SECRECY OF BANK DEPOSITS

As reported by Maria Luz B. Lite

For Banking Laws 2E

I. Historical Background

The Bank Secrecy Law was passed in September 1955, exactly ten years after the end of Second World War. The war had devastated the economy and recovery was just beginning. During this time, majority of the Filipinos were engaged in agriculture and thus the population was concentrated in the rural areas. Because of neglect and widespread illiteracy, farmer income grew rather slowly.

Massive poverty, in turn, fermented social discontent and unrest. With considerable peasant support, the Hukbalahap (Huks), the military arm of the Partido Komunisla ng Pilipinas threatened to topple the young Philippine Republic. To finance the campaign against the Huks and to build rural infrastructures, the Magsaysay government issued bonds.

Incidentally, the issuance of the bonds coincided with the passage of the Bank Secrecy Law. In fact, House Bill No. 3977, the forerunner of the Bank Secrecy Law, lumped the bond issuance and the bank secrecy provisions together. During that time, the Philippine banking system was still at its infancy.

There were only five Filipino-owned banks operating at that time, most of them founded during the period 1950-55. These banks catered to the needs of the booming Philippine industry and were urban in orientation. During the fifties, the government embarked on the Import Substitution Program. Abetted by the slapping of exorbitant tariffs on imported goods and by the restriction of imports through quotas, the elite began investing in industries.

To finance such investments, they borrowed from the banks, and, from then on, the banking industry gradually prospered. The Philippine capital markets were not fully developed then. In order to expand the capital markets and ultimately to generate economic growth, the House and the Senate passed House Bill No. 397718 and Senate Bill No. 351, respectively. Both bills intended to generate savings.

Banks and other credit institutions have been established by the government to expand the credit facilities in the country, and to private enterprise to establish banks and other credit institutions, but all these steps have not solved the problem of providing adequate capital to propel more speedily our economic development.

In both Houses, the lawmakers cited hoarding and capital flight as reasons for the passage of the Bank Secrecy Law. Money, silver and gold bullions is being smuggled abroad, and many people do not deposit their money in banks or invest in bonds for fear that the tax collection agencies might make inquiries about their bonds and deposits for purpose of taxation.

Bank accounts, by nature, are private and confidential. Individuals and firms want secrecy for their accounts. Moreover, protecting the identity of the account holders will make them less vulnerable to kidnapping and robbery. Finally, the law protects depositors' accounts from the scrutiny of the Bureau of Internal Revenue because without a court order, bank accounts cannot be used as evidence against tax evaders. The penalties imposed by the Bank Secrecy Law also deter outsider intrusion. The stringent protection of the identity of the account holders has indeed made bank deposits attract savers. By 1963, a quarter of public funds are deposited in commercial banks. Such meteoric rise attracted depositors.

Negative effects of the law were noted in its implementation.

Accordingly, the bankers are the greatest gainers of the Bank Secrecy Law. Abetted by the porous legal system, they can [and many of them did] plunder the depositor's hard earned money. The law makes prosecution and conviction of errant bankers difficult if not impossible. Moreover, the legal system tilts in favor of the bankers who can afford to hire competent but expensive lawyers. Conversely, the depositor's are the greatest losers. The law offers them no protection from the depredation by the bankers. Neither does it offer compensation to the legitimate victims of bank plunder.1

II. Significance of Privacy

The Civil Code provides that every person shall respect the dignity, personality, privacy and peace of mind of his neighbors and other persons. It punishes as actionable torts several acts of meddling and prying into the privacy of another. Public officers and employees or any private individual are also held for damages for any violation of the rights and liberties of another person

The revised penal code makes a crime of the violation of secrets by an officer, revelation of trade and industrial secrets, and trespass to dwelling. Invasion of privacy is also an offense in special laws like Anti-Wiretapping and Intellectual Property Code. It is in line with this premises that Act 1405 was promulgated

III. Full text of the Act

REPUBLIC ACT No. 1405

AN ACT PROHIBITING DISCLOSURE OF OR INQUIRY INTO, DEPOSITS WITH ANY BANKING INSTITUTION AND PROVIDING PENALTY THEREFOR.

