By kleptocracy in Malaysia we shall mean the present government exists to accumulate and increase the personal wealth and political power of its ethnocratic officials and the ruling class of oligarchs and crony capitalists at the expense of a manipulated population. The accumulation of personal wealth, completed without pretense of any honest service but practiced corruption, is often achieved by looting the national wealth through extensive exploitation of natural resources often with the participation of government-linked corporations and oligarchies. Then, there are export incomes in the form of economic rents resulting in capital flights, and even illegal trading resulting in transferring public funds into secret personal numbered bank accounts in foreign countries, see the Paradise and Pandora Papers.
An ethnocratic governance is where representatives of an ethnic group is holding a disproportionately large number of public posts to advance their ethnic group to the disfranchisement of others, (see Winter, J.A., Oligarchy, Cambridge University Press, 2011 and Wade, G., The Origins and Evolution of Ethnocracy in Malaysia, Asia Research Institute, National University of Singapore, Working Paper Series 112, April 2009).
In the case of Malaysia, the oligarchy consists of wealthy individuals with political influence constructing public policies benefitting their agricultural estates (for example, Felda Global Venture Holding) or business firms (YTL Power, NAZA Automotive Manufacturing, the Petra Group’s Elastomer Technologies Ltd., the Ananda’s TGV Cinemas); lucrative government contracts (to MMC Gamuda KVMRT (PDP) Sdn. Bhd. in the Klang Valley Mass Rapid Transit project, and to Cahaya Mata Sarawak Berhad (CMS) a contract covering all state roads maintenance in Sarawak totally over 4000 km. and a 15-year concession to maintain 643 km. of federal roads (Cahaya Mata Sarawak Berhad, Annual Report 2008, p.20)); and protectionist measures (as like Sapura-Kencana in the oil and gas sector or Dewan Niaga (Sarawak) monopoly on all timber exports) while displaying no remorse for the marginalized Malaysian. Often, these oligarchs are served and encouraged by crony capitalists who have close relationships between businesses and the ruling power.
A recennt example of crony capitalists intending to leech on state fund is the Metropolitan Commuter Network to build and operate a 100-km inter-city rail service in Johor – a 60:40 joint-venture between Malaysia Steel Works (Masteel) and KUB Malaysia Bhd. where 70% is financed through a government soft loan. Masteel said it is a private sector initiative, but it is surprising that a company with no experience in operating a commuter train got an idea of building such a system even before the government called for bids, unless its close connection to the ruling party is a fact.
Another damning episode is the national airline Malaysian Airline System (MAS) when it was under private crony-capitalist control. Mahathir in the nineties privatized the carrier, selling a one-third stake to well-connected corporate high-flyer, Tajudin Ramli.
However, when MAS performance was unimpressed it was re-nationalized as part of a corporate rescuse package. Tajudin later claimed that Mahathir had induced him to buy MAS (at RM$8 when the trading price was RM$3.50) so as to bail out Bank Negara after the central bank suffered massive foreign exchange losses due partly to foreign currency markets’ speculation in 1997. This crony-capitalist said that as a “national service”, he initiated an “Overriding Agreement” to indemnify him against any loss suffered.
With typical lack of transparency, accountability and dire details of the consequent court proceedings, a RM$580 million out-of-court settlement was reached with some government-linked corporations that were claiming MAS for their outstanding dues.
Once again, capitalism has imposed deprivation of the underlying population which not only depleted the national wealth but hand over handsomely amounts to unworthy and unmeritorious oligarchy’s entities.
Since 2002, the Ministry of Finance, Malaysia, had absorbed RM$7 billion of the Malaysian Airline System’ assets. Already in 2005 and again in 2009, MAS had called for right issue raising nearly RM$3 billion in cash calls that inadvertently increased Khazanah Nasional Bhd’s holdings in the airline to 69.5%. The recent planned third rights issue of another RM$3.1 billion had critics debating whether the airlines can take-off and fly without government support, (see Francis, I., “MAS turnaround getting the brush”, The Edge December 3rd. 2012, pp.42-43).
