The Bangko Sentral ng Pilipinas (BSP) wants its supervised financial institutions to set down the policy on the filing of legal cases against erring personnel to curb the incidence of misbehaving directors, officers and employees.

In a proposed circular, the BSP laid down what to do in terms of policy and guidelines such as to require both banks and non-banks to have a board-approved policy “governing the process and criteria to determine when to file cases against erring personnel, including dismissed directors, officers and employees.”

The BSP said this should “reinforce measures, including filing of legal cases, to deter misconduct and promote discipline in the BSFIs (BSP-supervised financial institutions) for the protection of the depositors and other financial consumers.”

The draft circular basically amended the following: risk identification and assessment under the operational risk management framework; as well as the recruitment and selection process and separation from service under the management of human resource-related risk.

The BSP said one of the major sources of operational risk is “people risk”. It said “banks shall embed in their enterprise-wide risk management framework measures to identify, measure, monitor, and control human resource related risks” and to ensure adequate policies, risk management and control measures.

On the filing of legal cases, BSFIs’ board of directors will establish the process, procedures, guidelines and criteria, which will be “aligned with the overall framework for managing human resource-related risks, to determine when to file administrative, civil and/or criminal case against erring or dismissed personnel.”

The following will also be considered in the decision-making process: nature and duration of the crime, infraction or offense committed; gravity or severity of the offense; amount involved; possibility of recovery or loss; presence of aggravating and mitigating circumstances; administrative, civil and/or criminal liabilities arising from the situation; costs of litigation; availability and strength of evidence; and potential risks that the BSFI, including its stockholders, directors and officers, may be exposed to.

The BSP also noted that the policy “must clearly indicate the decision-making process and approving authorities for the filing of administrative, civil and/or criminal cases.”

“This can be defined based on thresholds, aligned with the BSFI’s legal risk appetite, in graduated scale in terms of the amount and position of personnel involved, with a stricter application for those personnel holding fiduciary functions,” said the BSP.

In 2021 and 2022, the BSP imposed stricter rules under its Know Your Employees (KYE) guidelines to improve how BSFIs screen new hires and prevent any acts of fraud in the future. Pre-employment background screening includes background checking, verification of character references, psychological evaluation, past employment, credentials and professional qualification, among others.

The BSP has increased its watchlist file which is its dreaded blackbook of erring directors, officers and employees. This was a continuous process and the material information data base, previously called derogatory information file (DIF), are regularly updated.

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.

In 2022, the DIF has more than 8,000 names. There are estimates that as of end-2023, there are more than 10,000.

Meanwhile, 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 also 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.