The Perils of China’s “Debt-Trap Diplomacy”


September 10, 2018

Banyan

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Malaysia-China Relations:The Perils of China’s “Debt-Trap Diplomacy”

Malaysia’s rethink of Chinese belt-and-road projects has lessons for other countries

 Print edition | Asia

IN AUGUST, three months after his opposition coalition trounced the Malaysian party that had ruled since independence, Mahathir Mohamad, the country’s 93-year-old new Prime Minister, travelled to Beijing. His aim was to tell President Xi Jinping that his country was now the Malaysia that can say no.

Dr Mahathir’s predecessor, Najib Razak, had hewed close to China. His loss at the polls resulted more than anything from the stench of corruption within his ruling United Malays National Organisation (UMNO). But his chumminess with China was also a factor. The two issues were entwined.

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Najib Razak–Malaysia’s Voleur

During Mr Najib’s rule, huge holes appeared in the finances of a state investment vehicle, 1MDB, which Mr Najib chaired. America’s Justice Department estimates that $4.5bn was stolen from the fund by insiders. (Around the same time, nearly $700m turned up in Mr Najib’s own bank accounts.) As 1MDB teetered, Chinese state entities stepped in, taking stakes in 1MDB ventures.

The relationship with China grew ever cosier. Chinese-funded projects in Malaysia were packaged as part of China’s Belt and Road Initiative, a global infrastructure-building scheme close to Mr Xi’s heart. Jack Ma of Alibaba, a Chinese tech giant, won the right to turn a site near Kuala Lumpur’s main airport into a Digital Free Trade Zone. Malaysia’s government tried to silence criticism of its state-to-state dealings. And China showed its gratitude. In the run-up to Malaysia’s general election in May, the Chinese ambassador appeared to lend open support to the ruling coalition. Many people were surprised that Dr Mahathir managed to win, despite UMNO’s gerrymandering. Mr Xi had reason to be aghast.

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China is not used to recipients of its largesse challenging the terms on which it is offered. Yet growing numbers of them are struggling with debts to Chinese entities taken on to fund Chinese-staffed projects. The Centre for Global Development in Washington reckons that eight belt-and-road countries are at “particular risk of debt distress”, among them ones that border on China: Laos, Mongolia and Pakistan. That is why Dr Mahathir’s progress in disentangling his country from Chinese-funded ventures is being closely watched.

 

In Beijing Dr Mahathir was plain-speaking and deft. He said that Malaysia was cancelling the $20bn East Coast Rail Link, a massive belt-and-road project, as well as two oil pipelines in Sabah province. His message, in essence, was: very sorry—lovely projects, but since coming to office we’ve discovered we can’t afford them. Implicit was another point: we can’t afford them because we now know how inflated the costs are, and how skewed the deals are in China’s favour—or plain fishy. It appears the Najib government paid nearly 90% of the $2bn price of the Sabah pipelines, although they were only 15% complete. Part of a Chinese loan for them appears to have plugged financing gaps at 1MDB.

Since Dr Mahathir’s return, he has gone further, taking aim at a large, Chinese-led housing scheme in Johor state intended for wealthy investors in China. This week the Prime Minister declared that foreigners would not be given visas to live there. Most Malaysians, he complained, could not afford to live in the new development. (The government in Johor makes more reassuring noises to foreigners who might be interested.)

China has a tendency to launch into tirades against countries that confront it. In this case the response from Beijing has been muted. That may be partly because of Dr Mahathir’s careful choice of words. But Malaysia is an influential country in South-East Asia, a region that China wants to draw closer into its orbit. And China does not want to make enemies among belt-and-road countries. One of the main points of the project is to boost China’s influence over them. For other countries badly needing to renegotiate their deals with China, that is a lesson worth learning.

Of these, Pakistan, which also has a new Prime Minister, Imran Khan, is by far the biggest debtor to China. The China-Pakistan Economic Corridor, a collection of energy and infrastructure projects supposedly worth $60bn, is the biggest plank of China’s belt-and-road strategy. Not for the first time, Pakistan faces a balance-of-payments crisis. It wants out of its debt.

