The Politics of the Retail Trade Liberalization Law of the Philippines: An Assessment of the Policymaking for R.A. 8762

Bing Baltazar C. Brillo

2011   Banwa Social Science Journal, vol. 7, no. 1, pp. 21-39.

Keywords

Policy Change, Protectionist, Liberalization,
Retail Trade, and Republic Act 8762


Abstract

The proposal to amend R.A. 1180, otherwise known as the Retail Trade Nationalization Act of 1954, was contentious, as the shift from the protectionist to the liberalist mode was considered a drastic policy change. The proponents questioned the effectiveness as well as soundness of the law. They argued that the policy was outmoded, was not in tune with global capitalist development, and resulted in an inefficient industry. In the process, the stakeholders were drawn to two groups— those for liberalizing the retail trade and those for maintaining protectionism in the industry. The contradicting positions led to a passionate debate among the stakeholders and the policy actors. To understand the politics of policy change, several essential factors need to be examined: the context, the stakeholders as well as the cost and benefits equation, the rationale, the political resources as well as the concessions, and public perception. All those factors worked together to bring about the enactment of R.A. 8762 and the repeal of R.A. 1180. The experience illustrates the complexities of radical policy shift as well as the intricacies of policymaking in the Philippines.


Introduction

Republic Act (R.A.) 8762 defines retail trade as “any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or goods for consumption.” As the undertaking is basically selling to the final user, retailing is considered an industry that ultimately links up with the Filipino consumers.

The proposal to amend the 45-year-old protectionist policy of the retail trade in the 1954 R.A. 1180 was considered contentious, as the shift from the protectionist to the liberalist mode is a drastic policy change. Opponents contested the move— those benefiting from the current setup naturally took strong actions to maintain the status quo and preserve their advantage. Any radical change in society elicits suspicion and distrust among the people. The latter feared that politicians and powerful groups in society would use the occasion to further advance their interests at the expense of the public. Furthermore, xenophobic forces argued that opening the retail trade sector to foreigners was unpatriotic; and as a critical industry, the retail trade must be kept solely in the hands of Filipinos. In contrast, the proponents of policy change questioned the effectiveness as well as soundness of R.A. 1180. They argued that the policy was outmoded, was not in tune with global capitalist development, and had resulted in an inefficient industry. The contradicting positions led to a passionate debate among the stakeholders and the policy actors.

To understand the politics of policy change, particularly the radical shift from a protectionist to a liberal policy in the retail trade, several essential factors need to be examined: the context, the stakeholders as well as the cost and benefits equation, the rationale, the political resources as well as concessions, and public perception. This paper is about the interplay of these factors in the enactment of R.A. 8762 and the repeal of R.A. 1180, as the effect of each factor combined to bring about the policy change.


Framework of Analysis

Public policy is often broadly described as “anything a government chooses to do or not to do” (Dye 1972: 2). This definition implies that policymaking is a governmental activity where policy actors make formal decisions by enacting policies to address public issues or concerns. The policymaking process often consists of agenda setting, discussion, formulation, and approval of the policy. The process involves engagement among stakeholders— official government actors (such as the President, bureaucrats, senators, and congressmen) as well as societal actors (such as businessmen, workers, consumers groups, media, the religious sector, and international organizations). As the process requires interactions among policy actors, and the resulting policy creates winners and losers among the stakeholders, policymaking is essentially a political game. Understanding the politics of policymaking, particularly the success and failure of policy change, necessitates the examination of the integral factors of the process.

The first factor is the context. The context refers to the external political, economic, and social environment where the policy formulation process takes place (Birkland 2001). The environment can obstruct or facilitate the mobilization of demand for the policy, as changing times can create incentives for the stakeholders to take action. Thus, policy actors must have the capacity to recognize windows of opportunity in the changing conditions. In effect, the context exemplifies the importance of timing, as the “right timing” can provide an ideal circumstance for setting the agenda of the policy.

The second factor is the stakeholders and the costs and benefits equation. Stakeholders are key political actors whose influence is critical in the policymaking process. They are defined as “actors (persons or organizations) who have vested interest in the policy being promoted” (Schmeer 1999: 3). Their interests, declared or conceivable, should be taken into account, as they can potentially affect the dynamics of the process. “Political analysis should identify whose toes will be stepped on, who expect their toes to be stepped on, and how different groups are likely to react when their toes are stepped on, or when they think their toes will be stepped on” (Reich 2002: 139). Stakeholders’ participation as well as their support or opposition in pursuit of their interests may be seen as the ammunition by which the proposed policy will be settled.

Costs and benefits refer to the distribution of actual and perceived gains and losses among the stakeholders. Identifying the actual as well as potential winners and losers with regard to the policy is essential, as the apportionment of the costs and benefits exposes the process to potential conflicts or opportunities that can significantly affect the feasibility of the policy. One typical problem encountered by policy advocates is what Mancur Olsen (1965) called a collective action dilemma. The dilemma happens when the costs are immediately felt and concentrated on a small group while the benefits have long-term impact and spread to a larger group. This scenario creates strong incentives for the former and disincentives for the latter to mobilize for collective action. Moreover, the situation intensifies when, on one hand, the small group is highly organized, economically powerful, and politically well connected, and the other or larger group is not organized, is economically weak, and politically less influential (Reich 2002).

The third factor is rationalization. Rationalization refers to the arguments offered by policy actors to justify their positions and the policy. To be credible and compelling, arguments for a position must be logical, consistent with empirical evidence, and contemporarily relevant. The rationale for a policy must offer solution to a problem, be able to refute the counter arguments, and more importantly, be able to project an aura of “correctness.” Specifically, rationalization must show that the advantages outweigh the disadvantages of the policy change. The goal is to alter the equation of stakeholders by convincing the undecided and reluctant actors as well as by strengthening the commitment of advocates.

The fourth factor is political resources and concessions. Political resources refer to the capacity to use power, authority, and money to influence the policymaking process by enticing allies and pressuring opponents. Resources can be employed in many ways. They can take a benign form, such as informational support to enhance expertise, particularly the capacity to articulate and defend the policy position, or an audacious form, such as “side payments” (e.g., assurance of budget allocation and release of public funds, appointment to lucrative government positions, or outright cash in the form of bonuses) to create incentives to directly influence the behavior of policy actors. Here, the policymaking process is considered a transaction, where bargains and exchanges take place among policy actors (Stein et al 2005). Each transaction entered into bears costs, and these costs are paid off through side payments (Haggard and McCubbins 2001). The use of side payments in a political environment where patronage politics persists and elections are expensive can be very enticing for actors to climb the bandwagon for or against the policy.

Concessions in policymaking refer also to bargains and exchanges where the policy actors negotiate among themselves the content and the final form of the policy. The bargains and exchanges among policy actors are a give-and-take process that usually results in compromises, as policy proponents try to accommodate the demands of the opposition (Howlett and Ramesh 1995). Concessions are needed to persuade doubting lawmakers, to appease the opposing lawmakers, and to erase fears on the side of the public. Concessions over the policy are made by either inserting stipulations, removing provisions, or attaching exemptions. The effect of the practice is twofold: one, it dilutes the policy, and two, it ensures the passage of the policy.

The fifth factor is public perception. Public perception refers to the shaping of public opinion. Influencing public perception is important in policymaking. In a political system where lawmakers seek to win elections, public opinion is critical to influence the behavior of policy actors. As rule of thumb, lawmakers usually go along with and rarely go against popular opinion. It follows that winning the battle for public perception would translate into pressures on the lawmakers, a boost for the policy proponents, and marginalization for the opposition.

