Malaysia’s new national destiny - to become a global kleptocracy?

US Department of Justice  and Malaysia's scandal of scandals
Malaysia is once again in the midst of a serious political scandal, with the allegation that the government-run investment company 1Malaysia Development Berhad (1MDB) has been used to funnel approximately US$ 700 million to a personal account of Prime Minister Najb Razak.

It is not just Umno but the whole Malaysian nation which had been hit by the 1MDB scandal like being blasted by an atomic bomb, with the crowning ignominy of being regarded worldwide as a “global kleptocracy” as a result the US Department of Justice (DOJ) lawsuits to forfeit over US$1 billion assets in the US, UK and Switzerland as a result of US$3.5 billion criminal embezzlement, misappropriation and money-laundering of 1MDB funds.But the catastrophic after-effects of the 1MDB scandal have not ended with the DOJ action as evident from a greater and further loss of national and international confidence in Malaysian governance, when there was no official proactive response to the DOJ complaint despite the mass of details about the criminal conduct and grand larceny of 1MDB-linked funds involving the highest authority in Malaysia, euphemistically referred to as “Malaysian Official 1”.This is on top of the latest developments over the class action suit by ex-prime minister Dr Mahathir Mohamad's former political secretary, Matthias Chang and former PAS leader Husam Musa in the United States against individuals linked to 1MDB.

Against such a backdrop, three recent developments have made it clear that the storms from the “atomic bomb” explosion of the 1MDB scandal will not recede but will continue to haunt and hound Malaysia in the coming months and even years.


Firstly, the refusal of the Public Accounts Committee (PAC) to re-open investigations into 1MDB;

Secondly, the announcement by the Bank Negara governor Muhammad Ibrahim that there would be no re-opening of investigations against 1MDB despite the damning 136-page DOJ complaint; and

Thirdly, the statement by the new Malaysian Anti-Corruption Commission chief commissioner Dzulkifli Ahmad that his main focus is to ensure a civil service which is clean of corruption, misappropriation and power abuse, completely avoiding what should be the greatest challenge of MACC - to purge and save Malaysia from the international ignominy of a global kleptocracy.


The time has come for every Malaysian to know the meaning of kleptocracy - defined as a rule by a thief or thieves

the whole Malaysian nation which had been hit by the 1MDB scandal like being blasted by an “atomic bomb”, with the crowning ignominy of being regarded worldwide as a “global kleptocracy”

Media commentary on the scandal is full of superlatives, with Financial Times deeming it “biggest financial scandal in [Malaysia’s] modern history.” Danny Quah, writing for the Malaysian Insider, evokes 1MDB as evidence of a Malaysian political system that has lost its moorings after decades of success.

The political firestorm of the 1MDB scandal is real, and has the potential to become one of the most serious threats that the Barisan Nasional regime has ever faced.

But corporate and financial scandals like 1MDB are nothing new in Malaysia’s political economy. Observers of Malaysian politics should take note of the many historical antecedents of today’s scandal, many of which happened during an era described by Quah and others as an era of dynamism, optimism, and economic and political success.

More than 30 years ago, Malaysia was rocked by what opposition veteran Lim Kit Siang called the “scandal of scandals” when Bumiputra Malaysia Finance, a Hong Kong based subsidiary of state-owned Bank Bumiputra Malaysia Berhad, was found to have engaged in a wide range of shady dealings with the Carrian Group, a major player in Hong Kong’s booming property market.

The sordid details include not only imprudent lending to a high-flying connected borrower, but also the murder of a BBMB auditor who questioned the propriety of the loans! The BMF scandal was just one of many cases during Malaysia’s mid-1980s recession in which government-affiliated corporations—founded to create and steward wealth for bumiputeras—rescued connected firms.

Scarcely 10 years later, the Asian Financial Crisis struck Malaysia hard. As is well-known, the regime moved swiftly against its domestic opponents at the same time that it implemented its audacious adjustment package of capital controls and macroeconomic stimulus.

But at the same time, the regime shored up its corporate base as well. Funds from the state pension fund were used to rescue United Engineers (Malaysia) Berhad, which had borrowed to purchase shares in its parent company Renong, which served as a holding company for UMNO corporate assets. BBMB too was bailed out—yes, again—but this time by Khazanah, the government’s investment arm operating under the Ministry of Finance.

Other politically-linked firms found respite from the crisis as well, as Terence Edmund Gomez and Jomo Kwame Sundaram detailed in their magisterial book Malaysia’s Political Economy: Politics, Patronage, and Profits. The crisis saw so many bailouts of so many connected firms using public funds that observers often forget that each one was a significant scandal on its own.

High-level financial scandals in which public funds are used for private gain and corporate welfare are a common feature of Malaysia’s modern political economy. What makes 1MDB so special is that it implicates a politician who has struggled to cultivate an image as sitting above the corruption, graft, nepotism, and crime that are so characteristic of Malaysian politics (the decade-old Altantuya case notwithstanding).

The finding that funds were transferred to a personal account of Najib himself does not help. It strikes most observers as the height of venality to hold, as Minister of Youth and Sports Khairy Jamaluddin recently has, that there is nothing amiss in donations to a ruling party being channeled through a sovereign wealth fund and held in the personal bank account of a sitting Prime Minister.

