Why things like 1MDB happen

QUESTION TIME Malaysia had no major financial scandals – as in billion-ringgit ones – until the infamous case of Bumiputra Malaysia Finance or BMF emerged in the early eighties and captured the imagination of the press and the public.

Before we are a bit quick to point the finger at former prime minister Dr Mahathir Mohamad for that, let’s point out that Mahathir became prime minister only in 1981, after BMF, Bank Bumiputra’s wholly-owned Hong Kong subsidiary, started loaning money to George Tan’s Carrian group, eventually amounting to RM2.5 billion in all.

The loans were made between 1979 and 1983, which means that loans continued to be made to Carrian even after Mahathir became PM, implying that Mahathir cannot be totally absolved.

Carrian was a rising star in the Hong Kong property market then but subsequently went bust, making it the biggest bankruptcy in Hong Kong at the time. The scale of the scandal was simply enormous and record-breaking, putting Malaysia on the top of the list in terms of banking failure at that time.

The question is what was a unit of Bank Bumiputra, a bank set up to provide bumiputeras access to funding as part of the effort to increase their participation in business, doing lending money to a Hong Kong property group?

This was at that time, the largest banking scandal in the world and the interest in it spiked further when a Bank Bumiputra senior officer sent to Hong Kong to investigate was murdered and his body dumped in a banana plantation.

The end-result of the entire hugely complicated affair was that few people were brought to account and even the main person involved in the scandal, George Tan, spent just three years in jail. BMF’s then chairperson spent a long time fighting extradition to Hong Kong from the UK.

Eventually he pleaded guilty in Hong Kong, but in an interview with Malaysia’s The Sun in a pub in London, he disavowed any wrong-doing in 2008, saying he was the fall guy. According to Lorrain (photo), Bank Bumiputra was getting deposits of RM50 million a month from national oil corporation Petronas and had nowhere to put it to use. Hence Hong Kong and the Carrian loans.

Much like 1MDB, it looks like a money-making scheme gone wrong. The underlying problem was a total lack of proper governance at the bank and the movement of money out of it. Was it a desire to make money for the bank and hence for the country or was it a plot to siphon out money for the benefit of individuals?

There have been many others scandals since – too many to go into detail in this article. Bank Bumiputra’s rescue several times in the billions of ringgit, Maminco, Perwaja Steel, Malaysia Airlines’ sales and repurchase, the Renong debacle, the huge forex losses at Bank Negara Malaysia (BNM) in 1992/93 – they all held one thing in common, the breakdown of corporate governance due to political interference.

The BNM scandal is worth going into in some detail. While official accounts put it at around RM10 billion, other estimates place it at around RM30 billion, the actual figure masked by adjustments to reserves, accounting tricks and even the alleged depreciation of the ringgit to improve BNM’s reserve position in ringgit terms.

Another dubious first

In BNM’s case, it was a political decision – Mahathir gave the go ahead for BNM to take positions – speculate in other words – on the foreign exchange market, to obtain gains for the country. That’s unheard of for a central bank, and BNM is probably the first and only central bank to have engaged in such activities on such a scale among the central banks of the world – yet another dubious first and a record breaker for Malaysia.

The shame is that except for this one blemish, BNM has been largely a well-managed and run central bank with impeccable people at the top with a reputation for integrity. It has been a reliable watchdog, keeping the nation’s banking system from spiralling down out of control under some of the worst economic conditions.

But the interfering hand of the politician – in this case Mahathir – and the approval of clearly taboo practices for central banks sullied that and resulted in covert foreign exchange operations that few knew about even within the bank and the huge losses of billions of ringgit eventually which could no longer be hidden.

It is worth remembering that all of the other ones apart from the BMF scandal occurred during Mahathir’s long 22-year tenure as PM. Even the BMF scandal ran for part of Mahathir’s time, when loans were actually increased to the Carrian group in an attempt to recover money eventually.

Mahathir’s successor Abdullah Ahmad Badawi had few such large scandals but there were many allegations of patronage made with respect to his son, son-in-law and brother, and also references made to the so-called fourth floor boys – a coterie of close advisers who were supposed to have great influence in decision-making.

But to Abdullah’s credit, it was under his tenure that the government-linked companies (GLCs) transformation programme was started, an ambitious attempt to reform GLCs many of which were being managed badly with former civil servants at the top.

Khazanah Nasional, which is wholly-owned by the government, under Azman Mokhtar and which held many of the GLCs under its umbrella spearheaded the transformation, by bringing in professional managers as well as setting KPI targets, standards and rulebooks, amongst others.

Even the GLCs which were not under Khazanah were subject to scrutiny and new standards. There was a tremendous improvement in performance, accountability and adopting best practices although there was and still is greater room for improvement.

But his successor Najib Abdul Razak negated a huge part of the transformation when along came 1MDB, first formed as Terengganu Investment Authority or TIA, which in a space of five years had assets, many of them dubious and unverifiable, of RM51 billion and liabilities of RM48 billion. It was built on a towering edifice of debt never before seen in Malaysia, much of it guaranteed by the federal government.

1MDB is wholly-owned by the Minister of Finance Inc and is not subject at all to all the governance procedures required of other GLCs. It operates rather covertly, makes no public reports like Khazanah does yearly beyond what is required by statute and gives very little information of its operations.

Now evidence has surfaced in the form of an amendment to 1MDB’s memorandum and articles of association (MAA) in August 2009 that requires major financial commitments and other major decisions by 1MDB to be approved in writing by the prime minister.

If this had continued to be in place the question arises as to whether he had given approval to all of 1MDB’s major transactions. If he has not, that implies that many of 1MDB’s transactions would have been directly against the MAA.

As we saw this is not the first time such a lack of governance has happened in Malaysia. The question is why does it continue to happen.

The root causes

One root cause is the continued abuse of the bumiputera agenda. Such was the case with Bank Bumiputra where others took advantage of the bank, set up to help bumiputeras gain access to funding, to channel funds into Hong Kong for their own purposes leading to massive losses of money.

In subsequent years, Bank Bumiputra continued to lend money to well-connected bumiputra owners many of whom never repaid their loans, eventually making the bank bankrupt. That included Umno which owed Bank Bumiputra RM300 million at one time for loans associated with the Putra World Trade Centre.

In the guise of helping bumiputeras, much money was siphoned off out of financial institutions but very few people were brought to book. Such practices were accepted as part of the ordinary course of business.

Other reasons for such covert operations are to raise political slush funds which could be used during elections, although many suspect a huge part of these funds go into individual pockets where they are tacitly accepted as a part of patronage politics. Such reasoning and the channelling of funds into the pockets of party bigwigs around the country muffles criticism of the practices from within Umno.

Also much of the public funds are wasted and lucrative contracts and concessions are awarded to privileged businessmen who contribute to party funds. Often, these businesses inflate construction prices to cream off profits while the inflated figures allow them to charge more for services they provide.

The underlying problem is the system – as long as there is money politics and excessive powers vested in the hands of the executive it will continue to happen over and over again. As long as no one is brought to account for past transgressions, it will encourage more people to cheat; after all what do they have to lose?

We simply need a commitment to cut corruption and patronage from the top downwards if things like 1MDB are not to happen again. If that’s not forthcoming from the current government despite all the pressure put on it, the public needs to exercise its democratic rights.

P GUNASEGARAM is founding editor of KINIBIZ which produces an online business news portal and a fortnightly print magazine.