The unbanked and the undeclared banked

This Sunday we take on a tale of two extremes and how recent developments could soon cover them under one roof. On one end, there are the unbanked persons who are too poor to have monthly savings. On the other end, we have the undeclared bank money of those who have so much in excess that they hide it from the reach of law – especially tax laws.

Many among us may never fully relate with the unbanked, or appreciate the wisdom of putting loose change in a bank, if banking that small an amount is even practical or possible. That’s just fit for piggy banks then that are smashed open at the earliest opportunity of need. Or fit for the practice of cash bills saved inside bamboo tree trunks by our great grandparents. Because these small savings are within reach, they are not really cash saved, but rather cash on hand. Not unimaginable in real life are the common movie storylines about the drunkard husband getting the wife’s meager savings from her wallet, bag, or hiding place to buy alcohol or other vices.

Why bother, you may say, to save loose change? To put things in perspective, P20 saved can buy you two hours of games, surfing, or social media, even do business in an Internet cafe. A hundred pesos saved is a meal for four for a very modest meal of freshly cooked rice, instant noodles, and fish. For P50, one can get a haircut or a manicure.

For a wife with this story, for any person who is too shy to deposit loose change in a bank, or for anyone simply with inconvenient access to banks, especially in rural areas, mobile banking could be the solution.

One survey reveals that Pinoys would even prioritize cellphone load over food. With mobile banking, load budget can help savings as you only need to dial and press and your load is converted into savings.

The idea of e-wallet or mobile wallets is not new and could really work in a country like the Philippines where studies show that each Filipino household owns at least one to four mobile devices. Mobile banking in the market so far solves one important challenge for the unbanked – no minimum maintaining balance, and no need to dress up. Those who come in rugged in pang-harabas or semi-dirty slippers may feel out of place in the company of corporate-looking individuals in a bank, but not so when going to a partner pawnshop or convenience store. Banking in tingi seems to be the path to inclusive banking.

If those with meager cash can be encouraged by technology to do banking, those with abundant deposits from undeclared sources may be compelled to come clean or out in the open. The secrecy of bank deposits has, for generations, been a cherished haven. Our domestic law says that secrecy of bank deposits even from government officials is ensured to discourage hoarding of cash outside the system. If the money is in our local banks, it can be used for economic development.

The tide, however, of global policies and international practices pushed by the G20 (leading economies of the world) and the Organization of Economic Cooperation and Development (OECD) is to crack down on corporate tax evasion by exchanging information. Exchange of information is also present contractually in all tax treaties entered into by the Philippines.

Almost all countries in the world are in a position to cooperate with the exchange of information. The thing is, an executive branch of government can have its hands tied by domestic law. The Philippine bank secrecy law, for instance, only allows disclosure of bank information when the depositor allows it, or when the money in the bank is subject to litigation.

This law is the obstacle against compelling taxpayers to declare their interest income from their banks. If the law is amended to allow the Philippines to more effectively exchange information with their foreign counterparts, this would also mean that bank information can be secured even if not in relation to fraud examinations. I must admit that if bank accounts can only be looked into when there is prima facie evidence of fraud involving that depositor or that account, that may not be too helpful because the accounts can simply be credited to different names by the shrewd depositor.

Indicators of possible fraud that can be uncovered in an exchange of information are having a huge bank account in a country where the depositor has no business in, or domestically having bank accounts with balances disproportionate to the earnings of the declared business. As the Philippines could not remain to be the odd man out (even Switzerland’s and Singapore’s banking laws and policies do not allow for effective exchange of information), our banking secrecy law is expected to be amended.

How then do we protect the privacy of the innocents? That is always the relevant question. At least some privacy can be preserved for many, if implementation is based on materiality or thresholds. Small fishes anyway do not have big bank accounts and are not worth the trouble. The other thing is that if any information is required to be reported, it should not cause shame to the depositor, as in the case of the newly banked “unbanked” who may disclose an interest income of P3 (three pesos) from his total savings of P100.

The proposed amendment to our bank secrecy law may be necessary to keep the country on the path of being globally compliant. But legislators tread a sensitive nerve, and that power of access for the government should be kept in check. The privacy of the bank account for a person can be far more sacred than his own closet. If the lid on privacy will be lifted for tax reasons, the approach should be sensitive and minimalist to preserve the peace of those closets without skeletons in them.

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Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He also chairs the tax committee of the Management Association of the Philippines (MAP). Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.