One reason why Quah finds 1MDB so problematic is that it, for him, it represents the exhaustion of a political and economic order that brought great economic opportunity to ordinarybumiputeras without killing Malaysia’s economic growth. The 1MDB scandal shows how cronies “exploit…for self interest the very instruments designed to help others.” But if Malaysia’s political economy has a long history of scandals like 1MDB, the BN also has a long history of favoring its high-flying allies in the corporate sector.

The active role that the BN regime has played since 1971 in allocating opportunities and directing credit enables such favoritism, and its efforts under the New Economic Policy to expand rapidly the bumiputera corporate sector make it almost inevitable. Already by 1981, scholars such as Lim Mah Hui were able to show that half of all Malay directors of listed firms had political or administrative backgrounds (the figure for non-Malay directors was six per cent).

Yes, Mahathir’s actions as Prime Minister matter for understanding why UMNO politics and Malaysia’s political economy have developed in the way that they have, as Dan Slater has so cogently argued. But the enabling conditions for such scandals are part of the very foundation of the Barisan Nasional (BN) regime’s strategy for durable authoritarian rule. Najib works within the political system that his father, former Prime Minister Tun Razak, helped to create.

The use of public funds to reward and protect corporate allies is endemic to Malaysia’s political economy under the BN. It operates alongside a serious effort to favor bumiputera interests—indeed, to construct these interests through social and economic policies that nurture a particular notion of bumiputera-ism and Malay identity.

In my 2009 book on how the BN survived the Asian Financial Crisis, I termed these policies a “constitutive part of the BN regime.” The great strength of UMNO and the BN is that even with all of its high-level financial scandals, the redistributive machine of the New Economic Policy and its successors continues to function remarkably well.

Understanding this history helps to understand the prospects for reform.  That government-affiliated firms were involved in shady dealings tied to regime elites and their corporate allies 30 years ago does not in any way diminish the seriousness of the 1MDB affair today. That these were symptomatic of the strategy of coalition building, economic development, and regime maintenance pursued since 1971, though, reveals why regulatory reform or political change at the top will be insufficient to prevent the recurrence of future scandals.

Even if Najib succumbs to some challenger within UMNO, that challenger will himself be a product of the same system that produced Najib and his deputies, and will be forced to work within that system as well. Meaningful reform in Malaysia’s political economy requires a more fundamental change to the logic of rule and stability that the BN has pursued since 1971.

For obvious reasons, this is unlikely to come from within the regime. And for proponents of the kind of thoroughgoing regulatory, corporate, and political reform needed to prevent scandals such as 1MDB in coming years, the failure of Malaysia’s opposition coalition could not come at a worse time.The recent obsession of some with FCRA, NGOs is well known. Expectedly, some action under the Foreign Contributions (Regulation) Act, 2010, investigation of some NGOs linked to Zakir Naik/his family is being contemplated. While that may well be necessary, merely relying on this approach is not only likely to lead up the wrong path but may end up obfuscating the real issue. Significant amount of time, energy and public money could end up being wasted. Can such delinquencies be afforded when national security is at risk?

Syed Ali Alhabshee–Jangan bohong dan Tembak Lah

The case of 1MDB illustrates the problem. It is alleged a total of US$7 billion of funds has gone missing. A majority of the misappropriated funds has allegedly flowed to offshore companies. It is also suspected that some of these funds were used to support the ruling coalition’s campaign in the 2013 Malaysia General Election.

The concerns only erupted into a scandal in 2015 when the issue was raised by former Prime Minister Mahathir Mohamad in an internal party fight with Najib. Hundreds of thousands of people then went into the streets to protest, but Najib has so far successfully resisted the call for him to step down. He has also strengthened his position by sacking critics and the attorney general from his government. He was later cleared of any wrongdoing by the new attorney general

Malaysia has a long history of high-level financial scandals, some of them involving the country’s government-linked companies (GLCs). Yet, the recent case of 1MDB is particularly shocking. This is the first time that its sitting Prime Minister ( pic above) is directly implicated.

The 1Malaysia Development Berhad (1MDB) scandal in Malaysia which has recently become the subject of a high-profile lawsuit by the United States Department of Justice’s asset recovery initiative highlights the problems with state-ownership in the Malaysian economy. To prevent such scandals from recurring in the future Malaysia must define the role of the government in business and develop adequate institutional arrangements to counter potential abuse by politicians.

Malaysia has a long history of high-level financial scandals, some of them involving the country’sgovernment-linked companies (GLCs). Yet, the recent case of 1MDB is particularly shocking. This is the first time that its sitting Prime Minister is directly implicated.

Prime Minister Najib Razak has vehemently denied the allegations and claimed that the money was a ‘donation’ from the Saudi Royal Family. But the investigation by the US Department of Justice

Research into state ownership has long argued that GLCs are vulnerable to the problems of politicisation, corruption, and rent-seeking, which can cause them to be inefficient and mired in scandal. In Malaysia, GLCs have been used as a tool for politicians to direct benefits to their political supporters or even themselves.

