In a significant ruling, the Supreme Court of the Philippines addressed the complexities of graft and malversation involving public funds. The Court clarified the responsibilities of public officials managing government instrumentalities and defined the scope of liability for misuse of funds. The Court affirmed the conviction of Adriano A. Arcelo, former president of the Fund for Assistance to Private Education (FAPE), for violations of the Anti-Graft and Corrupt Practices Act and malversation. The court underscored that government funds, even those originating from private sources, must be handled with utmost diligence and adherence to legal standards. Ultimately, the decision reinforces the principle of public trust and accountability in managing resources intended for public benefit.

When Does a Private Fund Become a Public Liability? The FAPE Case

The case of Adriano A. Arcelo v. People of the Philippines and its consolidated petitions revolved around the alleged misuse of funds from the Fund for Assistance to Private Education (FAPE). FAPE was created in 1968 to provide financial assistance to private educational institutions. The central question was whether FAPE’s funds, particularly Account 1003—a commingled account of funds from various sources—could be considered public funds, and whether the actions of its officers constituted graft and malversation.

The legal battle began when the Private Education Assistance Committee (PEAC), the trustee of FAPE, filed a complaint against FAPE officers, including Adriano A. Arcelo (the president), Rosa Anna Duavit-Santiago (the investment director), and Roberto T. Borromeo (the vice-president). The complaint alleged plunder, violations of Republic Act No. 3019 (the Anti-Graft and Corrupt Practices Act), and the recovery of ill-gotten wealth. The core of the issue was Arcelo’s procurement of personal loans from FAPE funds and a PHP 50 million loan to Juan B. Lacson Colleges Foundation (JBLCF), chaired by his spouse.

The Sandiganbayan, a special court in the Philippines that handles cases of corruption by public officials, found Arcelo et al. guilty of violating Section 3(e) of Republic Act No. 3019 and malversation under Article 217 of the Revised Penal Code. The Sandiganbayan ruled that FAPE funds are indeed public funds and that the actions of Arcelo and his co-accused constituted a misuse of these funds. Arcelo et al. then appealed to the Supreme Court, questioning whether their guilt had been proven beyond reasonable doubt.

One of the major points of contention was whether FAPE was a government instrumentality or a private institution. The Supreme Court examined the nature of FAPE and its relationship with the government to determine its status. It looked at its creation through Executive Order No. 156, its purpose, and its composition to determine its classification. According to Section 2(10) of the Introductory Provisions of the Administrative Code, an instrumentality refers to any agency of the National Government, not integrated within the department framework vested within special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. This definition helped the Court classify FAPE as a government instrumentality.

Section 2. General Terms Defined. – Unless the specific words of the text, or the context as a whole, or a particular statute, shall require a different meaning:

(10) Instrumentality refers to any agency of the National Government, not integrated within the department framework vested within special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions and government-owned or controlled corporations.

The Court emphasized that the true criterion to determine whether a corporation is public or private is the totality of the relation of the corporation to the State. It stated, “If the corporation is created by the State as the latter’s own agency or instrumentality to help it in carrying out its governmental functions, then that corporation is considered public; otherwise, it is private.” This principle highlighted that FAPE’s role in assisting private education aligned with a public purpose, solidifying its classification as a government instrumentality.

Moreover, the Supreme Court addressed the argument that FAPE Account 1003 consisted of external and private funds and was therefore not subject to public scrutiny. The Court stated that commingled funds from investments of private educational institutions, the moment they are received by FAPE officers, are considered as government funds. Funds coming from private sources become impressed with the characteristics of public funds when they are under official custody.

Section 42. Accounting for Money and Property Received by Public Officials. – Except as may otherwise be specifically provided by law or competent authority, all moneys and property officially received by a public officer in any capacity or upon any occasion must be accounted for as government funds and government property. Government property shall be taken up in the books of the agency concerned at acquisition cost or an appraised value.

Regarding the allegation of conspiracy, the Court found that there was reasonable doubt about the existence of a conspiracy among Arcelo et al. to commit the crimes charged. The Court thus assessed the individual liabilities of each of the accused.

For Arcelo, the Court affirmed his conviction for violation of Section 3(e) of Republic Act No. 3019, which penalizes public officers who cause undue injury to any party or give unwarranted benefits, advantage, or preference in the discharge of their official functions. The Court stated that Arcelo’s actions demonstrated evident bad faith because he applied for personal loans and received proceeds from FAPE funds knowing they were public funds intended for education assistance. He also facilitated a PHP 50 million loan to JBLCF, chaired by his wife, creating a clear conflict of interest. The Court also affirmed Arcelo’s conviction for violating Section 3(h) of Republic Act No. 3019, which prohibits public officers from having a financial or pecuniary interest in any business, contract, or transaction in which they intervene or take part in their official capacity.

