Banks are hiring more qualified employees (Sabong News)

When a bank loses money because of fraud, and for the most part, it is fraud perpetrated by its own officials and employees, the hit on a bank’s reputation and decline in public trust is immediate. The Bangko Sentral ng Pilipinas’ (BSP) watchlist file, its dreaded blackbook of erring bankers, have increased after the BSP imposed stricter rules last year under its Know Your Employees (KYE) guidelines on how banks should screen new hires. “We expect financial institutions to screen their applicants against the BSP’s watchlist file internal information data base. But this should only be a part of, and not the only source of information, for pre-employment screening,” said BSP Governor Benjamin E. Diokno last Thursday, March 10. “The BSP watchlist of erring bank officials is a continuous process. Existing procedures are in place to ensure that the watchlist file and the material information data base, previously called derogatory information file (DIF), are updated and properly cleaned up,” he added. The former DIF, as the name implies, contains the list of individuals cited with adverse derogatory information but not yet disqualified from holding a director or officer position in any financial institution supervised by the BSP. Diokno did not disclose the number of persons in the BSP watchlist file since the list is confidential and for the internal use of the BSP only. He did say previously that the renamed DIF has more than 8,000 names. The BSP chief however said that the KYE is successful and essential in reducing the number of its watchlist file. “KYE is effective in weeding out unqualified bank personnel. The BSP supervised financial institutions (BSFIs) are required to adopt a risk-focused approach in their pre-employment background screening,” said Diokno. Pre-employment background screening includes background checking, verification of character references, psychological evaluation, past employment, credentials and professional qualification, among others. “This information is expected to enable the BSFIs to have sufficient knowledge of the applicant’s background and character, conflict of interest if any, and susceptibility to collussion, fraud or illegal activities,” said Diokno. In 2021, the BSP issued its KYE rules to weed out “unprincipled personnel” that could cause a BSFI reputational risks. The KYE rules instructs all BSFIs to adopt a risk-focused screening process based on the “sensitivities of certain positions” that requires “more stringent screening.” BSP wants BSFIs to have adequate understanding of an employee’s personal background, character, conflict of interest and propensity to commit fraud or irregularity, and to be able to identify “certain behaviors” that are red flags. The KYE principles should prevent losses due to frauds or irregularities arising from weak operational risk management, and it also promotes public confidence in the country’s banking system. Before the pandemic was declared in March 2020, the BSP issued new guidelines that allowed erring officials that have been banned from working as directors and officers to be delisted from the blackbook after five years “serving” as a watchlisted disqualified person. There are exceptions that could lead to an early delisting and reclassification if a case against a director or officer came out in his/her favor or “upon clearance by the appropriate body” such as judiciary, quasi-judicial bodies and domestic financial regulatory authorities, or similar agencies in foreign countries where the disqualified person has a derogatory record. The BSP has been enhancing the clean up procedures by establishing new criteria for placement in the DIF. The BSP also reviewed how it acquires information for the DIF, which are usually sourced from disclosures or official reports from banks, as well as BSP onsite examination findings. The BSP has two watchlist files, Disqualification File “A” for permanent disqualifications and File “B” for temporary watchlisted. A reclassification from “B” to “A” may be approved by the Monetary Board when the case that landed the erring banker in “B” has become final and executory. Last Thursday, Diokno in a press chat highlighted its most recent amended rules of streamlining and making easier the confirmation of BSFI officers’ appointments, and confirmation of the election or appointment of directors, trustees, and other BSFI officers now covers fewer select positions. Previously, all officers with a rank of senior vice-president (SVP) or higher were subject to BSP confirmation. The amendment limits this to big banks’ SVPs or higher, and heads of comptrollership or finance, lending, treasury, branch banking, and information technology, and who directly report to the president or CEO or equivalent rank. “Let me emphasize, however, that while we have relaxed the rules, the BSP continues to require BSFIs to have a sound corporate governance framework and to adopt a robust selection process for key members of senior management,” stressed Diokno. For other BSFIs, BSP confirmation is limited to directors or trustees, CEOs, presidents or their equivalent rank, heads of control functions, such as internal audit, risk management and compliance, and trust officers, regardless of rank. BSFIs and their key officers will continue to be monitored through offsite supervision and examination. The BSP also continues to have the authority to disqualify directors or officers under existing laws and regulations. BSP Circular No. 1136, signed by Diokno last February, also amended the confirmation of directors and officers’ biodata submission and rules on the interlocking directorships and officerships. The amendments will also apply to the BSP procedures on administrative cases involving directors and officers of BSFIs. Diokno said these changes complement BSP’s stricter policy on banks’ screening of its new hires and other human resource-related practices.