March 6, 2016
The Economist on Malaysia
Malaysia’s Prime Minister
The Najib effect
Not only Malaysians should be worried about rotten politics and a divisive Prime Minister
March 5, 2016 | From the print edition
ONE of South-East Asia’s richest and hitherto most stable countries, Malaysia ought to be a beacon. Its constitution is liberal, and its brand of Islam generally tolerant. Its diverse, English-speaking population, combining ethnic Malays, Chinese and Indians, gives it zest and vim. Yet under the prime minister, Najib Razak, the country is regressing at alarming speed. Its politics stinks (see article), its economy is in trouble, and there are worrying signs that the government is not above stirring up ethnic and religious divisions.
For the past year allegations of corruption have swirled around Mr Najib. They centre around hundreds of millions of dollars that made their way into his bank accounts before the most recent general election, in 2013 (see article). Investigators are looking into whether the money is linked to a troubled state investment firm, 1MDB, whose advisory board Mr Najib chairs. He denies wrongdoing. His attorney-general has ruled that the money was a legal donation from an unnamed Saudi Royal, and that much of it has been returned.
For Malaysians, the precise nature of what happened is not the main point. Mr Najib presented himself as a liberal out to remake the sleazy system of money politics by which the ruling United Malays National Organisation (UMNO) has held power since independence. He was to open up a crony economy. And he was to do away with repressive colonial-era laws, such as that for sedition.
Now Mr Najib’s credibility is in tatters. Facing inquiries around 1MDB, he has engineered the retirement of a pesky police chief, replaced an attorney-general and promoted members of an inquisitive parliamentary committee into the cabinet, where they can do less harm. Far from loosening colonial laws, the government is wielding the sedition law with new zeal. It is blocking news websites and hounding opponents (the opposition leader, Anwar Ibrahim, is in prison on charges of sodomy). Even yellow T-shirts have been outlawed since citizens protesting against corruption took to wearing them. The more Mr Najib cracks down, the more he alienates those who were once inclined to support him.
Foreign investors and others should be worried. The government is floundering in its responses to a sharp slowdown in the economy and to a falling currency. Cheap oil has hurt Malaysia, but its wretched politics will hold it back more in the long run. The government is now using dog-whistle politics to appeal to its ethnic-Malay, Muslim base, and is refusing to distance itself sufficiently from Islamists seeking the introduction of harsh sharia punishments.
Pro-government bigots in the street have told ethnic-Chinese Malaysians to “go back to China”. This is dangerous. Malaysia has seen race riots before, and could see them again. Nearby Singapore, with its different mix of the same ethnic groups, should also be alarmed.
Malaysia’s problems run deep. UMNO is out of ideas and seems incapable of rejuvenating itself. The fractured, rudderless opposition does not have the winning combination to overcome UMNO’s gerrymandering and harassment. And the next election is anyway still two years away. Restoring confidence will be tricky. But for as long as Malaysia is governed in the style of Mr Najib, ordinary Malaysians will suffer and their country will be deprived of the standing that it surely deserves in the world.
From the print edition: Leaders
The art of survival
As Najib Razak digs in, disillusion among Malaysians grows
March 5, 2016 | KUALA LUMPUR | From the print edition
ONLY standing room is left at the civic hall in Petaling Jaya in the western suburbs of Kuala Lumpur, Malaysia’s capital. Inside 1,000-odd middle-class Malaysians have gathered to consider the fallout from a corruption scandal that has buffeted the country since July. “The whole world is laughing at us,” says a retiree watching from the back rows.
At the heart of the scandal are hundreds of millions of dollars that for unclear reasons entered bank accounts belonging to the prime minister, Najib Razak (see article). You might think such a revelation would unseat Mr Najib and spell ruin for his United Malays National Organisation (UMNO), which has held power since independence. Instead, Mr Najib appears to have strengthened his grip, by purging critics within the cabinet and police. On February 29th the grand old man of Malaysian politics, Mahathir Mohamad, stormed out of the party in disgust. Dr Mahathir was Prime Minister for 22 years until 2003 and was once a fan of Mr Najib. No more.
Across the country, dissidents are feeling nervous. Last year at least 15 people, mostly dissenters in politics and civil society, were charged under a noxious colonial-era sedition law that Mr Najib had once promised to repeal. In late February authorities blocked one of Malaysia’s most popular news websites hours after it reported that not all Malaysia’s graft-busters are convinced that the Prime Minister has committed no crime. A new anti-terror law entitles the Prime Minister to nominate broad “security zones” in which police powers may be extended—a handy tool for crushing protests, critics say. The Attorney-General is mulling stiffer sentences, including caning, for people who leak government secrets.