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Mr Khan ought to do a Mahathir. And he is in an even better position. Far more than with Malaysia, there is a strategic dimension to China’s relations with Pakistan, says Husain Haqqani, a former Pakistani diplomat who is now at the Hudson Institute, an American think-tank. Officials in Beijing see Pakistan as a counterweight to India, China’s geostrategic rival. China needs Pakistan’s help in keeping Islamist extremism at bay. And it regards its neighbour as a vital route to the Arabian Sea. Unlike Dr Mahathir, Mr Khan himself seems not to grasp the problems of China’s debt embrace. But at least critics in Pakistan of the economic corridor are beginning to find their voice.

Debt divisions

China has more than its political ties with belt-and-road countries to consider. Chinese banks are getting worried about the safety of their lending. Commercial banks have sharply cut new belt-and-road financing since 2015. (So-called policy banks continue to lend.) And now the Belt and Road Initiative faces strong popular criticism at home. In part, the initiative is a victim of the Communist Party’s own propaganda: what debtors see as hard-to-service loans, state media paint as beneficent “aid”. That is a touchy word. At a summit in Beijing this week with African leaders, Mr Xi promised $60bn for the continent. Why, Chinese people asked on social media, is an indebted China spending so much abroad when it has pressing requirements at home? Censors rapidly shut down their criticisms of Mr Xi’s gesture.

China is right that many countries need more roads, railways and other infrastructure. But it is evident that the scheme it touts as a defining one of Mr Xi’s rule is losing its shine. Dr Mahathir’s trip may have taught some valuable lessons.

This article appeared in the Asia section of the print edition under the headline “Can’t pay”

 

New York Times : Malaysia pushes back against China’s Vision


August 24, 2018

New York Times :Malaysia pushes back against China’s Vision on account of Najib Razak’s stupidity

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Dr Kua Kia Soong hits out at PH ‘flip-flops’ ahead of 100-day milestone


August 15, 2018

Dr Kua Kia Soong hits out at PH ‘flip-flops’ ahead of 100-day milestone

Suaram Adviser Kua Kia Soong also says Putrajaya appears more interested in playing the blame game than getting down to business.

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Dr Kua Kia Soong, prominent activist,former Isa detainee, and prolific analyst, today accused the Pakatan Harapan (PH) government of flip-flopping on a number of issues, just days before the administration led by Dr Mahathir Mohamad marks its first 100 days in power.

Giving the example of the Unified Examination Certificate (UEC), Kua Kia Soong asked why it would take five years to recognise it when PH had stated in its manifesto that it was ready to accept it. He said other issues included the oil royalty promised to East Malaysia and the abolition of highway tolls.

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In July, Mahathir announced in Parliament that Putrajaya would honour its promise to provide 20% royalty to petroleum-producing states. But he later clarified the statement, saying the 20% payment would be based on profit instead of royalty.

The Suaram Adviser said it was also unacceptable that local elections could only be held after three years. “Delaying reforms in unacceptable. A really important reform we want to see concerns the redistribution of wealth,” he added.

Dr. Kua was speaking at Suaram’s presentation of its report card for PH’s first 100 days in government.He said following the election, Putrajaya seemed more interested in playing the blame game than getting down to business.

“We read news of the missing goods and services tax (GST) money, yet there has been no movement. Have the Police or Attorney-General acted on it? We should be told what happened to the money within a week,” he said.

He also took issue with Tabung Harapan Malaysia, a fund established to help settle the country’s RM1 trillion debt, saying he could not accept “sob stories” related to the initiative.

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“It’s about the management of the economy to plug the leaks, not the piggy banks of little boys,” he said, referring to the story of a youth who donated his savings to the fund.

As for the government’s war on kleptocracy, Kua asked why authorities had yet to zoom in on former Sarawak chief minister Taib Mahmud, who was accused of corruption in the past.

“And why haven’t Mahathir and his children declared their assets?”

