Banks warned on red flags in Ponzi schemes

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has directed banks to institutionalize red flag indicators to strengthen the industry’s capability to detect, prevent and mitigate risks arising from transactions related to illegal investment schemes.

BSP Deputy Governor Chuchi Fonacier said BSP-supervised financial institutions (BSFIs) could be used to channel the funds amassed from illegal investment activities through deposit accounts of lead perpetuators, their associates and related entities.

“It is therefore imperative that BSFIs adopt robust risk system to identify, detect, prevent and mitigate risks arising from these illegal activities. This is anchored on having a strong governance framework, adequate policies and effective controls, among others,” Fonacier said.

The regulator issued Memorandum 2019-028 directing BSFIs to adopt preventive measures relevant to illegal investment activities or schemes.

“This issuance intends to provide the BSFIs insights on relevant practices and common proactively red flag indicators that they should consider to strengthen their capability to detect, prevent and mitigate risks arising from transactions that relate to illegal investment activities,” Fonacier stated in the memorandum.

The Securities and Exchange Commission (SEC) as well as other supervisory authorities have identified illegal investment schemes including “Ponzi” schemes.

Fonacier said BSFIs should establish common red flag indicators related to activities of a “Ponzi” scheme such as frequent and significant cash deposits not aligned with customer’s business or financial profile, sudden spike in account activity, and several accounts where the account movements materially deviate from declared or known activities.

She said other indicators include newly established or registered businesses with unusually high volume of transactions, high volume of check issuance or clearing transactions from a single account, and unusual increase in transactions in branches located in areas where the identified illegal investment scheme operates.

The regulator said banks should perform the basic preventive measure of conducting necessary customer due diligence including controls to establish and verify the customer’s identity and background, financial profile, source of funds and wealth. Additional information should be obtained and validation procedures should be performed under an enhanced due diligence.

Fonacier said banks should incorporate in the transaction monitoring process a surveillance mechanism to timely capture information, advisories, or news reports that identify personalities or entities involved in illegal investment schemes.

She said banks should examine the background and purpose of all complex, unusually large transactions, and unusual patterns of transactions, which have no apparent economic or legal purpose, and other transactions that may be considered unusual or suspicious

“In cases where a BSFI forms a suspicion of money laundering and associated unlawful activities, and reasonably believes that performing the customer due diligence process will tip-off the customer, the BSFI need not pursue the customer due diligence process, but should file a suspicious transaction report, closely monitor the account, and review the business relationship,” she said.