The Philippines’ Financial Stink Bomb

Better get down, the nation’s second-largest bank is about to blow up

UNLESS some incredible deus ex machina intercedes, it seems increasingly likely that this jolly nation whose public concerns are limited to things like the fate of forgotten church bells or how many jaywalkers have been ticketed in the past few months will celebrate the Christmas season with a full-scale banking crisis. For a country whose banking industry is routinely judged as one of the soundest on the continent, if not the entire planet, one major fraud scandal every year resulting in losses counted in the tens of millions of dollars seems more than a little ironic. Last year’s RCBC money-laundering scandal was bad enough; this year’s Metrobank disaster will make RCBC look like a teenage girl getting busted for shoplifting by comparison.

As we now know – thanks largely to the Philippine Daily Inquirer, which broke the story last Friday – a certain Maria Victoria Lopez, a Vice President and head of Metrobank’s corporate management services division, embezzled at least P900 million and possibly as much as P2.5 billion from the bank in a scam dating back as far as 2012.

Lopez apparently created loans – two of them have been identified, with amounts totaling P850 million and P900 million, respectively – from a legitimate credit line of P25 billion for Universal Robina Corp. (URC), one of the bank’s biggest customers. Lopez then funneled the loan money into accounts created in URC’s name, from which she paid the interest on the loans (thereby making it appear as though URC was properly servicing its loans) and distributed money to other accounts, some apparently outside Metrobank, where she could withdraw the cash. According to the initial reports, many of the transactions were done in increments of P30 million pesos.

Lopez was caught when she attempted to withdraw P2.25 million from one of the spurious URC accounts via a manager’s check; bank employees apparently grew suspicious because the check was made out to an individual, which it shouldn’t have been if being drawn from that sort of corporate account.

The stench of this story is almost overwhelming.

Lopez now is in the custody of the National Bureau of Investigation (NBI) and faces a multitude of charges, but her arrest doesn’t even begin to answer all the questions about this particular case. Just asking those questions raises all sorts of disturbing implications about Metrobank and the state of the banking industry and regulation as a whole.

Lopez is the only one on the hook for the crime now, although from what little has been said publicly by NBI and BSP officials, there is at least an assumption that others were involved. Putting it that way is a gross understatement on the part of the authorities; the nature of the scam, if what has been publicly reported is correct, suggests an extensive conspiracy within the bank, as anyone with even a basic knowledge of banking operations and protocols would realize.

Although Lopez has been characterized as a high-ranking insider at Metrobank, the title “Vice President” is not all that impressive; Vice Presidents are a dime a dozen in large banks. Metrobank has 402 of them; Lopez’ rank as simply a “Vice President” meant she was five levels of authority below the bank’s president. That is significant, because it strongly suggests the amount of the loans she is known to have created probably exceeded her authorization ceiling. At each level of management, a limit is placed on how large a transaction that manager can authorize on his or her own. There are no universal rules on what those ceilings are, so it is still possible that at Metrobank a VP could authorize a P900 million loan, but common practice as described by managers at other local banks suggests otherwise.

The implication of that is there is a likelihood that there was at least one higher-ranking bank official (at Metrobank, a first vice president) involved in the scheme, albeit perhaps unwittingly.

Second, every transaction in a bank is subjected to some sort of post-transaction review by a different unit than the one originating the transaction, and this is especially true in the case of very large transactions like corporate loans. This is not just a matter of procedure or good banking practice, but a compliance issue – all banks have no choice but to do this, because it is a regulatory requirement. That implicates someone else within the bank as well; and in this instance, probably an entire department. Again, the involvement may have been unintentional; Lopez has been portrayed in the news reports as wielding a great deal of influence within the bank (she worked there for 30 years), and not one whose actions would ordinarily be questioned – an explanation that would be a little easier to swallow if she were not ‘only’ one of 109 vice presidents.

Third, it is standard procedure in every bank that transactions in excess of a certain amount require board approval; the common benchmark among Philippine banks is P100 million. Although there is not a specific rule on this and the amount may differ from bank to bank, the reactions from banking officials I asked about it ranged from “I find it hard to believe” to “no way in hell” the two big URC loans would escape Metrobank’s directors’ attention. The implication of this is that either there was some degree of complicity on the part of Metrobank’s board, or the conspirators were both sufficiently skilled and well-placed to be able to keep the activity from the board’s knowledge.

Fourth, there is the inconvenient little matter of reporting requirements to the Anti Money-Laundering Council (AMLC). Every transaction in excess of P500,000 involved in this scheme, from the loans, to their distribution to the “URC” accounts, to the transfers of money from those accounts to other accounts, to the withdrawal of the funds would have had to be reported to the AMLC.

That is the job of the AMLA compliance office in Metrobank (or any other bank), and because of the vast number of transactions reported to the AMLC daily, the AMLC largely relies on the banks’ compliance officers to flag suspicious transactions. But, the judgment of what is a suspicious transaction or not is ultimately up to the AMLC, and apparently not once in five years did any of the activity involving the spurious URC loan accounts catch the watchdogs’ attention.

There are two implications here: One is that Metrobank’s AMLA compliance unit may have been in on the scheme. The second and much less speculative implication is that just as in the RCBC case last year, the AMLC has been exposed as being virtually useless when it comes to detecting and stopping fraud and other financial crimes.

Attempt at a cover-up?

Finally, there is the troubling matter of the very obvious effort Metrobank – and perhaps even the BSP – has made to keep the scandal quiet, an effort that more than anything hints at much deeper trouble in Metrobank than anyone cares to admit.

The news of the crime didn’t become public until Friday, July 21, but Lopez was arrested on July 18 (the earlier reports said July 17), which was Tuesday. Presumably, for some period of time – perhaps days – before her arrest, Metrobank officials were aware that, at the very least, something highly irregular had occurred. Per BSP regulations, at that point, Metrobank should have reported it to the BSP; the bank apparently did not. If it had, it would certainly be in its and the central bank’s best interests to report to the public that it did, if only to reassure nervous clients and shareholders that it was on top of the situation as soon as it was discovered.

In addition, as a listed company, Metrobank (MBT) is required by both SEC and PSE rules to disclose to the market anything that could possibly materially affect its stock price – which the arrest of a vice president and department head on suspicion of fraud most certainly would. Yet the first disclosure to the PSE came in the form of a “clarification of news report” on Friday – three entire days after Lopez was arrested – only after the Inquirer broke the story.

It also may strike some observers as a bit odd that a scandal of this magnitude has seemed to attract very little attention from the local media, apart from creating a bit of a stir over the weekend, particularly in light of the extensive coverage given to last year’s RCBC case and recent banking troubles such as BPI’s “computer glitch” and the skimming attack on some of BDO’s ATM machines.

It may just be a case of the rapid atrophy of ambition and competence that seems to afflict the Philippine media these days, occupied as it is with covering the activities of an administration and society that neither grasps nor appreciates anything too complex. But the skeptic might wonder if some influence is being exerted to prevent too much attention to a bank whose management at this point appears to be either criminal or negligent, or both. Revealing further evidence that confirms that would be bad for business, after all, and might not look good for a central bank whose governor is barely a month into the job.

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