Related party transactions (RPTs)

Atty. Jun De Zuñiga The acronym “DOSRI” is well-known in banking parlance. It stands for “directors, officers, stockholders and related interests” or those parties who are disqualified from borrowing from their bank in excess of their capital contributions and deposits. There are good reasons for this rule. These parties occupy positions of control and influence and are thus capable of insider transactions. Excessive DOSRI loans are indicative of abuse in the handling of depositors’ monies, disregard of regulations, haphazard processing, lack of due diligence and bad governance, which constitute threats to a bank’s stability. Outside of the DOSRI transactions, there is another category of transactions which regulators are now looking into because, while these transactions are generally allowable, these may also potentially lead to abuses that can be disadvantageous to the bank, its depositors and creditors. This category is referred to as “related party transactions” or “RPTs”. The term “related parties” has a broader coverage since, in addition to DOSRI, it includes family members outside of those considered as DOSRI, or any party that can exert direct/indirect control over the bank, or any other person or entity whose interests may pose potential conflict with the interest of the bank. The RPTs apply not only to loans but to a wide area of other transactions such as service arrangements and contracts, purchases and sales of assets, construction, lease, trading and procurement. As mentioned, RPTs are generally allowable but the overarching policy is that these should be done on an arm’s length basis and, to assure their soundness, much responsibility is devolved on a bank’s board of directors. Thus, under Bangko Sentral regulations (Circular No. 895) a bank’s board of directors is tasked to “have the overall responsibility in ensuring that transactions with related parties are handled in a sound and prudent manner, with integrity, and in compliance with applicable laws and regulations to protect the interest of depositors, creditors and other stakeholders”. The board is also called upon to observe good governance so that RPTs are conducted on an arm’s length basis with no stakeholder being unduly disadvantaged. Accordingly, the board is required to adopt an RPT policy that will define and identify the bank’s related parties which list shall be periodically reviewed and updated. The coverage of the RPT policy shall capture a broad spectrum of transactions, covering not only those that give rise to credit risks but also those that could pose material risks or potential abuse to the bank. The policy should also take into account the size, structure and risk profile of the related parties. Other features of the required RPT policy would include: the identification and prevention on conflict of interest situations; limits for individual and aggregate exposures; whistle blowing mechanisms which will encourage employees to report confidentially and, without risk of reprisal, illegal, unethical and questionable RPTs; restitution of losses and other remedies for abusive RPTs; and disclosure and regulatory reporting. On the supervision side and as provided in the Bangko Sentral Circular, the BSP reserves the right to deploy its range of supervisory tools to promote adherence to the requirements for RPTs and to have timely corrective actions and compliance with BSP directives. It is recognized that RPTs can also create financial, commercial and economic benefits both to the bank and its counterparties. It is essential, however, that those transactions are done prudently, above board and with no undue risks to them.

* The above comments are the personal views of the writer. His email address is jzuniga@bsp.gov.ph