Cablegate: Philippines 2005 Inscr Part Ii: Financial

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A

REF: STATE 210324

Sensitive but Unclassified - Not for Internet - Protect

1. (U) The following text is the proposed International
Narcotics Control Strategy Report, Part II, Financial
Crimes and Money Laundering, for the Philippines for 2005-
2006. Post used the questions in reftel as the basis for
collecting information and assessing the current
situation for the country report. We will e-mail this
text as a word document to INL to facilitate the review

Begin Text:

2. (SBU) The Philippines is a regional financial
center, though it is not a major international offshore
financial center like Hong Kong or Singapore. There are
nine Offshore Banking Units (OBUs) established since
former President Marcos issued a decree in 1976
authorizing their formation. At present, OBUs account
for less than two percent of total banking system assets
in the country. The Bangko Sentral ng Pilipinas (BSP),
the Philippine Central Bank, which regulates onshore
banking, exercises regulatory supervision over OBUs and
requires them to meet reporting provisions and other
banking rules and regulations. In addition to
registering with the Securities and Exchange Commission
(SEC), financial institutions must obtain a secondary
license from the BSP subject to relatively stringent
standards that would make it difficult to establish shell
companies in financial services of this nature. For
example, a financial institution operating an OBU must be
physically present in the Philippines. Anonymous
directors and trustees are not allowed. The SEC does not
permit the issuance of bearer shares for banks and other

3. (SBU) In the past few years, the illegal drug trade
in the Philippines has reportedly evolved into a billion-
dollar industry. The Philippines continues to experience
an increase in foreign organized criminal activity from
China, Hong Kong, and Taiwan. Some insurgency groups
operating in the Philippines reportedly fund their
activities, in part, through the trafficking of narcotics
and arms and engage in money laundering through alleged
ties to organized crime. The proceeds of corrupt
activities by government officials are also a source of
laundered funds. Most of the narcotics trafficking
transiting through the Philippines is exchanged using
letters of credit. There is little cash and negligible
amounts of U.S. dollars used in the transactions, except
for the small amounts of narcotics that make it all the
way to the United States for street sale. Drugs
circulated within the Philippines are usually exchanged
for local currency.

4. (SBU) The Government of the Republic of the
Philippines (GRP) established an anti-money laundering
and counter-terrorist financing regime by passing
Republic Act 9160 -- the Anti-Money Laundering Act (AMLA)
of 2001. The GRP enacted Implementing Rules and
Regulations (IRR) for the AMLA in April 2002. The AMLA
criminalizes money laundering, an offense defined to
include the conduct of activity involving the proceeds
from unlawful activity in any one of 14 major categories
of crimes, and imposes penalties that include a term of
imprisonment of up to seven years.

5. (SBU) The AMLA also established the Anti-Money
Laundering Council (AMLC) as the country's financial
intelligence unit (FIU). The Council is composed of the
Governor of the BSP as Chairman, and the Commissioner of
the Insurance Commission and the Chairman of the
Securities and Exchange Commission as Members. The AMLC
is supported by a Secretariat headed by an Executive
Director who has a term of five years and must be a
lawyer. All the members of the Secretariat must have at
least five years experience in the BSP, the SEC, or the
Insurance Commission. They all hold full-time permanent
positions in the BSP upon their appointment. By law, the
AMLC Secretariat is an independent agency responsible for
receiving, maintaining, analyzing, and evaluating covered
and suspicious transactions, and providing advice and
assistance to relevant authorities.

6. (SBU) The AMLC's role goes well beyond traditional
FIU responsibilities and includes the investigation and
prosecution of money laundering. AMLC has the ability to
seize terrorist assets involved in money laundering on
behalf of the Republic of the Philippines after a money
laundering offense has been proven beyond a reasonable
doubt. In order to freeze assets allegedly connected to
money laundering, the AMLC must establish probable cause
that the funds relate to an offense enumerated in the
Act, such as terrorism. The Court of Appeals then may
freeze the bank account for 20 days. The AMLC may apply
to extend a freeze order prior to its expiration. The
AMLC is required to obtain a court order to examine bank
records for activities not listed in the Act. Serious
offenses listed in the AMLA that do not require a court
order include kidnapping for ransom, narcotics
trafficking, and terrorism-related crimes.