The key is to create in the public mind the idea that the policy serves the public well-being. Policy advocates not only must be cautious in presenting the issue and alternatives, but must also use language suitable for the public audience. At present, media is the main platform used to reach out to the public. In an open and competitive political environment, effective handling of media is essential to convey the “right” message to the people.

In a democracy where policy proposals go through the political process and are decided by votes, care in considering the right timing, accounting of interests, appreciation of costs and benefits, proper rationalization, employment of resources, utilization of bargains and exchanges, and the shaping of public opinion can translate into a greater chance of enacting or stalling the proposed policy, as those factors can result in more supporters, greater pressure, and voters for the policy. In this paper, the engagement and interplay among those factors will be surveyed to present an analytical narrative of the enactment of the retail trade liberalization law. The study will focus on how the integral factors worked together to bring about R.A. 8762.








The Context

In 1954 the Philippine Congress passed a landmark law— R.A. 1180, otherwise known as the Retail Trade Nationalization Act. The law’s protectionist policy was designed to break the control of aliens in the retail trade business, as the retail sector was considered a critical segment of the economy. In particular, the intention was to prevent Chinese retailers, who were not citizens, from controlling the industry. As aptly observed by Agpalo (1962), the primary irritating factor that instigated the nationalization of the retail trade was the alien domination of the industry. The enactment of the law was in keeping with the rising nationalist sentiment at the time, that vital industries must be in the hands of citizens.

With the advent of the 1990s, the effectiveness as well as soundness of R.A. 1180 was questioned. First, the critics argued that the policy had outlived its usefulness. The law was designed to protect Filipino retailers from the dominance of Chinese immigrant retailers, who at the time controlled around 60 percent of the industry (Agpalo 1962). But with mass naturalization, in particular with Chinese marrying Filipinos, alien retailers became citizens. Hence, absorption of the Chinese ironically made the protectionist policy ineffectual against them. An unintended consequence of the assimilation process was that R.A. 1180 protected the Filipino Chinese that it originally intended to exclude, and shielded them against foreign competition.

Second, the critics argued that the policy did not translate into growth in the retail trade industry. The law was in tune with the economic independence strategy, where development was achieved through government protection and intervention. In this strategy, the government needed to ensure that the retail trade industry was firmly under Filipino control. However, after four decades of implementing R.A. 1180, the Philippine retail sector could grow to only 10.9 percent of the gross domestic product (GDP) compared with the around 18 percent standard among Southeast Asian countries that had fully opened up their retail trade sector (Patalinhug 1996). The data show that the Philippine retail trade industry was lagging behind and that there was more room for growth.

Both insights on R.A. 1180 were underpinned by the global paradigm shift in economic thinking. From the 1980s onward, neoliberalism had become the dominant economic philosophy, as most countries adopted liberal policies in their pursuit of development. Following the core liberal economic principles of deregulation, privatization, foreign investment, and free trade, the post-EDSA Philippine governments have steadily embraced policies such as lowering of tariff, loosening of foreign exchange controls, and opening the banking sector to foreign investments. Thus, it is logical to expect the retail trade industry to accept liberalization and thus follow the liberalization of the other sectors of the economy. Moreover, affiliation with the World Trade Organization (WTO) and the ASEAN Free Trade Area (AFTA) has strengthened the commitment of the Philippine government to liberalize the economy.

These premises ushered in the clamor for the repeal of R.A. 1180. The economic think tanks of the Estrada administration called for the scrapping of the policy. They argued that reforming the retail trade law was long overdue, and the protectionist policy was no longer in tune with the times. For instance, the advent of internet retailing made it very difficult for countries to prevent foreign businesses from selling directly to their people. The economic managers from the National Economic Development Authority (NEDA) stressed that the timing for making drastic policy change was right. Opening up the remaining protectionist industry, the country would be sending a strong signal to the world that it was serious in embracing free trade and that the liberalist economic policies of the government had continuity and consistency— with the Estrada administration continuing the liberalization program of the previous regimes. Moreover, the timing was also right to take the bold action of liberalizing the retail trade sector. As the country in Southeast Asia that was least affected by the 1997 financial crisis, the Philippines was in a good position to attract foreign investors while other Southeast Asian countries were still reeling from the effects of the crisis.


The Stakeholders

In the process of repealing the Retail Trade Nationalization Act, the stakeholders took one of two positions: those in favor of allowing foreign investors in the retail business and those who wanted to keep the retail trade sector exclusively to Filipinos. The first group comprised those proposing policy change and liberalization or opening of the retail trade, while the second group opposed the change, and advocated the continuation of the protectionist policy in the retail trade.

The executive agencies were at the forefront of the effort to promote policy change. Because the bill was sponsored by the administration, executive agencies such as the Department of Trade and Industry (DTI), the Department of Finance (DOF), NEDA, the Board of Investments (BOI), and the Philippine Institute for Development Studies (PIDS) actively participated in crafting and deliberating on the bill. The bill was supported by the main consumer group in the country, the Consumer Union of the Philippines (CUP); international business groups, such as the American Chamber of Commerce, the European Chamber of Commerce, and the Australian and New Zealand Chambers of Commerce; and local business groups, such as the Philippine Chamber of Commerce and Industry, and the Federation of Filipino-Chinese Chambers of Commerce and Industry. On the other side, the key opposing groups that actively participated in the policy deliberations were mostly retail business organizations and their affiliates, such as the Kilusan Tungo sa Pambasang Tangkilikan (KATAPAT), the National Economy Protection Association (NEPA), Philippine Retailers Association (PRA), the Chamber of Filipino Retailers (CFR), the Philippine Association of Supermarkets, Inc. (PASI), the Philippine Franchise Association (PFA), and the National Market Vendors Cooperatives (NAMVESCO).

The proponents for the liberalization of the retail trade were in consensus that opening the industry to foreign investors was the right economic strategy. However, there were also disagreements among them. For instance, a major divergence was in the form of the safety net mechanism that must be incorporated in the policy. Two positions took shape: one was for a minimum capitalization requirement for foreign investors, and the other was for an assessment of the track record of the foreign investors. On one hand, the DTI, the BOI, and the DOF pushed for the minimum capital requirement of $1million for 100 percent foreign equity; $500,000 to less than $1 million for 60 percent Filipino and 40 percent foreign equity; and less than $500,000 for 100 percent Filipino equity. On the other hand, the main sponsor of the bill, Senator S. Osmena and the NEDA were for examining the track record of foreign investors. They argued that the focus should not be on quantity, but on the quality of people coming in, as quality investors would be more inclined to expand their business activity after they have tested the waters, so to speak.

Those opposed to the bill were in agreement that liberalizing the retail trade would be harmful to Filipino retailers and to the economy. Their common theme was to block the passage of the repealing bill. However, there were also differences in the position of the groups. For instance, PFA was against repealing the law; yet, it accepted the inevitability of liberalization. Thus, the members pleaded for partial rather than full liberalization of the industry. PRA admitted that liberalization was good; however, the members believed that the timing was wrong, as the country was still reeling from the Asian financial crisis.

The proposed bill was controversial. Stakeholders considered it radical as the change would constitute a policy shift from protectionism to liberalism. Among the stakeholders, the distribution of costs and benefits was delineated. The perceived principal gainers from the repeal of the policy were the Filipino consumers, manufacturers, farmers, and small retailers, particularly the operators of “sari-sari stores” (small, neighborhood convenience stores). On the other hand, the perceived biggest losers with the entry of foreign retailers were the local medium-sized and big retailers. It was thought that the costs would be borne solely by these groups, which would lose their monopoly of the local market and the government protection against direct foreign competition that they had been enjoying since 1954.

