Rachel Brown is a research associate in Asia Studies at the Council on Foreign Relations.
In February, $81 million stolen from the central bank of Bangladesh’s account at the Federal Reserve Bank of New York was laundered through the Philippines. Most observers worried about the security of the institutions involved. But equally if not more important is the potential impact on overseas Filipino workers. Increased scrutiny of vulnerabilities in the Philippines’ anti-money laundering provisions could make it harder for the over ten million Filipinos working abroad to send remittances home, as has occurred in many other developing nations. Globally, the Philippines is the third-highest recipient of remittances, which compromised 10 percent of GDP in 2014. These funds help fuel domestic consumption, and anything that affects the cost or ease of sending money to the nation will have significant economic implications.
The Bangladesh Bank scandal highlights flaws in the Philippines’ current anti-money laundering regime. While the government strengthened regulations in 2013, highly secretive banking laws remain. Additionally, the 2001 Anti-Money Laundering Act does not cover the Philippines’ thriving casino industry, the destination of the pilfered funds.
The revelation of these flaws and the parties involved may taint the image of the firms Philippine workers use to send money home. Philippine Senate investigations found that PhilRem, a Filipino remittance company in the United Kingdom and United States, converted and transferred the money into the accounts of one casino tour operator at the Rizal Commercial Banking Corporation (RCBC). In theory, the Philippines’ Anti-Money Laundering Act encompasses businesses like PhilRem that send or receive funds from workers overseas. In practice, the funds are small and hard to track, and firms may misidentify themselves. (PhilRem originally listed as a land-transport company). PhilRem partners with major foreign banks such as Barclays and Lloyds to facilitate goods and cash transfers, but its involvement in the scandal could make banks wary of remittance firms’ capacity to monitor for suspicious transactions.
The scandal has also sparked concern that the Philippines will be blacklisted by the inter-governmental Financial Action Task Force on Money Laundering (FATF). The Philippines was on the FATF blacklist in the early 2000s. When the FATF previously considered sanctioning the Philippines, officials worried about the repercussions for remittances. Senator Serge Osmeña noted this March that if re-blacklisted, “We will be at a loss because our banks will not be able to transact with their counterparts in New York and London.” Sending money to a blacklisted nation may entail higher fees, delays, and even denial of service.
Even if the Philippines is not blacklisted, remitters could still face challenges. The experiences of other countries perceived as weak on money laundering reveal potential risks. After September 11, requirements to monitor stringently the paths and recipients of money – and penalties for not doing so – increased. Some foreign banks simply ended partner relations with firms in suspect nations, as there was little incentive to risk incurring fines given the small profits. These changes hit particularly hard in Somalia as by 2015, most major American, British, and Australian banks ceased remittance services. Remittances also dropped considerably in Guyana when the Caribbean Financial Action Task Force blacklisted it.
Already, Philippine firms feel the squeeze of heightened suspicion. In late March, the Cebu Daily News reported greater scrutiny of remittances sent through a Filipino company in Australia. Even prior to the scandal, nearly forty banks shut down accounts of Filipino remittance firms in sixteen nations. In early 2016, RCBC, the Bank of the Philippine Islands, and Philippine National Bank all lost relationships with correspondent banks in Italy. If more firms lose relationships with international partners, reduced competition could lead to higher fees.
Further closures or increased fees would also deal a blow to already weakening Philippine remittances. In July 2015, remittances grew at 5.9 percent their slowest rate in half a decade. Falling oil prices, in particular, have hurt remittances, roughly a third of which come from the Gulf.
So what are the prospects for reforms that might forestall such closures? Last Thursday, the Philippine Central Bank’s governor announced efforts to minimize the damage to remittances from foreign banks limiting risk exposure. An inter-agency assessment of terrorist financing and money laundering weaknesses is underway, and the scandal has also revived interest in a biometric national ID system to better track who ultimately receives remitted funds. There is no question that the Philippines’ genuine money laundering vulnerabilities necessitate closer supervision, but lasting changes will occur only after the next president’s inauguration. Until then, banks should avoid too hastily curtailing services, otherwise families of overseas workers may pay too high a price.