7. (SBU) In March 2003, the GRP enacted amendments to
the Anti-Money Laundering Act under Republic Act 9194
that do the following: establishes the threshold amount
for covered transactions (cash or other equivalent
monetary instruments) at 500,000 pesos (approximately
$9,000) within one (1) banking day; requires financial
institutions to report suspicious transactions,
regardless of amount; authorizes the BSP to examine any
particular deposit or investment with any bank or non-
bank institution in the course of a periodic or special
BSP examination to ensure institutional compliance with
the AMLA; and, permits the AMLC to examine particular
deposits or investments opened or created before the
AMLA. The GRP has made impressive progress enhancing and
implementing its amended AMLA. Through the end of
October 2005, the AMLC had received 1760 Suspicious
Transaction Reports (STRs) involving 8144 suspicious
transactions, and had received Covered Transaction
Reports (CTRs) involving over forty-four million covered
transactions. After completing the first phase of its
information technology upgrades in 2004, AMLC is in the
process of acquiring software to implement link analysis
and visualization to enhance its ability to produce
information in graphic form from the CTRs and STRs filed
electronically by regulated institutions. AMLC has not
yet defined the requirements for the data mining
component of phase two that would allow it to most
effectively search its data base and generating patterns
and leads for investigation.

8. (SBU) Over the last year, the Philippines continued
to improve its ability to track, seize, and block
terrorist assets. Under the AMLA, the AMLC has authority
to freeze funds and block financial transactions
identified with or traced to designated terrorist
organizations or individuals engaged in the financing of
terrorism. The GRP is quick to respond when new
terrorist entities are added to the consolidated list of
terrorist individuals and entities subject to sanctions
pursuant to United Nations Security Council Resolution
1267 and subsequent resolutions. Upon notification that
the UN 1267 Sanctions Committee has approved an
additional name to the list, the AMLC takes immediate
steps to inform the local banks and issue orders to
freeze the assets in the banking system. As institutions
covered under the AMLA and subject to related BSP
Circulars, local and foreign banks in the Philippines
readily comply with the requests. Under the AMLA and the
Bank Secrecy Act, officers, employees, representatives,
agents, consultants, and associates of financial
institutions are exempt from civil or criminal
prosecution for reporting covered transactions. These
institutions must maintain and store records of
transactions for a period of five years, extending beyond
the date of account or bank closure. The AMLC has frozen
funds at the request of the UN Security Council, the
United States, and other foreign governments. Through
November 2005, the AMLC has frozen funds in excess of 366
million Philippine pesos and an additional 2.7 million
U.S. dollars.

9. (SBU) The Philippines has no comprehensive
legislation pertaining to civil and criminal forfeiture.
Various government authorities, including the Bureau of
Customs and the Philippine National Police, have the
ability to temporarily seize property obtained during a
criminal activity. Money and property must be included
in the indictment, however, to permit forfeiture.
Because ownership is difficult to determine in these
cases, assets are rarely included in the indictment and
are rarely forfeited. The country has no separate
legislation covering civil and administrative forfeiture.
Under the AMLA, the AMLC has the authority to seize
assets involved in a money laundering operation that may
end up as forfeited property after conviction, even if an
otherwise legitimate business. In December 2005, the
Supreme Court issued a new criminal procedure rule
covering civil forfeiture, asset preservation, and freeze
orders. The new rule provides a way to preserve assets
prior to any forfeiture action and lists the procedures
to be followed during the action. The rules also contain
clear directions to the AMLC and the Court of Appeals on
the issuance of freeze orders for assets under
investigation that had been confused by changes in the
amendment to the AMLA in 2003.