The perceived costs and benefits also created in a dilemma. On one side, the losses would be immediately felt and concentrated on the medium-sized and large retail businesses; on the other side, the gains would take a longer period to be felt and would spread to a very broad mass of people. In effect, it was believed that the costs would be shouldered by a relatively small sector of the economy, while the benefits would be felt by the whole society itself, as anyone can be identified as a consumer. On the part of the Filipino retailers, the dynamics generated a strong motivation to mobilize collective action against the bill. Their collective action was deemed influential as the sector was known to be well organized, financially well-off, and politically connected. This strength was exemplified by their capacity to block the bill a number of times since 1995 and by their passionate and well-orchestrated appeal during the legislative deliberations.


The Rationalization

The opponents of the policy change argued that R.A. 1180 was still valid at the time (1990s). They said that the retail trade industry, as a critical sector of the economy, must be protected against foreign competition and must be controlled by Filipinos who have a permanent stake in the well-being of the country. They also were skeptical of the outcome of competition, as they foresaw a one-sided contest. The entry of foreign retailers with their capital, and technological and other advantages could easily translate into uneven competition. For instance, they could use their financial muscle to resort to predatory pricing to eliminate competition. In addition, some in the opposition strongly believed that local retailers were still unprepared and needed some more time to get ready for competition. They suggested that Filipino retailers be given time to allow them to adjust.

For the opposition, pressing on with policy change would put many local retailers out of business. They predicted that massive displacements and closures would ensue, resulting in net job losses in the retail trade sector. The increase in unemployment would eclipse any gains in the reduction of prices of goods brought about by competition. To rationalize their position, they cited studies, such as “When Corporations Rule the World” by David Korten in support of the so-called “walmartization,” where the entry of mega global retailers in a particular locality causes sales of local stores to go down and local retail businesses to perish. They warned that the entry of foreign retailers would not automatically reduce prices, given the multitude of components that determine the price of goods (e.g., transportation cost, utilities, raw materials). If foreign retailers deemed the cost of operation high, then prices would not go down. Moreover, some opposing lawmakers were suspicious of the move to fast-track the repeal of R.A. 1180. For instance, Congressman W. Tanada, suspected that the action of the administration and its allies had something to do with the release of loans to the government, as international financial institutions had made the passage of the law a condition for the release of the loans.

Others tried to block the liberalization of the retail trade industry on constitutional grounds. The main argument, as expressed by Congressman E. Aumentado, was that repealing the law would violate the Constitution, specifically Article 2, section 19, which says: “the State shall develop a self-reliant and independent national economy effectively controlled by Filipinos;” Article 12, section 1, which says that “the State shall protect Filipino enterprises against unfair foreign competition and trade practices;” and section 10, which says “the congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly-owned by Filipinos.”

The UP Law Center sustained the opposition’s contention, by expressing the opinion that allowing alien participation in the retail industry would negate the constitutional mandate that the economy should be effectively controlled by Filipinos. However, DOJ opinion no.155, dated December 24, 1998, signed by Secretary S. Cuevas, gave a contradicting position, as he declared that the bill at hand had no constitutional infirmity. The DOJ found no legal or constitutional obstacle to the opening of the retail trade sector to foreign investors. Moreover, the DOJ also acknowledged that the policy change was within the powers of Congress to make, as the legislature has the authority and discretion, subject to those expressly reserved by the Constitution for Filipinos (public utilities, natural resources, mass media, and educational institutions), to determine the type or manner of investments open to foreigners.

In contrast, the proponents for policy change argued that the fundamental premise for repealing R.A. 1180 was that the protectionist policy resulted in an industry controlled by few players. The oligopoly created brought about the decline in the comparative and competitive advantage of the industry. Consequently, consumers were made to pay for the inefficiency of Filipino retailers, and this inefficiency translated into high prices and, low-quality goods. To deal with the problem as well as to break the control of the cartel, the industry needed to be subjected to healthy competition. As there were not enough big local capitalists who were willing to invest and challenge the dominance of the few controlling players in the retail industry, it became necessary to invite foreign retailers. Thus, the retail trade business must be exposed to the full force of foreign competition— the more players, the better for the industry.

As the central justification for policy change, the promotion of competition in the retail trade industry was theoretically rationalized by the concept of a contestable market. In describing the concept, M. Lamberte of the PIDS stated: “It doesn’t matter whether you have two producers or one thousand producers or one producer. What is important is that one will behave like a competitor. And the only way we can force him to behave like a perfect competitor is to threaten him.” The theory implies that what is important is the presence of countervailing forces to guarantee competition and ensure efficiency among the players in the industry. NEDA Director General F. Medalla affirmed that an efficient operator forces other operators to be efficient as well. He cited the case of Malaysia, where evidence shows that with the entry of foreign investors, the domestic enterprises showed much higher productivity. Here in the Philippines, liberalization in banking, telecommunications, shipping, and insurance showed beneficial impacts. For instance, in the telecommunication industry, the Philippine Long Distance Company (PLDT) that held a virtual monopoly in the past had become more efficient in the face of competition. Thus, the “transformation” of PLDT benefited the consumers as well as the company. As the joke goes: in the past, it took PLDT 10 years to provide one with a telephone that had no dial tone. Now, it gives you a telephone, complete with dial tone, in 10 days.

Thus, liberalization of the retail trade sector was expected to help address the following major problems confronting the country:

(1) Economic problem. The net effect of the entry of foreign retailers could be an increase in economic activity and employment, as expansion of the economy could be greater than displacement. For instance, tourism would be promoted because the greater availability of goods ranging from the cheapest in the market to high-end products could create a well-rounded shopping profile (e.g., new shopping capital in Asia) that would make the country more attractive to tourists. Moreover, the expansion of the industry could lead to the creation of jobs through subcontracting arrangements with the retail outlets for the supply of raw materials.
(2) Financial problem. The deficiency in local capital investment would be resolved by the influx of foreign capital. Domestic savings are too low to be the source of capitalization. As Senator R. Recto noted during the deliberations on the bill, in 1994 the gross domestic savings as a percentage of GNP was only 18 percent in the Philippines compared with 30 percent in Indonesia, 35 percent in Thailand, 37 percent in Malaysia, and 51 percent in Singapore.
(3) Management problem. The pressure from competition would force local retailers to be efficient, innovative, and flexible. The presence of foreign players also could expose the retail sector to newer management systems and technology transfer. The archetype of this development is Jollibee, the local fast-food company that adopted and utilized the technology and expertise of McDonalds, its main competitor, to edge out the latter in the fast-food business.
(4) Inflation problem. Competition and the quest to gain market share would help bring down the prices of commodities. Lower prices of goods, if attained, could translate into less pressure from the demand for an increase in salaries and into more savings to the consumers.
(5) Export market problem. There would be reciprocity in opening the retail trade sector. It would follow that opening the economy would lead other countries to also open their market to Filipino products. Moreover, the entry of global retailers would enable them to identify locally produced products that could be sold in their other retail establishments around the world.

Liberalization of the retail trade sector was also seen as a means to level the playing field for manufacturers and retailers. The NEDA argued that in the status quo, the manufacturers’ bargaining position was weaker than the retailers’ as the former had much more limited choices of big retailers to use. One consequence of the current practice, according to the DTI, was that manufacturers were usually paid either after 30 to 180 days, instead of outright cash, or for only goods sold by the retailers in the case of consignment. Another consequence was that small manufacturers had little chance of penetrating the market. This is exemplified by the case of Daila Herbal, where the small entrant manufacturer of soap was asked to pay for a space in a supermarket. This dilemma was echoed by Senator S. Osmena who said that to put up a display inside Rustan’s department store, a small-time manufacturer must pay P10,000 per square meter. Thus, if there were more retailers, the manufacturers could have more choices and they could look for retailers who could pay in cash or provide a better deal.

