PHILIPPINES CORRUPTION: BUSINESS LEADERS

C O N F I D E N T I A L SECTION 01 OF 03 MANILA 002670

SIPDIS

STATE FOR EAP/EP, EB/TPP/BTA/ANA
STATE PASS USTR FOR BWEISEL AND DKATZ
STATE PASS USAID AND OPIC
TREASURY FOR OASIA FOR AJEWELL
USDOJ FOR MCRAWFORD
USDOC FOR 4430/ITA/MAC/DBISBEE

E.O. 12958: DECL: 06/09/2015
TAGS: ECON EINV EFIN PGOV BEXP KCOR RP
SUBJECT: PHILIPPINES CORRUPTION: BUSINESS LEADERS
CONCERNED ABOUT RP'S FUTURE

REF: A. MANILA 2578

B. MANILA 2142

C. MANILA 2103

D. MANILA 1988

Classified By: Economic Counselor Robert Ludan.
Reasons: 1.4(b) and (d).

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Summary
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1. (C) Influential members of the Manila business
community increasingly express concerns about how
corruption is undermining the RP's economic outlook.
According to long-time Embassy contact Washington
Sycip, who is widely respected as among the top
economic observers in the country, corruption is at
its worst ever and is making it impossible for
democracy to work in the Philippines. President
Arroyo's husband, he claimed, is one of the worst
offenders, with a reputation for corruption seeping
down to all levels of society and eroding PGMA's
political standing. Francis Chua, president of the
Federation of Filipino-Chinese Chambers of Commerce,
claimed that almost all business people perceive
worsening problems with corruption. He echoed
Sycip's assessment that the First Gentleman is a
major problem with respect to corruption. Makati
Business Club Director Bill Luz, although generally
more optimistic, said that for local businesses,
"market realities dictate that it is time for the
government to clean things up or for businesses to
get out." He said that 2005-2006 is the year when
things must change to avoid significant deterioration.
Such assessments alarm potential foreign investors,
making it even more difficult for the GRP to attract
badly needed foreign capital. End Summary.

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Corruption and Democracy
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2. (C) Manila business leaders have increasingly
expressed serious concern about how corruption is
hindering their ability to conduct legitimate
business. Washington Sycip, a founding partner of
SGV (the country's most prominent accounting firm and an
affiliate of U.S. firm Ernst and Young) has become
increasingly pessimistic, claiming privately that
corruption nowadays is at its worst, surpassing even the
Marcos era. He has expressed doubt about democracy's
suitability for the RP. Emboffs strongly objected to
Sycip's assertion that the RP should reconsider democracy,
underscoring that the U.S. would not support any move to
non-democratic leadership. Sycip has responded by
pointing to countries in the region with stronger
leadership, such as Singapore, Malaysia, and China,
claiming they have made more progress in improving their
citizens' well-being through non-democratic systems.
Sycip has further argued that, in countries with per
capita GDP under $3000, Western-style democracy leads to
cronyism and corruption. He pointed out that two out of
the last five presidents elected here have been removed
from office by non-democratic means, leading him to
conclude that the Philippine democratic process is
choosing the "wrong" leaders. Of special concern was
corruption in the judiciary up to and including the
Supreme Court, which has destroyed the constitutional
system of checks and balances.


3. (C) According to Sycip, First Gentleman Jose Miguel
"Mike" Arroyo's behavior, in particular, is damaging the
credibility of the government and hinders President
Arroyo's ability to implement anti-corruption measures.
Sycip claimed that Mike Arroyo is heavily involved in the
illegal gambling or "jueteng" networks and closely
connected with major smuggling syndicates (ref B).
President Arroyo, according to Sycip, is aware of her
husband's misdeeds, but she is unwilling to do anything to
curb his activities because he was instrumental in
marshaling campaign donations and is now keeping those
supporters in line to help her maintain her grip on power.
This creates a practical difficulty for cabinet
secretaries, because many of these supporters have been

SIPDIS
placed in key government jobs and "report directly" to the
First Gentleman, bypassing the agency chain of command.
(See also ref A regarding latest claims that the
President's son, Congressman Juan Miguel "Mikey"
Arroyo, is involved in jueteng racketeering.) Sycip has
repeatedly expressed worries about the current
government's stability. President Arroyo is more
concerned about her ability to stay in office than
developing a strategic approach to policy making, he
critiqued. He noted that "it is not impossible that PGMA
will be forced out in the next couple of years."


4. (C) In response to complaints about corruption,
President Arroyo agreed to form an advisory group, of
which Sycip is a member. The group has advised the GRP
to abandon taxes on earnings and shift to taxing evidences
of wealth because taxing expenditures "better suits" the
Filipino character and will ensure better collection. It
has advised the DOF to publicize the amount of VAT
retailers collect and turn over to the government to
dissuade underreporting. Sycip nonetheless has lamented
that the GRP and PGMA, in particular, seem rarely to
follow the advice of the group.

