Imperfections in the financial sector

THE RECENT revelations of improper conduct at the R&L stockbroking company (now closed) is not reassuring. R&L places all the blame for misconduct on a lowly settlements clerk, Marlo Moron, who admits he has been engaged in malpractice since 2011.

Eight years of shenanigans!

Undetected by management, internal and external auditors!

Unsurprisingly the Securities and Exchange Commission (SEC) has issued a “stay order” which, if complied with, would preserve R&L’s company records.

I am concerned that government instrumentalities, designed in part to protect those who are clients of financial institutions, may not have the legislative powers necessary to afford the hoped-for consumer protection. If this applies to the SEC, then I hope it will say so and hopefully Congress will quickly pass legislation which will give SEC teeth to detect problems more quickly.

In the case of R&L, Capital Markets Integrity Corp (CMIC), the independent audit and surveillance arm of the Philippine Stock Exchange (PSE) is taking over R&L’s operations.

I hope CMIC carries out a vigorous audit of R&L. Was lowly settlement clerk Moron really the only one engaged in misconduct?

Financial institutions where malpractice has been exposed are overly fond of trotting out the “lone rogue” hypothesis. In some cases, such as the R&L debacle, it seems difficult to believe that Moron acted alone for such a long time.

I have never been convinced of RCBC’s story that Maia Deguito and her assistant were the sole miscreants in the 2016 $81 million Bangladesh Bank “cyberheist”. At the first Senate hearing to discuss the matter, RCBC’s legal officer pointed triumphantly at Deguito saying that the funds were sent via the SWIFT (Society for Interbank Financial Telecommunications) direct from Wall Street, New York to Jupiter Street, Makati where Deguito was branch manager. My understanding is that SWIFT transactions to Philippine banks arrive at the remittance center of the bank concerned. If the remittance center approves the funds, then they are transferred to the account holder’s account at the account holder’s branch.

In most banks, the branch manager does not have a great deal of authority. RCBC’s head office will have already approved the transaction when the funds reached the Jupiter Street branch. If this is the case, then RCBC’s characterization of Deguito as the lone rogue is not appropriate.

The disappointing aspect of the cyberheist is that the truth did not emerge. This is not lost on Bangladesh Bank which from time to time since 2016 has threatened to file a case against RCBC at the Southern District of New York. As far as I know, however, Bangladesh Bank has not implemented its threat.

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A relatively recent bright spot in dealing with imperfections of financial transactions is the banks’ appointment of customer care officers. Their role is to establish what happened when things go awry.

Some months ago, a family member used a debit card to buy goods purchased from Toys ‘R Us. The debit card efficiently withdrew money from our small BPI account but the system did not give a corresponding credit to the Toys ‘R Us account.

Yikes!

Where did our money go?

I emailed our colleague on these pages, Ignacio Bunye, an independent director of BPI, who immediately contacted BPI customer care manager, Ms. Luna who promptly established what happened and credited our account.

No harm done but it is regrettable that transactions involving third parties do not operate as smoothly as they should do.

I like debit cards because, unlike credit cards, they do not allow me to spend money I do not have.

Nevertheless the interbank systems on which retail purchases depend do not operate with sufficient reliability. When our debit card is used by the retailer, he sometimes receives the discourteous message: “DO NOT HONOR” when in fact my account has sufficient cleared funds to facilitate the transactions.

Embarrassing!

I hope Bangko Sentral ng Pilipinas (BSP) uses its authority to cause participating banks to implement glitch-free interbank systems.

I hope also that BSP has enough authority to ensure unfettered cooperation from the banks. Sometimes I wonder if banks are successful in keeping BSP at arms’ length.

Banks need to be forced to acquiesce to the legitimate authority of BSP.

My experience is that banks do not always comply with BSP and, for example, inappropriately invoke the 1955 Bank Secrecy Act (RA 1405) to avoid co-operating with BSP’s enquiries.

Shame!/PN