After enjoying a reputation for several years as an open, middle income economy, Malaysia has been the subject of numerous scandals related to the divestment of public funds into shell companies.
By 2008, Malaysia had achieved an average growth rate of over 7% per year for a successive period of 25 years, and nearly succeeded in eradicating poverty - which now exists at less than 1% based on the share of households living under the national poverty line of USD 8.50. Malaysia survived the Financial Crisis in 2009, listing growth rates of over 5% each year since 2010. In 2010 Malaysia launched the New Economic Model (NEM) in the hope of achieving high income status by 2020 but also to ensure the profits trickle down to lower income households. A survey of the World Bank’s Ease of Doing Business Index 2015 Malaysia saw a drop from 17th to 18th, but this is still a high ranking for a middle income economy. However, in our own data openness index Compass, Malaysia is aggregated as 70th based on our own criteria.
Yet financial corruption and fraud in Malaysia is a general problem far beyond the unique extent of 1MDB: Kroll Inc state that fraud is up 14% from three years ago, in its Kroll Global Fraud Report 2015/2016. The number of companies weighed down by financial loss arising from fraud has also increased to 69% last year, compared with 64% in 2014. The 1MDB scandal has highlighted the need for greater information on company assets, and the ability to identify frequent cases of so-called ‘creative’ accounting, whilst the Malaysian Securities Commission’s 2015 report demonstrates the largest amount of financial crime comes from insider trading - 74%.
Regional Illicit Financial Flows, 2004-13. Source: Financial Transparency Coalition
1Malaysia Development Berhad
Malaysia’s development fund is at the heart of one of the biggest scandals in the history of anti-corruption. 1MDB is currently under investigation by the U.S. Department of Justice for $1bn defrauded between 1MDB and PetroSaudi, $1.4bn, raised by Goldman Sachs and diverted to an offshore company in Switzerland; $1.3bn also from Goldman raised and diverted to a Singapore account.
Several officials treated the fund as a personal bank account, but the greatest scandal, as publicised by the Wall Street Journal, is that Prime Minister Najib Razak funneled money donated to 1MDB into his personal bank accounts at AmIslamic Bank via several foreign entities: SRC International (an energy company owned by the Finance Ministry), Gandingan Mentari (a subsidiary of SRC), Ihsan Pendara (which carries out corporate responsibility for 1MDB) to the amount of $11.13m.
Alongside this, Najib received transfers from an offshore called Tanore Finance to the amount of over $681 million on March 21st and 25th 2013. Najib has now been publicly identified as the ‘Malaysia Official No. 1’ named in the DoJ’s report by a senior minister in his cabinet, according to the BBC. The walls are closing in.
A sharp response to the fallout
The market response to the scandal was traumatic last year: stock markets plunged, the currency was in freefall, and internal political tensions were palpable. In response to these accusations (and investigations) Najib has cracked down on any dissent in his administration, dismissing cabinet ministers who dared to make accusations and replaced them with loyalists. He has dismissed his deputy prime minister for speaking out about the handling of the affair. He has even replaced the outgoing Chief of the central bank (which up until now had emphasised its neutrality) with a hand-picked bureaucrat, Muhammad Ibrahim, who took over the post and immediately announced that Bank Negara’s investigation on irregularities of 1MDB is over:
“We have complete all our investigations on 1MDB”....“We have imposed a penalty and have taken all necessary action entrusted under the law.”
Scrutiny will continue as the US DoJ continues to attempt to seize assets acquired by 1MDB, but in the short term, Najib has successfully closed any potential leaks. An early election has been mooted, and investor confidence has been shaken by the turbulent events.
It is worth reiterating that Malaysia remains an open hub for business, and whilst corruption has dominated the headlines in the past two years it is a perfectly serviceable environment for investment provided appropriate due diligence checks are undertaken. Global Risk Intelligence has published a report which demonstrates that the risks posed by 1MDB are outweighed by ‘the attractive tax incentives offered by the government, Malaysia’s strategic proximity to the primary Asian markets, and its consumers’ growing spending power’.
The country has also demonstrated initiative in providing open data for international due diligence, releasing a new front-end for their Company Commission register called ‘MyData’, although the original companies commission register should be the first port of call for any analyst. In the light of these developments, it is worth considering what methods of investigating corruption are available to the due diligence professional.
Behind the Paywall: the Companies Commission Register
The Companies Commission of Malaysia, or Suruhanjaya Syarikat Malaysia (SSM), is a statutory body formed under an Act of Parliament that regulates corporate and business affairs in Malaysia. The SSM was formed in 2002 under the Companies Commission of Malaysia Act 2001, assuming the functions of the Registrar of Companies and Registry of Business.
