Pharmally scandal: Due diligence failure overshadows debate on law

PHARMALLY EXECUTIVE ARRIVES AT THE SENATE: Members of the Office of the Senate Sergeant-At-Arms escort Pharmally Pharmaceuticals Corporation Executive Linconn Ong inside the Senate building on Tuesday (Sept. 21). SENATE PRIB PHOTO

MANILA, Philippines—When did Republic Act 11469, or Bayanihan 1, take effect?

As Lloyd Cristopher Lao, former head of the Procurement Service of Department of Budget and Management (PS-DBM), cites Bayanihan to Heal as One Act as basis for billions of pesos of COVID supply contracts awarded to controversial company Pharmally Pharmaceutical Corp., the question left hanging was: Was the law already in effect at the time?

Pharmally, incorporated on Sept. 2, 2019, bagged 13 contracts with the government worth a total of P11 billion—all involving supplies for COVID response—from March 2020 to July 2021.

READ: ‘Negosyo lang’: Pharmally’s meteoric rise

Pharmally, having less than P600,000 in capital, couldn’t finance hundreds of millions of pesos worth of surgical masks, gowns and other PPEs and got help from Chinese businessman Michael Yang, former economic adviser of President Rodrigo Duterte and the President’s friend starting when he was still Davao City mayor.

Yang, according to Pharmally officials in testimony at the Senate blue ribbon committee, served as guarantor to secure supplies from Chinese PPE manufacturers and also lent money at some point for Pharmally to be able to pay for the supplies.

In an analysis of the company’s financial statement, the Citizen’s Budget Tracker said Pharmally had no financial capability to deliver the volume of PPE supply stated in its contracts. The group said it was strange how a company with less than a million pesos in capitalization was able to bag billions of pesos worth of supply contracts and deliver supplies.

Graphic by Ed Lustan

Lao, who signed most of the contracts for PS-DBM, was asked by the Senate if he exercised due diligence before giving the contracts to Pharmally. He said yes but “we failed to check on the articles of incorporation” because it was not a requirement.

Lawyer Zoilo Andin Jr told INQUIRER.net that when the government enters into a contract, it should make sure that the company is legally, technically, and financially capable: “It looks like the PS-DBM lacked diligence in checking the firm’s background. It’s a basic requirement.”

Lao said that a financial statement—a written record which conveys the firm’s financial position, financial results, and cash flows—were “not required by Bayanihan 1, so we did not look into that, we only looked at the basic documents.”

READ: Duterte defends Pharmally Corp. in alleged overpriced deals

The first contract that Pharmally got was dated March 25, 2020, a day after the President signed the Bayanihan 1 law. The Pharmally contract was worth P13.86 million for 500,000 pieces of surgical masks that was requested by PS-DBM on the same day.

Lao said Bayanihan 1 was already in effect on March 25, 2020, saying that it “expressly states that procurement should be made judiciously, economically, and expeditiously in the exemptions from the provisions of [Republic Act] 9184 and other relevant laws.”

The President echoed the statements made by his former PS-DBM chief, ranting at Sen. Francis Pangilinan, a member of the blue ribbon committee, who raised the point that when Lao awarded billions of pesos of contracts to Pharmally without public bidding, the law was not yet in effect. Bayanihan 1 allowed negotiated contracts, instead of public bidding, for emergency supplies for COVID.

READ: In Duterte take on COVID, clarity lost in attacks vs critics

“What kind of senator are you?” Duterte said, referring to Pangilinan. “You want to debate about technicalities during a global pandemic?”

Pangilinan, in one of the Senate blue ribbon committee hearings, said Bayanihan 1, or Republic Act No. 11469, was not yet in effect on March 25, 2020 because the law and its rules took effect on April 6, 2020 yet.

Lawyer Ernie Salao, a procurement expert, told INQUIRER.net that the Bayanihan to Heal as One Act provided a different mode of procurement. Without the law “all government procurements should conform with Republic Act 9184 or the Government Procurement Reform Act.”

Graphic by Ed Lustan

He said Bayanihan 1 provides that implementing rules and regulations (IRR) for procurement should be released by the Government Procurement Policy Board (GPPB). “I’m sure they released one,” said Salao.

