SANCTIONS AGAINST UNSAFE AND UNSOUND BANKING PRACTICE

"SECTION 7 (a) Whenever upon examination by the Corporation into the condition of any insured bank, it shall be disclosed that an insured bank or its directors or agents have committed, are committing or about to commit unsafe or unsound practices in conducting the business of the bank, or have violated, are violating or about to violate, any provisions of any law or regulation to which the insured bank is subject, the Board of Directors shall submit the report of the examination to the Monetary Board to secure corrective action thereon. If no such corrective action, is taken by the Monetary Board within sixty (60) days from the submission of the report, the Board of Directors shall, motu propio, institute corrective action which it deems necessary. The Board of Directors may issue a cease and desist order and require the bank or its directors or agents concerned to correct practices, or violations within sixty (60) days. However, if the practice or violation is likely to cause insolvency or substantial dissipation of assets or earnings of the bank, or is likely to seriously weaken the condition of the bank or otherwise seriously prejudice the interest of its depositors and the Corporation, the period to take corrective action shall not be more than fifteen (15) days. The order may also include the imposition of fines provided in Section 16 (f) hereof. The Board of Directors shall duly inform the Monetary Board of the Central Bank of the Philippines of action it has taken with respect to such practice or violations. If the bank violates the cease and desist order or fails to correct the practices or violations as required within the period prescribed herein, the Corporation shall terminate the insured status of the bank the consequences of the termination of insured status of the bank on the Corporation, the bank and the depositors and their deposits shall be governed by Section 6 (h) hereof.

b) The actions and proceedings provided in the preceding subsection may be undertaken by the Corporation if, in its opinion, an insured bank or its directors or agents have violations, are violating or about to violate any provision of this Act or any order, rules or instruction issued by the Corporation or any written condition imposed by the Corporation or any written condition imposed by the corporation in connection with any transaction with or grant by the Corporation. (Amended by EO 890, 08 April 1983; R.A. 7400, 13 April 1992)."

To implement the aforequoted provisions of law, the Corporation has established procedures for the guidance of all member insured-banks or its directors or agents, which was approved by the Board of Directors, in its Resolution No. 94-11-118 dated Nov. 25, 1994.

Definition of Terms

1. The Corporation shall refer to the Philippine Deposit Insurance Corporation.

2. Cease and Desist Order (CDO) shall refer to the Order issued by PDIC, thru its Board of Directors, to a member insured bank or its directors or agents to correct (a) the unsafe or unsound practices in conducting the business of the bank (b) violated of any law or regulation to which the insured bank is subject or (c) violations of the provision of R.A. No. 3591, as amended or any order rule or instruction issued by the Corporation in connection with any transaction with or grant by the Corporation.

The object of the CDO is to protect depositors and PDIC against existing or potential risk exposure arising from said practices or violations.

3. Unsafe or Unsound Practices shall refer to any action or lack of action which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would result in abnormal risk of loss or damage to a bank, depositors and its shareholders or even the depletion of the Insurance Fund administered by PDIC.

4. Responsible Bank Directors/Officers/Employees shall refer to any bank officer/employee who shall be held accountable or answerable for any conduct or obligation in connection with bank transactions.

Procedures

1. When the PDIC's examination of a bank discloses that the bank or its directors or agents (a) have committed, are committing or about to commit unsafe or unsound practices in conducting the business of the bank, (b) have violated, are violating or about to violate any provisions of any law or regulation to which the bank is subject, or (c) if in the opinion of PDIC, the bank or its directors or agents have violated, are violating or about to violate any provision of the PDIC charter or any order, rule or instruction issued by the PDIC or any written condition imposed by PDIC or any written condition imposed by PDIC in connection with any transaction with or grant by PDIC, the bank or its directors or agents shall be given a reasonable period not exceeding 60 days within which to submit an action plan acceptable to PDIC to correct the practices. PDIC shall monitor the bank's compliance to its Action Plan in close coordination with BSP.

2. When the bank fails to submit such action plan within the prescribed period the examination findings shall be referred to the PDIC Board of Directors for appropriate action.

3. The PDIC Board shall in turn submit the report of the examination to the Monetary Board to secure corrective action and the Monetary Board shall undertake any and all necessary corrective action within sixty (60) days from submission of the report.

