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The Philippine bank at the center of a multimillion-dollar heist

Maia Santos-Deguito, the branch manager at the center of the scandal, testifies at the hearing.

MANILA   Can a multimillion-dollar dirty money transaction be orchestrated by a retail bank branch manager? Rizal Commercial Banking Corp., the former employer of Maia Santos-Deguito, would have you believe it can.

     On March 22, RCBC fired Deguito, the former manager of the bank's Jupiter Makati branch who finds herself at the center of an $81 million bank heist -- the one successful stage of an audacious attempt to steal $951 million from the foreign reserves of Bangladesh's central bank at the Federal Reserve Bank of New York.

     The sacking came amid ongoing investigations into the scandal by the Philippine Anti-Money Laundering Council and the Senate. RCBC officials have suggested that Deguito independently authorized the transfer of the stolen funds into her branch. Deguito has claimed that two senior executives, including the bank's president and chief executive, Lorenzo Tan, sanctioned the transactions.

     "It's getting deeper and both sides are firing missiles at each other," Sen. Teofisto Guingona III, who chairs the committee investigating the scandal, said on March 17. He was speaking after Deguito told her side of the story in a closed "executive session" with senators.

     The AMLC on March 11 charged Deguito before the Department of Justice with facilitating money laundering. If found guilty, she faces up to seven years in prison and a fine of up to 3 million pesos ($64,500).

     Guingona said his committee needs to conduct more hearings before unlocking the truth -- all of which leaves RCBC investors hanging on anxiously.

     The bank's shares closed up 1.7% at 29.60 pesos on March 23 -- the last trading day prior to the Easter break -- having fallen to 29.10 on March 22, a multiyear low. Since the Philippine Daily Inquirer broke the news about the money laundering issue on Feb. 29, RCBC's shares have lost 10.3%.

     "The recent performance of its [share] price went hand in hand with the investigations at the Senate," said Charles Ang, an equity analyst at local brokerage COL Financial. "Investors are concerned about the potential repercussions and consequences of this issue." 

     The saga -- which began with the Feb. 4 hacking of Bangladesh Bank -- can be traced back as far as May 2015, when five fake accounts were opened at the RCBC branch Deguito headed. With an initial deposit of $500 each, the accounts remained dormant until Feb. 8, 2016, when $81 million in wire transfers entered four of the five accounts from Bangladesh's foreign reserve account with the New York Fed.

     The money was quickly withdrawn and moved into another fake account at the same branch, before being transferred on to PhilRem Service Corp., a local remittance company, which in turn transferred the money to local casinos.

     On Feb. 11, Bangladesh central bank Gov. Atiur Rahman -- who has since resigned -- alerted his Philippine counterpart, Amando Tetangco, to the heist, prompting the AMLC to launch a probe. But it was only on Feb. 29 that Philippine authorities filed a petition to freeze the accounts involved.

     By the time the Court of Appeals ordered the accounts to be frozen on March 1, only $68,305 of the $81 million remained.

     In the meantime, PhilRem delivered $30.6 million to a man called Weikang Xu over several days from Feb. 5 to 13. Another $28.8 million went to Bloomberry Resorts and Hotels, the company behind Solaire Resort and Casino. A Bloomberry official said the money was intended for Xu's casino junket operations.

RCBC Jupiter Branch in Makati City (Photo by Richard Reyes)

     Businessman Kim Wong also received 1 billion pesos from PhilRem through his company's account, Eastern Hawaii Leisure Company, according to the AMLC.

     Wong, Deguito has claimed, is a friend of RCBC chief executive Tan, who at one point told her "to take care of that guy." Deguito told a Senate hearing that she was "supposed to give him [Wong] preferential accommodation or treatment." Tan has denied Deguito's claims. 

     When President Benigno Aquino signed a law in July 2014 allowing the full entry of foreign banks into the Philippines, RCBC was among the first to draw an overseas investor. In September that year, a unit of Cathay Financial Holding, Taiwan's largest financial service provider by assets, announced the acquisition of a 20% stake in RCBC for $400 million, highlighting the Philippine bank's potential.

     Midsized RCBC, which holds a universal bank license, is controlled by the Yuchengco group, a conglomerate led by diplomat Alfonso Yuchengco. It is the country's eighth-largest lender, with total assets of 410 billion pesos as of end-September 2015.

     Since Tan, formerly of Citibank, joined the company in 2007, RCBC's deposits have doubled to 342.4 billion pesos. Last year, the bank's total number of accounts jumped to 7.3 million from 6.7 million the year before. The bank also enjoys substantial custom from Japanese and South Korean companies operating in the Philippines.

