This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 06 MANILA 005927 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/ESC/TFS, INL AND EAP/MTS 
TREASURY FOR FINCEN 
JUSTICE FOR OIA AND AFMLS 
DEA FOR FO and OILS AND OFFICE OF DIVERSION CONTROL 
 
E.O. 12958: N/A 
TAGS: EFIN KTFN PTER SNAR KCRM KSEP RP
SUBJECT:  PHILIPPINES 2005 INSCR PART II: FINANCIAL 
CRIMES AND MONEY LAUNDERING 
 
REF:  STATE 210324 
 
Sensitive but Unclassified - Not for Internet - Protect 
Accordingly. 
 
¶1.  (U)  The following text is the proposed International 
Narcotics Control Strategy Report, Part II, Financial 
Crimes and Money Laundering, for the Philippines for 2005- 
¶2006.  Post used the questions in reftel as the basis for 
collecting information and assessing the current 
situation for the country report.  We will e-mail this 
text as a word document to INL to facilitate the review 
process. 
 
Begin Text: 
 
¶2.  (SBU)  The Philippines is a regional financial 
center, though it is not a major international offshore 
financial center like Hong Kong or Singapore.  There are 
nine Offshore Banking Units (OBUs) established since 
former President Marcos issued a decree in 1976 
authorizing their formation.  At present, OBUs account 
for less than two percent of total banking system assets 
in the country.  The Bangko Sentral ng Pilipinas (BSP), 
the Philippine Central Bank, which regulates onshore 
banking, exercises regulatory supervision over OBUs and 
requires them to meet reporting provisions and other 
banking rules and regulations.  In addition to 
registering with the Securities and Exchange Commission 
(SEC), financial institutions must obtain a secondary 
license from the BSP subject to relatively stringent 
standards that would make it difficult to establish shell 
companies in financial services of this nature.  For 
example, a financial institution operating an OBU must be 
physically present in the Philippines.  Anonymous 
directors and trustees are not allowed.  The SEC does not 
permit the issuance of bearer shares for banks and other 
companies. 
 
¶3.  (SBU)  In the past few years, the illegal drug trade 
in the Philippines has reportedly evolved into a billion- 
dollar industry.  The Philippines continues to experience 
an increase in foreign organized criminal activity from 
China, Hong Kong, and Taiwan.  Some insurgency groups 
operating in the Philippines reportedly fund their 
activities, in part, through the trafficking of narcotics 
and arms and engage in money laundering through alleged 
ties to organized crime.  The proceeds of corrupt 
activities by government officials are also a source of 
laundered funds.  Most of the narcotics trafficking 
transiting through the Philippines is exchanged using 
letters of credit.  There is little cash and negligible 
amounts of U.S. dollars used in the transactions, except 
for the small amounts of narcotics that make it all the 
way to the United States for street sale.  Drugs 
circulated within the Philippines are usually exchanged 
for local currency. 
 
¶4.  (SBU)  The Government of the Republic of the 
Philippines (GRP) established an anti-money laundering 
and counter-terrorist financing regime by passing 
Republic Act 9160 -- the Anti-Money Laundering Act (AMLA) 
of 2001.  The GRP enacted Implementing Rules and 
Regulations (IRR) for the AMLA in April 2002.  The AMLA 
criminalizes money laundering, an offense defined to 
include the conduct of activity involving the proceeds 
from unlawful activity in any one of 14 major categories 
of crimes, and imposes penalties that include a term of 
imprisonment of up to seven years. 
 
¶5.  (SBU)  The AMLA also established the Anti-Money 
Laundering Council (AMLC) as the country's financial 
intelligence unit (FIU).  The Council is composed of the 
Governor of the BSP as Chairman, and the Commissioner of 
the Insurance Commission and the Chairman of the 
Securities and Exchange Commission as Members.  The AMLC 
is supported by a Secretariat headed by an Executive 
Director who has a term of five years and must be a 
lawyer.  All the members of the Secretariat must have at 
least five years experience in the BSP, the SEC, or the 
Insurance Commission.  They all hold full-time permanent 
positions in the BSP upon their appointment.  By law, the 
AMLC Secretariat is an independent agency responsible for 
receiving, maintaining, analyzing, and evaluating covered 
and suspicious transactions, and providing advice and 
assistance to relevant authorities. 
 
