Loan sharks fund election campaigns, LGUs

Miriam Grace A. Go

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Local execs have been misusing their IRA for a long time -- as collateral to loan sharks, to fund campaigns, and this time to invest in a ponzi scheme

Newsbreak file photo

The news of officials in Mindanao misusing their local government units’ share in the internal revenue allotment (IRA)—in this case, to invest in the ponzi scheme by the Malaysian-run Aman Futures Group—is not new at all. It is “as old as the Local Government Code itself,” which established a fixed rate for the IRA share of LGUs, according to a report first published in the Dec. 28, 2007 special edition of Newsbreak magazine.

The report says elected officials in the poorest towns in Muslim Mindanao and in Samar had been using the IRA as collateral whenever they borrowed money from loan sharks to use in election campaigns and other personal needs. Read here how this other scam works.

MANILA, Philippines – Some mayors and barangay heads borrow from loan sharks, putting up their local government’s revenue shares as collateral, thus putting vital services on hold.

If Philippine elections have ceased to excite you, think of this scenario: loan sharks—not just politicians, imagemakers, voters, or election officers—have a field day in every campaign. Say that again?

Local government sources tell NEWSBREAK that candidates who ran in the barangay elections last October in Lanao del Sur, as well as mayors who had backed them, borrowed from loan sharks at usurious interest rates. The loan was badly needed because the going rate of vote-buying was P1,000 to P2,000 per vote.

They promised to pay the loan sharks with the internal revenue allotment (IRA) that the national government has yet to release to their local government units (LGUS).

Naturally, the mayors would be in deep debt.

In Lanao del Sur, reelectionist mayors usually advance from lenders the equivalent of their municipalities’ IRA for the coming year. So if mayors had borrowed against their entire 2007 IRA for the mid-term elections in May, then they must have borrowed several months’ worth of their 2008 revenue allotment for their candidates in the October village polls.

“It’s already a cycle. They borrow [against the IRA] for their campaign, and then borrow some more because they don’t have any more IRA to use. When the next election comes, they will borrow again,” says a source from a political family that had an experience with loan sharks.

These days, according to another source from the local office of the Department of the Interior and Local Government (DILG), even first-time candidates are funded by loan sharks. “Naturally, when they get elected, they have to pay the loans. The IRA is the most likely source to repay the loans.”

The IRA share of towns in Lanao range from P13.62 million to P54.95 million a year, released by the national government in monthly installments of P1.13 million to P4.58 million. The barangays receive allotment of about P13,000 a month each. In the province of Samar, many barangays are as mired in debt with loan sharks.

The chairpersons, using the villages’ IRA as collateral, borrow money supposedly to fund small construction projects that cannot wait for the “delayed” IRA releases.

But sources at the municipal and provincial governments belie the barangay heads’ motives for acquiring debts. “The bags of cement and the other materials that they need, they just solicit them from the mayors and the governor,” says an elected provincial official. It’s very likely then that money they borrow from loan sharks is “misused,” says another source from the Samar provincial development office.

Municipalities in Samar receive revenue allotments of P14.86 million to P58.02 million a year, in monthly installments of P1.24 million to P4.84 million.

‘5-6’ scheme

The immediate casualty of this practice would be the basic services that, even with their IRA intact, could barely be funded by these poor LGUs.

Lanao del Sur’s 39 towns are mostly 4th- and 5th-class, or those that have yearly incomes of P10 million to less than P30 million, excluding their IRA share. (Its only city, Marawi, is 4th class, earning P120 million to less than P180 million annually.)

Samar’s 23 towns are also classified as 4th- and 5th-class. (It has two cities, the 1st-class Calbayog and the still unclassified Catbalogan).

Low-income municipalities like them depend on their revenue allotment to shoulder at least 90 percent of their operational costs. With their IRA already put in hock to lenders, these LGUs have to squeeze dry their meager income to fund their operations, cover the interests on the loans whose principals are paid for by the IRA, and then deliver basic services—if there’s anything left to spend.

NEWSBREAK talked to more than a dozen sources—in Metro Manila, Samar, and Lanao del Sur—to understand the transactions between local officials and loan sharks. These sources are officials of government agencies in the provinces, aides and relatives of local officials who had dealings with loan sharks, and those involved in the illegal lending business.

