5. Prohibited Transactions by Bank Directors, Officers, and Employees

Principles

The Monetary Board is granted the authority to regulate the amount of loans and credit accommodations extended to DOSRI. (Sec. 36)¹

The prohibition on DOSRI loans is intended as a protection against over-borrowing of bank funds by bank’s DOSRI, as such over-borrowings may lead to bank failures. (Soriano v. People, G.R. No. 162336, 1 February 2010)² Banks are not created for the benefit of their directors and officers, they cannot use the assets of the bank for their benefit. (Go v. BSP, G.R. No. 178429)³

General Prohibition: No director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of others:

• Borrow from such bank;
• Become a guarantor, endorser, or surety for loans from such bank to others; or
• Be an obligor or incur any contractual liability to the bank. (Sec. 36)

A stockholder to fall under this provision should own at least 1% of the subscribed capital of the bank. (MORB, Sec. 341[c])⁴

An indirect borrowing includes one that is made by a third party, but the DOSRI has a stake in the transaction; a case where the DOSRI acted for his own benefit, using the name of an unsuspecting person and using dummies to circumvent the requirements of the law. (Soriano v. People)

Related interests are persons or entities connected to a bank’s directors, officers, or stockholders whose borrowings are covered by the DOSRI rules; borrowing through another person may also constitute indirect borrowing. (Sec. 36; Soriano v. People)

• Spouse or relative within the first degree (including adoption)
• Partnership where the spouse or relative is a general partner
• Co-ownership of the property mortgaged to secure the loan or other credit accommodations
• Interlocking directorship or officership between the bank and the borrower
• Corporation at least 20% of the capital stock or equity is owned by DOS of the lending bank. (MORB, Sec. 341[e])⁵

Exception: The director or officer may do so, provided the following requirements are complied with:

• Written approval of the majority of all the directors of the bank, excluding the director borrowing and recorded in the books of the bank. (Sec. 36)
• The reportorial requirement where such approval should be entered upon the records of the corporation, and a copy of the entry be transmitted to the appropriate supervising department of the BSP. (Id.; Go v. BSP)
• Ceiling requirement. The limit on the amount of loans and credit accommodations that can be extended to the bank’s DOSRI is equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank, excluding the following:
• Secured by assets considered as non-risk by the Monetary Board;
• In the form of fringe benefits; or
• Extended by a cooperative bank to its cooperative shareholders. (Id.)
• Terms. Not less favorable to the bank than those offered to others. (Id.)
• Waiver of Secrecy. The lending bank must require a waiver of deposit secrecy when a director’s, officer’s, or stockholder’s borrowing, together with related interests, exceeds 5% of the bank’s capital and surplus or the maximum amount permitted by law, whichever is lower. (NCBA, Sec. 26)⁶

Requisites of a DOSRI loan:

When a DOSRI borrower must waive deposit secrecy under Section 26:

• Borrower is a director, officer or stockholder of a bank;
• He contracts any loan or financial accommodation;
• Loan or financial accommodation is from:
• his bank or
• a bank that is a subsidiary of a bank holding company of which both his bank and the lending bank are subsidiaries or
• a bank in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank; and
• The loan or financial accommodation of the director, officer or stockholder, singly or with that of his related interest, is in excess of 5% of the capital and surplus of the lending bank or in the maximum amount permitted by law (Sec. 36⁷), whichever is lower.

Waiver of Secrecy of Bank Deposits

If the director, officer, or stockholder, together with his related interest, contracts a loan or any form of financial accommodation from his bank or a bank covered by Sec. 26, in excess of five percent (5%) of the lending bank’s capital and surplus or the maximum amount permitted by law, whichever is lower, the lending bank shall require him to waive the secrecy of his deposits of whatever nature in all banks in the Philippines (RA 7653, Sec. 26)⁸

Offenses

Criminal. Failure to comply with each requirement is already a violation of DOSRI Rules (prosecution of 3 offenses), and violation of each requirement is an offense in itself. (Go v. BSP, G.R. No. 178429)⁹

The violation consists in the failure to observe and comply with procedural, reportorial, or ceiling requirements prescribed by law in the grant of a loan to a director, officer, stockholder and other related interests in the bank. The elements of abuse of confidence, deceit, fraud or false pretenses, and damage, which are essential to the prosecution for estafa, are not elements of a DOSRI violation. (Soriano vs BSP, G.R. No. 159517-18)¹⁰

Thus, a person may be held liable both for estafa through falsification of commercial documents and violation of the DOSRI provision of the GBL¹¹ for a single transaction.

Administrative: removal. After due notice to the board of directors of the bank, the office of any bank director or officer who violates the provisions of this Section may be declared vacant.