For Borromeo, the Court reversed his conviction, stating that the prosecution failed to prove beyond reasonable doubt that he acted with manifest partiality or gross inexcusable negligence. The Court emphasized that signing hold-out promissory notes and agreements did not necessarily mean he granted the loan. As one of the authorized signatories, his signature on the documents does not necessarily signify an approval of Arcelo’s personal loan. The Supreme Court sided with his argument as he only relied on the checking, reviewing, and approval of responsible FAPE personnel following the procedure laid down in the Investment Manual for cash disbursements.

For Duavit-Santiago, the Court also reversed her conviction. The Court stated that Duavit-Santiago asked for confirmation from her superior, Atty. Jose D. Baltazar, concerning Arcelo’s application for personal loans, exhibiting good faith in the transaction. As there were proper channels she went through before proceeding with the loan transaction, it cannot be said she had malicious intent, a quality that an offense committed with dolo or bad faith requires.

As for the charges of malversation under Article 217 of the Revised Penal Code, the Court affirmed Arcelo’s conviction, stating that he misappropriated FAPE funds for personal loans and loans to JBLCF. Arcelo misapplied those same funds for his personal benefit, knowing they were to be used for assistance to private education and related matters.

However, the Court acquitted Borromeo and Duavit-Santiago of malversation, finding that the prosecution failed to establish negligence on their part. The Court noted that Duavit-Santiago obtained the confirmation of her superior and Borromeo acted on the checking, reviewing, and approval of responsible FAPE personnel. Hence, there was no failure to observe care, precaution, and vigilance that the circumstance justly demands.

FAQs

What was the key issue in this case?	The key issue was whether FAPE’s funds, particularly Account 1003, could be considered public funds, and whether the actions of its officers constituted graft and malversation under Philippine law. The case hinged on defining the boundaries of public trust and accountability in managing resources intended for public benefit.
What is FAPE?	FAPE stands for the Fund for Assistance to Private Education, established in 1968 to provide financial assistance to private educational institutions in the Philippines. It was created to utilize earnings from a trust fund to support faculty training, scholarships, and other programs benefiting private education.
Who were the key individuals involved?	The key individuals involved were Adriano A. Arcelo, the former president of FAPE; Rosa Anna Duavit-Santiago, the investment director; and Roberto T. Borromeo, the vice-president. They were all charged with violations of the Anti-Graft and Corrupt Practices Act and malversation.
What were the specific charges against Arcelo?	Arcelo was charged with multiple counts of violating Section 3(e) and Section 3(h) of the Anti-Graft and Corrupt Practices Act, as well as malversation. These charges stemmed from his procurement of personal loans from FAPE funds and a PHP 50 million loan to JBLCF, chaired by his spouse.
What was the court’s ruling on FAPE’s funds?	The court ruled that FAPE’s funds, including Account 1003, are considered public funds, even if they originated from private sources. The court reasoned that once these funds are under the custody and control of public officers, they take on the characteristics of public funds and are subject to public trust.
What does Section 3(e) of Republic Act No. 3019 prohibit?	Section 3(e) of Republic Act No. 3019 prohibits public officers from causing undue injury to any party, including the government, or giving any private party any unwarranted benefits, advantage, or preference in the discharge of their official functions. It essentially aims to prevent corrupt practices by public officials.
What is malversation?	Malversation, under Article 217 of the Revised Penal Code, refers to the act of a public officer who, by reason of their office, is accountable for public funds or property, and misappropriates, takes, or allows another person to take such funds or property. It is essentially the embezzlement of public funds.
What was the outcome for Borromeo and Duavit-Santiago?	The Supreme Court acquitted Borromeo and Duavit-Santiago of all charges. The Court found that the prosecution failed to prove beyond reasonable doubt that they acted with manifest partiality, evident bad faith, or gross inexcusable negligence in their involvement with the transactions.

The Supreme Court’s decision in this case serves as a reminder of the high standards of conduct expected from public officials, particularly those managing government resources. The ruling underscores the importance of transparency, accountability, and adherence to legal guidelines in handling public funds. While the Court recognized the need to protect public officials from undue harassment, it also reinforced the principle that public office is a public trust, and those who violate this trust will be held accountable.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Adriano A. Arcelo, vs. People of the Philippines, G.R No. 235870, February 05, 2025