¶6.  (SBU)  The AMLC's role goes well beyond traditional 
FIU responsibilities and includes the investigation and 
prosecution of money laundering.  AMLC has the ability to 
seize terrorist assets involved in money laundering on 
behalf of the Republic of the Philippines after a money 
laundering offense has been proven beyond a reasonable 
doubt.  In order to freeze assets allegedly connected to 
money laundering, the AMLC must establish probable cause 
that the funds relate to an offense enumerated in the 
Act, such as terrorism.  The Court of Appeals then may 
freeze the bank account for 20 days.  The AMLC may apply 
to extend a freeze order prior to its expiration.  The 
AMLC is required to obtain a court order to examine bank 
records for activities not listed in the Act.  Serious 
offenses listed in the AMLA that do not require a court 
order include kidnapping for ransom, narcotics 
trafficking, and terrorism-related crimes. 
 
¶7.  (SBU)  In March 2003, the GRP enacted amendments to 
the Anti-Money Laundering Act under Republic Act 9194 
that do the following: establishes the threshold amount 
for covered transactions (cash or other equivalent 
monetary instruments) at 500,000 pesos (approximately 
$9,000) within one (1) banking day; requires financial 
institutions to report suspicious transactions, 
regardless of amount; authorizes the BSP to examine any 
particular deposit or investment with any bank or non- 
bank institution in the course of a periodic or special 
BSP examination to ensure institutional compliance with 
the AMLA; and, permits the AMLC to examine particular 
deposits or investments opened or created before the 
AMLA.  The GRP has made impressive progress enhancing and 
implementing its amended AMLA.  Through the end of 
October 2005, the AMLC had received 1760 Suspicious 
Transaction Reports (STRs) involving 8144 suspicious 
transactions, and had received Covered Transaction 
Reports (CTRs) involving over forty-four million covered 
transactions.  After completing the first phase of its 
information technology upgrades in 2004, AMLC is in the 
process of acquiring software to implement link analysis 
and visualization to enhance its ability to produce 
information in graphic form from the CTRs and STRs filed 
electronically by regulated institutions.  AMLC has not 
yet defined the requirements for the data mining 
component of phase two that would allow it to most 
effectively search its data base and generating patterns 
and leads for investigation. 
 
¶8.  (SBU)  Over the last year, the Philippines continued 
to improve its ability to track, seize, and block 
terrorist assets.  Under the AMLA, the AMLC has authority 
to freeze funds and block financial transactions 
identified with or traced to designated terrorist 
organizations or individuals engaged in the financing of 
terrorism.  The GRP is quick to respond when new 
terrorist entities are added to the consolidated list of 
terrorist individuals and entities subject to sanctions 
pursuant to United Nations Security Council Resolution 
1267 and subsequent resolutions.  Upon notification that 
the UN 1267 Sanctions Committee has approved an 
additional name to the list, the AMLC takes immediate 
steps to inform the local banks and issue orders to 
freeze the assets in the banking system.  As institutions 
covered under the AMLA and subject to related BSP 
Circulars, local and foreign banks in the Philippines 
readily comply with the requests.  Under the AMLA and the 
Bank Secrecy Act, officers, employees, representatives, 
agents, consultants, and associates of financial 
institutions are exempt from civil or criminal 
prosecution for reporting covered transactions.  These 
institutions must maintain and store records of 
transactions for a period of five years, extending beyond 
the date of account or bank closure.  The AMLC has frozen 
funds at the request of the UN Security Council, the 
United States, and other foreign governments.  Through 
November 2005, the AMLC has frozen funds in excess of 366 
million Philippine pesos and an additional 2.7 million 
U.S. dollars. 
 
¶9.  (SBU)  The Philippines has no comprehensive 
legislation pertaining to civil and criminal forfeiture. 
Various government authorities, including the Bureau of 
Customs and the Philippine National Police, have the 
ability to temporarily seize property obtained during a 
criminal activity.  Money and property must be included 
in the indictment, however, to permit forfeiture. 
Because ownership is difficult to determine in these 
cases, assets are rarely included in the indictment and 
are rarely forfeited.  The country has no separate 
legislation covering civil and administrative forfeiture. 
Under the AMLA, the AMLC has the authority to seize 
assets involved in a money laundering operation that may 
end up as forfeited property after conviction, even if an 
otherwise legitimate business.  In December 2005, the 
Supreme Court issued a new criminal procedure rule 
covering civil forfeiture, asset preservation, and freeze 
orders.  The new rule provides a way to preserve assets 
prior to any forfeiture action and lists the procedures 
to be followed during the action.  The rules also contain 
clear directions to the AMLC and the Court of Appeals on 
the issuance of freeze orders for assets under 
investigation that had been confused by changes in the 
amendment to the AMLA in 2003. 
 