It has all appalled many urban and professional Malaysians. It has also made stars of the government’s most vocal critics. At the forum in Petaling Jaya, fans seeking selfies crowd around Tony Pua, an opposition MP whom police have banned from leaving the country; at dinner afterwards people at neighbouring tables insist on paying for his meal.
Malaysia is “essentially two countries”, says Ben Suffian, a pollster. Outrage is widespread in the cities, with growing numbers of young, liberal ethnic-Malays as well as most of the ethnic-Chinese and ethnic-Indian minorities who make up about a third the population. It is rarer in UMNO’s rural heartlands, where apathy is rife and where the party is trusted to defend racial laws designed to give the ethnic-Malay majority a leg-up.
Over the decades this rural voter base has helped keep UMNO in power. Indeed party leaders have been more concerned to protect themselves from challenges from within UMNO. Loyalty is prized over ability, while patronage and convoluted party rules discourage upstarts. Mr Najib has been playing the system more ruthlessly than many imagined. Recent sackings of subordinates have sent a signal about who is boss.
It is surely a relief to UMNO that Malaysia’s opposition has mostly bungled its chance to make hay from the affair. It had formed a loose coalition of three parties, reliant on an unlikely peace between two of them, a secular ethnic-Chinese outfit and a devout Malay-Muslim one. The opposition won the popular vote in a general election in 2013 but fell short of the number of seats required to take power because of gerrymandered constituencies. Yet rather than regroup and build momentum for the election that is due by 2018, it has been consumed by bickering. When tens of thousands of Malaysians rallied last August to demand Mr Najib’s resignation, they did so not under the banner of any political party but at the request of Bersih, an unaligned group that has long campaigned for clean politics and electoral reform.
Rock solid, or rocky?
Some people assert that Mr Najib’s hold may be shakier than it appears. Even in the countryside, worries about the economy have made the Prime Minister unpopular. Low oil prices have damaged Petronas, the state oil firm, slashing the amount of money the government can pour into development projects. A new sales tax has increased prices for many everyday items, while a slump in Malaysia’s currency, the ringgit, which has fallen by more than a fifth in the past 18 months, has put many imports out of reach. It all helps make some poorer Malays more susceptible to populists painting ethnic-Chinese and ethnic-Indian Malaysians as rent-seeking interlopers. But a new suspicion is growing among ordinary Malaysians that goings-on in Kuala Lumpur are affecting their own pocket books.
As for the party, rivals whom Mr Najib has vanquished may yet bounce back. Dr Mahathir, who has long called for Mr Najib to step down, is scheduled to attend an unusual forum of grandees and politicos from across the political spectrum who are meeting in private later this month to discuss alternatives to Mr Najib. Wan Saiful Wan Jan, of the Institute for Democracy and Economic Affairs in Kuala Lumpur, says that some UMNO bigwigs are backing the prime minister through gritted teeth. He says that a time may come when they say that enough is enough, especially when the party starts considering its strategy for the next election. Perhaps Mr Najib may risk calling a snap election before then, both to pre-empt conspiracy and to catch out the opposition before it can patch up its differences.
For Malaysia’s rattled liberals, all this seems theoretical. Last year they watched plans evaporate for a parliamentary vote of no-confidence. They are doubtful that the current corruption scandal will ever unseat Mr Najib.
Back at the civic hall in Petaling Jaya, the mood darkens as the evening wears on. Microphones passed around the floor reveal frustration and anger. One person insists that the opposition draw up a list of government officials who should face trial if the opposition takes power. A second, shaking with rage, frets that the opposition has “no chance” of winning the next poll. This is no time to give up hope, Ambiga Sreenevasan, a prominent lawyer, tells the crowd. Once the crisis is over, she says, “we must make sure this never happens to our country again.”
From the print edition: Asia
Malaysia’s 1MDB affair
Follow the money, if you can
Investigators in several countries are trying to get to the bottom of Malaysia’s growing corruption scandal
March 5, 2016 | KUALA LUMPUR | From the print edition
IT WAS a striking move from a country better known for hiding iffy foreign wealth than for exposing it. Frustrated by a lack of co-operation from Malaysian counterparts, Switzerland’s attorney-general declared in late January that there were “serious indications” that $4 billion had gone astray from Malaysian state concerns, some of it into accounts held by current or former Malaysian and Middle Eastern officials. The announcement fuelled an already combustible scandal that has transfixed Malaysians, battered their prime minister, Najib Razak, and could yet ensnare banks around the world.