Furthermore, small retailers, who according to the DTI comprised 96 percent, were the largest segment of the retail industry, and were projected to be minimally affected by the policy change. The sari-sari stores have distinct advantages over huge local retailers that the former could exploit when confronted by the influx of foreign retailers. Sari-sari stores are location-specific and occupy a special market niche based on convenience and unique services. For instance, sari-sari stores sell goods piecemeal (e.g., one can buy a stick of cigarette), and offer exceptional credit terms (e.g., payment is made after the buyer receives his salary). In addition, small retailers would also have more alternatives to source their goods. Sari-sari stores are clients of big retailers because their sourcing volume is too small to be serviced directly by manufacturers. The experience of Makro illustrates this case. Makro’s entry significantly improved the sourcing of cheaper supplies for sari-sari stores.

On the issue of the displacement that competition might bring, Director General F. Medalla admitted that “competition brings about greater efficiency although competition does displace people. So the question really there is how you balance benefits from competition with the cost of dislocation [that] competition brings about.” The adverse consequence, however, was portrayed as acceptable since overall the net effect of policy change is deemed positive for the economy. He added that the feared displacement was overblown, as the entry of foreign retailers does not equate to zero-sum game— the obliteration of local retailers. One reason is that the opening up of the retail trade sector, based on the experience of other countries, does not automatically result in a flood of foreign retailers coming to the country; usually it takes some time for them to come in. Filipino retailers also had some advantages that they could use against foreign retailers, e.g., familiarity with Filipino preferences, local culture, market terrain, and business climate. Moreover, there was no guarantee that foreign retailers considered as big players compared with local retailers would be successful in their business venture. For instance, as pointed out by Senator S. Osmena, global giant retailers such as Wal-Mart and JC Penny failed miserably in their venture in Indonesia, as local retailers repositioned and reinvented themselves to successfully compete with foreign retailers. Another is the experience with the Foreign Investments Act of 1991. The experience proved that the initial fear— the entry of foreign investors in the country would gobble up the local businesses— was unfounded.


The Political Resources and the Concessions

In the move to repeal R.A. 1180, the Estrada government certified the bill as urgent in Congress. The position of the administration was formally conveyed to the lawmakers through a letter sent by Secretary J. Pardo, informing them that President Estrada expected the bill to be prioritized by Congress. In line with the directive, the Government agencies, particularly the DTI and the NEDA, provided the information and materials needed in support of the passage of the bill. The materials were fed to the sponsoring lawmakers to enhance their knowledge and arguments during deliberations in Congress. The executive agencies also provided the working draft of the bill and served as “consultants” in the final drafting of the law. For instance, the BOI was in constant touch with the lawmakers from the committee hearings up to the Bicameral Conference Committee.

A critical factor in the enactment of the law was the perceived influence of the Office of the President over the lawmakers. Despite the limitations imposed by the 1987 Constitution, the Executive continues to hold sway over Congress. In Philippine politics, the unwritten rule is that the legislature follows the President, and not the other way around. An example of this is the continuing influence of the President on the selection of leaders in both chambers of Congress. The person elected as the Speaker of the House or the Senate President usually has the blessings of the sitting President. Another is the legislators’ perennial practice of climbing on the President’s bandwagon by affiliating themselves or their parties. The influence of the President over Congress emanates from the power over the purse, in particular, the power to control the release of budgetary funds. In an arena where patronage politics is prevalent, the “pork barrel,” which is used to fund the projects of lawmakers, is perceived to be crucial to their political survival (Caoili 2006). The Executive influence over the repeal of R.A. 1180 could be inferred from the retort of Senator S. Osmena against the continuous and vehement objection of the retailers group to the bill— that if they want to block the bill they should go and talk to Malacanang. The statement revealed the real force behind policy change. Furthermore, the support of President Estrada, who was still very popular at the time, made the opposing lawmakers realize the difficulty of blocking the passage of the bill. Recognizing the situation, the opposing lawmakers, as an alternative recourse, focused their efforts on influencing the content of the bill.

An issue in the repealing bill that needed concession was the safety net concern.The objectors argued for a guarantee that would provide security to Filipino retailers. To address the apprehension, particularly the fear on the psychological level among the Filipino retailers, the proponents agreed to incorporate in the bill the following safeguard proposals:

1. Retail trade enterprises with a paid-up capital of less than $2,500,000.00 are reserved exclusively for Filipino citizens and corporations.
2. Foreign investors interested in acquiring shares of existing local retailers may purchase only up to a maximum of 60 percent of the equity within the first two years from the effectivity of the repealing law.
3. Retail trade enterprises where foreign ownership exceeds 80 percent must offer a minimum of 30 percent of their equity to Filipinos through any stock exchange in the Philippines within eight years from their start of operations.
4. The DTI must prequalify all foreign retailers before they are allowed to conduct business in the Philippines. For instance, to preclude fly-by-night retailers, the DTI requires foreign retailers to have at least five retailing branches in operation anywhere around the world as well as have a five-year track record in retailing.
5. Only foreign retailers coming from countries that allow the entry of Filipino retailers would be permitted to engage in business.
6. At least 30 percent of the stock inventory of foreign retailers, after 10 years from the effectivity of the law, must be Philippine made.
7. Qualified foreign retailers are not allowed to use rolling stores or sales representatives, or engage in door-to-door selling or the restaurant business, or run sari-sari stores.

The key proponents of repealing the bill, however, did not believe that such safety net provisions were necessary. For instance, NEDA stated that if the law would put in too many ifs, buts, whys and wherefores, then the government would be sending a signal to the world that we are not serious in opening the retail sector. Nevertheless, the proponents accepted the reality that radical policy change arouses deep-seated suspicion and distrust. Moreover, the consensus among them was that, without the stipulations, passing the bill in both Houses would be much more difficult. To mitigate the complications, the proponents decided to be practical and accommodated the demands. The importance of concessions is summed up in the statement of Senator S. Osmena: “I just did it to appease some of the objectors to the bill.” Thus, the compromise assured the enactment of R.A. 8762 and the repeal of R.A. 1180.


Public Perception

The proponents of R.A. 8762 framed the policy as a consumer welfare act and as an antidote to an inefficient industry. They agreed that the industry had been enjoying protection for a long time, and that this protection had given rise to cartelization where the few big retailers, without genuine competition, enjoyed large profits at the expense of the consumers. Opening the industry to foreign competition would, in the long run, result in lower prices, better services, and higher quality of goods. For instance, Senator R. Recto stated that the “retail trade bill does not intend to solve all these problems; nevertheless, it is a step forward in promoting efficiency in the economy. If we would like to ensure that the cost of production, that the total economy is efficient, one way of doing this is to promote competition.” Thus, the repeal of R.A. 1180 was publicized as critical for the sitting Congress to enact if the legislators wanted to empower the Filipino consumers and revitalize the retail trade sector.

The policy proponents also took deliberate actions to counteract the propaganda of the opposing stakeholders. For instance, on the perceived detrimental effect on the local retailers, the advocates declared that the Filipino consumers’ welfare took precedence over all concerns, including the interest of a sector of the economy. They admitted that policy change would have pains, but the gains would be larger than the costs. On the issue of nationalism equated with protectionism, where the opponents of the policy argued that Filipino retailers should be amply shielded against foreign competition, the proponents were quick to spread the view that protectionism was archaic and equivalent to economic stagnation. Furthermore, they propagated the idea that it would be futile for the country to oppose the global march of liberalism, and that the only logical move was to abandon the protectionist policy and embrace the liberalist policy.