Dr. Ramesh Chander Praises Malaysian Finance Minister for early statement on National Debt


July 2, 2018

Dr. Ramesh Chander Praises Malaysian Finance Minister for early statement on National Debt

https://blog.limkitsiang.com/2018/07/02/r-chander-first-malaysian-chief-statistician-1963-1977-praises-guan-eng-for-early-statement-on-national-debt-and-stresses-urgency-of-coherent-plan-to-manage-malaysias-public-sector-debt/

R. Chander, Malaysian Chief Statistician (1963-1977) praises Finance Minister Lim Guan Eng for early statement on national debt and stresses urgency of coherent plan to manage Malaysia’s public sector debt.

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I  received an expert opinion on Malaysia’s public sector debt by Dr. R. Chander, the first  Chief Statistician of (1963-1977), who went on to serve as the Senior Adviser to the World Bank’s Chief Economist-Vice President from 1977 to 1996. Upon retirement from the Bank, he served as international adviser to multiple international agencies and governments.

Dr. Chander said he was encouraged by the speed with which the Pakatan Harapan (PH) government had come to grips with the most pressing issues and praised the Finance Minister, Lim Guan Eng for making an early statement on Malaysia’s debt situation.

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Najib Razak caught right handed by the FBI for stealing Malaysian people’s money. But he says it is a donation from the Saudi Royal Family

He said: “This was most timely indeed and most astute: it sent a strong signal to markets and had a calming effect; it told the electorate the mess that PH had inherited.

“At the same time it sent a strong message that the debt situation would impede the implementation of several of the electoral promises.

“Concurrently it provided a rationale for the cancellation/suspension of several mega projects that were to be financed by loans – terms of which were rather unfavorable to Malaysia.

“A good side effect was the call to patriotism that was brought out by the launch of the Harapan Fund!” The question now is: Where do we go from here?

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In his opinion piece, which I attached below, he stressed the urgency of coming up with a coherent and sound plan to manage Malaysia’s public sector debt.

[Media Statement by DAP MP for Iskandar Puteri Lim Kit Siang in Kuala Lumpur on Monday, 2nd July 2018]

Taming Malaysia’s GLC ‘monsters’


June 24, 2018

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1MDB Top Honcho–Arul Kanda Kandasamy

“…recent revelations show Malaysia’s debt position may be more precarious than first thought. The new government has correctly highlighted the need to include certain off-balance-sheet items and contingent liabilities such as government guarantees and public–private partnership lease payments in any complete assessment of debt outstanding, as the use of offshoot companies and special purpose vehicles in the deliberate reconfiguration of certain obligations mean that traditional debt calculations underestimate Malaysia’s actual debt.”–Jayant Menon

About a month before Malaysia’s parliamentary election in May, then-opposition leader Mahathir Mohamad raised concerns over the role that government-linked companies (GLCs) were playing in the economy, being ‘huge and rich’ enough to be considered ‘monsters’.Data support his description — GLCs account for about half of the benchmark Kuala Lumpur Composite Index, and they constitute seven out of the top-10 listed firms in 2018. They are present in almost every sector, sometimes in a towering way. Globally, Malaysia ranks fifth-highest in terms of GLC influence on the economy.

Calls to do something about GLCs have increased since the election following the release of more damning information, although most of it relates to the GLCs’ investment arm: government-linked investment companies (GLICs). Recent reports confirm that the former government had been using Malaysia’s central bank and Khazanah (a sovereign wealth fund) to service the debt obligations of the scandal-laden 1 Malaysia Development Berhad government fund. The central bank governor has since resigned.

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The GLCs have not been immune from scandals either. The most recent relates to a massive land scandal involving Felda Global Ventures, which is the world’s largest plantation operator. There have also been a series of massive bailouts of GLCs over the years, the cumulative value of which is disputed but could be as high as RM85 billion (US$21 billion). All of this led one prominent critic to proclaim that ‘GLCs are a nest for plunderers’ and that the government should ‘sell them all’. Although this may be extreme, it does raise a critical question — what, if anything, should the government do?