¶10.  (SBU)  In 2005, several multilateral organizations 
recognized the progress achieved by the GRP in improving 
its anti-money laundering regime and addressing former 
vulnerabilities.  The Financial Action Task Force (FATF), 
an international body formed by the G-7 industrialized 
countries and dedicated to detecting and preventing money 
laundering worldwide, removed the Philippines from its 
list of Non-Cooperating Countries and Territories (NCCT) 
in February 2005.  In addition, the Egmont Group, an 
international coalition of leading Financial Intelligence 
Units (FIUs) working to coordinate efforts to combat 
terrorist financing, accepted AMLC's membership 
application in July 2005.  Besides working through the 
Egmont Group to enhance asset tracing on a multilateral 
basis, the AMLC has entered into bilateral Memorandum of 
Understanding with counterpart FIUs in Korea, Malaysia, 
Indonesia, and Thailand, among others. 
 
¶11.  (SBU)  There are currently 88 prosecutions underway 
in the Philippine court system that involved AMLC 
investigations or prosecutions, including 34 for money 
laundering, 24 for civil forfeiture, and the rest 
pertaining to freeze orders and bank inquiries.  Although 
some of these cases may conclude shortly, the Philippines 
still has no conviction to date for money laundering 
offenses.  AMLC investigators, however, played a role in 
a cooperative effort between U.S. and Philippine law 
enforcement agencies that resulted in the successful 
conviction of a high-ranking General before a military 
court martial board.  The Philippines must ensure that 
prosecutions for money laundering offenses lead to 
regular, timely, and well-publicized convictions to deter 
criminal activity. 
 
¶12.  (SBU)  Questions remain in the Philippine anti-money 
laundering regime about whether financial institutions 
comply fully with AMLA provisions.  For example, the BSP 
does not have a mechanism in place to ensure that the 
financial community is adhering to the reporting 
requirements.  Banks in more distant parts of the 
country, especially Mindanao where terrorist groups 
operate more freely, may feel threatened and inhibited 
from providing information about financial transactions 
requested by AMLC.  In addition, there is a concern that 
issues identified by FATF regarding bank secrecy have not 
been completely resolved.  While bank secrecy provisions 
to the BSP's supervisory functions were lifted in Section 
11 of the AMLA, implementation appears to be incomplete. 
Due to Philippine "privacy issues," examiners of the BSP 
are not allowed to review documents held by covered 
institutions in order to determine if the covered 
institutions are complying with the reporting 
requirement.  They are only allowed to ask AMLC, as a 
result of their examination, if an STR has been filed. 
If AMLC determines one was not filed, then it has the 
responsibility to make inquiries of the covered 
institution.  This process is slow and cumbersome; AMLC 
is working with the BSP to find ways of streamlining the 
process. 
 
¶13.  (SBU)  The Philippines is a founding member of the 
Asia/Pacific Group on Money Laundering, a multilateral 
organization dedicated to assisting countries in the Asia 
Pacific region improve their capabilities to track and 
seize assets and enhance regional efforts to combat money 
laundering.  In particular, the Philippines is a party to 
the 1988 UN Drug Convention and the Convention Against 
Illicit Traffic in Narcotic Drugs and Psychotropic 
Substances.  The GRP has signed and ratified all 12 
international conventions and protocols related to 
terrorism, including the UN Convention against 
Transnational Organized Crime and the 1999 International 
Convention for the Suppression of the Financing of 
Terrorism.  The Philippines and the United States have a 
Mutual Legal Assistance Treaty that entered into force in 
¶1996.  AMLC has responded promptly to 120 requests for 
assistance from the U.S. and other countries and was 
commended by the United Kingdom for its assistance on a 
case in 2004.  In turn, AMLC has made 70 requests for 
mutual assistance from foreign jurisdictions.  Post is 
unaware of any refusal on the part of the GRP to 
cooperate with foreign governments or FIUs related to the 
investigation of financial crimes. 
 
