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The Office of the Comptroller reveals conflict of interest, disbursements without benefit, and lack of accounting, control and oversight in the operations of Mayagüez municipal companies

The Office of the Comptroller of Puerto Rico (OCPR) issued a disclaimer of opinion on the fiscal operations of the Municipality of Mayagüez, since sufficient and appropriate evidence could not be obtained to validate whether the operations were carried out in accordance with the applicable law and regulation. Based on the objectives established and other matters that arose, nine findings are discussed.

The Report reveals that, upon the OCPR's request for fiscal documents of the nine municipal companies, the Municipality's Finance and Budget manager only delivered incomplete information for Mayagüez Economic Development, Inc. (MEDI), created in 2014. The absence of documents evidenced that they did not have an accounting system that recorded the fiscal transactions.

In addition, MEDI's Board of Directors did not supervise compliance with the regulation by the executive director, who was indicted by the Federal Prosecutor's Office on March 22, 2021, for his participation in a $9 million fraud that the Municipality had transferred to MEDI. On November 9, he pleaded guilty to four counts of wire fraud and money laundering. MEDI's Board of Directors was chaired by the mayor, the treasurer was the Municipality's Finance manager, and three municipal officials acted as members.

The audit notes that the Municipality disbursed $1.6 million in payments without evidence of the public benefit obtained. These situations were referred on March 1, 2023, to the consideration of the Secretary of Justice, so that he takes the corresponding action.

In this regard, the auditors could not obtain information on the use given to a transfer of $606 thousand to a bank in Spain, which a private entity lent to MEDI for the purpose of obtaining a line of credit for €500 million euros to finance the Plan Mayagüez 2032. Nor did MEDI's Board offer information on whether the financing of the €500 million was finalized, which, incidentally, were transferred to another bank account in London.

Another 71 transfers for $383 thousand lacked information on the usefulness and benefit, such as the transfers made to: a company of the executive director, a software company in New York, beneficiaries with addresses in Spain, or a bank in Turkey. In 2015, $47 thousand was paid for a trip to Dubai by MEDI's executive director and two financial advisors of the Municipality. The trip was made to complete arrangements for a $4 billion loan to refinance the Municipality's debt. The deputy mayor had approved this trip and the then mayor was aware. In fact, the financing was not finalized.

In violation of the Constitution of Puerto Rico, the deputy mayor of the Municipality, who in turn acted as vice president of MEDI's Board and of another municipal company, Medi Films, authorized using the Mayagüez Recreation and Sports Palace as collateral to obtain financing for Medi Films. He also authorized Medi Films to request financing for $10 million with a Savings and Credit Cooperative. Medi Films was incorporated by a private person as a for-profit municipal company on December 30, 2015.

The examination of these actions revealed that these transactions not permitted by law benefited four private companies, owned by the then executive director of Medi Films and financial advisor 1. In fact, these persons incurred a conflict of interest since they used their position in the municipal company to benefit themselves and do business with their private companies. 

The then executive director of Medi Films signed with Cooperative A the contracts for the loans and lines of credit for $4.3 million to finance films, which he deposited in the accounts of his corporations A and B at Cooperative A. From 2017 to 2018, he received, in his personal capacity, 10 payments for $94 thousand from his corporations.

The then financial advisor 1 also used his position for his own benefit and that of corporations C and D of which he was a part, with the lines of credit guaranteed by MEDI with public property. In this regard, he received payments from accounts A and B for the sum of $921 thousand.

These situations were referred to the Secretary of Justice and the director of the Office of Government Ethics on November 2, 2023, for their evaluation and corresponding action.

As of May 31, 2022, the municipal company MEDI had not reimbursed the Municipality the initial capital received for $5 million from the lease canon of the Dr. Ramón Emeterio Betances Hospital (90% of the capital) and direct contributions from the Municipality (10% of the capital). In fact, the Municipality did not comply with the repealed Municipalities Act of 1991, by failing to promulgate and approve regulation on the management of the initial capital.