Section 1. It is hereby declared to be the policy of the Government to give encouragement to the people to deposit their money in banking institutions and to discourage private hoarding so that the same may be properly utilized by banks in authorized loans to assist in the economic development of the country.

Section 2. 1 All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or 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.

Section 3. It shall be unlawful for any official or employee of a banking institution to disclose to any person other than those mentioned in Section two hereof any information concerning said deposits.

Section 4. All Acts or parts of Acts, Special Charters, Executive Orders, Rules and Regulations which are inconsistent with the provisions of this Act are hereby repealed.

Section 5. Any violation of this law will subject offender upon conviction, to an imprisonment of not more than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court.

Section 6. This Act shall take effect upon its approval.

1 Historical Background is lifted from different researches as published in the Philippine Law Journal entitled BANK SECRECY LAW: A HISTORICAL AND ECONOMIC ANALYSIS by Franz David Ong Lim

Approved: September 9, 1955

Footnote

1 This Section and Section 3 were both amended by PD No. 1792 issued January 16, 1981, PD 1792 was expressly repealed by Sec 135 of R.A. No. 7653, approved June 14, 1993. The original sections 2 and 3 of R.A. No.1405 are hereby reproduced for reference, as follows; "Sec 2 All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written per-mission of the depositor, or 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," "Sec. 3. It shall be unlawful for any official or employee of a banking institution to disclose to any person other than those mentioned in Section two hereof any information concerning said deposits."

IV. Purposes

The Secrecy of Bank Deposits Act has the following purposes:

1. To encourage people to deposit their money in banking institutions; and2. To discourage hoarding of money2

V. Covered Deposits

All deposits of whatever nature with banks or banking institutions in the Philippines including investment bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are considered as absolutely confidential in nature and may not be examined, inquired or looked into by any person, government official, bureau or office.

Trust accounts are also included. The rationale on the inclusion of trust accounts is discussed by the Supreme Court in the case of Ejercito vs Sandiganbayan3 where it ruled the money deposited in the trust account was intended not merely to remain with the bank but to be invested elsewhere. That to hold that this account is not protected by R.A 1405 would encourage private hoarding of funds that could otherwise be invested by banks in other ventures, which is contrary to the policy behind the law.

VI. Exceptions to Secrecy of Deposits

1. Upon written permission of the depositor or investor*2. In cases of impeachment;*3. Upon order of a competent court in cases of bribery of dereliction of duty of public officials;*

2 The same may be properly utilized by banks in authorized loans to assist development in the country3 509 SCRA 190, November 30, 2006

4. Upon order of a competent court in cases where the money deposited or invested is the subject matter of the litigation;*

5. Upon order of a competent court or tribunal in cases involving unexplained wealth under the Anti-Graft and Corrupt Practices Act (R.A. No. 3019);

6. Upon inquiry by the Commissioner of Internal Revenue for the purpose of determining the net estate of a deceased depositor4

7. Upon order of a competent court or in proper cases where there is probable cause of money laundering5;

8. Disclosure to the Treasurer of the Philippines for dormant deposits for at least ten (10) years under the Unclaimed Balances Act6;

9. Upon order of the Court of Appeals when there is a probable cause under the Human Security Act;

10. Inquiry or examination by the PDIC and/BSP of deposit accounts and all information related thereto in case there is a finding of unsafe or unsound banking practice.7

VII. OTHER LAWS GOVERNING SECRECY OF BANK DEPOSITS

Republic Act No. 8367 (An Act Providing For The Regulation Of the Organization And Operation Of Non-Stock Savings and Loan Associations)

Republic Act No. 6426 (Foreign Currency Deposit Act of the Philippines) 8 which is Applicable to Filipino and foreign nationals holding foreign currency accounts; where the only an exception provided is upon the written permission of the depositors.

