Why does the Philippines attract financial fraud?

Dr. Stephen Cutler is a security analyst and anti-money laundering consultant in the Philippines who previously served in the FBI.

What is it about the Philippines that seems to attract financial fraud?

Funds stolen from Bangladesh's central bank were routed to a Philippine bank in 2016, from where they were laundered into the gambling industry. Westpac Banking was accused last December by Australia's financial crime watchdog of money-laundering breaches, which included payments to suspected child exploiters in the Philippines.

And in late June, it was confirmed that Wirecard, the German payments technology company, had been involved in a fraud where apparent business partners in the Philippines did not exist, along with 1.9 billion euros ($2.1 billion) supposedly held in two Philippine banks.

Allegations of spurious documents, fraudulent transactions and the involvement of junior employees of major Philippine banks call into question not just how these banks supervise internal matters but larger issues of weaknesses in the country's oversight of its financial system.

What these cases point to is a lack of enforcement capacity on the part of the Philippines' Securities and Exchange Commission; the Bangko Sentral ng Pilipinas, its central bank; and the Anti-Money Laundering Council, or AMLC.

While these agencies have many good and diligent employees, what appear to be lacking are the ability and willingness of these three bodies to conduct meaningful routine monitoring and verification of financial institutions. This should be aimed at ensuring real compliance with best practices and the legal requirements of due diligence and know your customer policies, beyond going through the motions for audits.

Senior managers at banks have admitted that accounts with them are often opened with "show money," allowing businesses to obtain SEC documentation, after which the accounts are closed. The accounts are intended to assure investors that money is available to protect them, but closing the accounts, giving no notice to the SEC, leads to shell companies. The SEC has limited staff and cannot conduct reviews of documentation to ensure all remains in order.

The BSP and AMLC both also lack the staffing that would allow meaningful investigations and follow-ups of suspicious activity and even of legally required suspicious transaction reports. The sieve intended to catch bad actors and protect the nation has too many holes. That needs to change.

AMLC officials open a bag containing dollar bills which are returned by Chinese casino junket operator to Bangladesh in Manila in March 2016: the sieve has too many holes.   © BSP/AP

Reporting on Wirecard shows that a whistleblower raised serious issues on the handling of transactions and accounting issues to senior management. But in the Philippines, there is little to no encouragement for any whistleblower to come forward with serious allegations.

There is, in theory, a witness protection program from the Philippine Department of Justice. But it has a poor reputation for actually protecting anyone. Part of the problem is that it can only move people within the Philippines, not to a faraway place where they can rebuild their lives.

Recently, the government advised the public that it could report misbehaving or corrupt public officials through the 8888 citizens' complaint hotline -- but this does not apply to criminal behavior in private corporations.

The Philippines must take steps to upgrade its ability and, even more so, the perceptions of its willingness to protect witnesses. The Philippines needs to develop a strong whistleblower system, allowing employees to safely and securely report errant behavior by senior management. The BSP, SEC and AMLC should establish protected mechanisms for such reports, with meaningful follow-up investigation on allegations.

Incidents involving the Philippines may well be greeted with "here we go again" and a sigh of disappointment bordering on disbelief. The Philippine financial system must take greater action as an industry to reduce reputational risk and strengthen its standing in international circles. This will start with boards and senior management making public and credible statements in support of transparency and global state of the art banking practices.

The Wirecard allegations should spur serious work by Philippine banks and their regulator to bolster the nation's reputation in financial services.