Ang, Marilen R.
2D
Banking Laws
July 25, 2009
OUTSOURCING BANKING FUNCTIONS AND SERVICES Outsourcing is the process of entering into a contract or subcontract with a third party for the purpose of carrying out functions otherwise unavailable or cannot be accommodated by the client organization alone. It involves the transfer or shift of the management and customary execution of an entire business function to an external service provider. Business segments typically outsourced include information technology, human resources, facilities, real
estate management, and accounting. Cost savings, which is the lowering of the overall cost of the service to the business; improvement of quality of services; knowledge; operational expertise; access to talent and manpower; and risk management, are among the many benefits primarily realized in such process. In the country, banks are also outsourcing some of its functions in accordance with the laws and regulations promulgated to govern its dealings and transactions. Republic Act No. 8791, otherwise known as the General Banking Law of 2000, has provided for the structure of rules that would govern banking and financial system in the Philippines. This law has specifically provided, in Section 55.1(e), that banks may not outsource inherent banking functions. In addition to that, BSP Circular No. 488, series of 2005, for instance, explicitly provided for the functions, services or activities that may be outsourced by banks subject to the approval of the Monetary Board and those that may be outsourced without need of prior Monetary Board approval. BSP Circular No. 429, series of 2004 also provided that banks/non-banks should establish policies for managing the risks associated with outsourcing activities. The use of third parties does not diminish the responsibility of the board of directors and senior management to ensure that the outsourced activity is conducted in a safe and sound manner and in compliance with applicable laws and regulations. Compliance risk assessment and testing may be outsourced, subject to appropriate oversight by the compliance officer. The service level agreement shall ensure a clear allocation of responsibilities between the external service providers and the bank. Furthermore, the outsourcing bank should manage residual risks associated with outsourcing arrangements, including default, operational failures, and possible disruption of services. Banks may outsource activities such as data imaging, storage, retrieval and other related systems; clearing and processing of checks not included in the
Philippine Clearing House System; and printing of bank deposit statements. Banks may also outsource credit card services; printing of bank loan statements and other non-deposit records; bank forms and promotional materials; credit investigation and collection; processing of export, import and other trading transactions, transfer agent services for debt and equity securities; property appraisal; property management services; messenger, courier, postal services; security guard services; vehicle service contracts; janitorial services; public relations services; procurement services; temporary staffing; and legal services from local legal counsel. In connection with the guidelines allowing the outsourcing of the internal audit function, among other banking functions that may be outsourced by banks and other non-bank financial institutions under BSP supervision, which was only released in 2005, it is noteworthy to discuss the case of Development Bank of the Philippines, et. al. vs. Commission on Audit (G.R. No. 88435, January 16, 2002). DBP approved the hiring of Joaquin Cunanan & Co. as the DBP's private external auditor for calendar year 1986, as required by Central Bank Circular No. 1124 and the World Bank, following an economic recovery loan granted by the World Bank on the condition that the Philippine government will rehabilitate the DBP which was then saddled with huge non-performing loans. The issue was whether or not the constitutional power of the COA to examine and audit the DBP is exclusive and precludes a concurrent audit of the DBP by a private external auditor. The Supreme Court finally ruled that petitioner bank can be and must be allowed to outsource its internal audit function not only in compliance with the condition set by the World Bank but also for the reason that outsourcing the function enables DBP to have access to expertise offered by the private external auditor.
