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MANILA – An advocacy group that tracks state spending on the COVID-19 pandemic said it identified at least six 'red flags' in the government's deals with Pharmally Pharmaceutical Corp.

The Senate is currently probing Pharmally, which supplied allegedly overpriced face masks, face shields and other medical equipment to the government.

• What is Pharmally Pharmaceuticals? Who controls it?

“Given our review, the audited financial statements do not inspire confidence that the government entered into a contract that was advantageous to the people,” said Citizens’ Budget Tracker coordinator Ken Abante.

“And I there are I think, when you zoom out, the story’s actually much larger than Pharmally,” he said.

Abante said that they have five high-risk observations in relation to the contracts awarded to Pharmally by the procurement service division of the Department of Budget and Management (PS-DBM).

These are:

• Potential under-declaration of input VAT related to purchases amounting to P402.2M
• Insufficient contracting capacity
• Insufficient disclosures and details for Donations that were declared as fully deductible expenses
• Missing and incomplete material disclosures in the 2020 Financial Statements - High
• Sources of interest expense and foreign exchange gains/losses are not presented and disclosed in the 2020 financial statements

A sixth medium-risk observation, which was mentioned in the group's published analysis, said the reported amounts in the disclosures on the deals did not match.

Abante explained that these are possible red flags that authorities can look into, because these indicate a potential for fraud, substantial losses for undeclared and uncollected revenues or misuse of public funds, or even serious violation of some regulatory requirements.

‘NO FINANCIAL CAPABILITY’

Citizens’ Budget Tracker Civic Engagement Lead Jahleel-an Burao said Pharmally did not appear to be financially capable to deliver on P7.9 billion in contracts it was awarded in a very short time frame.

“These were awarded from April to June, and if you look at the April transactions they were awarded three days, six days in between transactions and June it’s a similar pattern. So it’s very curious that a company that only had P599,000 in its bank accounts is being made to fulfill contracts that are worth billions,” she said.

“While these are not required items to be fulfilled in light of emergency procurement, I think it’s to the interest of the public for the people who are approving these transactions to do their due diligence or at least do a sanity check to see if they were able to fulfill a contract of a similar size.”

“This is the single largest completed contract. There was none of these available. None of the disclosures were able to indicate that,” she stressed.

Abante agreed with Burao that the rush to purchase medical equipment should not have been an excuse to skip due diligence.

“According to some government representatives yesterday, it was because it was rushed. It was a massive urgent timetable for government to actually secure PPE and mask supplies for our frontliners. But it does not mean that national government should not do due diligence to check whether there are other eligible suppliers that could have delivered better and faster and at cheaper prices,” he said.

Financial reporting lead Michael Lava also noted that Pharmally had no loans or long-term liabilities that would have enabled it to produce the personal protective equipment government bought from it.

“They just started with a paid up capital of P625,000 and at the start of 2020, before they bagged the first contract of P62 million, they only had cash of P599,000, and as mentioned by former USec. (Lloyd Christopher) Lao yesterday in the Senate hearing, that there was no advance payment to the companies. Meaning that they need to deliver fully the items before they get fully paid.”

“So this is very curious case because in the financial statements we didn’t see any loans, any long term liabilities the company had secured to ensure that they will be able to deliver the contracts as agreed with the government,” he said.

TAX EVASION?

Burao also said that Pharmally appeared to have underdeclared its input value-added tax (VAT).

“This is not an outright accusation that those were underdeclared, but given the size of it, according to our laws, 30 percent underdeclaration can be prima facie evidence that this was intentional,” she said.

If Pharmally indeed underdeclared its VAT, the purchase of equipment from it would have meant a “double whammy” for Filipinos, Burao said.

“It’s kind of a double whammy ‘cause if we had local suppliers, that could have translated to income for Filipinos and Filipino workers. But at the same time because it was awarded to this company, and there is seemingly undeclaration of VAT it also translated to lost revenues that we could have benefitted from.”

“So they really need to explain what happened there, present competent and convincing documentation that nothing was amiss so that we could be comforted that foregoing the opportunity to award this contract to local suppliers was not for naught,” she said.

SIX WAYS TO DEFRAUD TAXPAYERS

Abante said they will still come up with more observations on Pharmally’s financial statements in the coming days.

"If you look at it from a wider view, how many times can taxpayers be defrauded? There are at least six ways.

“You have a company that possibly entered into contracts that had a higher price than what apparently domestic suppliers could offer.

"You have a company that possibly undervalues its taxes both income taxation and VAT, that lowers the tax take of government that can be used to fund social services."

“Third you have a company that’s possibly not financially capable and there are issues of going concern that if they folded, the people would be the ones who would not receive the services because they folded because of lack of due diligence.”

“Fourth, you have domestic suppliers who potentially could offer and could have employment for the people but were not considered for these larger contracts.”

“Fifth, you have an external auditor who says despite these material differences in financial statements even issues an unqualified opinion or a good opinion. So the external auditor must also be prepared to defend the good standing opinion that that person made for Pharmally."

“And lastly the sixth is appointments. Who is eventually accountable for the people who signed and entered into these contracts with Pharmally? Is it just the procurement service of the DBM, or up to where is the accountability there? Even the appointing authority of the undersecretary which is the president of the Philippines,” he said.

Abante said Filipinos should ask these questions because they deserve the truth.

“We deserve to know where our taxpayer money, in the largest crisis we’ve had since the Second World War, went,” he said.

The full report of Abante's group can be read here.

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