After months of forensic audit involving the tracing of funds flows through web-like transactions in the 12 closed banks collectively known as the Legacy Banks, forensic experts from Punongbayan and Araullo, an affiliate of international audit firm Grant Thornton concluded that in general, funds did flow into the banks as deposits.

Although some fraudulent and suspicious transactions were uncovered, a large portion of accounts were found to be valid. Suspected fraud occurred not so much in the deposit-taking activities but in the siphoning of funds generated from the public. Punongbayan and Araullo was engaged by the Philippine Deposit Insurance Corporation (PDIC) to assist in forensic audit of the Legacy banks which were almost simultaneously closed and placed under PDIC receivership in December 2008.

PDIC President Jose C. Nograles said that Punongbayan and Araullo findings together with results of PDIC investigations led to the filing of 26 cases against Legacy banks owners and officers amounting to P8.4 billion. As indicated in the complaints filed, the Legacy banks aggressively solicited deposits from the public by enticing them with double your money promotions and other freebies, then siphoned off those deposits. Nograles said that it was moral hazard in its most despicable form, because the risk undertaken by depositors who were lured by the promise of extraordinarily high yields and freebies had been effectively transferred to PDIC which had so far paid P11 billion in deposit insurance.

The PDIC President said that moving forward, the deposit insurer had successfully pushed for enhanced authorities in the amended PDIC Charter to mitigate moral hazard. It had stepped up vigilance against potential copycats. He said that PDIC had issued new Regulatory Issuances (RI) on record keeping and beneficial ownership of accounts. RIs on unsafe and unsound banking practices and exclusions on deposit insurance coverage are being crafted.

Last year, the Legacy banks and other related companies were subject of Congressional investigations due to suspicions of massive fraud. Earlier, a sizeable number of accounts were tagged as doubtful because missing documents and banks records in disarray raised suspicions about those accounts. Judicious search enabled PDIC to piece together evidence that showed funds were actually deposited.