensteins Banking Sector.

Since this economic loss could have been added to the Gross Domestic
Product of the country, it is reasonable to assume that the opportunity cost
(discount rate) is equal to the average GDP growth rate of the Philippines.
Lastly, the annual loss from the Philippine economy would be discounted at
6.3% which is the average GDP growth rate of the Philippines from 2010 to
2014. The computation would at least include 2 years loss since it would take
a minimum of two years for a country to have its blacklist lifted.
Remittances (in
Billions USD)
Year 0
Year 1
Year 2

25.800
18.750
13.627

Loss per
Annum
(7.050)
(5.123)
(12.173)

Loss
Discounted at
6.3%
(6.632)
(4.534)
(11.166)

The Discounted Maximum Loss is computed to be USD 11.166 Billion.

Note: This does not take into consideration the probability of occurrence
since the event of being blacklisted is a matter of FATFs discretion and
assigning probability would be difficult. It only shows what could be the
worst economic impact if the country would be blacklisted.

Recommendation
Weighing the cost of the Philippines being blacklisted by the FATF, it is of
great importance that the Philippines improve its anti-money laundering
measures. Which among the suggested actions should the government focus
on? Although all of these must be addressed in the long run, it is important
to know which issues the government should prioritize in the short run.
The following are the issues that affect the BASEL AML Index a grading
methodology that rates countries based on their susceptibility to money
laundering activities.
Risk Indicators
ML/TF Risk
Corruption Risk
Financial Transparency and Standards
Public Transparency and Accountability
Political and Legal Risk

Weighting
65%
10%
15%
5%
5%

Based on the data above, these are the list of possible actions to address the
said risks:
1. Passing of Freedom of Information Bill Corruption Risk, Financial
Transparency and Standards, Public Transparency and Accountability
2. Stricter ML/TF risk management of banks ML/TF Risk, Political and
Legal Risk
3. Amendment of Bank Secrecy Law Financial Transparency and
Standards, Public Transparency and Accountability
4. Amendment of current AMLA provisions ML/TF Risk

5. Additional legal personnel to focus on money laundering cases

Political and Legal Risk
By having two different scenarios, there would be two different
recommendations and courses of actions suggested to address the different
scenarios.
Scenario 1: The USD 81-Million Money Laundering Scandal has been
resolved
Priority: Stricter ML/TF risk management of banks
AMLC must prioritize the strict implementation of the existing AMLA
provisions especially the provision in which banks must have adequate ML/TF
risk management since banks are the primary gatekeeper of the financial
system from fraud money. AMLC must push the banks to become more
thorough especially in transactions involving international parties.
Once strict implementation of AMLA has been made, the AMLC could begin
advising the Congress to reform the existing provisions of AMLA to
incorporate previously excluded sectors that provides potential mechanism
for money laundering (i.e casinos, real estate, etc.)
Scenario 2: The Scandal has not been resolved and the Philippines
getting blacklisted is probable
Priority: Amendment of current AMLA Provisions, Amendment of
Bank Secrecy Law, Additional legal personnel focusing on money
laundering
AMLC must convince the Congress to prioritize the reform on AMLA and to
amend the Bank Secrecy Law over other issues. AMLC, together with the
Congress, must also take extra measures to convince FATF that the Philippine
government is capable of handling its money laundering problems. Such
measures would be passing a bill that is at par with the international
standards and create a separate juridical group that would be dedicated to
money laundering cases.

Bibliography
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theft
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https://www.wolfsberg-principles.com/pdf/home/Wolfsberg-RiskAssessment-FAQs-2015.pdf
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