BSP: Banco Filipino operated a 'pyramiding scam'

MANILA, Philippines - Troubled Banco Filipino Mortgage and Savings Bank was able to continue doing business in recent years, despite being insolvent, by operating a "Ponzi" scheme, the central bank said in a statement on Tuesday.

The Aguirre-led bank dangled interest rates of between 6% to 13.9% to attract depositors to its special savings products, according to the Bangko Sentral ng Pilipinas (BSP).

This was way higher than the 1.8% to 3.3% that other banks offered, the BSP said, citing a Report of Examination on the thrift bank.

The BSP said Banco Filipino was engaging in Ponzi or pyramiding scheme since the thrift bank was using these deposits "to pay the interest on old deposits and its day-to-day operations."

Thus, the BSP likened this to "a Ponzi or pyramiding scheme which are considered fraudulent investment operations."

“In no uncertain terms, Banco Filipino’s only way of operating is to continue engaging in a Ponzi scheme where withdrawals are funded by later deposits,” it said.

The BSP also noted that the bank engaged in a Ponzi scheme because it was "unable to generate enough income from normal banking operations."

The BSP statement on Tuesday followed its filing of a 170-page Comment/Opposition at the Court of Appeals.

Last week, the appellate court required the BSP and its policy making body, the Monetary Board, to explain the March 17 order to close Banco Filipino and place it under receivership.  

Lawyers enjoy, depositors suffer

Banco Filipino promised higher-than-usual yield to their depositors to pay fat fees to lawyers and consultants, the BSP said.

The regulator singled out lawyers Perfecto Yasay and Harry Roque.

"They were paid P245 million in 2010 alone. Of this, P131 million was paid from October to December last year," BSP said.

Yasay is a former chairman of the Securities and Exchange Commission and current vice chair and lawyer of Banco Filipino.

He has served as the spokesperson for the troubled bank when its nationwide branches closed in March 15 after withdrawals were not serviced and the banks' and depositors' checks  bounced.

He has repeatedly denied that Banco Filipino is insolvent. He said the blame should squarely be on the BSP since the latter did not extend it emergency loans and financial assistance.

On the other hand, Roque is a lawyer who handles various national issues including impeachment, reproductive health, freedom of information, and the Constitution.

On top of these handsome legal fees, the BSP said the bank's officers and consultants were paid "roughly P250 million in 2010."

These legal and consultancy fees even exceeded the average gross income of the bank from 2007 to 2009. The BSP noted that the bank was only earning P245 million during the period.

Owners' unpaid loans

The bank owners and officers had hefty unpaid loans, the BSP said.

The bank owners, including Albert "Bobby" Aguirre, the officers, and related interests -- collectively called DOSRI in banking parlance -- borrowed money and never paid them back.

The unpaid DOSRI loans reached P2.2 billion, the BSP said, adding that this amount exceeded limits.

"Banks are not created for the benefit of its directors or officers. Instead,  BF was being run to the “extreme prejudice of its depositors” since it was violating various laws and BSP regulations," it noted. 

The bank owners and officers also hid the true financial weakness of the thrift bank. They refused to submit regular financial statements for years, the regulator said.

The BSP also noted that the bank's board of directors failed to "hold any meeting" and "review the financials of the bank." 

Financial weakness

Banco Filipino's "ponzi" scheme put the depositors' money at risk, noted the BSP.

The higher-than-usual promised yield on deposits pushed interest expenses of the bank to P1.1 billion for the period 2007 to 2009, and the bank could not afford it. 

The BSP described the combination of the Ponzi scheme, fat fees and hefty unpaid loans as "an unending vicious cycle."

The result was staggering annual losses that averaged at P2.8 billion from 2007 to 2009.

It also manifested in withdrawals that could not be serviced and checks that bounced days before Banco Filipino itself shuttered its nationwide branches .

BSP maintained that the thrift bank is insolvent with liabilities exceeding its assets by P8.4 billion.
 
BSP said it recommended to the Monetary Board the closure of and placing Banco Filipino under PDIC receivership based on "these undisputed facts."

It also stressed that its actions were "the only course left in order to protect Banco Filipino’s depositors, creditors and the public in general."

Last week, the BSP and the bank officers filed criminal charges against each other.