¶14.  (SBU)  For several years, the GRP has realized the 
need to enact and implement an Anti-Terrorism Law that, 
among other things, would define and criminalize 
terrorism and terrorist financing, and give military and 
law enforcement entities greater tools to detect and 
interdict terrorist activity.  President Arroyo declared 
in her State of the Nation address in June 2005 that 
passage of such a law was one of her priorities for the 
remainder of the year.  The Philippine legislature took 
steps to achieve that result in autumn 2005 in 
consolidating bills and bringing them to the floor for 
full consideration.  The Senate tabled its version of an 
Anti-Terrorism Bill (SB 2137) in October and the House 
calendared its own bill (HB 4839) in November.  The 
Senate and House held hearings in late 2005; the bill 
passed its second reading in the House in December with 
the third and final reading expected in mid-January 2006. 
The GRP remains optimistic that both houses will pass a 
comprehensive law addressing terrorism in 2006.  In the 
absence of an Anti-Terrorism Law, the AMLC is able to 
continue freezing funds and transactions identified with 
or traced to designated terrorist organizations and/or 
individuals upon request of the United Nations Security 
Council, the U.S., and other foreign governments. 
 
¶15.  (SBU)  Another important development in 2005 was the 
AMLC's effectiveness in bringing the numerous foreign 
exchange offices in the country under the money 
laundering provisions.  The Monetary Board issued a 
decision in February 2005 defining the 15,000 exchange 
houses as financial institutions and instituting a new 
licensing system to bring them under the provisions of 
the AMLA.  Under this decision, all exchange dealers were 
to receive training from the AMLC by July 2005 to obtain 
licenses and ensure compliance with the Act.  With so 
many dealers and continued misunderstanding about the new 
regulations, only 2500 exchange dealers were trained and 
registered by the end of July.  Training teams from the 
AMLC have held over 1000 classes for dealers and bankers 
throughout the country to implement this decision.  By 
the end of November, an estimated half of the foreign 
exchange offices still in operation have received the 
mandatory training and been registered.  This requirement 
reduced the number of foreign exchange dealers 
dramatically, perhaps down to 7500, as less reputable 
offices chose to close down rather than seek licensing. 
 
¶16.  (SBU)  There are still several sectors operating 
outside of AMLC control, under the AMLA as revised. 
Although the AMLA specifically covers exchange houses, 
insurance companies, and casinos, it does not cover 
stockbrokers or accountants.  Although covered 
transactions for which AMLC solicits reports include 
asset transfers, the law does not require direct 
oversight of car dealers and sales of construction 
equipment, which are emerging as creative ways to launder 
money and avoid the reporting requirement.  Although the 
AMLC has the authority to request the chain of casinos 
operated by the state-owned Philippine Amusement and 
Gaming Corporation (PAGCOR) to submit covered and 
suspicious transaction reports, it has not yet done so. 
There is increasing recognition that the nearly 20 
casinos nationwide offer abundant opportunity for money 
laundering, especially with many of these casinos 
catering to international clientele arriving on charter 
flights from around Asia.  Several of these gambling 
facilities are located near small provincial 
international airports that may have less rigid 
enforcement procedures and standards for cash smuggling. 
PAGCOR is the sole franchisee in the country for all 
games of chance, including lotteries conducted through 
cell phones.  At present, there are no offshore casinos 
or internet gaming sites.  The U.S. Treasury Department 
is arranging the visit of a team with expertise in Las 
Vegas to conduct a series of workshops with GRP officials 
in February 2006 on money laundering in casinos. 
¶17.  (SBU)  Despite the efforts of the GRP authorities to 
publicize regulations and enforce penalties, cash 
smuggling remains a major concern for the Philippines. 
Although there is no limit on the amount of foreign 
currency an individual or entity can bring into or take 
out of the country, any amount in excess of $10,000 
equivalent must be declared upon arrival or departure. 
Based on the amount of foreign currency exchanged and 
expended, there is systematic abuse of the currency 
declaration requirements and a large amount of unreported 
cash entering the Philippines.  A training seminar that 
the U.S. Departments of State and Homeland Security plan 
to conduct jointly in Manila in late January 2006 is 
intended further to raise awareness about the problem of 
bulk cash smuggling and assist law enforcement and 
finance officers investigate and address the problem. 
 
¶18.  (SBU)  The problem of cash smuggling is exacerbated 
by the large volume of foreign currency remitted to the 
Philippines by Overseas Filipino Workers (OFW).  The 
amount of remitted funds grew by 25% during the first ten 
months of 2005, and should exceed $10 billion for the 
year, equal to 11% of GDP.  The BSP estimates that an 
additional $2-3 billion is remitted outside the formal 
banking system.  Most of these funds are brought in 
person by OFWs or by designated individuals on their 
return home and not through any alternative remittance 
system.  Since most of these funds enter the country in 
smaller quantities than $10,000, there is no declaration 
requirement and the amounts are difficult to calculate. 
The GRP encourages local banks to set up offices in 
remitting countries and facilitate fund remittances, 
especially in the U.S., to help reduce the expense of 
remitting funds. 
 
