9 November 2020
Philippines

Philippine SEC Adopts Risk-Based Rating System in Monitoring Compliance with AML/CFT Laws

With the issuance of Securities and Exchange Commission (“SEC”) Memorandum Circular No. 26 series of 2020, the SEC will adopt an Anti-Money Laundering and Combatting of Financing Terrorism (“AML/CFT”) Risk Rating System (“ARRS”) that will serve as a supervisory tool for the SEC to gauge a covered institution’s[1] compliance with AML/CFT rules and regulations. Corresponding enforcement actions will be imposed depending on the composite rating garnered by a particular covered institution.

As a supervising body, the SEC has the authority to conduct off-site and on-site examinations of covered institutions, which may include questionnaires, dedicated meetings, and examination of books and records. Under the ARRS, covered persons will be evaluated using an overall composite rating of “weak,” “needs improvement,” “satisfactory,” and “strong,” corresponding to the numerical scale of 1 to 4 and subject to the following enforcement actions:

Overall Risk Rating
Enforcement Action
4 and 3
No enforcement action required.
2 and 1
Submission to the Anti-Money Laundering Division of the Enforcement and Investor Protection Department (“AMLD-EIPD”) of a written action plan duly approved by the corporation’s board of directors aimed at correcting the noted inefficiency. The viability of the plan will be assessed and the covered institution’s performance monitored.
1
Prompt corrective action will be immediately required. The covered institution will be subjected to close monitoring and regular compliance audit by the AMLD-EIPD.

The risk assessment will be based on the following three major components of a covered institution’s framework and operations:

  • efficient board of directors and senior management oversight;
  • sound AML policies and procedures embodied in its Money Laundering and Terrorist Financing Prevention Program (“MTPP”) duly approved by the board of directors; and
  • effective implementation.

In addition, the SEC will consider the following factors in determining a covered institution’s risk profile:

  • value/size of assets or transactions – a larger value is generally considered as a higher risk;
  • complexity and diversity of products – a more diverse and complex product is generally considered as a higher risk;
  • customer profile – PEPs, clients with foreign business or interests, non-resident clients, high-net-worth individuals are generally considered as high risk customers;
  • frequency of international transactions (cross-border funds flow, transactions with off-shore centers, tax havens and high-risk jurisdictions);
  • distribution channels (deals directly with customers, uses the services of third parties or agents, to conduct customer due diligence process, non-face-to-face or the use of information and communication technology); and
  • record of compliance with relevant rules and regulations.

Non-compliance may result to imposition of a fine ranging from PHP 5,000 (approximately USD 104) [2] to PHP 2 million (approximately USD 41,667), issuance of a cease and desist order, suspension or revocation of the SEC license, or dissolution of the corporation and forfeiture of assets. Moreover, the penalties which may be imposed by the SEC shall be without prejudice to the imposition of other sanctions for violation of the Anti-Money Laundering Act, the Terrorist Financing Prevention and Suppression Act, their respective implementing rules and regulations, and other related issuances.

Implications for businesses in the Philippines

Existing AML/CFT rules require covered institutions to adopt an AML/CFT policy based on its conduct of an institutional risk assessment. The corporation’s board of directors is mandated to exercise active control in the implementation of institutional risk assessment and is thus ultimately responsible for the corporation’s compliance with AML/CFT laws. Thus, covered institutions should ensure compliance with AML/CFT laws to avoid being penalised. Compliance includes maintaining a detailed, up-to-date, and properly documented AML/CFT policy, board and senior management oversight, timely reporting and record keeping, and cooperation with the regulators.


If you have any questions or require any additional information, please contact Felix Sy or Aubbrey Lim of Insights Philippines Legal Advisors (a member of ZICO Law).

This alert is for general information only and is not a substitute for legal advice.

[1] The Circular applies to covered persons as enumerated under the Anti-Money Laundering Act and SEC Memorandum Circular No. 16, Series of 2018 or the 2018 AML/CFT Guidelines, which include among others:

  • banks, non-banks, quasi-banks, trust entities, foreign exchange dealers, pawnshops, money changers, remittance and transfer companies and other similar entities regulated by the Bangko Sentral ng Pilipinas;
  • insurance companies, pre-need companies, other entities regulated by the Insurance Commission;
  • securities dealers, brokers, salesmen, investment houses and other similar persons managing securities or rendering services as investment agent, advisor, or consultant;
  • mutual funds, close-end investment companies, common trust funds, and other similar persons;
  • financing companies and lending companies, both with more than 40% foreign participation in its voting stock or with paid-up capital of PHP 10 million or more; and
  • other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or property supervised or regulated by the SEC.

[2]  USD 1 = PHP 48