As probe shines light on COVID deals, more questions arise
MANILA, Philippines—From what started as deficiencies in the government’s COVID-19 funds flagged by an audit report, the Senate found more red flags involving P8.7 billion in orders for medical supplies given to private, mostly foreign companies, and the role played by key individuals in government and in President Rodrigo Duterte’s circle of allies.
The spending of billions of pesos in public funds on supplies procured without public bidding and through negotiated contracts had legal cover from several issuances, like Duterte’s national emergency proclamation for the pandemic and the two Bayanihan laws, which allowed the President to realign funds for COVID expenses.
But details emerging from the Senate investigation appear to bolster claims of irregularities in the expenses, like markups on prices that raised eyebrows and fueled accusations of an overprice.
While Duterte said senators might be just politicking, a group of independent accountants and two other private audit teams took a look at the most controversial contract in the COVID fund spending—purchases of PPEs costing more than average from the company Pharmally Pharmaceuticals Corp or just Pharmally.
Ken Abante, of the nongovernment watchdog Citizens’ Budget Tracker (CBT), said in an interview with ANC that he and two accountants who were the lead authors of the study found six issues in the contract given to Pharmally.
Abante said five of those were “high-risk observations, meaning these are possible red flags that the Senate and Commission on Audit can look at because these indicate that there’s a potential for fraud.”
Pharmally: Financial Statements Analysis (with the Citizens’ Budget Tracker and Right to Know, Right Now! Coalition)
In their report, Abante along with Jahleel-An Burao and Michael Lava included a risk rating framework which listed the results of the independent audit of the Pharmally contract.
The observations made by the researchers, according to Abante, “can tell you whether a company is able to operate as a growing concern.”
Among the six observations listed by Burao and Lava, who audited the Pharmally contracts, were:
- Potential under-declaration of input VAT related to purchases amounting to P402.2-M (high risk)
- Insufficient contracting capacity (high risk)
- Insufficient disclosures and details for donations that were declared as fully deductible expenses (high risk)
- Missing and incomplete material disclosures in 2020 financial statements of the company (high risk)
- Sources of interest expense and foreign exchange gains or losses are not presented and disclosed in the 2020 financial statements (high risk)
- Reported amounts cannot be matched in the disclosures (medium risk)
“We noted that the company does not appear to be financially capable to support P7.9 billion contracts that were awarded from a very short time frame,” Burao explained.
The contracts were awarded to Pharmally between April to June last year, which according to Burao, were awarded three or six days between transactions.
“So it’s very curious that a company that only has 599 thousand in its bank account is being made to fulfill contracts that are worth billions,” she added.
According to her, they looked into the firm’s Single Largest Completed Contract (SLCC) or Net Financial Contracting Capacity (NFCC) and determined whether it was the same size as the contract they were awarded.
“This was not the case, it was very far from that,” she said.
A review of the Statement of Cash Flows and the Statement of Financial Position also showed that Pharmally’s P5,994,500 total assets before bagging the contracts were insufficient to warrant the awarding of P7.9B worth of contracts from April to June 2020.
“As mentioned by former Usec Lao in the Senate hearing, there was no advanced payment to the companies. Meaning, they had to deliver fully the items before they get fully paid,” explained Lava.
“So this is truly a curious case because in the financial statements we didn’t see any loans, any long-term liabilities that the company had secured,” he added.
Abante said the findings highlighted discrepancies within the contract between PS-DBM and Pharmally.
“The audited financial statements do not inspire confidence that the government entered into a contract that was advantageous to the people,” he said.
The COA and Bureau of Internal Revenue (BIR) said they will conduct a separate investigation on the Pharmally contracts.
It should be noted that in the analysis, the authors found possible under-declared VAT in the firm’s financial statements.
“It could be a flag of under-declared VAT input,” Burao said.
“This is not an outright accusation that these were under-declared but given the size of it according to our laws, a 30 percent under-declaration can be prima facie evidence that this was intentional,” said Burao.
The prominent agencies, individuals and issues that are forming the cast of characters and the story line in the unfolding Senate investigation included:
Commission on Audit
Last month, the Commission on Audit (COA) released its annual audit report, which showed the deficiencies on how the Department of Health (DOH) managed its P67.32 billion fund to fight the COVID-19 pandemic in 2020.
The Senate blue ribbon committee started conducting an inquiry into the pandemic funds of DOH last year after the COA report found deficiencies worth at least P67 billion.
It started investigating the P42 billion fund transfer between the DOH and the Department of Budget and Management-Procurement Service (DBM-PS) and allegations of overpricing in the procurement of PPE sets and the murky background of suppliers that got a huge chunk of the funds.