Republic Act 6848 (An Act Providing for the 1989 Charter of the Al-Amanah Islamic Investment Bank of the Philippines)9. Exceptions provided under this law are; (1) inspection by the bank’s auditor; (2) upon written permission by the depositor; (3) in cases where the money deposited or the transactions concerned is the subject of the court order

Section 55 of the General Banking Law complements the Law on Secrecy of Bank deposits. However, it allows disclosure of information upon order of a court of competent jurisdiction without reference as to the type of cases involved

VII. Examination by the Ombudsman

Among the powers vested upon the Ombudsman is to examine and have access to bank records in lieu of their power to administer oaths, issue subpoena and subpoena ducess tecum and take testimony in any investigation or inquiry.10

4 Section 6(f), National Internal Revenue Code

5 Section 11, Anti-Money Laundering Act of 20016 Section 2, Act No 39367 Section 8, par. 8, R.A. No. 3591 as amended by R.A. 9576 effective June 1, 20098 Covers foreign currency deposits, except Islamic Banks9 Covers confidentiality of deposits in Islamic Banks. This law provides a separate set of exceptions than Act 1405, which are: (1) inspection by the bank’s auditor, or (2) upon written permission of the depositor, or (3) in cases where the money deposited or the transaction concerned is the subject of a court order.

10 Sourced from Section 15 of R.A. No. 6770 .

The Supreme Court laid down the following restrictions in Marquez vs Desierto11:

1. There must be a pending case before a court of competent jurisdiction;2. The account must be clearly identified;3. The inspection must be limited to the subject matter of the pending case; 4. The bank personnel and account holder must be notified to be present during the inspection5. The inspection must be limited to the account identified

VIII. When Deposit is Subject Matter of Litigation

‘Subject matter of the litigation’ means the matter or thing with respect to which the controversy has arisen, or the thing in dispute.

Illustrative Case: where the bank inadvertently caused the transfer of the amount of $1, 000,000.00 instead of only $1,000.00, the court sanctioned the examination of the bank account because the money is the subject matter of the litigation.12

IX. Unexplained Wealth and Plunder

Unexplained wealth as described in Section 8 of Republic Act 3019

xxx a public official who has been found to have acquired during his incumbency, whether in his name or in the name of other persons , an amount of property and/or money manifestly out of proportion to his salary and to his other lawful income, the fact shall be a ground for dismissal or removal…xxx

The Supreme Court ruled that cases of unexplained wealth are similar to cases of bribery or dereliction of duty. It expresses the notion that a public office is a public trust and any person who enters upon its discharge does so with the full knowledge that his life, so far as relevant to his duty is open to public scrutiny.13

Plunder is where ny public officer who, by himself or in connivance with members of his family, relatives by affinity or consanguinity, business associates, subordinates or other persons, amasses, accumulates or acquires ill-gotten wealth through a combination or series of overt or criminal acts as described in Section 1(d) hereof in the aggregate amount or total value of at least Fifty million pesos (P50, 000,000.00)14

The exclusion of unexplained wealth from the rule on secrecy in as much as an inquiry is concerned extends to cases where such property is concealed by being held or recorded in the name of other person.15

X. In garnishment11 359 SCRA 772, June 27 200112 Mellon Bank, NA vs Magsino, 190 SCRA 633, 199013 PNB vs Gancayco, 122 Phil 50314 Section 2 [REPUBLIC ACT NO. 7080] AN ACT DEFINING AND PENALIZING THE CRIME OF PLUNDER15 Based on R.A No. 3019

Garnishment is a legal proceeding in which a plaintiff seeks the satisfaction of a debt obtained through a judgment where the court directs a third party in possession of the property of the defendant to make it available to satisfy the judgment.

Bank deposits may be garnished by judgment creditors under Rule 39 of the 1997 Rules of Civil Procedure.

Garnishment of bank deposits does not violate R.A. No. 1405. When an account is garnished, no real inquiry is made on the account and the disclosure of the deposit made by the bank is purely incidental.