The significance of Najib Razak’s SRC case to corporations and public servants

 

From Philip Koh

On Dec 8, the Court of Appeal (COA) handed down its decision dismissing the appeal by former prime minister Najib Razak (the appellant) in his attempt to overturn a High Court decision that found him guilty of seven charges relating to:

i) the receipt of gratification of RM42 million for his involvement in decision-making as a public officer of the Malaysian government in breach of Section 23 of the Malaysian Anti-Corruption Commission (MACC) Act 2009;

ii) a breach of Section 409 of the Penal Code where he, as an agent of SRC International and in his capacity as prime minister, finance minister and adviser emeritus, committed a criminal breach of trust (CBT) in those capacities, being entrusted with dominion over RM42 million belonging to SRC; and

iii) money laundering charges under Section 4(1)(b) of the Anti–Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 by receipt of RM42 million into his personal bank account.

The significance of the case for an officer of a public body

Any controller, shareholder and director of a corporation, including a GLC, should take heed of the COA’s affirmation of Justice Mohd Nazlan Mohd Ghazali’s High Court decision.

A director cum dominant owner is now fastened with fiduciary duties which, in the event of misconduct, may be exposed to not only civil liabilities under company and capital market laws and regulatory regimes, but also faces severe sanctions under criminal law in the form of custodial penalties.

Finding on corruption charges

The COA held that there are two main elements for an offence of illegal gratification under the MACC Act – that is, i) the accused was an officer of a public body; and ii) the accused used his office or position for gratification for himself, his relative or associate.

The COA upheld the High Court ruling that the former prime minister, being a member of the administration, an MP, and in receipt of public funds as remuneration, is a “member of a public body”.

As for use of position for gratification, the Court noted that there are statutory presumptions under Section 23(2) of the MACC Act upon the prosecution proving that an accused had taken part in the making of any decision or taking of any action, and such a decision or action concerned a matter where the appellant had either a direct or indirect interest.

The Code of Ethics of Members of the Administration (Kod Etika bagi Anggota-Anggota Pentadbiran) ensures that no conflict of interests arise between his personal interests and his holding of the public office.

When such a situation arises, “a public officer must not only declare his interest but also leave the meeting, and his non-attendance during the meeting or deliberations be recorded”.

In this case, Najib, who was present at two Cabinet meetings approving government guarantees in favour of Retirement Fund Inc or KWAP (Kumpulan Wang Persaraan), failed to comply with ethical norms.

On the critical issue of whether he had had an interest in the subject matter of the executive decision made by the Cabinet, the COA observed, “there is overwhelming evidence which established a glaring personal interest ….” in the Cabinet decision to issue the two government guarantees which unlocked a flow of funds from KWAP to SRC.

It is of interest that the prosecution is not required to prove receipt of gratification and that it suffices under Section 23(2) of the MACC Act that there had been use of position to obtain gratification.

The finding that appellant is not an officer of SRC and representative of government

This part of the COA’s ruling throws up an interesting fact. It was Najib’s own defence that Section 23(4) of the MACC Act, which provided that “this section shall not apply to an officer who holds office in a public body as a representative of another public body which has the control or partial control over the first mentioned public body in respect of anything done in his capacity as such representative for the interest of that other public body” did not apply to him.

The COA held that this exemption from the strictures of the offence of gratification could not benefit the appellant, as he could not be deemed as an officer of SRC and representative of the government.

The finding that Najib is not an officer is interesting. The term “officer” of a corporation has been defined under the Companies Act 2016 to include “any director, secretary or employee of the company …”.

The reference that the appellant cannot be deemed to be a government representative also raises a question. The COA is cognizant that the appellant played a dominant role in SRC by virtue of his being the prime minister at the material time.

We must also draw attention to the fact that the COA in another section affirmed the finding that the appellant is a shadow director of SRC (see below). Section 4 of the Companies Act defines a director to include a shadow director, as it states “a person in accordance with whose directions or instructions the majority of directors are accustomed to act”.

The fact that the exemption under Section 23(4) is not available to the appellant can be justified on separate analytical grounds of construction of the provision, and not the finding that the appellant is not an officer of SRC nor that he is not a representative of the government.

With respect, the finding that the appellant is a shadow director brings him within the compass of director under the Companies Act, and though the term representative is not defined, it does appear that surely a prime minister or finance minister is a representative of the Malaysian government.