Some experts have proposed the formation of an independent body with operational oversight for GLICs after institutional autonomy is established and internal managerial reforms are introduced. Unlike most GLCs, GLICs are not publicly listed and face little scrutiny. The same applies to the various funds at the constituent state level.

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For GLCs, the answer is less straightforward. Mahathir claims that GLCs have lost track of their original function. Before the Malaysian government decides on what to do, it needs to examine the role GLCs should play — as opposed to the role they currently play — and to examine their impact on the economy.

In Malaysia, GLCs were uniquely tasked to assist in the government’s affirmative action program to improve the absolute and relative position of ethnic Malays and other indigenous people (Bumiputera). The intention was to help create a new class of Bumiputera entrepreneurs — first through the GLCs themselves and then through a process of divestment.

Given the amounts of money involved and the cost of the distortions introduced, the benefits to Bumiputera were unjustifiably small and unequally distributed. The approach of using GLCs as instruments of affirmative action failed because it led to a rise in crony capitalism, state dependence, regulatory capture and grand corruption. There is also empirical evidence that GLCs have been crowding out private investment, a concern raised in the New Economic Model as early as 2011.

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Malaysia’s National Debt is said to be around 65 percent of current GDP

Additionally, recent revelations show Malaysia’s debt position may be more precarious than first thought. The new government has correctly highlighted the need to include certain off-balance-sheet items and contingent liabilities such as government guarantees and public–private partnership lease payments in any complete assessment of debt outstanding, as the use of offshoot companies and special purpose vehicles in the deliberate reconfiguration of certain obligations mean that traditional debt calculations underestimate Malaysia’s actual debt.

All these factors combine to place new impetus on reconsidering the extent of government involvement in business. Divestment will not solve Malaysia’s debt problem, but it can help if there are good reasons to pursue it. So how should the government proceed?

It is important to recognise at the outset that there is a legitimate role for government in business — providing public goods, addressing market failures or promoting social advancement. And like in most other countries, there are good and bad GLCs in Malaysia. If a GLC is not crowding out private enterprise, operates efficiently and performs a social function effectively, then there is no reason to consider divestment. But a GLC that crowds out private enterprise in a sector with no public or social function or one that is inefficiently run should be a candidate for divestment.

In assessing performance, one needs to separate results that arise from true efficiency versus preferential treatment that generates artificial rents for the GLC. The latter is a drain on public resources and a tax on consumers. Divestment in this case will likely provide more than a one-off financial injection to government coffers — it will provide ongoing benefits through fiscal savings or better allocation of public resources.

The divestment process should be carefully managed to ensure that public assets are disposed at fair market value and that the divestment process does not concentrate market power or wealth in the hands of a few. This has apparently happened before.

The new government has committed itself to addressing corruption and improving the management of public resources. As part of this process, one must re-examine just how much government is involved in business. This is one of the many tasks that the Council of Eminent Persons is undertaking in the first 100 days of the new government. If done correctly, this should rejuvenate the private sector while enabling good GLCs to thrive, and it should fortify Malaysia’s fiscal position in the process. This is what Malaysians should expect — and indeed demand — of the ‘new Malaysia’.

Jayant Menon is Lead Economist in the Economic Research and Regional Cooperation Department at the Asian Development Bank and Adjunct Fellow of the Arndt–Corden Department of Economics, The Australian National University.

US Mounts Major Global Anti-Money-Laundering Campaign


June 19, 2018

US Mounts Major Global Anti-Money-Laundering Campaign

by John Berthelsen@www.asiasentinel.com

The US Treasury Department has initiated a wide-ranging campaign against money laundering across the globe and is leaning on governments particularly in Cyprus, Beirut, Singapore and the Gulf states including Dubai in an attempt to stop the flow of billions of dollars that wash through the financial system every day from Russia, Iran and China.