They all refused to be named for fear of reprisal from the loan sharks and whoever are backing them. Interviews were done face-to-face, through telephone, and through email, each crucial information verified and counter-checked with other sources.

They say that the loans carry a monthly interest of 20 percent, similar to the common “5-6” scheme. Like any illegal transaction, these don’t involve documents. In Lanao and Samar, the loan sharks are assured of repayment because they reportedly have connections in government agencies, LGU depository banks, and politicians powerful enough to intercept the IRA of borrower-LGUs.

Lanao’s sharks

In Lanao del Sur, many of the loan sharks are professionals or former overseas workers who used their savings to start their lending business.

Some are retired government employees, who use their connections to get to clients. NEWSBREAK was able to obtain the name of the alleged biggest lender in the province, but we couldn’t independently verify it.

There are two ways that many local officials in Lanao compromise their IRA. One is when they borrow campaign funds from the loan sharks during election years. Another is when they borrow smaller amounts either to make ends meet for the LGU, or sometimes to finance their personal needs, when the IRA from Manila is delayed.

During an election, the mayor of a town expecting an annual IRA of, for example, P20 million, borrows the said amount from the loan shark months before the campaign. The loan shark gives him only P18 million, the 10 percent already deducted. When the mayor is reelected, he—rather, the municipal government—has to pay P22 million, or the amount of the IRA plus the other 10-percent interest.

Sometimes, sources say, loan sharks allegedly connive with officers of the Land Bank of the Philippines in Marawi, which services most LGUs in the province. Bank officers supposedly tell the mayors that their revenue allotment for the month had not yet arrived even if it’s already with the bank, and “casually suggest” that they go to specific lenders who can readily provide them cash.

If a town’s monthly allotment is P2 million, the lender gives the mayor only P1.8 million, but will collect P2.2 million the following month. When the IRA finally “arrives” from Manila, the bank officers release it directly to the loan sharks and get an unspecified commission.

Under this arrangement, the LGU loses P600,000 that month. Since it will operate only on P1.8 million when it needed the entire P2 million, it will have to source P200,000 to augment its operational costs, and pay the P400,000 interest of the loan.

A former mayor of a 5th-class town got a big surprise when he assumed his post years ago, because a loan shark approached him with an offer. He was told that he could borrow money against his town’s IRA to cover for the financial needs left behind by his predecessor. Unaware of how such deals worked, he agreed, only to be jolted when the loan shark had problems getting the revenue allotment directly from the LGU’s Land Bank account and came running after him. His relatives had to pool money to pay the lender.

As we went to press, the manager of Land Bank in Marawi had not replied to the questions we sent him. But finance and budget officials in Manila doubt the story that Land Bank officers there would deliberately withhold the local government’s revenue allotment and connive with loan sharks.

They point out that when it comes to funds that are considerable, vital, and regularly scheduled like the IRA, the mayors can always inquire with the Department of Budget and Management or the bank’s main branch in Makati City to track their IRA.

They find it more plausible that Land Bank officers sometimes refuse to release the IRA because the mayors try to withdraw it in their personal capacity, which isn’t allowed.

The IRA has to be released only to the local government, not the mayor, with the necessary documents from the budget department. These are the Special Allotment Release Order or SARO, which has a cover memorandum that contains the comprehensive schedule of the IRA for the entire year, and the Notice of Cash Allocation or NCA, which is issued monthly. They are also required to present a Municipal Accountant’s Advice that authorizes the bearer to withdraw the revenue allotment on behalf of the LGU.

There were incidents in the past, according to finance and budget officials, when Land Bank officers were harassed or hurt by mayors or their goons when they refused to release the IRA without those documents.

The bank has a record of adhering to rules on IRA releases.

In 1997, several barangay chairs in Lanao del Sur sued Maclaring Lucman, as manager of Land Bank-Marawi, for not releasing their barangays’ IRA to them. These were barangays captains who claimed to be serving on a holdover capacity after failure of elections was declared in May that year. They didn’t have the required accountant’s advice, however.

Eventually, Lucman released the money to the barangay treasurers who were working with the newly elected barangay chairmen, and who earlier presented certifications of their election from the provincial and local offices of the DILG.

The regional trial court and the Court of Appeals sided with the barangay captains. But the Supreme Court’s third division reversed the lower courts’ decision in 2006.