Salao explained that if the first contract between Pharmally and the government came earlier than the date of effectivity of Bayanihan 1’s IRR, “technically there is a violation” because the Government Procurement Reform Act should be the prevailing law which required public bidding.

The GPPB issued the Guidelines for Emergency Procurement Under Republic Act 11469, or Bayanihan 1, on April 6, 2020 through Resolution No. 06-2020.

On March 23, 2020, GPPB released Resolution No. 03-2020 to simplify and streamline the Rules on Negotiated Procurement (Emergency Cases).

It provided that the head of the procurement entity, or government agency making the purchase, “may authorize the end-user unit or any other appropriate bureau, committee, support or procuring unit to directly negotiate with a legally, technically, and financially capable supplier, contractor, or consultant.”

Graphic by Ed Lustan

Salao said the Commission on Audit (COA) would call out the government office involved for “irregular” transaction if a contract or deal did not go through required procedure.

He said these irregular contracts included cases when the government agency purchased goods without documents.

“If I am part of COA, I would initiate an investigation so that those involved could explain,” said Salao.

READ: P550 million lost in expired COVID-19 test kits from Pharmally

“It does not necessarily mean that a thing that is illegal was committed based on that fact alone,” he said.

“We need to have an open mind in the conduct of investigation,” added Salao.

Diligence ‘indispensable’

Salao said there’s a reason that the law required a company to be “legally, technically and financially capable” to be awarded contracts. “It is not how we normally interpret those words,” he said.

Graphic by Ed Lustan

He said a company should be legally, technically, and financially capable because “we don’t want a situation where the government enters into a contract with a company that has no capability.”

“Since ‘public office is a public trust’, diligence is indispensable. It’s a given because of the principle that it is the people’s money that we are spending,” Salao said.

He explained that if the government enters into a contract with a company that would require help from a “third party to raise the fund, I think that is a red flag,” he said.

Andin had said on ANC that Pharmally’s admission that it had to borrow money from Yang to pay for supplies in its contracts with the government could be a violation of Republic Act No. 3019 or the Anti-Graft and Corrupt Practices Act.

He said those who signed the government contracts with Pharmally could face corruption cases. “It could, because under Republic Act 3019 it is a punishable act to award a person undue benefits or be manifestly partial to a particular individual,” said Andin.

Gov’t loss

Andin explained that it was essential to identify if the COVID contracts were “prejudicial” to the government.

READ: Pharmally, supplier made a profit of nearly P5 million on 1st face mask deal

In the investigations, it was revealed at the Senate that in the first contract with Pharmally, the government lost nearly P5 million.

Based on receipts and documents presented in the Senate investigation, it was learned that Tigerphil Marketing, the supplier that Pharmally contacted for PPE supplies, earned P2.95 million in profit while Pharmally earned P1.19 million in profit just in one contract.

Linconn Ong, Pharmally director, had said Pharmally bought surgical masks from Tiger for P23.90 each and sold these for P27.72 each.

“Pharmally should not have won the bid. They are really unqualified because they have no items,” said Sen. Richard Gordon, head of the blue ribbon committee.

Increased doubt

The capability of the firm to finance the contracts and the PS-DBM’s exercise of due diligence, however, were not the only concerns raised as the investigation led to more revelations on the government’s COVID-19 spending.

• Talk with Lao

Ong said he met Lao before the PS-DBM sent a Request for Quotation (ROQ) on March 25, 2020. Ong said he submitted a letter of intent and offered to deliver surgical masks immediately.

He said Lao asked him if they could immediately deliver the request. Ong responded “yes”.

Krizle Mago, an officer of Pharmally, said the inventory was delivered the same day, but retracted her statement, saying it was delivered the next day—March 26, 2020.

• Shady dates

The 500,000 surgical masks, the inventory involved in the first contract of Pharmally with the government, was delivered a day after the ROQ was sent—March 26, 2020.

READ: Senators question Pharmally’s ‘same day delivery’ of 500K masks to DBM-PS

However, Mago said the Notice of Award of contract from the PS-DBM was accomplished only on April 6, 2020 and that the company was paid nine days after.

• Advance delivery

In one of the blue ribbon committee hearings, Sen. Risa Hontiveros said that Mago sent a message to a PS-DBM staffer that Pharmally had delivered two million surgical masks.