Conclusion

In the beginning, the context was the driving force that propelled the demand for the policy of liberalization. The global paradigm shift toward economic liberalism created an atmosphere ideal for policy change. The policy proponents argued that, as a protectionist policy, R.A. 1180 was passé and would not promote the economic development of the country. In the process, the stakeholders formed two groups: those for policy change or for liberalizing the retail trade, and those for the status quo or for maintaining protectionism in the industry. Opening the retail trade sector to foreign retailers was contentious as the move constituted a radical change in policy. Compounding matters, the perceived costs and benefits created a collective action dilemma, as the losses would immediately be felt and concentrated on a particular sector, while the gains would be long term and will spread to a broad group of people.

The collective action dilemma in part was offset by better rationalization for policy change. The rationale was potent, as it was well grounded theoretically as well as reinforced empirically. The theoretical foundation was based on the concept of a contestable market, where the presence of a genuine competitor is necessary to ensure competition and an efficient industry. Empirically, liberalization of the retail trade sector was offered as an effective way of addressing the economic ills faced by the country. In addition, the relative successes of past liberalist policies in other industries (e.g., banking, telecommunications, shipping, and insurance) had a strong persuasive appeal. Thus, the potential adverse consequences of policy change were rendered acceptable as the net effect would be beneficial to the economy.

Because policy change was an administration bill, the resources of government were put behind it. A critical factor is the compelling influence of the President over Congress. This advantage was supplemented by information disseminated to counteract the opposing propaganda as well as address the public’s apprehension. Moreover, concessions added flexibility to the proponents, as they used compromise on the contents of the law to appease and accommodate the demands of the opposition. All those factors worked together to bring about policy change. Thus, the enactment of R.A. 8762 exemplifies the dynamics among the several essential factors in the policymaking process, as this engagement and interplay guaranteed the passage of the law. The experience illustrates the complexities of a radical policy shift as well as the intricacies of policymaking in the Philippines.



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Power Politics in Policymaking: The Anti-Money Laundering Act of the Philippines

Bing Baltazar C. Brillo

2010   Arts and Social Sciences Journal, vol. 2010: ASSJ-9
 

Abstract

The Anti-Money laundering law (AMLA) is a financial regulation enacted mainly because of external demand, as the Financial Action Task Force (FATF) called on the Philippine Government to comply with the Anti-Money Laundering (AML) regime. The FATF not only summoned the Philippine Government, but also determined the shape and content of the AMLA by requiring the institutional policy actors to conform to the global standards. Thus the FATF exercised direct powers—agenda setting and decision making— in persuading the Philippine Government to enact the law. The institutional policy actors were impelled to prioritize the consideration and deliberation of the financial regulation (agenda setting) and compelled to enact and rework the content of the policy to conform to the FATF standard within a time frame (decision making). The FATF’s use of direct powers was made possible and reinforced by the context-shaping power of the prevailing financial structure, specifically, the establishment of the AML regime. Context-shaping bound the institutional actors to enact the policy because of the prevailing AML regime established by the FATF. As the context-shaping power underscored the exercise of the agenda-setting and decision-making powers, the lawmaking experience that created the AMLA highlights the employment of the different dimensions of power as well as the contemporary dynamics in the global financial structure vis-à-vis the policymaking process.


Keywords: Anti-Money Laundering Law; Agenda-Setting; Decision-Making; Context-Shaping.




1. Introduction

Power is pervasive in politics, as the practice of the latter entails the exercise of the former. In the praxis of the political, policymaking is the central activity where power is utilized in the process as well as in shaping the outcome. As the principal political institution in society, the Government assumes the mandate of undertaking such activity. The Government makes public policies that go through the lawmaking process. The process entails the exercise of influence and power, as the institutional policy actors contend with vested interests in crafting policies.

In the era of financial globalization where financial transactions are instantaneous and interconnected, the power dynamics in lawmaking has been refashioned. One effect of financial globalization is the reorientation of the power relations among policy actors in some areas, such as financial regulations. International organizations are added to the policy equation, as the external actor becomes an influential policy actor. In effect, the encroachment of international organizations on lawmaking is reshaping the power relation to their advantage.

This paper is about the power dynamics at work in policymaking. The study analyzed the power play involving the Financial Action Task Force (FATF) and the governmental policy actors in crafting the Anti-Money Laundering Law (AMLA, Republic Act 9160) and its amendment, Republic Act 9194, in the Philippines, as well as the consequence of the anti-money laundering (AML) regime in the power dynamics of the policy process. With the use of the framework of analysis developed by Hay [1], the paper surveyed how the FATF functioned and utilized power to bring about financial regulation. Specifically, the paper examined the use of agenda-setting, decision-making, and context-shaping powers in enacting the AMLA.


2. Framework of Analysis: The Three Dimensions of Power

The centrality of the concept of power is well-established in the study of politics and has been acknowledged by most scholars and practitioners in the realm of the political. As the field of study recognizes the essentiality of the concept, however, the discipline also acknowledged the perennial problem of defining power. For instance, referring to the ongoing debate about the nature and definition of power, Hay noted that the controversy “rests fundamentally on the tension between a concept of power that is simple, precise and potentially quantifiable and one which is more complex and intuitively appealing, yet which is much more difficult to catalogue and measure” [1].

Notwithstanding the problem, power has been generally viewed from the purview of a particular school of thought in the study of politics. The pluralist conception of power dominates political science, where power is considered “transparent, expressed in unambiguous and empirically demonstrable way in the decision-making process” [1]; while the realist conception of power dominates international relations, where power is deemed as the “ability of states to use material resources to get others to do what they otherwise would not” [2]. Both conceptions are rooted on the classic Dahlian definition— power over another conceptualization, where one exercises control over another to the extent that the former can get someone to do something that otherwise the latter would not want to do [3]. The directness of effect on political actors has made the definition the most influential view of power in the study of politics. The dominance of the Dahlian definition, in effect, has developed into a simplified but one-dimensional view of power.

The constricted view of power has resulted in the underdevelopment of the concept. To deal with this inadequacy, political scholars have underscored the need to expand the outlook, as power is deemed multidimensional in nature. This sentiment has led some scholars to critique and reexamine the dominant conception. For instance, Barnett and Duval [2] argued that to have a more robust understanding of how power works in international politics, scholars need to see the connection among the multiple conceptions of power (e.g., compulsory, institutional, structural, and productive power).

In political analysis, the more prominent contemporary literature heeding the call for the reassessment of power is the “faces of power” of Hay [1]. Hay discussed the three dimensions of power and argued for the need to redefine power. The first dimension, consistent with the Dahlian definition, sees power as decision making— determining the outcome of political decision. The focus of analysis is the formal political arena. In this conception, the actors that exercise power are those whose opinion holds sway in the decision-making process [1]. The second dimension, following Bachrach and Baratz [4] effort to broaden the definition, sees power as not only decision making but also agenda setting— the capability to set the political agenda. The focus is the formal political arena as well as the informal processes surrounding the corridors of power. The conception for a more inclusive definition of power is grounded on the argument that through the agenda-setting process, powerful actors get to decide which issues become subject to the formal decision-making process and which do not [1].