The audit reveals that MEDI and Medi Energy, Inc. obtained a commercial loan with Cooperative B for $1.5 million, of which $1.4 million would serve as collateral to finance for $12 million the acquisition of power generators for the Mayagüez Medical Center with a corporation from Canada. Medi Energy is another municipal company created in 2015 to generate business with renewable energy. This transaction had no benefit. As of October 11, 2022, MEDI had paid Cooperative B $422 thousand in interest and $275 thousand toward the principal of the loan.

The Municipality of Mayagüez did not include in its audited financial statements the financial information of MEDI, nor did it present MEDI's financial position in a separate document. Due to this omission, the certified public accountants issued an adverse opinion on the financial statements from 2017 to 2022. This situation is attributed to the mayor and the Finance manager departing from the regulatory provisions of the 2020 Municipal Code, and of the Municipalities Act of 1991. 

The Report states that the municipal company Mayagüez Economic Development-Financial Strategies, Inc. (MEDFS) was incorporated at the Department of State by financial advisor 1 of the Municipality and of MEDI, without the authorization of the Municipal Legislature or of the Municipality. MEDFS was registered in 2014 to promote the commercial development of Mayagüez. In this regard, the Legislature could not fulfill its responsibility to evaluate the need for MEDFS. This situation fostered the fraud related to the $9 million that the Municipality transferred on March 29, 2016, to MEDI to invest and generate profits.

The municipal company MEDI did not maintain administrative control of its operations since, among other things, it lacked regulation to govern the acquisition of goods and services, the contracting of professional services, and the processing of disbursements, among others. In addition, the Board, which should have held a monthly ordinary meeting, only met 16 times in the 85 months of the period examined.

As of November 15, 2023, the Municipality had not conducted audits or monitoring of the operations of the municipal companies. This lack of adequate supervision on the part of the mayors in office fostered the summary suspension of the then mayor, the judicial process against him and against the Finance and Budget manager. In addition, the lack of oversight resulted in the inability to detect in time situations that led to the judicial proceedings against the former executive director of MEDI, three financial advisors, a legal advisor, and two other persons.

The audit comments that the Municipality paid $2.4 million to a law firm to recover from the brokerage houses the loss of $9 million from the fraud. From this effort, $8.2 million could be recovered, of which MEDI returned $5.8 million to the Municipality. MEDI operated practically with public money and there is no evidence of the profit from its efforts. Therefore, its budgetary situation was not the best for contracting with the law firm.

A court in Alicante, Spain, required MEDI to pay €6.7 million euros on November 9, 2022. The plaintiff claimed from MEDI and Mayagüez Economic Development Iberica, S.L.U. the payment of services rendered related to the issuance of a corporate bond for €500 million, trips to Hong Kong, London, and Portugal to advise on the placement of the bond to interested parties, and the request for a second bond issuance for €10 million. On February 3, 2023, the Municipality referred this matter to the Federal Prosecutor's Office through a law firm, since it established that the then director of MEDI was not authorized to create any entity in Spain, nor to carry out the issuance of the €500 million.

As of February 2, 2024, two civil lawsuits against MEDI for $8.1 million were pending resolution. One of the lawsuits included Medi Films as a defendant for $6.5 million and claimed the execution of chattel liens, the foreclosure of a mortgage, and unjust enrichment, among others.

The Municipality's budget was $69 million in 2018, $61.5 million in 2019, $54.5 million in 2020, $58.5 million in 2021, $61.6 million in 2022, and $55.2 million in 2023. The financial statements from 2018 to 2022 reflected accumulated deficits of $25.7 million, $22 million, $24.2 million, $14.4 million, and $1.4 million, respectively.

In addition to the recommendations to the Secretary of Justice and the director of the Office of Government Ethics, the Report recommends that the director of Management and Budget ensure that the Municipality complies with the Corrective Action Plan established by the Office of the Comptroller of Puerto Rico. This second report on Mayagüez covers the period from July 1, 2017, to February 28, 2023.

Audit Report OC-25-60 is available on our website: www.ocpr.gov.pr