O 150914Z NOV 07 FM AMEMBASSY MANILA TO RUEHC/SECSTATE WASHDC IMMEDIATE 8879 UNCLAS SECTION 01 OF 04 MANILA 003669 SUBJECT: CORRUPTION IN THE

PHILIPPINES: CHALLENGES AND PROGRESS REF: MANILA 3086 MANILA 00003669

001.4 OF 004

1. (SBU) SUMMARY: Corruption, both real and perceived, remains an ongoing challenge in the Philippines. The recent conviction for plunder of former president Joseph Estrada has highlighted the corruption issue, as have continuing corruption allegations involving a range of government officials throughout the country. A free and active media, along with a vibrant civil society, ensure an increasingly vigorous public debate on corruption-related issues. Likewise, political leaders are speaking more openly about the need seriously to combat corruption. Lost in the public debate and partisan finger-pointing is the progress that the Philippine government is making to strengthen its ability to prevent and fight corruption and the improved prospects for addressing a long legacy of malfeasance. This cable provides a brief overview of the problem and also discusses USG assistance to help build the Philippine government's long-term capacity to prosecute, and for the judiciary to effectively

handle, corruption cases.

END SUMMARY.

------------------------LONG LEGACY OF CORRUPTION ------------------------2. (U) Corruption in the Philippines has had a long legacy. Most notably during the Marcos era (1965-1986), corruption has been an endemic problem that has contributed significantly to the weakening of many national institutions. Marcos is widely believed to have systematically plundered billions of dollars by taking over large corporations; creating state monopolies for vital sections of the economy, such as sugar and coconuts; using offshore dummy companies to launder his ill-gotten money; extracting kickbacks from foreign companies doing business in the Philippines; skimming foreign loans; and directly raiding the public treasury. 3. (U) While Marcos's brand of blatant corruption may be a thing of the past, corruption remains a pervasive challenge at all levels of government. According to the most recent Transparency International survey, the Philippines ranks 131st out of 180 nations in the perception of corruption by business and country analysts -- the higher the number, the higher the level of corruption. (At 43rd, neighboring Malaysia ranked far ahead in fighting corruption, while Indonesia lagged behind Philippines at 143rd.)

---------------PETTY CORRUPTION ---------------4. (U) Corruption is far from limited to highlevel government officials, beginning with poorly paid, low-level local government workers. An ineffective government bureaucracy -waiting periods for the most basic actions, such as paying for a traffic ticket, can take an entire day -perpetuates a system whereby otherwise law-abiding citizens find it necessary to pay bribes ("lagay") to government officials for immediate processing and issuance of documents. This practice can extend to "fixers," individuals who are not government officials but who are related, or have access, to them. The practice may also involve outright extortion, where the government official refuses to process paperwork unless he is compensated. ------------------CONTRACT CORRUPTION ------------------5. (U) Government agencies that handle publicly funded projects, particularly those involving large sums of money, are fertile ground for corrupt officials. Officials who award contracts often demand bribes from would-be bidders. A recent Social Weather Station business survey found that three out of five business managers working on government contracts said they were asked for bribes in 2006. Ghost projects and payrolls --

whereby non-existing projects are financed by the government while non-existing personnel are paid salaries and allowances -- can be found in those government agencies involved in formulation and implementation of infrastructure projects. Evasion of public bidding regulations in the awarding of contracts ensures many contracts are awarded to favored business enterprises or contractors, who can provide financial kickbacks. Infrastructure contracts are passed from one contractor to another so that in the process each contractor retains a percentage of the project value, often resulting in the use of substandard materials or unfinished projects. -------------------------LAW ENFORCEMENT CORRUPTION -------------------------6. (U) Corruption in law enforcement is equally widespread. At the street level, it is not uncommon for officers to demand petty bribes for traffic and other minor offenses, real or simply alleged. Law enforcement officers are also known to extract protection money ("tong") in exchange for permitting businesses to conduct legitimate business operations without necessary permits, or for illegitimate businesses, such as gambling and drug lords, to conduct illegal activities. The law enforcement officer then protects the business from other law enforcement authorities. ----------------SIGNS OF PROGRESS -----------------

7. (U) The Office of the Ombudsman's prosecution of Estrada for plunder and the Sandiganbayan antigraft court's unprecedented conviction and 40-year sentencing of the former president clearly indicate that the Philippine government is taking significant steps to address the problem. (While Estrada was pardoned, he was required to forfeit bank accounts and property amassed illegally during his two-year tenure, as decreed by the graft court that found him guilty.) With substantial Philippine government support, as well as other donors including the U.S. Government, the Ombudsman's Office and the Sandiganbayan anti-graft court, have been steadily making significant progress along with other Philippine government agencies. --------------------------THE OFFICE OF THE OMBUDSMAN --------------------------8. (U) As the constitutionally independent institution for anti-corruption efforts, the Office of the Ombudsman has the authority to investigate and prosecute corruption cases in the public sector. It initiates its own investigations and prosecutions but also receives cases from other institutions, such as the Department of Finance's Revenue Integrity Protection Service, the Presidential Anti-Graft Commission, and the Armed Forces of the Philippines.