Procurement Service (PS) of the DBM
Among the deficiencies flagged by COA was the P42 billion for COVID supplies that was transferred by DOH to the PS-DBM.
The PS-DBM handles large-scale procurements for the government during the pandemic, including COVID-19 supplies. Government agencies, on the other hand, can purchase supplies from the DBM-PS instead of making deals with private firms.
Health Secretary Francisco Duque III
As the country’s health chief, Francisco Duque III was among the names that resurfaced as the Senate looked into the DOH’s handling of pandemic response funds.
According to Senate Minority Leader Franklin Drilon, Duque “committed the original sin” after the DOH transferred its money to PS-DBM without any memorandum of agreement (MOA).
Duque told the Senate there was nothing irregular in the movement of funds.
Lloyd Christopher Lao
Lloyd Christopher Lao, former head of PS-DBM is among the personalities quizzed by the Senate blue ribbon committee regarding the purchase of face masks and shields last year at marked up prices that were almost double prevailing market costs.
He was also questioned about his involvement with a small company that bagged billion-peso contracts from PS-DBM.
Lao also served as Duterte’s election lawyer in 2016.
Pharmally Pharmaceutical Corp.
Pharmally Pharmaceutical Corp., which is now at the center of the ongoing Senate investigation, was among the firms recommended to and chosen by PS-DBM to supply face masks, test kits, PPEs and other medical supplies for the pandemic.
The little-known trading company was awarded the biggest share of funds from PS-DBM despite having existed for only around eight months. This further raised suspicion among senators.
Among the red flags tied with the company, which claims to import and distribute pharmaceutical products and medical devices as its “main line of business,” was its fictitious address.
At a Senate blue ribbon panel hearing on Aug. 27, senators found that the company listed a fictional address on its Securities and Exchange Commission general information sheet (GIS).
The COA named seven companies that were awarded contracts worth millions by the PS-DBM to supply PPEs, face masks, and face shields.
Pharmally Pharmaceutical Corp. was registered with the Securities and Exchange Commission in September 2019 with declared capital of P625,000.
Pharmally, however, was not the only company on the list of suppliers that got contracts from the PS-DBM. The others were Newlife Pharmaceutical Inc., Cosmic Technologies Inc., Phil Pharmawealth Inc., EMS Components Assembly Inc. (a Filipino company), Health Wellness Lifestyle Inc. and Philippine Blue Cross Biotech Corp.
Chinese businessman and Duterte’s former economic adviser Michael Yang was mentioned in the Senate investigation after an RTVM video was played showing him and officials of Pharmally Pharmaceuticals Corp. meeting Duterte in Davao in 2017.
“Possibly among the supporting actors [in the controversy] is former economic adviser Yang,” said Sen. Risa Hontiveros on August 30.
Yang established the Davao City Los Amigos (DCLA) mall when Duterte served as Davao City mayor.
According to businessman and ex Mindanao Economic Development Council chair Sebastian Angliongto, Yang and Duterte had been seen dining together in a Chinese restaurant in the past.
In 2019, dismissed police officer Eduardo Acierto linked Yang to illegal drugs. Yang was later cleared by law enforcement agencies for lack of substantial proof.
Duterte also said Yang was a legitimate businessman.
The Senate blue ribbon committee is currently investigating allegations of overpricing in the procurement by the PS-DBM of PPE sets, face masks and face shields on behalf of the DOH.
The money trail in the controversy goes way back to the P42 billion that was transferred by the DOH to PS-DBM which was found to be not covered by a memo of agreement between the two agencies or any documentation.
Officials, however, told senators that since the transfer took place during a national emergency—the pandemic—it was exempted from the normal processes.
The P42 billion was the biggest chunk of the P67 billion in spending flagged by COA for deficiencies.
According to Drilon, the transfer of funds without the MOA or supporting documents violated the implementing rules and regulations of the Procurement Act.
“There is nothing there which dispenses with the execution of the MOA which is necessary so that there can be a documentary tracing of this disbursement—P42 billion,” Drilon told Lao during the Senate hearing.
From the COVID-19 funds received by the PS-DBM, at least P8.7 billion worth of contracts were awarded to companies from April to May 2020 to supply PPEs, COVID test kits, and other medical equipment.
Pharmally Pharmaceutical Corporation, was awarded the biggest share with a P3.8 billion contract.
Under the contract, the firm set the price for face mask at P27.72 per piece, which was at least double the price offered by other suppliers amounting to P13.50 to P17.50 per piece.
Compared to the test kits costing P925 each sold by other suppliers, Pharmally sold kits that cost P1,720 each.
PPE sets from Pharmally also cost P1,910 each while market prices averaged P945 per test kits in May 2020.