In late 2011, the government investment arm, Khazanah, announced a surprise share swap agreement between Air Asia and MAS in a move reportedly aimed at boosting the income-generation of the national carrier. The deal did not go through, (KiniBiz, 6th. September, 2013).
As an argument, the MAS and Air Asia Bhd. collaboration effort – that was eventually called off – involved a RM$1.1 billion share swap, the question arises as to whether a radical overhaul in the airline is possible presently because an internal audit had exposed irregular procurement practices in the engineering division besides the existing loopholes in its contracts with various crony-capitalist vendors that are gainful to them rather than to the corporation itself.
Besides, the Air Asia entrepreneurship business model is very different from the archaic and ethnocratically-run government-linked corporations.
Therefore, it is not unexpected through the years that at least 23 of Malaysia’s biggest companies are regarded as “special vehicles” for the United Malays National Organization (UMNO) receiving huge amount of money in government contracts because these companies are hard-wired to the crony capitalists’ principles of moral conduct of mass exploitation – a monopoly structure of production that is state and crony-capitalist owned – thereby undermining rakyat-rakyat aspiration of sharing wealth equally, (see Gomez, E.T., Politics in Business: UMNO’s Corporate Investments, Kuala Lumpur: Forum, 1990).
In Sarawak, as the Chief Minister, the Taib’s family oligarchs exploits the biodiversified forests with Sarawak’s largest timber and logging companies (Ta Ann, Samling, WTK, Sanyan) while maintaining concurrent monopolistic control in the log exports via Achi Jaya Transportation, besides other commanding plantations’ interest in Sarawak Plantation. Achi Jaya Transportation and Achi Plantations are subsidiaries of Aichi Jaya Holdings in peninsular Malaysia belonging to one Onn Mahmud, a crony capitalist to the Taib family since 1980 when the latter assumed office as the Chief Minister of Sarawak. In 2007, Japanese tax authorities revealed that tens of millions US dollars had to be kick backed to Onn Mahmud’s Achi Jaya Transportation otherwise the Sarawak government would not issue timber export permits, (The Japan Times, 29/03/07).
The confidential cable from the U.S. Embassy in Kuala Lumpur to the State Department dated 13th. October 2006, had noted in a report that “Taib and his relatives are widely thought to extract a percentage from most major commercial contracts – including those for logging – awarded in the state”. Unsatisfied with present wealth looting, in 2010, the Minister for Land Development, James Masing had declared a mission to convert a further 1 million hectares (2.5 million acres) of tropical forest into oil palm plantations by 2020 and that there would be a need for a “more aggressive development of Native Customary Rights land”.
The accumulation of wealth by this ethnocratic regime is detailed in an exclusive press release in 2011 by the Bruno Manser Fund indicating that the Taib family’s family connection has over 400 companies in 25 countries, including offshore finance centers such as those in British Virgin Islands, Jersey, Bermuda and the Cayman Islands. In peninsular Malaysia, Taib is a major shareholder of Mesti Bersatu Sdn. Bhd. which is a parent company for another 10 Malaysian companies with interests in the property, plantation and construction sector.
Indeed, the US embassy’s Political Section Chief concluded after a visit to Sarawak’s state capital in 2009, that: “the Sarawak State government remains highly corrupt and firmly in the hands of its chief”. In November 2009, the US embassy reported to Washington that “Chief Minister Taib remains unchallenged after 27 years in office, his government doles out timber-cutting permits while patrolling the under-developed state using 14 helicopters, and his family’s companies control much of the economy.”(Wikileaks leaked cable between US embassy Malaysia to the State Department Washington. Labeled – Confidential Section 01 OF 03 Kuala Lumpur 001935. Subject: Sarawak: Opposition adrift; Indigenous people lack services; police reject criticism. Classified by: Political Section Chief Mark D. Clark for reasons 1.4 b, d. Published 29.08.11, Viewed 06.08.12).
