Regulatory failure

The story here is neither about greed nor gullibility. It is about regulatory failure.

Since the STAR broke the story a week ago about the pyramiding scam perpetrated by the Aman Futures Group, our top officials have been tripping over each other, making a grand show of a decisive response. After all, thousands of Filipinos lost their savings to this heartless scam.

I can understand the DOJ going hammer and tongs after Aman president Manual Amalilio and other officers of this fraudulent company. They need to be prosecuted as soon as possible, although Amalilio by the latest accounts appears to have fled to Sabah.

I do not quite understand the actions of the DILG. The agency sacked police officers in several Mindanao towns where Aman operated most intensively. Several local executives are being investigated, presumably for allowing this scam to operate unchecked (and possibly for investing public monies in this bizarre company).

There are reports of murders and arson possibly related to the scam. The suggestion is that police officers and public officials are taking revenge on people associated with Aman Futures, thus the need for countermeasures to avert a bloodbath. That is a chilling suggestion, conjuring images a lynching mob taking justice into their hands.

To date, however, I have not come across any report about the regulatory agencies being investigated for sleeping on the job.

This is not the first Ponzi scheme to collapse. It might not be the last. Those who lost their money because they were lured into the web by promises of spectacular returns will very likely not recover anything. The policy issue at hand is quickly improving regulatory capacity to prevent recurrence of scams like this one.

I have seen some opinion columns hector about greed and gullibility. Greed and gullibility, however, will forever be with us. The solution does not lie in moral rebirth. It lies in improving the financial literacy of ordinary citizens and upgrading government’s ability to detect scams early enough.

Mere mortals, unfortunately, are heirs to the frailties of greed and gullibility. The reason we agreed to establish government is to protect citizens from their own frailties by regulating commerce and setting standards. This is why businesses need to register with government and report their activities to the appropriate regulators.

When things like Aman Futures happen, we do not improve on our lives by blaming the greedy for their greed or the gullible for their gullibility. We improve our lives by uncovering where regulation failed and where governance might be improved.

It puzzles me how Aman Futures could have attracted as many as 15,000 gullible investors and raised an estimated P12 billion without being detected by the appropriate regulatory agencies. This is obviously a large operation and it could not have kept itself beneath the regulatory radar.

It did, apparently. There is something seriously wrong with the regulatory radar.

To date, no one has told us how Aman Futures is registered — or, more important, how it managed to get itself registered. It is bad enough that the Philippines is the extreme textbook case about how long it takes to get a business registered. It is worse that despite those tedious procedures for registering a business, a fraud like Aman Futures manages to slip through the bureaucratic gauntlet and inflict its curse of thousands of Filipinos.

Understandably, given the depressed interest rates in the banks, the ground is fertile for investment companies that promise to double one’s money quickly.

It has become unwise to keep money in an ordinary savings account. The interest paid on deposits is way below the inflation rate. One loses money as one saves.

People need very little convincing to redeploy their savings elsewhere, especially in a pyramiding operation that promises incredible returns. The lower the interest rate regime, therefore, the greater the duty of regulatory agencies to be doubly vigilant.

The fact that Aman Futures happened, and on such a scale, tells us that government was sleeping on the job.

Let us not blame police officers. They are not there to audit finance companies.

Let us not blame municipal mayors who invested their own money in what turned out to be a scam. They are barely more financially literate than the police.

It is the Securities and Exchange Commission (SEC) that failed here. First, because they allowed something like Aman Futures to be registered. Second, because they failed to properly monitor its activities.

If those victimized by Aman Futures are hopping mad, they should go after the SEC. This is the government agency that should have protected them.

They should also go after the BIR.

Instead of expending the bureau’s energies running in the service of political persecution, they ought to have been closely scrutinizing the books of Aman Futures and other companies like it. By doing so, they will not only be collecting taxes due. They will also be protecting the savings of ordinary citizens.

In a word, Aman Future’s humungous swindle happened only because government failed.

We now know from the record that thousands of defrauded victims filed complaints many months before. Authoritative response happened only after the mainstream media carried the story. By which time, most of the perpetrators have fled.

On the side, this helps build the case for media reporting the bad news instead of simply performing as that proverbial mirror on the wall for the vanities of the powerful.