10. (SBU) In 2005, several multilateral organizations
recognized the progress achieved by the GRP in improving
its anti-money laundering regime and addressing former
vulnerabilities. The Financial Action Task Force (FATF),
an international body formed by the G-7 industrialized
countries and dedicated to detecting and preventing money
laundering worldwide, removed the Philippines from its
list of Non-Cooperating Countries and Territories (NCCT)
in February 2005. In addition, the Egmont Group, an
international coalition of leading Financial Intelligence
Units (FIUs) working to coordinate efforts to combat
terrorist financing, accepted AMLC's membership
application in July 2005. Besides working through the
Egmont Group to enhance asset tracing on a multilateral
basis, the AMLC has entered into bilateral Memorandum of
Understanding with counterpart FIUs in Korea, Malaysia,
Indonesia, and Thailand, among others.

11. (SBU) There are currently 88 prosecutions underway
in the Philippine court system that involved AMLC
investigations or prosecutions, including 34 for money
laundering, 24 for civil forfeiture, and the rest
pertaining to freeze orders and bank inquiries. Although
some of these cases may conclude shortly, the Philippines
still has no conviction to date for money laundering
offenses. AMLC investigators, however, played a role in
a cooperative effort between U.S. and Philippine law
enforcement agencies that resulted in the successful
conviction of a high-ranking General before a military
court martial board. The Philippines must ensure that
prosecutions for money laundering offenses lead to
regular, timely, and well-publicized convictions to deter
criminal activity.

12. (SBU) Questions remain in the Philippine anti-money
laundering regime about whether financial institutions
comply fully with AMLA provisions. For example, the BSP
does not have a mechanism in place to ensure that the
financial community is adhering to the reporting
requirements. Banks in more distant parts of the
country, especially Mindanao where terrorist groups
operate more freely, may feel threatened and inhibited
from providing information about financial transactions
requested by AMLC. In addition, there is a concern that
issues identified by FATF regarding bank secrecy have not
been completely resolved. While bank secrecy provisions
to the BSP's supervisory functions were lifted in Section
11 of the AMLA, implementation appears to be incomplete.
Due to Philippine "privacy issues," examiners of the BSP
are not allowed to review documents held by covered
institutions in order to determine if the covered
institutions are complying with the reporting
requirement. They are only allowed to ask AMLC, as a
result of their examination, if an STR has been filed.
If AMLC determines one was not filed, then it has the
responsibility to make inquiries of the covered
institution. This process is slow and cumbersome; AMLC
is working with the BSP to find ways of streamlining the

13. (SBU) The Philippines is a founding member of the
Asia/Pacific Group on Money Laundering, a multilateral
organization dedicated to assisting countries in the Asia
Pacific region improve their capabilities to track and
seize assets and enhance regional efforts to combat money
laundering. In particular, the Philippines is a party to
the 1988 UN Drug Convention and the Convention Against
Illicit Traffic in Narcotic Drugs and Psychotropic
Substances. The GRP has signed and ratified all 12
international conventions and protocols related to
terrorism, including the UN Convention against
Transnational Organized Crime and the 1999 International
Convention for the Suppression of the Financing of
Terrorism. The Philippines and the United States have a
Mutual Legal Assistance Treaty that entered into force in
1996. AMLC has responded promptly to 120 requests for
assistance from the U.S. and other countries and was
commended by the United Kingdom for its assistance on a
case in 2004. In turn, AMLC has made 70 requests for
mutual assistance from foreign jurisdictions. Post is
unaware of any refusal on the part of the GRP to
cooperate with foreign governments or FIUs related to the
investigation of financial crimes.