Sen. Risa Hontiveros during the Senate hearing also provided information that links Pharmally to a company with the same name—Pharmally International Holdings—flagged by the Taiwanese government for financial fraud.
“Their stocks have been suspended in the Taiwan stock exchange and their chairman faced a warrant of arrest for financial fraud,” according to the document cited by Hontiveros.
According to Drilon, the eight-month-old firm also has paid-up capital of only P625,000, which was “obviously insufficient” to assume “huge risk” for the delivery of P8.68-billion worth of procurement.
Negotiated procurement, according to law, can only be entered into with two persons or entities that have technical, legal and financial capabilities.
Drilon also said the company generated a profit of P393 million as its assets grew from P599,000 in 2019 to P284.9 million in 2020, which was around the same time it bagged government contracts from the PS-DBM.
An electronic company identified during the Senate hearings as Philippine Blue Cross Biotech Corp. bagged a total of P432.17 million contracts from the DBM-PS for the procurement of 1.32 million face shields.
According to Drilon, the government could have saved P284 million in the procurement of COVID-19 response supplies if there was no “middle man” involved in the transactions.
“If there was a government to government transaction, without a middle man, the Philippines would have saved P284 million as commissioned, as fees of Pharmally,” Drilon said in an interview with ANC last Sept. 2.
“It is alleged that the government would have had to look for suppliers because of the tightness of the supply. They even had the Chinese ambassador assist them. If that is so, why do you have to go to a middle man, why not do a government-to-government transaction?” the senator said.
Another crucial subject of the controversy, alongside the billions of pesos passed from the government to private firms, was the link between the people involved in the issue.
Last week, Hontiveros showed the links connecting what she said were “shady” individuals and Pharmally.
According to senators, the firm’s chair, Huang Wen Lie, is “wanted” in Taiwan for alleged securities fraud, stock manipulation and embezzlement.
Another company official, identified as Huang Tzu Yen, is wanted for stock manipulation.
“Why did we even deal with these shady individuals and companies?” Hontiveros said.
Aside from the connection within the firm, the senators also uncovered Pharmally’s relationship with other prominent individuals in the Philippines.
Among the incorporators of Pharmally were directors of the Full Win Group of Companies, one of them a certain Zheng Bingqiang who is likewise wanted for stock manipulation.
Meanwhile, the chairman of Full Win’s “Philippine version”, according to Hontiveros, is Michael Yang — Duterte’s ex-economic adviser.
From this revelations, the senator brought up the 2017 video of Yang and Pharmally officials meeting Duterte in Davao City.
“Is there more to this story than what the President is leading us to believe?” she said.
Lao, when asked by the Senate to explain the costs of PPE sets bought by PS-DBM, said the price of P1,800 per set was not just one item but several items in a package.
He said while the Department of Trade and Industry fixed a price ceiling of P900 per PPE set prices differ based on technicalities.
“There’s a layman’s term for PPE and a technical term for PPE,” Lao told the Senate.
“The layman’s term of PPE is the coverall but technically when you say PPE, it’s multiple items that protect a person from being infected,” Lao said.
He said PPE sets bought for P1,800 each contained eight to 10 items per package. “This is not just one item. It has multiple items,” said Lao. The DTI suggested retail price of P900, he said, applied only to coveralls.
Hontiveros countered that the prices would still be lower if the supplies had been bought from other suppliers.
The chief implementer of the National Task Force Against COVID-19, Secretary Carlito Galvez Jr. explained that PPEs bought from Pharmally were of “medical grade” and were not locally produced, which explains the higher costs.
“We bought that because of the urgency of time,” said Galvez.
Duque also said there was an urgent need to buy masks because the DOH’s supply was wiped out when Taal erupted in January 2020 and required the distribution of face masks to affected communities.
Presidential spokesperson Harry Roque also said that the Senate probe has yet to prove that the PPEs supplied by Pharmally were overpriced.
“They can’t prove the overpricing of PPEs because they can’t show that the P1,700 at that time was overpriced,” he said at a press briefing.
During the same press briefing, Roque said there is “no need” for the Senate to conduct an investigation on individuals behind Pharmally.
“Under the law, we have a principle that a corporation has a separate personality, separate and distinct from the stockholders. But the one that entered a bid was the corporation,” he said.
“We don’t need to scrutinize the personalities behind the corporation because that’s a separate personality,” he added.
READ: Palace: Corporation ‘separate’ from shareholders, no need to scrutinize those behind Pharmally
In defense of Yang, Duterte said his former economic adviser took part in biddings for his businesses in the Philippines.
“I thought we are inviting investors? That’s why I went to China several times to ask them to help us. Investments. Their money will be poured here first so we can have some,” the President said speaking in Filipino.
Malacañang cleared Yang, denying he was involved in the purchase contracts.
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