The third dimension, following Lukes’ attempt to incorporate the Marxist notion of “false consciousness” to the definition, sees power as not only decision-making and agenda setting but also preference shaping— influencing others by shaping what they think, want, or need [5]. The focus is on the formal political arena and the informal processes, as well as the broader civil society in which preferences are shaped. In this conception, powerful actors not only exercise power over and set the agenda, but also distort the perception and the perceived interest of the people [1] through ideological indoctrination or psychological control [6]. Lukes’ attempt to broaden the definition, however, created complications in the conceptualization, as determining power in preference shaping indicates a need to differentiate between genuine interests and false interest of the actors. Identifying real from false interests entails a normative judgment, which presupposes superiority in one (ability to see and make correct judgment about real interest) and inferiority in another (subjectively judge the incorrect interest). This praxis implies a condescending relationship, which from the academic vantage point, makes the undertaking highly biased, subjective, and empirically unjustifiable.

As a remedy, that is, to maintain the three-dimensional perspective but eliminate the value judgment in the conception, Hay [1] proposed that the definition of power emphasize not only the consequences of one’s choices on the actions of another, but also their effects on the context within which subsequent action must take place. Power then could be seen as both context shaping and conduct shaping. The former refers to the “capacity of actors to redefine the parameters of what is socially, politically, and economically possible for the others,” and the latter refers to the ability of actors “to influence directly the actions and/or choices of another individual or group” [1]. The distinction entails two forms: indirect (context shaping) and direct (conduct shaping) power. On one hand, indirect power emphasizes “power relations in which structures, institutions and organizations are shaped by human action in such a way as to alter the parameters of subsequent action” [1]. Indirect power may also serve as the potential basis for exercise of direct power. Thus, the effect of indirect power is latent, as the exercise of this power creates an atmosphere that restricts or limits future actions as well as sets down the grounds for potential exercise of other powers. Direct power, on the other hand, has an effect that is immediate, visible, and behavioral, as the exercise of this power is openly felt by the intended recipient.

In this paper, the power taxonomy identified would be used to assess the forms of power in play in the process of enacting the AMLA. In particular, the workings, impact, and interplay of direct power (power as decision making and agenda setting), and indirect power (power as context shaping) are examined from the beginning to the end of the policymaking process.


3. Power as Agenda Setting

Policymaking comprises the whole legislative enterprise of producing public policies. The process begins with policy initiation, where demand for a policy arises to meet a certain issue, problem, or contingency. In the case of the AMLA, there was an international demand for financial regulation to address the threat that money laundering poses to the stability of the global financial system. Money laundering is defined as “a process in which the illicit source of assets obtained or generated by criminal activity is concealed to obscure the link between the funds and the original criminal activity” [7]. This criminal activity has been used by criminal syndicates and terrorist groups to legitimize their illicit finances. To curb the practice, the G-7 member States in 1989 facilitated the establishment of the FATF. “The FATF is an intergovernmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing” [12]. The international organization assumed the lead role in combating the worldwide problem of money laundering by mandating that all states legislate the AMLA. The FATF mandate was reinforced after the 9/11 terrorist attack against the United States, as the incident revealed the urgency of the worldwide implementation of financial regulation.

One of the countries identified as lacking the AMLA was the Philippines. The country was on the list of Non-Cooperative Countries and Territories (NCCT) in 2000. Being on the NCCT list, the Philippines was vulnerable to the imposition of countermeasures following Recommendations 21 and 22 of the FATF:

21. Financial institutions should give special attention to business relationships and transactions with persons, including companies and financial institutions, from countries which do not or insufficiently apply the FATF Recommendations. Whenever these transactions have no apparent economic or visible lawful purpose, their background and purpose should, as far as possible, be examined, the findings established in writing, and be available to help competent authorities. Where such a country continues not to apply or insufficiently applies the FATF Recommendations, countries should be able to apply appropriate countermeasures.

22. Financial institutions should ensure that the principles applicable to financial institutions, which are mentioned above are also applied to branches and majority owned subsidiaries located abroad, especially in countries which do not or insufficiently apply the FATF Recommendations, to the extent that local applicable laws and regulations permit. When local applicable laws and regulations prohibit this implementation, competent authorities in the country of the parent institution should be informed by the financial institutions that they cannot apply the FATF Recommendations [12].

The FATF called on all financial institutions to give “special attention” to business and financial transactions emanating from among the NCCT to ascertain the lawfulness of the transactions. Thus, countermeasures could translate into a huge increase in the “transaction cost” of doing business. The extra scrutiny that might be imposed on financial transactions emanating from the Philippines would result in delays. The international financial transactions of local banks and other financial institutions, which run into hundreds of millions pesos a day, would no longer be automatically done. Instead, the financial transactions would be handled manually. In the globalized era of instantaneous transactions, a delay of a few days or weeks could easily translate into enormous financial losses and opportunity cost. For instance, in the committee hearings in the Senate and House of Representatives, Department of Justice Undersecretary Jose Calida estimated that the transaction cost due to delays per day could reach P169 million in exports, P116 million in imports, and $4 billion in remittances.

The Philippines needed to enact the AMLA as the prerequisite for removal from the blacklist. Noncompliance with the FATF demand would result in the imposition of more severe additional countermeasures. These countermeasures included the cooperative sanctions of the international financial institutions (IFIs), such as the World Bank and International Monetary Fund as well as the G-7 member states. According to Mr. Leonilo Coronel, the Executive Director of the Bankers’ Association of the Philippines (BAP), the countermeasures may isolate the Philippine banking system from the rest of the international financial community and make it difficult to transact business. The vulnerability of the Philippines to these sanctions was exacerbated by the current makeup of the economy, which is debt-driven and remittance-based.

In the past, Congress made several attempts to enact an anti-money laundering law. In the Tenth and Eleventh Congresses, Congressman Raul Gonzales in the House filed the so-called Rico bill, and the late Senator Robert Barbers in the Senate filed an anti-money laundering bill. The anti-money laundering bills, however, did not prosper beyond the committee level, as an AML bill was not considered a serious legislative agenda. The legislators and the executive branch (Aquino, Ramos, Estrada, and Arroyo administrations) did not see the urgency of the AMLA despite the country’s being a signatory to international agreements, such as the 1998 United Nations Political Declaration and Action Plan Against Money Laundering and the 2000 United Nations Convention Against Transnational Organized Crime, which mandate it.

Only upon the FATF’s decision to put the Philippines on the NCCT list did the government initiate steps to place the AMLA on the legislative agenda as well as prioritize its enactment. Following the FATF demand to pass the financial regulation, President Gloria Macapagal Arroyo made a commitment to the FATF on May 2001 that she would certify to the newly elected Twelfth Congress the urgency of enacting the AMLA [12]. The executive commitment formally pushed the executive agencies, particularly the Department of Finance (DOF), the Department of Justice (DOJ), and the Bangko Sentral ng Pilipinas (BSP), and the legislature— the Senate and House of Representatives— to take immediate action and cooperate. The enactment of the AMLA became of primordial importance, taking precedence over all other pending legislative bills.

Agenda-setting power is “the ability to structure policy debate by controlling which issues are discussed or establishing a priority amongst them” [6]. In the agenda setting for the AMLA, the impetus came from an external entity. Before the FATF came into the picture, the AMLA was out of the picture in the policy agenda of the institutional policy actors. The FATF demand was the compelling factor that prompted the executive and the legislature to consider and undertake the deliberation of the financial regulation.


