Introspective
Business World, 11 February 2012
The twists and turns of the impeachment telenovela have suddenly focused the lens of public scrutiny on an obscure corner of the country’s financial system — the laws on the secrecy of bank deposits. A remarkable fact the public has learned is that peso bank accounts and foreign exchange-denominated bank accounts are not created equal. For while there is no legal impediment to peering into the peso bank accounts in the course of an impeachment, dollar accounts are more a sacrosanct matter — they are now the subject of a restraining order from the Supreme Court, possibly even threatening to cause a constitutional crisis.
Defenders of the chief justice have found refuge in the ironclad provisions of RA 6426 (Section 8), which states that foreign-currency deposits are of an “absolutely confidential nature,” and, except with written permission of the depositor, can in no way “be examined, inquired or looked into by any person, government official, bureau or office whether judicial or administrative or legislative, or any other entity whether public or private.”
On the other hand, RA 1405 also says peso deposits are of “an absolutely confidential nature.” It does, however, make the explicit exception that these can be revealed “in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation.”
This difference in treatment is a Marcosian legacy (surprise!). It was Marcos who allowed local banks to accommodate foreign-exchange accounts to begin with, while it was his 1977 decree (PD 1246) that stipulated unconditional secrecy for such accounts.
Besides utmost secrecy, foreign-exchange deposits then were privileged by a complete exemption from taxes (and even today interest on dollar accounts is subject only to a 7.5% final withholding tax, versus 20% for peso deposits).
All of this was part of a Marcosian conceit that the Philippines could become a “financial center” like Switzerland, Liechtenstein, the Bahamas, or the Caymans (places the Marcoses were obviously familiar with). But, frankly speaking, with such rules in place, the dictator also effectively opened up the country to become a financial haven for tax evaders, corrupt dictators, arms smugglers, drug dealers and other beneficiaries of illegal funds — aside, of course, from the run-of-the-mill trying to diversify portfolios, reclusive heiresses, and trustees for discreet millionaires.
On paper, at least, this seemed to make sense. After all, the country at the time was scraping up all the dollars it could lay its hands on, so allowing foreign-currency deposits would have helped boost the sagging foreign exchange reserves.
And if even richer states like Switzerland and Liechtenstein could stand the stench of Nazi war-criminals, dictators, and arms dealers, how could the Philippines afford to thumb its nose at the business? Pecunia non olet, as the Romans used to say.
Alas, however, the Philippines never did become such a haven. How could it have, given the social unrest and political instability provoked by the Marcos regime itself? Indeed, ultimately even the Marcoses preferred to stash most of their wealth overseas. (Nice of you to visit us, Mr. Lewis and Mrs. Ryan!) As proof, the Philippines today is not among the 37 countries that have drawn the suspicious eye of the US as havens for their own tax-evading citizens.
In the meantime, the three-monkey model of Swiss banking (i.e., see no evil, hear no evil, speak no evil) has also come under fire and may be rapidly going out of fashion. Swiss banks (e.g., UBS, Julius Baer, and others) have recently agreed to pay billions of dollars in fines to the US to avoid prosecution for coddling tax evaders.
They’ve also had the same problem with the German government, which they have had to pay $2.8 billion in fines for failure to disclose undeclared assets of their German clients. More important, these banks have now had to reveal the names of thousands of US and German citizens behind their numbered accounts to the tax authorities, especially those with at least $1 million in deposits (so maybe $700,000 may still be safe).
The irony is that, if the Philippines had in fact become an important tax haven for foreigners, foreign governments would probably have pressured us by now to repeal our bank secrecy laws on foreign-currency deposits.
And if foreigners’ bank accounts had to be exposed for tax investigation purposes, consistency would have dictated that those of Filipinos should be treated the same way. But precisely because the country never did succeed in becoming a significant international financial center, no pressure has ever built up. Instead, the legislation originally designed to attract foreigners has been used by some rich, smart, and powerful Filipinos to squirrel away and conceal funds from their own government.
It is probably high-time that deposit secrecy laws were reformed. First of all, foreign exchange-denominated accounts ought be treated in the same way as peso accounts. The rationale for their unequal treatment has long been eroded. This means the confidentiality of dollar accounts should be clearly delimited in the same way as for domestic currency deposits.
Even the level of secrecy of peso accounts itself may be unduly strict for a modern democracy and open society. Existing qualifications to “absolute confidentiality” relate mostly to investigations into the conduct of public officials. By contrast, private citizens are vulnerable only in suspected cases of money laundering and investigations of bank fraud. A glaring omission is investigation relating to tax fraud or tax evasion. Other jurisdictions would regard such inquiries into private accounts — even those of ordinary citizens-as being fairly routine and justifiably undertaken simply upon order by competent courts. The Philippines preserves confidentiality even in these cases.
For such a relaxation of rules to work without harming business confidence and the economy, however, we require first of all, a tax bureaucracy with an established record of competence and professionalism; otherwise, their added discretion could merely be used for political harassment and simple extortion.
Second, and more important, since most requests to pry into private bank accounts are bound to land in the lap of the courts, we also need a Judiciary that can be trusted not to use its power to collude in extortive ventures, or to sell its decisions to favor partisan political or business interests. Oh, but I forget — this was the very reason for the impeachment to begin with.