Although planning for the campaign, headed by the department’s Marshall Billingslea, Assistant Secretary for Terrorist Financing and Financial Crime, began during the administration of former US President Barack Obama, the Trump administration is seeking aggressively to stop the flow of illegally gained money from the three countries into UK and French real estate, small German banks and the Gulf states.

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Paul Manafort is charged for money laundering.

It is uncertain how much of the new assertiveness can be traced to the US initiative. A spokesman for the Treasury Department said only that the department is “undertaking initiatives against money laundering in several different countries as part of an ongoing process.”

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However, banks from Cyprus to Singapore to the long-standing boltholes for hot cash in the Caribbean are being told to clean up their act or lose access to the Belgium-originated Society for Worldwide Interbank Financial Telecommunication – the SWIFT system, as it is known, through which almost all of the world’s financial transactions travel. Hundreds of billions of dollars a day move through the system, which enables the world’s financial institutions to send and receive secure information about financial transactions.  The SWIFT system has come to dominate the world’s movement of money.

Sources speculate that the US aggressiveness played a role in the demand last week by the UK government, also triggered by the poisoning of the former Russian spy Sergei Skripal and his daughter Yulia, that Russian oligarch Roman Abramovich, the owner of the Chelsea Football Club, explain the source of his vast wealth before he is granted a new UK visa. The UK government has launched a further crackdown on wealthy investors into the UK.  Offshore destinations of illicit funds in the Cayman Islands, Guernsey, Jersey, Gibraltar and Nassau are also under the microscope.

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Read this:  https://www.khmertimeskh.com/92067/

The amount of money spirited out of developing countries is astonishing. The Washington, DC-based NGO Global Financial Integrity, in a 2017 report, estimated that illicit currency flows in and out of the developing world amounted to at least 13.8 percent of total trade, or US$2 trillion, in 2014, the last year for which reliable data were available. An astonishing US$3.97 trillion in illicit funds left China between 2000 and 2011 alone, according to Global Financial Integrity.

Laundered money has been pouring out of Russia for the better part of two decades as oligarchs made rich by the Putin regime have looted a long string of government-linked companies, particularly in oil and gas. The money has gone into expensive homes along the Cote d’Azur in France as well as London, and New York and Beverly Hills in the US. At one point, realtors in New York said roughly 30 percent of condominium sales were going to buyers who listed international addresses including – notably – the family of the now-disgraced former Prime Minister of Malaysia, Najib Razak, as well as Viktor Khrapunov, the former mayor of Almaty, Kazakhstan’s capital city, who has been accused of stealing hundreds of millions of dollars from the country.

With the Trump administration on a rampage against Iran, US authorities are seeking to shut down Iranian funds flowing into Dubai, Bahrain, Kuwait and Qatar as well as banks in Asia including Woori Bank and Industrial Bank of South Korea, according to Bloomberg News Service, which cited documents and testimony on how Iran siphoned US$1 billion from escrow account funds to evade US-imposed sanctions. Other banks that have been hit with compliance lapses included the Agricultural Bank of China, one of the country’s Big Four banks as well as

Songhua Bank of South Korea and Mega International Commercial Bank of Taiwan, according to Bloomberg.

The campaign to lean on Middle Eastern banks could well cause a liquidity crisis in the region including Dubai and Qatar, two of the region’s biggest banking centers, as well as in Lebanon, equally with Cyprus a repository of laundered funds that have flown into financing of terrorist activities by Hezbollah and other groups.  One source speculated that uncertainty over a liquidity crisis was spurring unsettled emerging markets over the past couple of months, with Argentina again facing crisis.

The problems for Cyprus are enormous.  Stelios Orphanides, writing in the Cyprus Business Mail on May 29, said that there is “increasing concern in the ranks of professionals and entrepreneurs in Cyprus over the impact of stricter anti-money laundering and terrorist financing practices being applied, amid fears that recent US pressure on the islandʼs financial and business service providers to take US sanctions more seriously into account, may have a transformative effect on the economy.”

