The Philippines is to rewrite laws designed to combat money laundering just 24 hours after they were passed by Parliament in a last-ditch attempt to avoid sanctions.

The new legislation was intended to help the Philippines escape censure for being lax in the fight against dirty money - and thus avoid its financial system, and an annual $7.5bn in remittances from expatriates, from being disrupted.

The worst case scenario is if the correspondent banks cut off lines with Philippine banks... But we don't know how severe the situation will be Alberto Reyes Central bank deputy governor

But on Friday, the Paris-based Financial Action Task Force said amendments which weakened the new regulations rendered them "deficient", giving Manila till 15 March to avoid "counter-measures".

At the same time, the FATF judged that the Ukraine has toughened its own regulations enough to allow it to escape sanctions.

But - unlike Grenada - which has finally made it off the list - it will remain on the FATF's "blacklist" of non-cooperative countries and territories (NCCTs) till its new legislation has been implemented.

Stopgap

The President of the Philippines, Gloria Arroyo, had refused to sign the new laws, saying she wanted to wait till after the FATF made its decision.

Members of Parliament had weakened the proposed legislation by requiring a court order before suspect bank accounts can be investigated.

Only cases of kidnapping for ransom, drug trafficking and terrorism are exempt.

Non-cooperative territories

Cook Islands Egypt Indonesia Burma Nauru Nigeria Philippines St Vincent & Grenadines Ukraine

That was enough to trigger the FATF's warning, and Ms Arroyo has now ordered finance officials to work with legislators to rewrite the rules once more.

In the meantime, the central bank has drawn up emergency plans to cope with the fact that overseas banks will be taking extra care when processing transactions with the Philippines.

The country's 43 commercial banks have been ordered to extend short-term loans to families caught short, and a credit window for exporters.

"The worst case scenario is if the correspondent banks cut off lines with Philippine banks," said central bank deputy governor Alberto Reyes.

"But we don't know how severe the situation will be."

Writing the rules

The FATF has been drawing up internationally-recognised guidelines for fighting dirty money since 1989.

The NCCT list is the centrepiece of its efforts, and has shrunk from two dozen names to just 10 over the past decade as countries have responded to the threat of having their financial system effectively frozen out of international finance by tightening up lax rules.

While it cannot impose sanctions, it can recommend them to its 29 members, as it has now done with the Philippines.

Since the tragedy of 11 September 2001, it also has responsibility for guiding international efforts to deal with the funding of terror.

Controversy

The NCCT list could be in danger of disappearing, though.

The International Monetary Fund is keen to combine its work on financial regulation with that of the FATF.

But its developing world members say the NCCT list is discriminatory, accusing rich FATF members - especially the US and the UK - of forcing reforms on offshore jurisdictions which they refuse to countenance for their own banks.