14. (SBU) For several years, the GRP has realized the
need to enact and implement an Anti-Terrorism Law that,
among other things, would define and criminalize
terrorism and terrorist financing, and give military and
law enforcement entities greater tools to detect and
interdict terrorist activity. President Arroyo declared
in her State of the Nation address in June 2005 that
passage of such a law was one of her priorities for the
remainder of the year. The Philippine legislature took
steps to achieve that result in autumn 2005 in
consolidating bills and bringing them to the floor for
full consideration. The Senate tabled its version of an
Anti-Terrorism Bill (SB 2137) in October and the House
calendared its own bill (HB 4839) in November. The
Senate and House held hearings in late 2005; the bill
passed its second reading in the House in December with
the third and final reading expected in mid-January 2006.
The GRP remains optimistic that both houses will pass a
comprehensive law addressing terrorism in 2006. In the
absence of an Anti-Terrorism Law, the AMLC is able to
continue freezing funds and transactions identified with
or traced to designated terrorist organizations and/or
individuals upon request of the United Nations Security
Council, the U.S., and other foreign governments.

15. (SBU) Another important development in 2005 was the
AMLC's effectiveness in bringing the numerous foreign
exchange offices in the country under the money
laundering provisions. The Monetary Board issued a
decision in February 2005 defining the 15,000 exchange
houses as financial institutions and instituting a new
licensing system to bring them under the provisions of
the AMLA. Under this decision, all exchange dealers were
to receive training from the AMLC by July 2005 to obtain
licenses and ensure compliance with the Act. With so
many dealers and continued misunderstanding about the new
regulations, only 2500 exchange dealers were trained and
registered by the end of July. Training teams from the
AMLC have held over 1000 classes for dealers and bankers
throughout the country to implement this decision. By
the end of November, an estimated half of the foreign
exchange offices still in operation have received the
mandatory training and been registered. This requirement
reduced the number of foreign exchange dealers
dramatically, perhaps down to 7500, as less reputable
offices chose to close down rather than seek licensing.

16. (SBU) There are still several sectors operating
outside of AMLC control, under the AMLA as revised.
Although the AMLA specifically covers exchange houses,
insurance companies, and casinos, it does not cover
stockbrokers or accountants. Although covered
transactions for which AMLC solicits reports include
asset transfers, the law does not require direct
oversight of car dealers and sales of construction
equipment, which are emerging as creative ways to launder
money and avoid the reporting requirement. Although the
AMLC has the authority to request the chain of casinos
operated by the state-owned Philippine Amusement and
Gaming Corporation (PAGCOR) to submit covered and
suspicious transaction reports, it has not yet done so.
There is increasing recognition that the nearly 20
casinos nationwide offer abundant opportunity for money
laundering, especially with many of these casinos
catering to international clientele arriving on charter
flights from around Asia. Several of these gambling
facilities are located near small provincial
international airports that may have less rigid
enforcement procedures and standards for cash smuggling.
PAGCOR is the sole franchisee in the country for all
games of chance, including lotteries conducted through
cell phones. At present, there are no offshore casinos
or internet gaming sites. The U.S. Treasury Department
is arranging the visit of a team with expertise in Las
Vegas to conduct a series of workshops with GRP officials
in February 2006 on money laundering in casinos.
17. (SBU) Despite the efforts of the GRP authorities to
publicize regulations and enforce penalties, cash
smuggling remains a major concern for the Philippines.
Although there is no limit on the amount of foreign
currency an individual or entity can bring into or take
out of the country, any amount in excess of $10,000
equivalent must be declared upon arrival or departure.
Based on the amount of foreign currency exchanged and
expended, there is systematic abuse of the currency
declaration requirements and a large amount of unreported
cash entering the Philippines. A training seminar that
the U.S. Departments of State and Homeland Security plan
to conduct jointly in Manila in late January 2006 is
intended further to raise awareness about the problem of
bulk cash smuggling and assist law enforcement and
finance officers investigate and address the problem.

18. (SBU) The problem of cash smuggling is exacerbated
by the large volume of foreign currency remitted to the
Philippines by Overseas Filipino Workers (OFW). The
amount of remitted funds grew by 25% during the first ten
months of 2005, and should exceed $10 billion for the
year, equal to 11% of GDP. The BSP estimates that an
additional $2-3 billion is remitted outside the formal
banking system. Most of these funds are brought in
person by OFWs or by designated individuals on their
return home and not through any alternative remittance
system. Since most of these funds enter the country in
smaller quantities than $10,000, there is no declaration
requirement and the amounts are difficult to calculate.
The GRP encourages local banks to set up offices in
remitting countries and facilitate fund remittances,
especially in the U.S., to help reduce the expense of
remitting funds.