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The disgraced former Prime Minister Najib Razak and his wife Rosmah Mansor are now under investigation

The problems are exemplified by the notorious FBME Bank, headquartered in Tanzania although at least 90 percent of its business was conducted in Nicosia before it was shut down by the US Treasury Department’s Financial Crimes Enforcement Network, or FinCEN last October after a three-year campaign. The bank, owned by Fadi and Ayoub-Farid Saab, was the repository of funds from such notorious characters as Dmitry Klyuev and Andrei Pavolov, key suspects in the looting of Hermitage Capital, once controlled by William Browder before he was driven out of Russia. Dozens of outlaw organizations allegedly banked at FBME, although the Saabs continue to deny any wrongdoing.

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The Hermitage looting and its aftermath resulted in the so-called Magnitsky Act, passed in the US Congress after Sergei Magnitsky, an associate of Browder’s, was beaten to death in a Russian jail while he was attempting to investigate the theft. As a result, a list of top Russian officials were barred from transacting financial business through the SWIFT system.  Natalia V. Veselnitskaya, the Kremlin-backed lawyer who met with Donald Trump Jr. and others in Trump Tower in June of 2016, was attempting to get the Magnitsky Act reversed. That meeting is now a subject of the investigation by Robert Mueller into Russian attempts to subvert the 2016 election that brought Trump to power.

FBME was the subject of a 2016 series of stories by Asia Sentinel that described the alleged laundering of millions of US dollars out of the Indonesia-based Bank Mutiara, formerly known as Bank Century, which was looted by its owner, Robert Tantular, and others during the global financial crisis of 2009.  Bank Mutiara was taken over by the Tokyo-based J Trust financial conglomerate, heavily backed by Nobuyoshi Fujisawa.  J Trust and the Saabs have threatened multiple lawsuits against Asia Sentinel over the stories. Asia Sentinel stands by its reporting.

Another of the primary targets of the campaign is Singapore, which by one report has the equivalent of US$368 billion from Indonesia in its banks – 40 percent of the island republic’s total bank deposits. In one astounding heist, more than  US$13.5 billion was looted from the Indonesian central bank’s recapitalization lifeline to 48 ailing banks during the 1997-1998 Asian financial crisis. As the government poured money into the banks in the attempt to save them, the bankers were stealing it and moving the money to Singapore.

According to a 2007 Asia Sentinel story, some 18,000 Indonesians described as “rich” live in Singapore. They were said to be worth a combined total of US$87 billion, more than Indonesia’s entire annual government budget at the time.

Indonesia’s Corruption Eradication Commission is said to be investigating the movement of as much as US$1.5 billion from Bank J Trust, the former Bank Mutiara, which was sold to the Japanese financial services corporation J Trust Group. J Trust is heavily backed by Taiyo Pacific Partners, the Washington State-based investment fund whose chief investment officer was Wilbur Ross, now President Donald Trump’s commerce secretary. The Indonesian bank is believed to be connected to some of the country’s most powerful politicians. KPK targets are said to ionclude Boediono, the former central bank governor and vice-presidential running mate of former President Susilo Bambang Yudhoyono.

Others are said to be Rafat Ali Rizvi, a British citizen who at one point faced the possibility of a death penalty for helping to loot Bank Century, the carcass from which Bank Mutiara was fashioned, and Hesham Al Warraq, a Saudi national who was also a major shareholder in the bank. Only Robert Tantular, the president of Bank Century, has been jailed.

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Other countries’ leaders have used Singapore as a piggy bank as well, including Myanmar, whose generals moved millions of stolen funds out of their country into Singapore banks. The Singaporeans were so grateful that in 2009, they named an orchid planted in their spectacular Singapore Botanic Garden for Thein Sein when he paid a visit.  More recently, Singapore cracked down on Swiss banks BSI Bank and Falcon Private Bank and withdrawing their licenses in 2016 for acting as conduits for billions of dollars funneled from the scandal-ridden 1Malaysia Development Bhd. Two other banks – the Singapore-based DBS and the major Swiss bank UBS were hit with heavy fines.