Police say they do not know the purpose for which the money was deposited in the banks. This with due respects is preposterous, to say the least. This is the first, easiest and quickest fact that can be and should have been established.

The investigators will do well to remember that we have in our country something called The Foreign Exchange Management Act, 1999 (FEMA). Its purpose, put simply, is to regulate the use of foreign exchange in India. All transaction in foreign exchange have to necessarily flow through a dealer authorised by the Reserve Bank of India.

Inflow of foreign funds is also within the framework of FEMA. Section 10 of FEMA imposes a duty on the Authorised Dealer (AD) to take necessary declarations & information from the concerned person as will reasonably satisfy the concerned AD that the transaction will not contravene the provisions of FEMA or any rules and regulations made there under. The purpose of inward remittance has to be specified. Any contravention or evasion has to be reported by the AD to RBI.

The Rs 60 crore, reportedly, came in over three years from three countries. There were multiple transactions. Money flowed in through banking channels. And yet the police claim that they do not know the purpose for which the money came. The first persons to be questioned should have been the bank officials. Did they take the necessary declarations, ask the right questions and reasonably satisfy themselves that the inflows were in accordance with the Rules of the land. They would have got multiple opportunities to do this even if they had missed out on an earlier one. The collusion, if any, between the law breakers and law enforcers would have been revealed.

Rs 60 crore is not a small amount by any stretch of imagination. It will be interesting to know what purpose was declared to the bankers by the persons in whose accounts the amounts were credited. Equally interesting will be to know what factors were considered by the bankers to reasonably satisfy themselves that the inflows of this humongous amount were in order.

Lest we lose track of the real issue, the question is not of this specific case or of the Rs 60 crore. The issue is much, much larger and grave: how much such bombs are ticking away endangering our national security.

As students of commerce will recall, we were taught to accept/deposit the inflows first and ask questions later. One sincerely hopes that the banks do not work the same way.

Notwithstanding the importance of the scarce commodity that foreign exchange is, it cannot be allowed to dilute controls by the banks which could endanger national security. Diligent professionals appreciate the distinction between academics and real life. This reassurance is necessary. Only then will we be justified in continuing to bank on the banks. And afford to sleep peacefully content that the security of our great nation is safe.

Excessive State Influence in Business

Malaysia has a long history of high-level financial scandals, but this is the first time a sitting prime minister is directly implicated. Some $7 billion of funds has gone missing from 1MDB. The failure of institutional safeguards to prevent or take action against such irregularities points to major deficiencies within Malaysia’s governance of GLCs.

The failure of institutional safeguards to prevent or take action against such irregularities points to major deficiencies within Malaysia’s governance of GLCs. Six decades of rule by the United Malays National Organisation (UMNO), the main ruling party in Malaysia, has undermined Malaysia’s democratic institutions. There are now no effective institutional checks and balances on the handling of GLCs by the state and politicians.

Underlying the 1MDB scandal is the problem of excessive state influence in business. It is estimated that GLCs account for approximately 36 per cent of the market capitalisation of Bursa Malaysia and 54 per cent of the benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBMKLCI). GLCs do not only participate in natural monopolies or strategic industries, but compete with the private sector in highly lucrative businesses such as retail, construction and property development.

In the case of 1MDB, the state-owned investment company also has a huge involvement in property development, through the projects of Tun Razak Exchange (TRX) and Bandar 1Malaysia. These projects were particularly controversial because the land was sold to 1MDB at a very low price by the government. Critics argued that the land should instead have been auctioned publicly and that the projects could be handled more effectively and efficiently by private companies.

Although the government embarked on a GLC transformation program in 2004 and committed to divest their non-core holdings and non-competitive assets in 2010, its influence in Malaysian business has never really faded. On the contrary, as argued by Malaysian economist Dr. Edmund Terence Gomez, there is increasingly an ‘extreme concentration of powers by the executive’. To prevent future scandals Malaysia should curb the excessive role of the state in business and put in place institutional mechanisms that subject politicians to proper checks and balances.

There are increasing discussions at a global level, particularly by the Organisation for Economic Co-operation and Development (OECD), regarding which institutional governance frameworks can best regulate the state in its handling of GLCs while also improving their performance and accountability.

Malaysia should consider adopting the OECD guidelines on corporate governance of state-owned enterprises (SOEs) to benchmark itself against the world’s best practices. The guidelines recommend a clear separation between the state’s ownership function and regulatory function, which is currently lacking, particularly in the 1MDB case where the prime minister is the ultimate decision-maker.

Both the state and GLCs must also observe a higher standard of transparency. A clear and consistent ownership policy should be established to define the overall objective of state ownership and the state’s role in corporate governance. This move must also be complemented by wider reform in Malaysia’s democratic system. The problem goes beyond the current prime minister. Lasting reform will require ensuring free and fair elections and a true separation of powers between executive, legislative and judiciary branches as well as strengthening the independence of key institutions, including the central bank and the Attorney- General’s Office.

Comprehensive institutional reform is necessary to restore public confidence. But this process is expected to be difficult given the deep influence that the ruling party holds within the different branches of government.