Illicit outflow of funds could be due to illegal capital that occurs when money is illegally earned, transferred or spent. It was stated that such sum amounting to US$285.24 billion (RM$872.8 billion) existed from our country between 2001 and 2010 (Global Financial Integrity, Washington 2012), earning Malaysia a dubious second ranking next to China.
However, some have argued that there are reasons for these leakages.
Such outward funds could be from PETRONAS or Setia or Genting “investing overseas” or, according to Bank Negara Malaysia “20% of illicit outflows were accounted for by unrecorded transfer of proceeds via informal channels” that is typically captured by the Errors and Omissions (E&O) of the Balance of Payments (BoP) or it could be due to “trade mispricing”, according to the Royal Malaysian Customs Department, where evaded customs duties could be in cases of under- and over-invoicing of exports and imports of goods, as well as phantom shipments and other falsification of the value or quantity of shipments, (the Global Financial Integrity 2010 Report, however, had indicated the loss of tax revenue in percentage of government revenue at 15.4% due to trade mispricing, between 2002-2006). Whatever the defied explanations, this is still a huge sum of money of nearly RM$175bn not re-invested in the country for the benefits of Malaysians during that period. It was also recently reported by GFI that Malaysia had lost RM$150 billion in illicit outflows in 2009, and RM$200bn by 2010.
On the other hand, one could also possible say that some of the unlicensed money remitting services in Malaysia is alleged to have been a part of a US$6 billion (RM18.3 billion) online money laundering operation in US operating under the Liberty Reserve entity. That payment could have been made but not officially declared is typically classified under black, shadow or hidden economy which could include illegal activities such as the drug trade, and other unmeasured activities of a shadow economy which in Malaysia, between 1990-1993, constituted 38%-50% as percentage of our GDP, much higher than Singapore’s 13%, but comparatively similar to Tunisia and Mexico experience, (see Hindriks and Myles, Intermediate Public Economy, Chapter 16, MIT Press 2006 and Hindriks, J., Keen, M., and Muthoo, A. (1999) “Corruption, extortion and evasion.” Journal of Public Economics 74: 395-430).
According to The Tax Justice Network (2011), “The Cost of Tax Abuse – a briefing paper on the cost of tax evasion worldwide”, the size of the shadow economy in Malaysia is an estimated US$73481 million which resulted in the shadow economy as a percentage of health service at a high figure of 110% that if minimized could allocate and distribute better healthcare to the marginalized Orang Asals in Malaysia.
However, some of the larger outflows of funds were already in existence during the 1980s when the emergence of a bigger public and corporate debts as a consequence of capitalist cronyism (see “Cronyism and Capital Controls: Evidence from Malaysia”, Journal of Financial Economics, vol. 67(2), pages 351-382, February 2001) where Simon Johnson and Todd Mitton provide empirical evidence for Malaysia that the imposition of capital controls during the Asian financial crises benefitted primarily firms with strong connections to Prime Minister Mahathir, again without any improved collateral performance when compared with other firms).
Other examples of political favouritism are also well expressed by Jomo and Gomez (in Malaysia’s Political Economy: Politics, Patronage and Profits, 1999) when they documented official status awarded to firms that are run by crony Malays, and also those informal ties that exist between leading politicians and firms that are run by the capitalist class of Malay and Chinese thereby immiserizing the working class.
Hence, we have to ask whether private-enterprise economy can work better in a redistribution of wealth and income toward greater equality? This country has wide ranging natural resources and abundant talents, and had once lived through good periods of unprecedented growth and progress. However, the growing share of the society’s income tend to accrue to corporations (especially oligarchies) and wealthy renters (especially crony-capitalists) while the share of the underlying population stagnates or even had declined substantially in the past few years.