     Taiwan's Cathay Financial said it remains confident in RCBC despite the scandal. "So far in 2015, we think the return from the RCBC investment was pretty good -- with annualized returns of about 6%," said Lin Chao-Ting, executive vice-president of Cathay Life Insurance.

     "The heist case RCBC is involved in would not influence our confidence in the company," he added. "We think RCBC has a very decent management team, a lot of them coming from Citi." 

WAKE-UP CALL   Other Philippine banks have not been negatively affected by the issue, on the back of relatively solid fundamentals. However, the country's first cross-border dirty money scandal has exposed its lax banking and anti-money laundering regulations, as well as the lack of due diligence among lenders as deposits grow.

     "The RCBC side may not execute thoroughly its internal control -- they might need more disciplined staff training and more awareness of money laundering [and] cybertheft," Lin said.

     Casinos also remain excluded from the jurisdiction of the Anti-Money Laundering Act, which was last amended in 2013 to cover lawyers, accountants, and precious stones and metals dealers.

     At the time, new casino licensees were starting to develop the country's "Entertainment City," a gaming complex near Manila Bay, which is touted as the Philippines' answer to Macau. Casino lobbyists used that project as a bargaining chip to exclude gambling houses from the anti-money laundering law's expanded scope, according to Sen. Sergio Osmena III. 

     Meanwhile, the scandal, which has been widely reported outside the country, could overshadow a string of reforms that the central bank has introduced to strengthen the banking system and lure more foreign lenders. While the scandal did not hurt financial markets, the continuation of a business-as-usual attitude could harm the economy in the long run.

     Teresita Herbosa, chairwoman of the Securities and Exchange Commission and co-chair of the AMLC, said the heist jeopardizes the standing of the Philippines within the Financial Action Task Force, the intergovernmental body combating money laundering and terrorist financing.

     Established in 1989, the FATF has 37 members as well as associates and observers. In 2012, the Philippines avoided being placed on an FATF blacklist after making amendments to its 2001 Anti-Money Laundering Act.

     "Unfortunately, the casinos were excluded at the last minute," Herbosa said in early March. She added the FATF is now demanding to know the "status of the planned coverage of casinos" under the act.

     FATF blacklisting, a threat which has become real again, would raise the cost of financial transactions and damage the Philippine economy, which is heavily reliant on remittances from workers abroad.

     For AMLC Executive Director Julia Bacay-Abad, the inclusion of casinos and real estate brokers, as well as the repeal of a half-century-old bank secrecy law, which held up investigations into the scandal, are key amendments that Congress should pass.

     These reforms, however, are unlikely to pass smoothly as the Philippines' largest lenders are part of family-owned conglomerates that have a great deal of influence over political decisions.

     BDO Unibank, the largest lender by assets, is controlled by the family of Henry Sy, the country's richest man, who owns conglomerate SM Investments and shopping center giant SM Prime Holdings. Metropolitan Bank & Trust is a unit of GT Capital Holdings, the holding company of tycoon George Ty, while Bank of the Philippine Islands is owned by Ayala Corp., a big conglomerate. Another major lender, Philippine National Bank, is owned by LT Group, the holding company of tycoon Lucio Tan.

     "I'm sure it's going to be an uphill battle to lift the bank secrecy law," the AMLC's Abad said. Osmena, also the chairman of the Senate's committee on banks, financial institutions and currencies, said "trying to amend that bank secrecy law is going to be bloody."

     Authorities have already moved to boost existing regulation, pending legislative amendments, while the scandal is touching many nerves in the country. Analysts have avoided commenting on the issue, and a broadcaster has been suspended for making comments about RCBC.

     But central bank Deputy Gov. Nestor Espenilla said the theft should prod lawmakers to speed up critical legislative reforms.

     "The wake-up call on money laundering risks may be positive in the long-run," Espenilla said, "if it results in fast-tracking" of overdue legal reforms needed to combat money laundering and terrorist financing in the Philippines.

     "The wake-up call on cybercrime risks is also a good reminder for enhanced vigilance that will make the system less vulnerable," he added.

     On March 23, RCBC published a full-page newspaper advertisement that read: "RCBC offers its sincerest apologies for the involvement of its personnel in the money laundering scheme now [the] subject of Senate Blue Ribbon and AMLC investigations."

     Given that it has taken the theft of $81 million to bring these issues to light, it appears the Philippines may be learning some lessons -- the hard way.

     Nikkei staff writer Cheng Ting-fang in Taipei contributed to this report. The information in the timeline was sourced from Philippine Anti-Money Laundering Council documents, Philippine Senate inquiries and RCBC press releases as of March 25.

     

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