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Finding Alternatives To Government Institutions
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5. (C) According to the Federation of Filipino-Chinese
Chambers of Commerce and Industry (FFCCCI) President
Francis Chua, the Chinese-Filipino business community
encounters corruption on a regular basis in the tax
bureau, customs, and other government functions. (Note:
The Chamber, although it represents only a portion of the
business community, is one of the most influential
economic voices in the country. End Note.) Corruption,
he said, is increasingly undermining the ability of
companies to operate efficiently in the RP. Despite GRP
efforts to combat corruption, he said there is no
indication that the situation is improving. According to
Chua, almost no business people believe the GRP's claims
that its efforts are achieving results. He echoed Sycip's
claim that the First Gentleman is a major problem with
respect to corruption, pointing to his links to "jueteng"
and the many politicians and local officials involved in
the illegal gambling racket.


6. (C) Chua added that the Chinese-Filipino community
is losing confidence in the government, in particular the
courts. The FFCCCI maintains an internal settlement
process to resolve disputes among member companies because
members have so little trust in the court system. This
process is being used more frequently now as an increasing
number of FFCCCI members see the courts as unreliable and
unpredictable because of corruption. Chua said this
corruption will probably not create immediate instability
for the government, but it does make it more and more
difficult to sustain economic growth. Capital flight is
not yet a problem, he said, as Chinese-Filipino
businesspeople continue to invest domestically in real
estate, food industries, textile and garment production
and business expansion in general. Many of their
investments are scaled back, however, from what they would
be in a clean market. Other FFCCCI members separately
commented that they are more hesitant to invest in the RP
than in the recent past. Chua and other FFCCCI members
have said that almost none of the Chinese-Filipino
business community is investing in the stock market, where
volatility and non-transparency remain serious
disincentives.

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Trying To Make A Difference
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7. (C) Bill Luz, Director of the Makati Business Club
(MBC),optimistically noted that he sees more people
jumping into the fray to battle corruption. The MBC, a
collection of the RP's most prominent business leaders,
spearheads an anti-corruption business coalition that,
according to Luz, is gaining traction. Luz warned,
however, that the stakes are getting higher every day.
MBC's coalition focuses on fighting corruption by raising
public awareness and applying pressure on corrupt
officials. When MBC first started its campaign two years
ago, the majority of business leaders Luz approached would
not get involved because, he said, they did not believe it
would make a difference in how GRP officials conduct
themselves. Luz said that situation has changed; pressure
is now materializing because the level of corruption has
hit the point where it is intolerable and market realities
have dictated to local businesses that it is time to clean
things up or get out. He called 2005-2006 "the year when
things have to change."

8. (C) Luz said that people should watch the rumors
swirling around the first family carefully. Regarding
Mike Arroyo's involvement, Luz said he senses that the
allegations will continue and sooner or later someone will
come forward with clear evidence of wrongdoing. Although
the President may be able to steer clear of any
implications of personal wrongdoing, Luz said that there
had been no previous instance in which a spouse's scandal
did not damage or bring down his or her partner.
(Comment: The election to the Senate of former President
Estrada's wife and son refute this claim, however. End
Comment.)


9. (C) From the business perspective, Luz said the most
damaging aspect of the intensifying rumors is the
constant undermining of GRP credibility. He expressed
some optimism about GRP efforts to improve tax
collection, citing progress reported by the DOF. He
said the business community in general has confidence in
the economic leadership team now in place, but worries
that entrenched interests may hinder their efforts to
crack down on tax evaders and smugglers. He said that he
does not foresee a violent backlash against enforcers, but
that the risk would increase if the GRP improves the
efficiency with which it prosecutes evaders; the odds in
prosecutions still favor the accused, with stalling
tactics usually leading to favorable outcomes. He called
the current efforts "hand to hand combat" and said that
the GRP really needs to "put someone in a cell." He
cited quick fixes the GRP could employ, including freezing
the assets of those being prosecuted to prevent them from
leaving the country, as is now commonplace. Nonetheless,
true change will only come with decreased caseloads for
judges, especially for those courts trying corruption
cases. Repairing the judiciary, however, which would
require legislation and perhaps constitutional change,
he observed.

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Comment
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10. (C) Clearly, serious minds are increasingly
questioning the current administration's ability to lead
the Philippines out of its difficulties. The irony is that,
as they note, the government is doing more to combat
corruption, but the problem is getting worse. Such
assessments alarm potential foreign investors and may
foreshadow serious growth problems down the road, as the
government fails to attract outside investment and finds
itself unable to adequately invest in the country's future.

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