Not as advertised

Ben D. Kritz

Ben D. Kritz

IF there was an award for which case best epitomized the incredible ineptitude of the Aquino Administration—a cabal that has given us more than a few such cases to consider—the ongoing RCBC ‘money laundering’ scandal, in my opinion, would be a clear winner.

The entry and subsequent disappearance in the Philippines of nearly $81 million in funds stolen from the account of the central bank of Bangladesh at the Federal Reserve Bank of New York has exposed a consistent disconnect between the reputation the Philippines has in terms of its business and economic environment among external observers and people who are actually here.

To outside observers—in this particular case, the inter-government Financial Action Task Force (FATF) based in Paris—the Philippines is reasonably in line with global standards. It has an anti-money laundering law, and it has a dedicated institution (the Anti-Money Laundering Council) to carry out monitoring and enforcement of the law. Where the FATF has expressed concern is in terms of gaps on paper, such as the exemption from monitoring for casinos under the present anti-money laundering act, and all it takes for the Philippines to resolve that sort of concern is a promise to make the appropriate revisions.

It is only when a complaint is raised or some other disaster like the current scandal occurs that it becomes obvious how insufficient the global benchmarks are in terms of providing a realistic assessment. The present anti-money laundering structure is obviously as good as useless, because it completely failed to prevent the ‘laundering’—if that is even an appropriate way to describe it—of the Bangladesh Bank’s stolen funds. The law says all the right things, yet there is no capacity to enforce it effectively. According to AMLC executive director Julia Abad, the agency only has 28 personnel, only nine of whom are actual financial analysts, to examine the thousands of covered transactions reported each day.

As my friend and fellow columnist Dodo Dulay pointed out last week, it is ridiculous for the AMLC to suggest that the breakdown that made the current scandal possible are shortcomings in coverage of the current law when all the agency did was demonstrate it cannot even effectively manage the law in its present, limited form.

The AMLC is the most obvious example, but it is far from the only one. Investors routinely encounter selective enforcement of regulations, local regulations that contradict national ones, and wide variations from one place to another when it comes to process execution for registering, licensing, and monitoring businesses.

And contrary to what many people might assume, corruption is not the factor most to blame for these kinds of headaches (although it is indeed a factor in far too many cases), but rather simple ability. Agencies or local governments who have capable people often do not have the resources to equip them properly to carry out their mandates, or there are adequate materials and financial resources but a shortage of competent people to employ them correctly. Often, both problems coexist.

Whatever the situation, the consequences for businesses, particularly those attempting to enter the local environment from the outside, are the same: Additional costs, delays, and adjustments that could not have been anticipated from the rather generalized assessments—such as the FATF’s current judgment that the Philippines is not really a haven for money laundering.

In an interview over the weekend, the dean of INSEAD business school Ilian Mihov suggested that it was in fact the Philippines’ ‘unpredictability’ that discouraged investors, rather than a lack of incentives. Given the country’s obvious positive economic attributes, investors are going to take a look at the Philippines anyway, Mihov explained; incentives such as tax breaks are largely irrelevant. What they’re really looking for is “a good institutional environment,” one that is predictable enough to support longer-term planning on the part of the business. The implication of Dr. Mihov’s even bringing up the topic is, of course, that far too many investors find, some of them far too late, that the Philippines does not in fact have a good institutional environment.

Global assessments of the Philippines, the kind made by organizations such as the FATF, the International Labor Organization, or the World Bank, devote too much attention to form and not nearly enough to actual function. When smart investors do their due diligence, most of them are put off by the difference between reality and what was advertised; even those who find it manageable and still worthwhile realize that proceeding with investment plans bears an unavoidable risk that unexpected changes to the ‘institutional environment’ could occur later on.

There can be hardly any argument that a critical priority – and in a broad sense, perhaps even the most important priority – of the next Administration will be to improve institutional capacity, to simply focus on bringing the institutional environment to a level someone credible could actually call “good” with a straight face. That is a tough job, one that requires a great deal of hard work out of the public eye, and also requires not only a great deal of practical experience, but better-than-average leadership skills. Given the unsurprisingly shallow level of political discourse to this point in the campaign, whether or not the next Administration will be suitably equipped to carry it out is something we’re going to have to wait to learn.


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