¶19.  (SBU)  The Philippines also has over 5000 non- 
government organizations (NGOs) that do not fall under 
the requirements of the AMLA.  Charitable and non-profit 
entities are not required to make covered or suspicious 
transaction reports.  The SEC provides limited regulatory 
control over the registration and operation of NGOs. 
These entities are rarely held accountable for failure to 
provide year-end reports of their activities, and there 
is no consistent accounting and verification of their 
financial records.  Because of their ability to 
circumvent the usual documentation and reporting 
requirements imposed on banks for financial transfers, 
NGOs could be used as conduits for terrorist financing 
without detection.  The AMLC is aware of the problem and 
is working to bring charitable and not-for-profit 
entities under the interpretation of the amended 
implementing regulations for covered institutions. 
 
¶20.  (SBU)  The GRP has not ensured sufficient funding to 
expand and enhance human resources applied to combat 
money laundering and terrorist financing.  The GRP's 
budget request for 2006 slashed funds for AMLC overhead 
and operations from 24 million pesos ($450,000) to just 
10 million pesos ($200,000).  This will cut AMLC's 
funding for training, travel, and utilities such as phone 
and electricity.  Without sufficient funding, AMLC will 
be unable to equip and train law enforcement and 
regulatory personnel properly.  As AMLC seeks to expand 
its workforce to take on new projects, its limited 
resources will prevent building capacity for better 
oversight and investigation. 
 
¶21.  (SBU)  Through the Special Economic Zone Act, the 
Philippine Economic Zone Authority (PEZA) oversees and 
manages most of the country's special economic zones, 
also referred to as ecozones.  These ecozones may allow 
goods and raw materials to be unloaded for immediate 
transshipment, or stored, sorted, packed, refined, or 
manufactured for later export without being subject to 
import taxes.  PEZA currently oversees 246 registered 
ecozones located throughout the Philippines - 134 private 
and public export processing zones, 96 information 
technology parks, and 16 tourism zones. 
 
¶22.  (SBU)  In addition, there are special economic zones 
located inside the former U.S. military bases in the 
Philippines, notably the Subic Bay Freeport (SBF), the 
Clark Special Economic Zone (CSEZ), and Camp John Hay in 
Baguio.  These ecozones are independent of PEZA, subject 
to legislation under the Bases Conversion Development 
Authority (BCDA), and managed as separate customs 
territories.  The Subic Bay Metropolitan Authority (SBMA) 
is the operational arm of the Philippine Government in 
developing the Subic Bay Freeport while the Clark 
Development Corporation manages the CSEZ.  There are two 
other ecozones administered outside the jurisdication of 
PEZA:  the Cagayan Economic Zone in northern Mindanao and 
the Zamboanga Freeport in southwest Mindanao.  Each 
authority is responsible for ensuring that all business 
entities inside its ecozone abide by the regulations 
governing its establishment and operation. 
 
¶23.  (SBU)  To register and locate in an ecozone, a 
company must meet stringent standards and submit 
substantial documentation to prove it is a legitimate 
business entity.  Once all the application forms are 
provided and other requirements met, the company is 
screened and evaluated by the respective zone authority. 
When the evaluation is concluded and the registration 
application is endorsed, the authority's Board of 
Directors decides whether the company is entitled to 
locate in an ecozone.  Individuals working in an ecozone 
enterprise must obtain and carry proper identification 
cards at all times. 
 
¶24.  (SBU)  Individual entities in the ecozones and the 
governing authorities are not covered under the AMLA. 
However, financial exchanges within the ecozone going 
through the local banking system would be captured in 
that institution's transaction reports to the AMLC. 
Smuggling is rampant in the Philippines.  Although the 
ecozone authorities are generally on the lookout for 
smuggled goods, there is widespread concern that many of 
the goods entering the country illegally or undetected 
originally arrive at one of the ecozones adjacent to a 
seaport.  Many of these goods are then sold at black 
markets in the country.  Authorities require the 
enterprises located in their ecozones to submit monthly 
and quarterly reports on their sales and production.  The 
respective ecozone authority that would have jurisdiction 
over them investigates companies who have questionable 
operations and who may be engaged in suspicious 
activities. 
 
End Text. 
 
Jones