Lapse in due diligence

When it rains, it pours for Philippine offshore gaming operators (Pogo).

Touted by the past administration as a reliable source of additional revenues, some Pogos had instead been found to have evaded the payment of taxes and used their facilities to engage in scams and other illegal activities, such as human trafficking.

Then came the report that Global ComRCI, the management consulting company that Philippine Amusement and Gaming Corp. (Pagcor) had hired to act as third party auditor of Pogo operations, turned out to be untruthful about its financial condition.

In a recent hearing at the House of Representatives on Pagcor’s budget, Pagcor chair Alejandro Tengco said they were in talks with the Office of the Solicitor General to sue Global ComRCI for the recovery of the P1 billion it had paid it under a P5.8-billion contract because the latter submitted a spurious bank certificate.

He said that under the law, the submission of any fraudulent document on a bid would render the proposal null and void. And on that basis, Pagcor had terminated its contract with Global ComRCI.

Assuming the truth of Pagcor’s allegation, it is unfortunate it learned about the true nature of the financial certificate only after it had paid P1 billion.

Any business person worth his or her salt, or has common sense about basic management principles, is expected to check the background or credentials of any party that he or she plans to do business with.

The saying “trust but verify” becomes more significant when the transaction involves a lot of money and could invite public scrutiny.

Due diligence, which is defined as “a process that involves risk and compliance check, conducting an investigation, review, or audit to verify facts and information about a particular subject,” is standard operating procedure in high-value business deals.

When due diligence is done by the book, or in accordance with established procedures of the business concerned, there is little room for doubt about the regularity of the transaction.

To ensure objectivity and fairness in the evaluation of competing business proposals, especially if the deal could have a significant impact on the competitors’ bottom line, some companies outsource the due diligence process to professional groups, e.g., management consultants, law offices and accounting firms, that have the expertise to do so.

This way, when management makes a decision based on the recommendation of that third party and its action is later questioned for any reason, it can pass on the task of answering the questions to the outside consultant.

Of course, due diligence can be undertaken internally, or by the existing staff, but there is no assurance the desired quality of the results would be achieved as that process would simply be an add-on to the staff’s regular duties and responsibilities.

Considering Pagcor’s corps of lawyers and accountants, it is surprising it failed to check the authenticity or genuineness of the bank certificate submitted by Global ComRCI.

In this age when the internet, with its extensive search engines, has made it possible for information about people, places and events to be secured at the flick of a finger, that failure, deliberate or otherwise, is difficult to explain.

Assuming it did an internet search and it did not produce credible results (which should be a red flag), Pagcor could have sought the assistance of local banks with international connections in verifying the existence or credibility of the bank that issued the certificate.

So now Pagcor is mulling over the idea of going to court to recover the P1 billion it had paid to Global ComRCI.

Good luck.

It is doubtful if Global ComRCI would simply roll over and return that money. Expect it to fight tooth and nail and, who knows, Pagcor may find itself instead being ordered to pay damages to Global ComRCI for unilaterally terminating the audit contract.

The undesirable saga of Pogos continues. INQ

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