The staffer responded by asking who gave the instructions. Mago said she would ask her boss—Ong and Mohit Dargani, the corporate secretary and treasurer of Pharmally.

The two, however, said they could not recall the details of the delivery.

Hontiveros said it looked like the delivery was made even before the ROQ from the PS-DBM was sent: “How would you know how much you’d be paid?”

• Yang or his ‘friends’?

On Sept. 10, 2021, the day when Yang attended the investigation, he said he was not the one who financed the firm, but his “friends”.

However, Ong and Huang Tzu Yen, Pharmally chairperson, said they received Yang’s help—he lent them money and served as guarantor for Pharmally with Chinese suppliers.

• Surgical masks for P27.72

Ong also admitted that Pharmally did not have stocks of PPE and the inventory that the company delivered came from a local supplier—Brother Tiger or TigerPhil Marketing Corp.

READ: Pharmally exec admits getting face masks at P23 each from ‘Brother Tiger’ to supply gov’t

He said Pharmally got the face masks from Tiger for P23.90 each and sold these for P27.72 each.

Sen. Richard Gordon estimated that TigerPhil profits reached P2.95 million and Pharmally’s reached P1.9 million on a single transaction.

• Luxury cars

In the investigations, Gordon asked about the expensive cars allegedly owned by Pharmally executives. He presented slides showing the models and price of vehicles supposedly owned by three Pharmally executives:

• Mohit Dargani, Porsche 911 Turbos S worth P8.5 million
• Twinkle Dargani, Lamborghini Urus (SUV) worth P13 million
• Lincon Ong, Porsche Carrera 4S worth P13.5 million and Lexus RCF worth P5.9 million

Gordon noted that the luxury vehicles were registered with the Land Transportation Office in 2021, the year after Pharmally bagged billions of pesos worth of contracts with the government and got paid.

• No importer’s license

Mon Abrea, a certified public accountant, said in the investigations that Pharmally was registered as a wholesaler with one primary purpose—“to import”.

He said the firm, in its notes to financial statement, did not indicate if they had an importer’s license.

He explained that it normally takes two to three years to establish a company’s reputation to prove its financial capacity.

• Not an asset, no lease agreement

Abrea said the firm’s office in Bonifacio Global City in Taguig City was not declared as an asset. It was not also declared as rented because there was no lease agreement.

The same was noted with the company’s warehouse. He said its location and registration with the Bureau of Internal Revenue were not declared.

For Andin, these revelations cast doubt on the deals that the government had with Pharmally, saying that it should prompt Filipinos to take a “hard look” and ask “what’s going on?”

What’s going on?

He said Yang’s words conflicted with Ong’s and Huang’s as the President’s former economic adviser said it was his friends who financed the company while Ong and Huang testified that it was Yang.

This and the other revelations made in the investigations, he said, should prompt concerns. “How can you not doubt?” he said.

He explained that as Yang was no longer with the government, there is nothing wrong if he helped Pharmally, but the conflicting narratives raise more questions.

“You have to take all of the circumstances, piece by piece, and try to see if there is a pattern that will evolve,” said Andin.

“All of that will eventually come up with a picture and hopefully, it will lead to prosecution and have those involved be held responsible,” he said.

For Salao, while it is not illegal for a company to engage in business even with small finances, it was important to know how the company operates.

Abrea noted that in Pharmally’s notes to financial statements, its operations were not indicated.

He said that when Pharmally had P7.2 billion purchases, it was not clear if the amount was borrowed or if there were additional investments.

‘Not normal’

In an analysis of the firm’s financial statement, Abrea said there was a rise in Pharmally assets since its incorporation in 2019 with only P625,000. He said its assets grew to P7.2 billion in 2020.

“The increase of 44,149% is not normal. I hope this happens to all companies, where you grow such a big capital from a little investment. I’m not saying this is illegal or suspicious,” he said.

Abrea, however, highlighted that with P625,000 capital, the firm invested P13 million in motor vehicles, P250,000 in container vans and P276,000 in computers.

He said the Pharmally gained over P265 million in one year or a 42,344.24% return on investment from a total of P7.5 billion worth of sales.

“Even if you invested small, it is possible to transact for bigger money. But in this case, it is not clear how they financed or ran their operations,” he said.

TSB