4. If no such corrective action is taken by the Monetary Board within sixty (60) days from the submission of the report or despite the MB's directive, no corrective action is taken by the bank or its directors or agents, the PDIC Board shall, motu propio, institute corrective action which it deems necessary. The PDIC Board of Directors may issue a cease and desist order and require the bank or its directors or agents concerned to correct practices or violations within sixty (60) days.

PDIC shall enlist BSP's comments on a proposed CDO within 48 hours before it is sent. A copy of the CDO transmitted to the bank shall be simultaneously furnished BSP.

5. The CDO will require the insured bank or its directors or agents to cease and desist from undertaking specific banking activities until defined affirmative actions are taken by the insured bank or its directors or agents concerned to correct practices and violations. Such affirmative actions must be undertaken within sixty (60) days from receipt of such CDO by a responsible bank director officer or employee. However, if in the discretion of the PDIC Board of Directors, the practice or violation is likely to cause insolvency or substantial, dissipation of assets or earnings of the bank, or is likely to seriously weaken the condition of the bank or otherwise seriously prejudice the interests of its depositors and the Corporation, the sixty (60) day period to take corrective action may be shortened to not less than fifteen (15) days. In this case, the bank will also be ordered to cease and desist from accepting deposits until the required affirmative actions are undertaken by the bank or by its stockholders.

6. The CDO shall clearly specify the following:

1. Unsafe or unsound practice or condition being sought to be corrected;

2. The person or persons or the banking units or offices to which the CDO is being directed;

3. The currencies and amounts involved, when applicable;

4. The time periods within which the specific actions or corrections should be taken; and

5. Verifiable, relevant action or actions being required.

7. A re-examination of the bank shall be undertaken by the PDIC after the end of the corrective period to verify the bank's compliance with the requirements of the CDO. Prior to the conduct of the re-examination, PDIC shall consult with BSP for the latest information/developments on the bank. If the PDIC Board determines, based on the examination report, and the consultations with BSP that there has been full compliance with the CDO, the Board may order the lifting of the CDO.

8. PDIC may allow an amendment of the CDO in the event PDIC determines that the insured bank has substantially complied with the terms and conditions of the CDO. The Bank may be deemed to have substantially complied with the CDO if all of the following conditions exist:

1. Policy management, and procedural changes have been adopted and implemented, which have clearly arrested or reversed the bank's unsafe or unsound condition and on the basis of which, the bank's condition and operations can be reasonably anticipated to improve, and key statutory prudential ratios are expected to be met in the current accounting period.

2. In case of bank insolvency, sufficient capital has been infused, to meet the BSP's minimum capitalization requirements; and,

3. The bank has complied with all the reportorial requirements of the CDO.

9. If some unsafe or unsound practices and conditions cannot reasonable be fully corrected within the prescribed period of the CDO, PDIC may also accept a Deed of Undertaking (DOU) from the bank's Board of Directors as substantial compliance if conditions 8b and 8c are met. The DOU must specify the remaining corrective actions which the bank will undertake within a time frame acceptable to PDIC.

10. Sanctions and Penalties for Non-Compliance with the CDO

a. Fines

1.1.	PDIC shall fine the directors, officers or employees responsible an amount from P500.00 to P1,000 a day for each type of violation, the imposition of which until shall be final and executory until reversed, modified of lifted by the PDIC Board of Directors; and
1.2	PDIC shall file the appropriate action in Court against the directors, officers or employees responsible for the violations.

2.1	Despite the CDO by PDIC, and after PDIC has given two (2) written warnings, the bank continues to solicit and accept deposits notwithstanding its insolvent position, prejudicing the interest of the depositors and the Deposit Insurance Fund;
2.2	After two written warnings from PDIC on the unsafe or unsound practices sought to be corrected, the bank continues to violate any provision of banking law or regulation which causes substantial dissipation of the bank's assets and earnings, seriously weakens the bank's condition and prejudices the interest of the depositors and the Corporation; and
2.3	Refusal or Failure to comply with the reportorial requirements of the CDO or the submission of false or patently misleading information despite three warnings from PDIC in accordance with the Regulatory Issuance No. 93-1 dated November 9, 1993.

b. Termination of Insured Status

Please be guided accordingly.

Adopted: 7 Dec. 1994

(SGD.) ERNEST LEUNG
President