GAPING LOOPHOLE: For 26 long years (from 1978 to 2003), the government lost billions of pesos annually to syndicates stealing and encashing checks payable to the Bureau of Internal Revenue and the Bureau of Customs — because nobody bothered to plug a procedural loophole.

Of all people, it was Bataan Gov. Enrique “Tet” Garcia Jr. — he has nothing to do directly with the problem — who came up with the simple solution that completely stopped the multibillion-peso thievery.

His solution was so simple that one wondered why it took the Finance department almost four years before finally adopting it on Oct. 27, 2003 through the issuance of Clearing House Operating Memo (CHOM) No. 375.

Had not Garcia’s solution been adopted, avoidable losses running to billions of pesos yearly would have continued to this day.

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BANKS’ ROLE: The massive revenue losses started in 1978, when direct payments to the BIR and the BoC were stopped and, instead, were coursed through authorized agent banks (AABs).

Ironically, payment through authorized banks was deemed a solution to the problem of petty malversation of cash collections by BIR and Customs personnel amounting to tens of thousands of pesos.

The new system indeed curbed petty malversation immediately. But instead of losing just tens of thousands of pesos, the government began losing billions to syndicates adept in intercepting and encashing fat checks payable to the BIR and the BoC.

The thieves took advantage of a loophole in the payment system through authorized banks. The more skeptical among us may even suspect that the loophole was inserted into the system on purpose.

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HOW IT WAS DONE: The modus operandi of the syndicates was quite simple:

1. The syndicates befriend the manager, accountant or cashier of a bank branch to collude with them.

2. They then open fictitious deposit accounts in bank branches whose key officials had agreed to conspire with the syndicates. (There are 5,000 bank branches all over the country susceptible to this arrangement.)

3. The syndicates deposit unfunded third-party checks with amounts exactly corresponding to the amounts of the checks (payable to the BIR or the BoC) that they had intercepted.

4. The unfunded third-party check is then replaced with the intercepted check payable to the BIR or the BoC and presented for clearing to the drawee bank through the Philippine Clearing House Corp. (PCHC).

5. The check payable to the BIR or the BoC is cleared in the usual manner where the drawee bank merely verifies the authenticity of the check signatory(ies) and determines if the fund deposit is sufficient to cover the amount of the check being cleared.

6. The cleared check is then retained by the drawee bank and enclosed to the bank statement given to its depositor at the end of the month. [Uncleared checks, on the other hand, are returned on the following day by the drawee bank(s) to the depository bank(s).]

7. The proceeds of the cleared check payable to the BIR or the BoC (i.e., not returned by the drawee bank to the depository bank in three days) which had been diverted by the syndicate to its fictitious account are then withdrawn and the deposit account closed.

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SEPARATE BATCHING: An obvious solution is in developing a system enabling or requiring the drawee bank to determine additionally that indeed the proceeds of checks payable to the BIR or the BoC will go to the government or the Bureau of Treasury (BTr) before they clear them.

The system developed by Garcia simply proposed the separate batching of checks that are payable to the BIR or the BoC as they are forwarded to the PCHC for clearing.

Separately batched, the checks can now be isolated and listed by PCHC as deposits to the accounts of BTr.

This procedure facilitates a complete electronic listing of these checks. At the end of each banking day, the list is sent to all concerned parties (drawee/depositary banks, their head offices, BTr, BIR and BoC). The list makes verification possible that indeed proceeds of these checks will go to BTr.

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VITAL LIST: How did the Garcia formula plug the loophole?

In the old system, the drawee banks merely determined the authenticity of signature(s) and the sufficiency of funds before clearing the checks. In the case of checks payable to the BIR or the BoC, the bank did the same determination — but without knowing if the proceeds would be credited to the government (BTr).

With Garcia’s solution, drawee banks can now verify and ensure that proceeds of all checks payable to the BIR or the BoC will be credited to BTr accounts. This is achieved by additionally checking that the checks are on the PCHC list. Only when they are so listed that the checks are cleared by the drawee banks.

Some of the reported big losses resulting from the old system included those at Land Bank Quezon Ave., Quezon City, where P1 billion-plus was stolen; Land Bank in Binangonan, Rizal, P1 billion-plus lost; and Port of Limay allegedly involving Customs officials who took P1 billion-plus.

Neither the BIR nor the BoC has a complete list of all these cases. Some of the thieves, including some bank officials, have been caught but no one has gone to jail for this white collar crime.

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