19. (SBU) The Philippines also has over 5000 non-
government organizations (NGOs) that do not fall under
the requirements of the AMLA. Charitable and non-profit
entities are not required to make covered or suspicious
transaction reports. The SEC provides limited regulatory
control over the registration and operation of NGOs.
These entities are rarely held accountable for failure to
provide year-end reports of their activities, and there
is no consistent accounting and verification of their
financial records. Because of their ability to
circumvent the usual documentation and reporting
requirements imposed on banks for financial transfers,
NGOs could be used as conduits for terrorist financing
without detection. The AMLC is aware of the problem and
is working to bring charitable and not-for-profit
entities under the interpretation of the amended
implementing regulations for covered institutions.

20. (SBU) The GRP has not ensured sufficient funding to
expand and enhance human resources applied to combat
money laundering and terrorist financing. The GRP's
budget request for 2006 slashed funds for AMLC overhead
and operations from 24 million pesos ($450,000) to just
10 million pesos ($200,000). This will cut AMLC's
funding for training, travel, and utilities such as phone
and electricity. Without sufficient funding, AMLC will
be unable to equip and train law enforcement and
regulatory personnel properly. As AMLC seeks to expand
its workforce to take on new projects, its limited
resources will prevent building capacity for better
oversight and investigation.

21. (SBU) Through the Special Economic Zone Act, the
Philippine Economic Zone Authority (PEZA) oversees and
manages most of the country's special economic zones,
also referred to as ecozones. These ecozones may allow
goods and raw materials to be unloaded for immediate
transshipment, or stored, sorted, packed, refined, or
manufactured for later export without being subject to
import taxes. PEZA currently oversees 246 registered
ecozones located throughout the Philippines - 134 private
and public export processing zones, 96 information
technology parks, and 16 tourism zones.

22. (SBU) In addition, there are special economic zones
located inside the former U.S. military bases in the
Philippines, notably the Subic Bay Freeport (SBF), the
Clark Special Economic Zone (CSEZ), and Camp John Hay in
Baguio. These ecozones are independent of PEZA, subject
to legislation under the Bases Conversion Development
Authority (BCDA), and managed as separate customs
territories. The Subic Bay Metropolitan Authority (SBMA)
is the operational arm of the Philippine Government in
developing the Subic Bay Freeport while the Clark
Development Corporation manages the CSEZ. There are two
other ecozones administered outside the jurisdication of
PEZA: the Cagayan Economic Zone in northern Mindanao and
the Zamboanga Freeport in southwest Mindanao. Each
authority is responsible for ensuring that all business
entities inside its ecozone abide by the regulations
governing its establishment and operation.

23. (SBU) To register and locate in an ecozone, a
company must meet stringent standards and submit
substantial documentation to prove it is a legitimate
business entity. Once all the application forms are
provided and other requirements met, the company is
screened and evaluated by the respective zone authority.
When the evaluation is concluded and the registration
application is endorsed, the authority's Board of
Directors decides whether the company is entitled to
locate in an ecozone. Individuals working in an ecozone
enterprise must obtain and carry proper identification
cards at all times.

24. (SBU) Individual entities in the ecozones and the
governing authorities are not covered under the AMLA.
However, financial exchanges within the ecozone going
through the local banking system would be captured in
that institution's transaction reports to the AMLC.
Smuggling is rampant in the Philippines. Although the
ecozone authorities are generally on the lookout for
smuggled goods, there is widespread concern that many of
the goods entering the country illegally or undetected
originally arrive at one of the ecozones adjacent to a
seaport. Many of these goods are then sold at black
markets in the country. Authorities require the
enterprises located in their ecozones to submit monthly
and quarterly reports on their sales and production. The
respective ecozone authority that would have jurisdiction
over them investigates companies who have questionable
operations and who may be engaged in suspicious

End Text.


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