Malaysia: 1MDB scandal symptomatic of deeply-embedded corruption

December 7, 2015

In the context of corruption in Malaysia, no news item has had a greater impact in recent times than the scandal involving current Prime Minister Najib Razak. Najib has been accused of channelling approximately US$700 million from government-run strategic development company 1MDB to his own personal bank account.

In August 2015, the Malaysian Anti-Corruption Commission stated that the monies banked in Najib’s personal account came from a variety of donors, excluding 1MDB. It did not, however, elaborate on the identities of the donors or why the funds were transferred.

Events took a dramatic twist later that month when a member of Najib’s own United Malays National Organisation (UMNO) party filed a civil suit against him. In the suit, the party member accused Najib of breaching his duties as trustee, as well as defrauding party members by failing to disclose receipt of the donated funds and not accounting for use of the funds.

The suit triggered widespread criticism among Malaysians, many of whom claimed to have lost confidence in Najib’s leadership of the country as a result of his involvement in the scandal. Increasingly, there were calls for his resignation.

Suspicions grew further when several members of the Malaysian Government were removed from their positions following an investigation into the scandal, including former deputy prime minister Muhyiddin Yassin, whose position was given to current Minister of Home Affairs Ahmad Zahid Hamidi, and Attorney General Abdul Gani Patail, whose post was taken over by former Federal Court judge Mohamed Apandi Ali.

In addition, the Public Accounts Committee investigating the purported losses in 1MDB was indefinitely postponed due to four of its members being given positions in Najib’s cabinet. And former UMNO party member Khairuddin Abu Hassan was arrested after he lodged police reports in the United Kingdom, Singapore, France and Hong Kong regarding financial improprieties at 1MDB.

In a parliamentary session back in October 2010, 1MDB disclosed that its accounts had been fully audited and signed by KPMG as of 31 March that year. Lending further credence to the theory that the state-run entity was fully transparent with its operations, Deloitte was involved in the valuation and analysis of the 1MDB portfolio, while Ernst & Young provided 1MDB with tax advice.

While scandals such as this are common in other regions of the world, Malaysia had been fortunate in possessing a good governance record. However, the 1MDB scandal and political corruption generally is increasingly being viewed as a cancer that is deeply embedded among the upper echelons of the Malaysian Government.

According to the World Economic Forum’s Global Competitiveness Report 2013–2014, if companies behave unethically in a certain country it puts that country at a disadvantage when it comes to where to do business. In a Malaysian context, this includes the continuation of policies awarding huge infrastructure projects to selected Bumiputera companies without open tender, and the awarding of government contracts to well-connected companies due to cronyism.

Because of Malaysia’s current restrictions on freedom-of-information legislation in most states, such connections are not transparent. Highlighting these relationships requires discreet yet effective reputational enquiries.

Corruption challenges to note

From a compliance officer’s standpoint, perceiving the right levels of risk in a country of engagement or operations can make or break a deal. Determining the level of risk not only involves understanding the local legislature, but also requires an understanding of the local business practices and environment and what this means for the company and subject of engagement. It should also be noted that dealings with Malaysian entities should not be overly influenced by major scandals such as the aforementioned.

Some risk areas may fall into a grey area from which it is harder to proceed.

The following are a few key corruption challenges to consider when doing business in Malaysia. They include, but are not limited to:

  • individuals regularly switching back and forth between working for the private and public sectors, which allows for elusiveness in potential active government participation in the economy and public–private relations
  • political and campaign financing, as donations from corporations and individuals to political parties and candidates are not limited and political parties are not legally required to report on what funds are spent during election campaigns
  • access to information, because Selangor and Penang are the only Malaysian states (out of 13) to pass freedom-of-information legislation (and even then the legislation passed still has limitations), and the country’s Official Secrets Act enables any document to be officially classified as secret, making it exempt from public access and free from judicial review.
Previous Article
The dangers of modern-day slavery
The dangers of modern-day slavery

Below is an excerpt from the webinar. To access the complete complimentary webinar, please go to www.compli...

Next Article
Anti-bribery certification to provide a competitive advantage
Anti-bribery certification to provide a competitive advantage

ISO 37001 Anti-Bribery Management Systems Standard The new standard for anti-bribery management systems, I...

Expand your team to overcome your compliance challenges

Tell me how