9. (U) Starting from an abysmal six percent conviction rate in 2002, the Ombudsman has registered significant gains in prosecuting corrupt public officials. With the help of newly recruited investigators and prosecutors trained with USAID assistance, the Ombudsman succeeded in raising the conviction rate to 33 percent by the end of 2005. While the cumulative conviction rate of cases decided between December 2005 and June 2007 rose slightly to 35 percent, the conviction rate for the first six months of 2007 alone rose to 63 percent. 10. (U) Notwithstanding this progress, the Ombudsman continues to face certain challenges. Investigations are hampered by Philippine banking secrecy laws that limit access to certain crucial financial information, and by poor protection for would-be whistle-blowers. Many investigations are initiated based on "lifestyle checks" - indications that government staff are living beyond their means and cannot explain the source of their assets. These may be carried out by Ombudsman investigators or by other government agencies, but are generally re-investigated by the Ombudsman before being submitted for prosecution. ---------------------------------THE SANDIGANBAYAN ANTI-GRAFT COURT ---------------------------------11. (U) The Ombudsman prosecutes cases of highlevel officials at the Sandiganbayan anti-graft court, while Department of Justice attorneys are deputized to prosecute corruption cases of lower-

level officials in regional trial courts throughout the country. The Sandiganbayan is composed of a presiding justice and 14 associate justices, sitting in five divisions of three justices each. It is served by the Office of the Ombudsman (to which the Office of the Special Prosecutor belongs), which investigates and prosecutes crimes under the Anti-Graft and Corrupt Practices Act. By the end of 2006, the Sandiganbayan had a total caseload of 2,114 cases, or an average caseload of 423 cases per division. 12. (U) The high caseload and the general practice in Philippine courts to try cases on a piecemeal basis combine to make trials at the Sandiganbayan last an average of 6.7 years from filing to promulgation. Delay is often a means by which the guilty avoid punishment for their crimes, and in the case of corruption, continue enriching themselves with public funds. Delay in the disposition of cases also erodes the effectiveness of the Sandiganbayan as a powerful deterrent to graft and corruption. While delay remains a significant problem, the Sandiganbayan, assisted by the U.S. Government, has taken steps recently to address the issue by improving case management and making several important procedural changes, most notably through the move to continuous trials (see paragraph 19 below). ------------------------------------------DEPARTMENT OF FINANCE - REVENUE INTEGRITY PROTECTION SERVICE (RIPS) -------------------------------------------

13. (U) The Revenue Integrity Protection Service detects, investigates, and prevents corruption in the revenue generating agencies of government under the Department of Finance. Its current successes include filing of 34 graft cases so far in 2007, compared to 18 cases for the entire year in 2006. To date, 18 officials of the Bureau of Internal Revenue or Bureau of Customs have been suspended by the Ombudsman under the program. Six Bureau of Customs officials recently were suspended for alleged smuggling of 16 luxury vehicles and cases were filed against two Customs officials for the illegal release of another 14 high-end luxury vehicles at the Subic Bay Freeport Economic Zone in Olongapo City. This is partly in response to the complaints lodged by American car manufacturers. ---------------------------------------------BUREAU OF INTERNAL REVENUE - RUN AFTER THE TAX EVADERS PROGRAM (RATE) ---------------------------------------------14. (U) The RATE Program, created by the Bureau of Internal Revenue in 2005, pursues tax evaders and those involved in facilitating tax evasion. According to the National Tax Research Center, an estimated P179 billion in revenues has been lost through tax evasion from 2001 to 2006 alone. From the time the program began in 2005, some 87 RATE cases have been filed with the Philippine Department of Justice against Bureau of Internal Revenue officials. The Program achieved a 12.2 percent increase in corporate tax return filers as of June 2007 and 3.9 percent in individual taxpayer