The exemption under Section 23(4) of the MACC Act is meant to provide a defence “to a holder of office in a public body which is merely at a holding level in a group enterprise”, and acts or makes decisions solely for the interest of a member of that group shall not be deemed to have been a commission of offence of gratification under Section 23(1) of the MACC Act.

Finding of director and agent under the Penal Code

The COA referred to the Hansard of a speech by then law minister Syed Hamid Syed Jaafar Albar that a purposive construction be made in the scope of what constitutes “director agent” under the Penal Code.

Reference to Hansard as an aid to statutory construction, though not determinative of judicial decision-making, is salutary. The COA agrees that with such an approach (i.e. purposive), mere technicalities resulting in acquittals being secured for white collar crimes will be obviated.

Shadow directors

For corporations and GLCs, the affirmation of who may be caught within the scope of being a shadow director is instructive and cautionary.

In Section 402A of the Penal Code, the definition of a director is similar to that under Section 4 of the Companies Act. The COA observed that “shadow directors usually lurk in the shadows without any formal position in the company, seeking shelter behind others, and seldom hold themselves out as directors of the company. They operate clandestinely and without showing their hand. But when the evidence is closely scrutinised, we will find their hidden hands instructing the directors to act in the manner that the shadow directors want them to.”

While reference to the term ‘shadow’ suggests that the observation is apposite, it must be pointed out that recent common law decisions do not require the so-called “shadowy element” and that it suffices if the majority of the board acts or is accustomed to act, in accordance with the directions or instructions of such a person.

In fact, the SRC case is one such case and the High Court decision affirmed by the COA is that the appellant, being also prime minister and adviser emeritus is such a shadow director, notwithstanding the absence of clandestine aspects.

Again, Article 67 of SRC, which grants authority to the prime minister to appoint and remove any director, makes him a directing mind and gives him authority to hire and fire de jure directors.

GLCs where the government, whether through MoF Inc or its ministries, hold a golden share with a negative veto or appointing and dismissal power, must take heed of this aspect of the ruling.

Finding on criminal misappropriation and instructions to banks

This aspect would be of interest to financial institutions. The COA affirms the High Court’s ruling that there has been criminal misappropriation with movement of funds of RM27 million, RM5 million and RM10 million from SRC accounts to the appellant’s personal bank account.

The COA dismissed the appellant’s contentions that scanned digital signatures and instructions do not suffice, by reference to the fact that “the bank can act on scanned or electronic instructions as long as the signatories agree to the transfer and for their digital signature to be used”, also so long as other requirements imposed by the bank in respect of such instructions are fulfilled.

The COA further affirmed the High Court finding of dishonest misappropriation and that “actual knowledge of SRC monies being deposited into his personal bank account” is not contradicted.

The Arab donation

The COA carefully evaluated the appellant’s contentions and agrees that the so-called letters purportedly written by a member of the Saudi royal family is a fabrication and a “concoction that is completely bereft of credibility”. The COA held that funds in the appellant’s personal bank account which came from SRC is well-established.

The COA also observed that “all evidence negates the appellant’s contention that he was motivated by national interest and not personal gain” when he participated in Cabinet meetings that approved the two government guarantees. It was in that context the COA made the observation that it is “a national embarrassment”, a description well within judicial language.

Amla and wilful blindness

The COA’s decision affirms that Amla charges were rightly proved and that there were elements of wilful blindness.

The CAO observed that “The appellant had deliberately shut his eyes and chose not to verify the origins of the funds but instead relied wholly on others, while at the same time spent the RM42 million for his own purpose and benefit.”

Corporate social responsibility

A concluding observation that the COA also dismissed was the contention that the funds were expended for CSR activities.

Ex-post facto justification of “the reason or purpose of expenditure after dishonest misappropriation” is not relevant to CBT charges. In any event, the evidence did not bear out that the monies were expended for CSR nor were any authorised by SRC.

Conclusion

The COA decision is being appealed against. Notwithstanding the appeal decision, it has been set down with clarity the law in areas which corporations and GLCs must take heed, and officers must discharge their fiduciary duties with requisite care and skill and honest diligence. - FMT

Philip Koh is adjunct professor at Universiti Malaya and an advocate & solicitor.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.