The allegations of misappropriation centre on a Malaysian state investment fund, from which it is suspected that large sums were siphoned by businessmen and officials with links to Mr Najib. It is thought that some of this was used to help his party win an election in 2013; some was spent on buying assets at questionable prices; and some of the remainder was moved to offshore shell companies and bank accounts. All those suspected of involvement, including Mr Najib, deny wrongdoing. None has been charged with a crime.
The affair spans the globe. Caught up in it are not only Malaysian officials and money men but also several big banks and perhaps Saudi royalty. The money trail leads from Malaysia to Singapore and elsewhere in Asia, Abu Dhabi, Switzerland, the Caribbean and New York. Authorities are investigating in Switzerland, America, Singapore, Hong Kong and the United Arab Emirates. They face a daunting challenge in piecing together such a complex case, a task made harder by operators’ widespread use of opaque offshore vehicles.
The story’s institutional protagonist is 1Malaysia Development Berhad (1MDB). It was originally a regional development fund for Terengganu, an oil-rich Malaysian state, but in 2009 the country’s finance ministry took it over and rebranded it. Mr Najib heads the ministry, as well as being prime minister. The plan was for the fund to suck in investment through tie-ups with foreign firms. Mr Najib chairs 1MDB’s board of advisers.
1MDB got most of its financing by raising debt. A series of bond issues pushed its borrowings up to $11 billion. By 2014 questions were multiplying about its financial health, spurred by the fact that it had had three audit firms in five years. A flurry of investigations in the media drew on leaked documents. 1MDB denies wrongdoing.
Malaysian investigators concluded that deposits into a bank account held in Mr Najib’s name came through banks and companies linked to 1MDB. They found that a firm that was once part of 1MDB and is now controlled by the finance ministry, SRC International, paid $13m into the account in 2014-15. The attorney-general, Mohamed Apandi Ali, has said that there is no evidence that Mr Najib was aware of the payment. (We all overlook items on our bank statements.)
More eye-catching was an earlier payment into Mr Najib’s account, of $681m, from a shell company. This was made only weeks before the general election in 2013, which Mr Najib won narrowly. Some say it was linked to 1MDB. The official explanation is that it was a legal donation from an unnamed member of the Saudi royal family. Mr Najib has denied ever taking public money for personal gain. 1MDB says it has not paid any funds into the Prime Minister’s personal accounts.
On March 1st the Wall Street Journal reported that investigators in two countries, whom it didn’t identify, believe that more than $1 billion in total flowed into Mr Najib’s personal accounts, much of it originating from 1MDB. These investigators, it is alleged, reckon that the payments were, in part, routed through a company linked to—or made to look as if it was linked to—a venture involving 1MDB and Middle Eastern interests.
1MDB had various dealings with an Abu Dhabi-based sovereign fund called IPIC which guaranteed some of 1MDB’s bonds. The dealings included a tie-up with Aabar Investments PJS, an IPIC subsidiary. 1MDB transferred more than $1 billion to what appeared to be a division of Aabar. Yet investigations allegedly suggest the money in fact went to a firm based in the British Virgin Islands (BVI) with an almost identical name to the Abu Dhabi concern.
This transaction seems not to have been recorded on the books of Aabar’s parent, IPIC. (1MDB says it stands by its own accounts, which show the payment.) The suspicion is that financial sleight-of-hand may have been used to pass off the transfers as legitimate payments between corporate partners. Investigators believe much of this money ended up in Mr Najib’s accounts after being routed through a second company in the BVI, according to sources cited by the Wall Street Journal.
IPIC is reported to be looking into what happened to the money paid out by 1MDB but not booked as coming into the Abu Dhabi fund. Aabar denies wrongdoing.
Also in the spotlight is a joint venture between 1MDB and PetroSaudi, an oil firm. 1MDB injected $1 billion into the venture. Two-thirds of this was moved to a Seychelles-based firm shortly afterwards, according to a draft report by Malaysia’s auditor-general. 1MDB later sold its interest in the venture, using some of the $2.3 billion raised to invest in a Cayman-based vehicle. 1MDB then reportedly sacked its auditor, KPMG, after the firm expressed concern over the identity and financial standing of the vehicle’s owners. 1MDB asserts that all the Cayman money is accounted for. PetroSaudi has denied doing anything wrong.