Samar’s store

In Samar, barangay captains borrow from lenders either for their salaries and the honoraria of their barangay councilors, or for the purchase of construction materials for their projects. For these cash advances, they usually go to a store in a pier in Catbalogan, where other government employees run when they need extra cash. For decades, the store has been known to provide “5-6” loans.

The alleged owner of the store is a provincial official, who knows the schedule of the arrival of the barangays’ IRA from Manila, and can therefore make ways to intercept their IRA to ensure payment of loans.

An insider in this provincial official’s lending business told NEWSBREAK that they now ask to be issued a power of attorney, signed by the barangay chair and barangay treasurer, so they can withdraw the IRA on their behalf. The source, however, didn’t show samples of this document. He didn’t say either why the LGUs’ depository banks would honor those documents.

“Some of our regular clients even issue authorizations that are good for one year, so they don’t have to make a new one every time they borrow,” the loan agent said in Waray.

Some barangay captains claim that there are times when, instead of borrowing cash from lenders, they get construction materials from suppliers. They just sign a promisory note that the materials would be paid once their barangays’ IRA shares arrive. They acknowledge, however, that the amount indicated in the promisory note is already bloated, to represent a 20-percent interest (the same rate imposed by lenders on cash loans).

“They say that’s the only way they can implement projects. There’s nobody else they can approach for big amounts that take long to pay,” said a former employee of the local DILG office.

Sources in local government leagues in Manila are aware of the Samar official’s loan sharking business that caters to barangay officials. They are not surprised either by reports of mayors in Lanao pawning their IRA.

One of them says the practice should be understood within the context of a local government being forced to “bite the bullet” so it could raise money for its needs.

Old practice

Based on sources’ accounts, the practice of mayors and barangay chairpersons running to loan sharks is as old as the Local Government Code of 1991.

Before the Code, there was no formula for the local governments’ revenue shares, nor were there regular releases—the national government gave them whatever amount it wanted, when it wanted. The Code entitles local governments to 40 percent of the collection of the Bureau of Internal Revenue. This share is divided thus: 23 percent among provinces, 23 percent among cities, 34 percent among municipalities, and 20 percent among barangays.

In the early years of the Code, Manila released the IRA quarterly. In many cases, the poor local governments, highly dependent on their allotment, used up their shares even before the next quarterly release arrived.

There were cases, too, of local governments receiving their money behind schedule. The regional offices, through which the DBM released the checks, had different workloads and could not always prepare the necessary release papers promptly.

By this time, loan sharks—who were already catering to teachers and other government workers—presented their “products” to local officials.

Dealing with loan sharks has apparently become a habit for officials of poor LGUs because they still go to these lenders even now that IRA shares are released monthly and promptly. The DBM deposits the money to the central branch of government banks, usually Land Bank, which in turn transfer it to their branches in the provinces.

Need for discipline

Former Budget Secretary Emilia Boncodin, who was with the department from the 1970s until 2005, doesn’t find any excuse for local officials borrowing from loan sharks supposedly because their money is delayed.

“It’s not a question of release but of LGUs learning to program their funds well—you know how much is coming when.” If ever the IRA is delayed under the new system of releasing, it will only be for a few days, owing to the fund transfer procedures of depository banks, she says.

If local officials will insist on advancing their local governments’ IRA with illegal lenders, that constitutes “plain and simple greediness,” she says. It will reinforce the wisdom behind having to release the IRA in installments, “just to put some discipline” on local governments.

“If you release the money in full, especially to low-income municipalities, baka maubos (they might use it all up),” she said.

In Samar, advocates of good governance suggest a stricter audit system on the IRA, and the imposition of stiffer penalties on officials who misuse them.

In Lanao del Sur, concerned citizens say that government banks should offer friendlier loan terms to local governments so they will go to the banks instead of loan sharks. At present, says a local DILG official, the LGUs in this province have low or no credit worthiness.

The source from a political clan says government banks should use the example of former Marawi Mayor Omar “Solitario” Ali. Openly against loan sharks, Ali during his time took out loans from banks to meet the financial needs of the city government.

“If only all the mayors would do that,” he said, “then banks will be the loan sharks’ biggest competitors.” – (with a report from Vicente Labro in Samar for Newsbreak in 2007)/  


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Miriam Grace A. Go

Miriam Grace A Go’s areas of interest are local governance, campaigns and elections, and anything Japanese.