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Philippine Government Shortchanged in Internet Gambling Deal?

Posted on October 21st, 2010

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In the Philippines, a government agency advised a government owned and controlled corporation about its dealings, amidst fears that the government would be at the losing end. The Commission on Audit, or COA is counseling the Philippine Amusement and Gaming Corporation or Pagcor that it should review its transactions with Philweb Corporation. Philweb is currently handling Internet casino operations for Pagcor, and agreements between the two may have been letting the government miss earnings that should have been allocated to it. Pagcor, however answered back, saying that the claims of COA are not substantiated. Moreover, Pagcor pointed out that its current agreement with Philweb is more advantageous in comparison to its casino deal with a previous company.

In its report on Pagcor for the year 2009, the commission claimed that the fees of Philweb, in conjunction with the lack of cash management abilities of Pagcor in its Internet gaming operations, have been unfavorable to the government. The deal between Pagcor and Philweb has been in place since 2006, with the enforcement of the Intellectual Property License and Management Agreement, or the IPLMA, wherein Philweb was given the task to manage the Internet casino operations of Pagcor. In turn, Pagcor pays for Philweb’s services and gets to keep the exclusive license of intellectual property rights to software systems, as well as the hardware needed to run the online casinos. The agreement was renewed last year, which made it enforceable for 3 years, until 2012.

COA forwarded a recommendation that Pagcor should have its deal with Philweb renegotiated. Moreover, the auditing commission also recommended for Pagcor to handle the cash management of the Internet casinos by itself. With that, it would have a bigger say on how to control and make the best use of its earnings. The COA claims that Pagcor could actually do a better job in managing the cash flow of the Internet casino program. Thus it does not see the point of Pagcor paying Philweb a huge amount for something it could do competently by itself. The report stated, “Had Pagcor handled the management of the [Internet casino operations], the total amount of 14,787,690 pesos could have been saved excluding the time value of money for the years 2007 to 2009.” Under the IPLMA agreement, as the proponent of e-games in the Philippines, Philweb will also be tasked to provide cash management and technical marketing services to the Internet casino operators of Pagcor in exchange for getting 40 percent of the net winnings in the Internet casino.

In addition, Pagcor also paid Philweb a fee for software license fee amounting to 10 percent of winnings even though Philweb does not really hold the intellectual software rights of the software. COA divulged that Philweb’s role is confined to being the middleman between Pagcor and the real owners of the software, Real Time Gaming (RTG) Holdings Limited. The commission recommended that Pagcor should deal directly with RTG instead of having to include Philweb, which only added to the latter company’s kickbacks. COA stated in its report, “Apparently, Philweb Corp. got its license from RTG for the proprietary software license used in Internet casino operations while Pagcor is paying the 10-percent software license fee to Philweb which has no intellectual software capability but acted as just a middleman between Pagcor and RTG Holdings Limited.” If that is not enough, residual fees were also divided between Pagcor, which got 58.2 percent, and Philweb which got 41.8. Another item for Philweb is a capital advances fee, which is equal to 0.5166 percent of net casino winnings. The remaining 2 percent of casino winnings were spent on advertising activities for the promotion of the Internet casino.

Pagcor defended its partner, saying that the 40 percent share of Philweb from net winnings had been utilized for its other responsibilities such as providing training to the casino manpower, marketing and customer service. Pagcor elaborated that Philweb had to be the provider of hardware and other equipment needed to run the electronic games. An additional 100 personnel were also hired by Philweb under its payroll to widen the e-games operations. Lastly, Pagcor claims that the current arrangement has given them 34 percent of gross winnings, which is a substantial increase compared to the 15 percent of gross winnings it with its partner prior to Philweb, SAGE Internet casino. Philweb, through its president Dennis Valdes, declined to comment on the issue.