4. Power as Decision Making

The process of enacting the AMLA was circumscribed by the FATF in two ways. First, the law must be passed before the 30 September 2001 deadline. Second, the law must conform to the 40 + 9 Recommendations, which was the FATF mandated global standard. The FATF report showed that the Philippines did not have any specific legislation to criminalize money laundering per se and did not meet 23 of the 40 Recommendations, and that the current Congress urgently needed to enact the AMLA. The 40 Recommendations called for the criminalization of money laundering and the 9 Recommendations called for the criminalization of the financing of terrorism. Both the deadline and the global standard were unilateral demands of the FATF on the Philippines. The failure to enact, enacting after the FATF deadline, or enacting but without conforming to the FATF standard would result in the imposition of countermeasures against the Philippines.

The time frame for passing the AMLA was tight, as the committee hearing on the House of Representatives and the Senate commenced on the 22nd and 29th of August, respectively; 32 and 39 days before the FATF deadline. Under normal circumstances, the number of working days was insufficient to enact a highly complex and contentious law like the AMLA. Twice, the government appealed for an extension of the deadline (the first plea was made in the 4th Asia Pacific Group on Money Laundering [APG] meeting and the second was at the FATF meeting in Tokyo), but both were turned down by the FATF. The FATF made it clear that the demand to enact the AMLA was nonnegotiable. Thus, the unequivocal message was that the Philippines must enact the AMLA on time or face the consequences.

To cope with the FATF requirements and avert the grim scenario of facing the countermeasures, the institutional policy actors needed to act immediately. On the part of the executive, the DOF, DOJ, and BSP came up with the administrative draft to “guide” the legislators. The draft was fed to the committee hearings in both chambers so as to fast-track the deliberations. On the part of the legislature, the Senators and the Representatives engaged in express and marathon proceedings to expedite the crafting of the law. Moreover, President Arroyo certified the committee reports of both chambers. In effect, the certification dispensed with the constitutional requirement of three readings on separate days. Thus, the second and third readings were done on the same day.

The lawmakers took shortcuts in the usual lawmaking practice, such as abruptly replacing (by substitution) the committee report with a new working draft while it was being sponsored in plenary, and limiting the bicameral conference committee (BCC) deliberations as well as the ratification of the BCC report in both chambers to just a day. Because of these extraordinary actions taken by the legislators, Congress was able to pass the AMLA (Republic Act 9160) a day before the FATF deadline.

The lawmakers were able to meet the FATF deadline; however, they committed lapses in conforming with the 49 + 9 Recommendations. Exemplifying the “satisficing” mind-set (just-to-comply attitude), the lawmakers decided to disregard some FATF criteria; as a result, the action diluted the policy. The most conspicuous digression of the AMLA was in the issue of threshold amount (minimum amount needed to trigger the mechanism for reporting suspicious transactions). The FATF standard for the threshold was $10,000 (P500,000), but the Senators and Congressmen set P4 million as the threshold amount in the AMLA. The decision was seen as a compromise to opposing lawmakers to ensure the passing of the AMLA, as it was perceived that lowering the threshold would be unacceptable to their wealthy colleagues as well as their moneyed supporters in the business community.

Consequently, the FATF in its June 2002 Report noted that some stipulations of R.A. 9160 were inconsistent with 49 + 9 Recommendations. For instance the FATF report cited:

1. Although the Philippines’ authorities interpret the regulations as requiring the reporting of all suspicious transactions, this nevertheless conflicts with the AMLA, which only requires reporting of high-threshold suspicious transactions.

2. The law allows the AMLC to access account information upon a court order, but a major loophole remains in that secrecy provisions still protect banking deposits made prior to 17 October 2001. Secrecy provisions also still restrict bank supervisors’ access to account information [12].

In view of these deficiencies, the FATF again called on the Philippine Government to take the necessary steps to comply with the global standard. To ensure action, the FATF warned that the Philippines would remain in the NCCT list and may still face countermeasures unless the appropriate legislative amendments were made before 15 March 2003 [12].

Around September 2002, the Senate and the House of Representatives started the deliberations for amending R.A. 9160, while the newly created Anti-Money Laundering Council (AMLC) took the lead role in the amendment process on the executive side. With the AMLC working as the conduit of information in Congress, the amendment process generally went smoothly in both chambers from the committee hearings and plenary debates up to the approval of the reconciled version of the Senate and the House in the BCC. With an approved BCC report, the only things needed for the amendment bill to become a law were the plenary ratification of both chambers (which is considered as a mere formality) and the signature of the President.

Immediately after the approval of the BCC report, however, the FATF gave indications that the approved report would not be acceptable. The FATF continued to see in the BCC report inconsistencies with the 49 + 9 Recommendations, such as the expansion of the definition of “covered transaction” to include any suspicious transaction regardless of threshold amount; to make P500,000.00 the threshold for reporting covered transactions; and to broaden the definition of suspicious transactions. Thus, the whole effort of amending the AMLA could go to waste if the FATF rejected the amendment. Rejection would imply that the Philippines would continue to be in the NCCT list and would suffer the countermeasures.

To remedy the situation, the Arroyo Government interceded and arranged a dialogue between the lawmakers and the FATF. On 18 February 2003, the FATF delegates and the legislators (16 Senators and a number of Congressmen) led by Senate President Franklin Drilon held a dinner meeting. In the meeting, the lawmakers sought the concerns of the FATF by asking its delegates about specific provisions they want to include or exclude in the AMLA. In turn, the lawmakers put forward proposals on which they sought the approval of the FATF delegates. After “getting the nod” of the delegates, Senate President Drilon requested that the gentlemen’s agreement be put into writing to make sure no “slip-up” could happen in redrafting the bill.

The agreement implied that the already approved BCC report would be substantially changed. This scenario implied two things: first, there was a need to redraft the bill and reconstitute the BCC; and second, the imposition of the agreement over the reconstituted BCC would mean that the members could not make any changes beyond those things approved by the FATF. Thus, acceding to the FATF demand necessitated “ditching” the BCC report, which was a genuine product of the institutional policy actors’ engagement in the policymaking process, and “tying the hands” of the BCC members as well as the whole Congress, as their freedom to discuss and propose was constricted by the agreement.

Conforming to the agreement, on 4 March the legislators reconvened the BCC to redraft the bill. During the deliberations, the Senate and House leadership reminded the members that they needed to strictly follow the agreement to avoid the risk of inserting stipulations unacceptable to the FATF. As Senator Edgardo Angara warned, adding one word or another inadvertently may require another round of negotiations with the FATF. The next day, the reconstituted BCC report was forwarded and ratified in both chambers. The resulting act, R.A. 9194, was signed into law by the President on 7 March 2003.

Power in decision making refers to the ability to control the process of making choices as well as reaching the outcome. In the decision making for the AMLA, the institutional policy actors were compelled by the FATF to enact and amend the law within a given time frame. The insistence of the FATF provided enough impetus for the lawmakers to rework the content of the AMLA to ensure that the law conformed to the 49 + 9 Recommendations.


5. Power as Context Shaping

The FATF influence on the Philippine policymaking process was further reinforced by the contemporary dynamics of the global financial structure. The integration of the financial system has altered the underpinning of the state’s authority in making policies. In the realm of financial regulations, the influence of international organizations has intensified and transcended the territorial jurisdiction of states. Globalization, depicted as increasing financial interdependence, has further hastened the change. “Globalized international financial markets are more open, more liquid and more internationally integrated than ever before” [8]. In effect, financial transactions became open and instantaneous. With this unprecedented financial mobility, issues such as the danger posed by the erratic financial system emerged and necessitated coordination and cooperation among states. “All the crises of the 1990s highlighted the vulnerability of national financial systems and the need for countries participating in the global financial system to have strong standards of accounting, prudential regulation, disclosure, exchange and so forth” [8]. Avoiding such financial crises in one area or region cannot anymore be done in isolation, as the crisis can easily spill over to other states.