returns not counting suspended accounts which will be tallied at end-year. --------------------------------------------------BUREAU OF CUSTOMS - RUN AFTER THE SMUGGLERS PROGRAM (RATS) --------------------------------------------------15. (U) The RATS Program, established by the Bureau of Customs in July 2005 and formally launched in 2006, is mandated to detect and prosecute smugglers and other customs and tariff law violators. Despite being a relatively new program, RATS has already achieved significant successes. Thru September 2007, some 52 cases have been filed with the Philippine Department of Justice under against the target set by the MCC Threshold Program of 32 during this period. Some 11 high value cases have already been filed with the Court of Tax Appeals. To further help prevent smuggling, the Bureau of Customs has taken its initial first steps to shift all operations to "paperless" transactions. -------------------------U.S. GOVERNMENT ASSISTANCE -------------------------16. (U) The U.S. Government's Millennium Challenge Corporation's (MCC) Threshold Program in the Philippines, managed by USAID, assists the Ombudsman in strengthening its anti-corruption efforts in a number of ways. First, it has helped

improve the abilities of staff to investigate and prosecute corruption cases through training in substantive law, investigation and prosecution skills, legal writing and research, and case preparation. The project has also improved the Ombudsman's information technology capabilities by developing a sound connectivity plan, improving office processes in preparation for automation, and deploying a World Bank-funded case management system. The MCC program has also provided assistance in the areas of investigation and surveillance. Finally, it has helped inform school curricula by providing teaching materials on corruption. 17. (U) The MCC Threshold Program is also working to strengthen and institutionalize anti-corruption programs. Almost 1,000 government officials have been trained under the program, with some training provided by U.S. agencies such as the Internal Revenue Service, the Federal Bureau of Investigation and the U.S. Department of Justice. The information technology component will enable all 115 district Offices of the Philippine Bureau of Internal Revenue to be brought on-line, and will automate the human resource records of its 11,000 employees. Finally, the MCC Threshold Program is engaging civil society in the fight against corruption by supporting the Multi-Sectoral AntiCorruption Council and various focus groups that act as watchdogs to prevent corruption in government. The USG is also providing advisory assistance to the Philippine Anti-Money Laundering Council, which is investigating seven corruption cases involving P1.4 billion.

18. (U) USAID assists the Sandiganbayan to increase the court's efficiency and reduce delay. USAID helped the Sandiganbayan develop a computerized case management information system, making it easier for Sandiganbayan justices and their staff to track the status of cases and identify those that are overdue or require timelier attention. USAID also has assisted Sandiganbayan justices in improving their courtroom management and enabling them, for the first time, to conduct continuous trials, which has produced encouraging results. Justices reported that processes such as the presentation of prosecution evidence took only a week under continuous trial, as opposed to almost a year under a piecemeal trial. 19. (U) Hearing the testimony of witnesses over several successive days (rather than several months of infrequent appearances) has increased judicial ability to gauge the reliability of witnesses and rule effectively. Moreover, with the prospect of dilatory tactics eliminated, the accused in almost half (22) of the 54 pilot cases selected for continuous trial opted to enter plea agreements, effectively concluding their cases. With the success of the pilot test, the Sandiganbayan's presiding justice is now considering full-blown implementation of continuous trial for all cases beginning in 2008. 20. (SBU) The USG is also providing case-specific assistance to the Ombudsman. An example is the prosecution of Carlos Garcia, a former Major General and Comptroller of the Army of the

Philippines, for using his position to obtain over approximately P375 million through false billing of Army contracts and kickbacks from contractors. The Ombudsman's Special Prosecutor considers the Garcia and Estrada cases as important examples that the rule of law can reach both high-ranking civil and military officials. The USG is providing the testimony of DHS-ICE agents and physical evidence to support the charge of plunder. ------COMMENT ------21. (SBU) Tackling corruption remains a central challenge to good governance in the Philippines and ensuring broad-based economic growth. Corruption is also a deterrent to foreign investment, particularly in terms of providing a level playing field for investors and especially for U.S. companies that must comply with the Foreign Corrupt Practices Act. The good news is that there is a widening recognition of the problem in the Philippines and increasing groundswell of support to address the issue. Similarly, there are new efforts underway by the government to address key corruption issues and to strengthen those institutions most critical to anti-corruption efforts, including the Office of the Ombudsman, the Bureau of Internal Revenue, the Bureau of Customs, and the judiciary. To demonstrate its seriousness in fighting corruption, the Philippine government has disbursed one billion pesos to various government agencies for this effort. While no one expects the corruption problem to disappear

in the short-term, the Philippine government is beginning to make real strides towards that goal. Visit Embassy Manila's Classified SIPRNET website: http://www.state.sgov.gov/p/eap/manila/index. cfm You can also access this site through the State Department's Classified SIPRNET website: http://www.state.sgov.gov KENNEY