SSM attempts to serve as an agency to incorporate companies and register businesses as well as to provide company and business information to the public. The commission launched SSM e-Info Services to allow information on companies and businesses to be clearly obtainable via the online system.
Information availability summary table
Within the e-register, limited company information is available without actually paying for the documentation. However, via OpenCorporates, it is possible to obtain the company name, number, type and address without registering on SSM at all.
There are three main forms of corporate structure in Malaysia - enterprise, SDN Berhad, and Limited Liability Partnerships. Enterprises include sole proprietorships and partnerships of a maximum of 20 people, with no audit and annual filing requirements, but with unlimited liability - in both cases the owners’ personal assets are liable to be taken by creditors without protection. Profits are considered under individual income.
By far the most common form of company in Malaysia is SDN Berhad (private limited company), since the company is its own legal entity. There is also a Berhad (public limited company) which is the same except the shares are public and it must have more than 50 members. It does not have to be a listed company. 1MDB is a Berhad).
After the 1MDB case, the Malaysian Accounting Standards Board issued Amendments to MPERS (Malaysian Private Entities Reporting Standard). The general filing requirements of listed companies is that there is no requirement for listed companies to file electronically - it is a purely voluntary requirement, and even this voluntary requirement has only been imposed this year. A more stringent set of protocols is inferred by MPERS, but only take effect on financial statements beginning after 1 Jan 2016 .
Sources of information
Searching by individual
Although the names of directors feature behind the paywall when you request documents, the registry itself does not provide names.
A company profile which can be purchased via the e-Info system contains the following:
Registered and Business Address;
Summary of Share Capital;
Company Financing Statement.
A business profile which can be purchased via the e-Info system contains the following:
Current Business Owner;
Nature of Business; and
Registration is performed at https://www.ssm-einfo.my/index.php?id=register
To acquire documents, it is necessary to go into My e-Account and recharge
Click on search company:
After searching, the available documentation will be added to the basket:
At this point, the cart can be checked out and the documents retrieved. As a system, SSM makes the documents inexpensive and easily searchable, but the inability to search by individual is regrettable and the information available is dependent on standard filing requirements.
For example, if we are to retrieve the information available on 1MDB, we see that we can see the details of the board with some transparency, even including passport IDs of the board of directors, and addresses (which we’ve redacted). We can also see who the audits have been conducted by, and more detailed information on charges and share capital.
Open registers, unenforced filing
SSM recently came under scrutiny for awarding 1MDB a further six-month extension to submit its financial statements for the year ending March 31st 2015, according to The Edge Financial Daily. 1MDB now has until September 30th 2016 to submit its accounts. This deadline has subsequently been continuously extended from March 31st 2015. In outrage, 1MDB blamed the officials and agencies investigating the organisation for the absence of the documents: the very same reason given for the previous extension. Clearly SSM does not have the authority to hold 1MDB to account - undoubtedly, a difficult undertaking, given the Prime Minister is the Chairman of the board of directors.
The most likely outcome is that SSM will simply impose a penalty which 1MDB can pay for with more bond sales. IMDB have already begun selling assets to China - they recently sold a collection of energy assets to China’s state-owned General Nuclear Power Corp.
It is clear from the documents that the audit for 1MDB’s accounts for 2013-14 was performed by Deloitte Malaysia. To distance themselves from the quality of the audit, Deloitte have released a statement:
“The complaint contains information, which, if known at the time of the 2013 and 2014 audits of 1MDB, would have impacted the financial statements and affected the audit reports and, accordingly, those audit reports issued by Deloitte Malaysia dated March 28, 2014, and Nov 5, 2014, respectively in connection with the 2013 and 2014 financial statements of 1MDB, should no longer be relied upon.”
It is unprecedented for an audit to be recalled - and it surely therefore means that the status of these accounts are yet to be audited. The Companies Commission have yet to make a statement on whether 1MDB will be charged under the companies act, but it seems unlikely.
Malaysia needs independent judicial oversight for due diligence
The scandal was clearly facilitated by organisational and legal structures which result in a lack of oversight - for example, the attorney general serving as both the leading legal adviser to the government and choosing the cases which are to be investigated), with the prime minister appointing members of the judicial commission, which selects the judges for the cases. Clearly a conflict of interest is inevitable. The Malaysian Anti-corruption commission stated that the money ‘donated’ into Najib’s accounts was legally provided by a donor in Saudi Arabia, which has been denied. There is no truly independent or Royal commission on corruption, which Transparency International has repeatedly called for.
Malaysia remains a fruitful economy for investment, but the scandal of 1MDB and the lack of regulatory oversight raises question marks for the future.
Written by Paul May, Editor at Arachnys. Arachnys is a digital platform that consolidates and aggregates business information from sources like the ones featured here to make due diligence research quicker and more effective. Contact the author at firstname.lastname@example.org if you would like to find out more.