Regulatory Issuance No. 2011-02 was published by the Philippine Deposit Insurance Corporation (PDIC) last January to clarify which deposit accounts and transactions are excluded from the coverage of deposit insurance. It will be recalled that Congress passed Republic Act No. 9576 in 2009 which increased the maximum amount of deposits covered by PDIC insurance to P500,000. The same law excluded from the coverage of the PDIC insurance the following accounts or transactions: (i) investment products, such as bonds and securities, (ii) deposit accounts which are unfunded, or that are fictitious or fraudulent, (iii) deposit accounts constituting or emanating from unsafe or unsound banking practices, and (iv) deposits determined to be the proceeds of unlawful activity.
Under the PDIC regulation, the account is an investment product if no debtor-creditor relationship exists between the bank and the client, and instead, the relationship is that of trustor-trustee or principal-agent; the principal amount is not protected; the amount is not withdrawable on demand; and other analogous features. On the other hand, deposit accounts are unfunded or are fictitious or fraudulent if the bank did not receive the money alleged to be deposited, or when the deposit is simulated or feigned, as when it was made to appear that money was received by the bank but in fact was not, or when the bank employed means calculated to deceive.
Deposit accounts constituting or emanating from unsafe or unsound banking practices are those which are so determined by the PDIC, in consultation with the Bangko Sentral ng Pilipinas. Under the PDIC rules, if in the course of its examination of a bank, or upon complaint or report, the PDIC finds that the deposit emanates from unsafe or unsound banking practices, the PDIC may issue a Directive to Cease and Desist (DCD) enjoining the bank from offering or continuing to offer to the public such deposits and advising the bank and the public of the withdrawal of the insurance coverage over these types of deposits. The DCD shall be effective upon publication notwithstanding any request for reconsideration filed by the bank or a depositor.
Deposits that are determined to be the proceeds of unlawful activity, the payment of deposit insurance on which shall be deferred, are those which are the subject of any freeze order, civil forfeiture proceedings, money laundering, or any other case involving an unlawful activity, as enumerated in the Anti-Money Laundering Act of 2001. Deposits determined with finality by the courts to be proceeds of unlawful activity shall not be paid deposit insurance.
The public should be aware of these rules in the wake of recent bank closures. More often than not, the closure of banks is due to unsafe and unsound banking practices. One of the unsafe and unsound banking practices which the PDIC has identified is the offering of high interest rates when the bank has negative unimpaired capital and either a liquid assets to deposits ratio of less than 10% or an operating loss. High interest in the contemplation of the PDIC is interest over 50% higher than the prevailing market rate. The public should, thus, beware of such attractive yet risky offers.