Investigators are also looking into who drove 1MDB’s complex transactions. Assuming it is genuine, correspondence obtained by Sarawak Report, an investigative website, appears to show that a key figure in the fund’s dealings with PetroSaudi was a Malaysian financier, Low Taek Jho, a family friend of Mr Najib. Mr Low reportedly also helped direct some election spending for Mr Najib’s ruling coalition, Barisan Nasional. 1MDB and Mr Low have insisted he merely advised the fund, unpaid. He denies wrongdoing.
Banks, too, face awkward questions. Several global banks handled large payments that are under scrutiny, among them arms of JPMorgan Chase and Royal Bank of Scotland. One question is whether there were grounds for the banks to suspect that any of the transactions were questionable—or whether especially rigorous checks on public officials and other “politically exposed persons”, or PEPs, were called for and carried out.
The role played by Goldman Sachs is also notable. The investment bank led 1MDB’s main bond issues, earning unusually high fees on them (Goldman has said this is because it temporarily held the risk on its own balance-sheet). Goldman’s chairman for South-East Asia, Tim Leissner, grew close to Malaysia’s elite. Last year Goldman put him on leave and now says he has left the firm.
Mr Najib’s response to the scandal has been to swipe at his critics. Muhyiddin Yassin, a Deputy Prime Minister who wanted investigations stepped up, was sacked from the cabinet last year, and the Attorney-General was replaced—supposedly on health grounds, though Sarawak Report has published documents appearing to show that charges were about to be brought against Mr Najib.
On February 27 Mr Muhyiddin called for the Prime Minister to resign, saying the outgoing Attorney-General had shown him “proof” that Mr Najib acted criminally in connection with 1MDB. The government said this was part of a “politically motivated conspiracy” to topple Mr Najib.
The new Attorney-General, Mr Apandi, has moved swiftly to exonerate Mr Najib, closing a probe into the $681m “donation” and asserting that it had nothing to do with 1MDB. The government says that most of the money was sent back to the donor after the election. Why, some ask, was so much of the payment returned if it was legal?
Not all Malaysia’s institutions have been supine. Last year the central bank urged the attorney-general to begin a criminal prosecution of 1MDB managers after concluding that the fund had moved $1.8 billion overseas based on inaccurate disclosures. This money was supposed to go to the PetroSaudi joint venture and related loans. Instead, much of it went elsewhere and is unaccounted for, according to the auditor-general’s draft report. (The final report was supposed to be released last December, but has twice been delayed.) The central bank requested a review of the finding by Mr Apandi that 1MDB did not commit any offences. This was rejected.
Malaysia’s anti-corruption commission, an independent agency, investigated the payments into Mr Najib’s account and handed its findings to Mr Apandi late last year. He returned them to the commission in January, requesting more information. The commission has denied reports, based on unauthorised briefings, that it recommended charging Mr Najib.
It was the haste with which Mr Apandi ruled out criminality that prompted the sharper tone from the Swiss authorities, who are investigating suspected bribery, corruption, misconduct in public office and money-laundering linked to 1MDB. They appear to be unimpressed with the blanket exoneration, though they say Mr Najib is not a suspect.
Through a brass plate, darkly
Singapore is also investigating suspected money-laundering and says it has frozen a “large number” of bank accounts. The case is a test of the city-state’s resolve in dealing with financial crime. Like Hong Kong, it has seen big inflows of wealth in recent years, including money of dubious provenance from Switzerland.
But the sleuths face many hurdles. The corporate secrecy offered by offshore centres makes the task of penetrating structures used to move money slow and difficult. The OECD and others have begun to try to lift this shroud, but transparency reforms are at an early stage.
Then there is the complex and clunky international system of “mutual legal assistance”, or MLA, under which countries ask each other for help in investigations. Piecing together the jigsaw is all the harder if the country at the centre of the probe is unhelpful. Malaysia has said it will assist the Swiss, but that looks unlikely. Indeed, it is using blocking tactics, for instance by telling Switzerland to file its MLA request through Malaysia’s foreign ministry. That is unusual: such requests would more typically go through the justice ministry, which is viewed abroad as less political.
Malaysian officials reacted angrily to Switzerland’s announcement about misappropriation, accusing it of spreading “misinformation”. When the Swiss and Malaysian attorneys-general met last year, the Malaysians are believed to have said they would arrange for those caught up in the affair to provide testimony in depositions, but this has not happened. Without Malaysian help, it will be hard for foreign sleuths to complete their probes. For now, though, they seem determined to keep digging, causing anxiety in the Malaysian capital, parts of the Middle East, and some of the world’s largest financial centres.
From the print edition: Asia