It is not surprising then that in a recent Fitch Report stated that “Malaysia’s public finance are its key rating weakness” as during the first quarter of 2013, the government-guaranteed debts off-balance sheet had already amounted to RM$147.7 billion which means that in total the national debt presently is RM$656.6 billion; by 2020, it had exceeded RM$1.2 Trillion!
The Fitch Ratings also highlighted that the government-guaranteed debts have increased from 9% of the GDP in year 2008 to 15% of the GDP in year 2012. This also means that overall our national debt would now be more than 65% of the GDP. This figure indeed is really way above the ceiling of 55% as set by Parliament.
In fact, the Malaysian Institute of Economic Research further had this to say on its web-site, “Financial stability needs to be preserved, as risks are building up, especially with high level of household debt and increasing federally-guaranteed debt of Government-linked companies (GLCs).”
The GLCs are in league with the oligarchs and crony capitalists in siphoning wealth from the nation, and when they failed, often are ‘renationalized’ at considerable public expense. GLCs are defined as companies that have a primary commercial objective but by which the ethnocratic governance – through Khazanah Nasional Bhd – has a direct controlling stake especially in making major decisions like awarding contracts, financing, acquisitions and divestments.
Gomez and Jomo (1999, op.cit) and Gomez (2002) had indicated the relationship-based capitalism where there are close connections between business and politics in Malaysia confirmed by the previous cited Johnson and Mitton (2003) research, too. Indeed, it was the increasingly dependency on debt financing before the 1997 instable economic conditions as the key domestic factor that pushed the country headlong economic downward to the distress of many a rakyat in the country, (Suto, M. (2003), “Capital structure and investment behavior of Malaysian firms in the 1990s: A study of corporate governance before the crisis”, Corporate Governance: An International Review, 11, pp. 25-39).
It is even more revealing that Malaysian firms with political patronage – besides a positive link between political patronage and capital structure – tend to carry more debt, too, (Fraser, Zhang and Derashid, C. (2006), “Capital structure and political patronage: The case of Malaysia”, Journal of Banking and Finance, 30, pp. 291-1308;see also: Wei, K.T. & Hooi, H.L.,“Capital Structure of Government-linked companies in Malaysia”, Asian Academy of Management Journal of Accounting and Finance, Vol.7, No:2, pp. 137-156, 2011.
In the partner state of Sabah, Malaysia’s former Foreign Minister Musa Aman and brother Anifah Aman, Chief Minister of Sabah, are alleged to be the secret beneficiary of lucrative timber licenses in the state’s dwindling Forest Reserves with a financial cost of malpractices equivalent to RM$285m. On 12th. June 2012, Swiss public prosecutor was asked to charge UBS over laundering of some Sabah logging corruption proceeds when in early April 2012 bank statements had shown that Musa Aman’s sons had accessed “dirty money”.
Timber trader Michael Chia (Tien Foh) was arrested in Hong Kong and charged with money laundering (through CTF International which though registered in the British Virgin Islands on April 18, 2006, it was de-registered in 2008) as he attempted to smuggle SG$16m. to Malaysia in 2008. Chia was stated to be linked with Anifah Aman though the latter had denied any of the allegations surrounding this case, (sarawakreport.org/2012/04).
This Chia guy has three offshore companies in which he is listed as either director or shareholder. Besides CTF International, the other two offshore companies owned by Chia are Ravenswood Development Ltd. and Ark Capital Technologies Ltd. Further, Chia’s wife Yap Loo Mien and another woman, Yap Siaw Lin, also appear on the list as key shareholders in 3 separate British Virgin Islands entities.
Yap Loo Mien owned two companies – Perfect Minds Incorporated and StarWater Corporation, while Siaw Lin (rumored to be Chia’s mistress) owned Splendor Success Worldwide Ltd.
Meanwhile, in another part of the world – another research-study unfolds.
to be continued…
in Part 2
first published in
STORM, 8/10/2013 with recent materials and or embedded reference links incorporated during August 2022
The List of References and Related Readings are in Part 2:
Illicit Capital, Illegal Transactions