Handling the vulnerabilities of the globalized financial structure created the need for financial regulations. The effectiveness of financial regulations was premised on each state adopting as well as abiding by these regulations. At present, the worldwide responsibility for disseminating the financial regulations has been taken over extensively by international organizations. The task has provided the impetus and rationale for international organizations to encroach on domestic policymaking and, consequently, has tremendously increased the influence of international financial organizations on the institutional policy actors and the policy process. In this global financial setup, interference by international organizations in external policy was acceptable and considered legitimate.

In managing the contemporary global financial structure, international organizations have relied principally on the concept of international regimes. International regimes are “sets of implicit or explicit principles, norms, rules, and decision making procedures around which actors’ expectations converge in a given area of international relations” [9]. Simply put, international regimes can be construed as “sets of governing arrangements” [10] imposed on the international community. International regimes, which include informal customs and formal negotiated agreements, affect states’ behavior as well as international relations. In global finance, financial regimes aim to regulate states’ behavior and promote international cooperation to promote global financial stability. Financial regimes are formalized into treaties or international agreements to make them binding to states. In addition, treaties and agreements usually prescribe formal and informal penalties and are administered by specialized international organizations [11]. The administering organization functions as the principal regulator and enforcer of the regime, as it could impose sanctions to recalcitrant states. For instance, the international trade regime is underpinned by the World Trade Organization (WTO) and the international financial regime is backstopped by the IMF and WB.

In view of the worldwide proliferation of illicit money and terrorist finance the AML regime was established. The AML regime promoted the global adoption of laws and regulations that address the problem of the unhampered flow of illicit money. Specifically, the AML regime mandated that all states legislate a financial regulation that combats money laundering and terrorist financing. The FATF, after its formation, became the official regulator and enforcer of the AML regime. On one hand, the FATF regulates by requiring that the law passed by each state conform to the FATF-imposed international standards. The condition was instituted to ensure consistency among the laws crafted by states and effective global implementation. On the other hand, the FATF enforces by imposing sanctions on nonconforming states. In a sense, the capacity to inflict punitive measures makes the AML regime compulsory rather than voluntary.

The AML regime places strong incentives for compliance and penalizes uncooperative behavior. The Philippines, as one of the countries identified as NCCT, hardly has any choice but to accede to the AML regime, as the country would be taking enormous fiscal and monetary risk if it decides to disregard the AML regime. As the FATF could impose sanctions, the AML regime has “a critical impact on what policy makers can and cannot do and the policy choices they make” [11]. The Philippines cannot afford to become a pariah state; as long as economic development is a principal agenda, the government cannot isolate itself from the international financial institutions and the global capitalist economy.

Moreover, the global financial structure is highly skewed, as the financial regimes were determined and set up by wealthy and powerful states, and “ordinary” states were bound to follow. As financial regimes were used to compel, indirect power was utilized on other states. Likewise, the exercise of indirect power opened the possibility of employing direct powers, as the former serves as the basis for the exercise of the latter. In this global setup, the Philippines has negligible influence on the FATF as well as inadequate capacity to resist pressures from the AML regime. This was exemplified by the extraordinary efforts taken by the Philippine government to enact the AMLA, such as the marathon deliberations, the amendment proceedings, and redrafting of the BCC report to conform to the FATF standard. This experience was shared by NCCTs, as all the blacklisted states took immediate action to comply with the AML regime. The clout of the AML regime over states was overwhelming, as even Myanmar, which is considered a rogue state, took serious action to comply with the FATF demand (In the 2006 FATF Report, Myanmar was removed from the NCCT list).Thus the action taken by the Philippines and the other blacklisted states showed the effectiveness as well as the entrenched status of the AML regime in the present global financial structure.

The dynamics of the global financial structure have made international regimes the mode for policy co-optation, and international organizations as legitimate policy actors. The AML regime has restricted the parameters for policy decisions of the institutional actors and sanctioned the management of the policy process by the FATF from the outside, so to speak. Moreover, the financial structure, as it puts limits to a state’s policy choices and process, exemplifies the exercise of indirect power as well as serves as the basis for the exercise of direct powers. Thus, the exercise of agenda-setting and decision-making powers exhibited by the FATF in the enactment of the AMLA was made possible and reinforced by the context-shaping power of the prevailing financial structure.


6. Conclusion

In the contemporary era of financial globalization, the AMLA was the byproduct of the skewed relations of power politics in policymaking. By convention, lawmaking is a domestic process where the institutional actors, and the executive and legislative branches are the central policy actors. The experience in creating the AMLA altered the power dynamics, as the FATF dominated the institutional actors. The FATF influenced the policymaking by exercising agenda-setting and decision-making powers on executive officials and the legislators. In agenda setting, the institutional policy actors were obliged to prioritize the consideration of and deliberation on the financial regulation. In decision making, the institutional policy actors were compelled to enact and rework, within a time frame, the content of the policy to conform to the FATF standard. The FATF employed mainly the threat of sanctions in exercising these powers. The use of the agenda-setting and decision-making powers was made possible and reinforced by the context-shaping power of the prevailing financial structure. In context shaping, the institutional actors were bound to enact the policy because of the prevailing AML regime established by the FATF, as noncompliance would make the Philippines an outcast state. Overall, the FATF influenced the lawmaking process and content of the AMLA through the use of direct and indirect powers.

The lawmaking process that produced the AMLA manifested the relationship among the different types of power. The agenda-setting power focused on the introduction of the policy, the decision-making power emphasized the deliberations on the substance of the policy, and the context-shaping power dealt with the effect of the prevailing global financial structure on the policy dynamics. The enactment of the AMLA exemplified the use of several dimensions of power as well as the connection among them, as each dimension reinforced the use of the other dimensions. Thus, the AMLA illustrates that to have a better analytical grasp and understanding of the policy process, the outcome, and the contextual dynamics, all possible sources of power must be considered in the policymaking equation.


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Primary Sources (Congressional Documents)

Congress of the Philippines. 2001. Transcript: House of Representatives Committee Hearings on Money Laundering (Committee on Banks and Financial Intermediaries).

Congress of the Philippines. 2001. Transcript: Senate Committee Hearings on Money Laundering (Committee on Banks and Financial Institutions and Committee on Justice and Human Rights).

Congress of the Philippines. 2001. Transcript: Bicameral Conference Committee on Senate Bill 1745 and House Bill 3083.

Congress of the Philippines. 2001. Transcript: House of Representatives Session Proceedings on Money Laundering.

Congress of the Philippines. 2001. Transcript: Senate Session Proceedings on Money Laundering.

Congress of the Philippines. 2002. Transcript: House of Representatives Committee Hearings on the Amendments to the Anti-Money Laundering Act (Committee on Banks and Financial Intermediaries, Committee on Economic Affairs and Committee on Justice).

Congress of the Philippines. 2002. Transcript: Senate Committee Hearings on the Amendments to the Anti-Money Laundering Act (Committee on Banks and Financial Institutions and Committee on Constitutional Amendments).

Congress of the Philippines. 2002. Transcript: Senate Session Proceedings on the Amendments to the Anti-Money Laundering Act.

Congress of the Philippines. 2003. Transcript: Bicameral Conference Committee on Senate Bill 2419 and House Bill 5655.

Congress of the Philippines. 2003. Transcript: House of Representatives Session Proceedings on the Amendments to the Anti-Money Laundering Act.

Republic Act 9160. Anti-Money Laundering Act of 2001.

Republic Act 9194. An Act Amending Republic Act no. 9160, otherwise known as the Anti-Money Laundering Act of 2001.