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Malaysia | The 1MDB scandal

Malaysia | The 1MDB scandal

The 1MDB scandal has attracted significant international attention in the media, and commentators have been expressing concern about the possible implications for Malaysia’s political stability and that of the closely linked, business environment.

Malaysia’s prime minister Najib Razak is embroiled in a corruption scandal which has triggered a political crisis in Malaysia and sparked international controversy. It follows a The Wall Street Journal exposé in July 2015 that alleged around $700m of funds were transferred from the state-owned investment firm, 1Malaysia Development Bhd (1MDB), to Najib’s private bank accounts. The prime minister has denied the allegations, but the matter continues to unfold, with almost daily developments, highlighting considerable public discontent with the performance of the ruling coalition.

For the past four months, faced with this scandal, an embattled Najib has been fighting for his political life. To protect his position, the gloves have come off. He has sacked four ministers, the attorney general and deputy prime minister and thus effectively halted a parliamentary investigation, ordered the arrest and prosecution of individuals critical of him, closed down two local newspapers and blocked websites that were reporting negatively about his actions[1]. Meanwhile, the Malaysian Anti-Corruption Commission (MACC) announced that the money found in Najib’s bank accounts does not originate from 1MDB but ‘unidentified’ Middle East-based political donors. The MACC, which many observers believe is informally controlled by Najib, has, so far, found no evidence to suggest Najib misused any 1MDB funds.

Even this high-level intervention has failed to stop the scandal spreading. 1MDB is now the subject of criminal investigations in at least five countries, including the US, UAE and Switzerland. At home, Najib has faced calls for his resignation and a member of his own political party has filed a civil suit against him and the parliamentary opposition a motion of no-confidence.

The 1MDB scandal has attracted significant international attention in the media, and commentators have been expressing concern about the possible implications for Malaysia’s political stability and that of the closely linked, business environment. Partly a result of the declining prices of Malaysia’s export commodities, but also partly a result of the 1MDB scandal, Malaysia has seen a sudden withdrawal of foreign investors[2] and a dramatic currency slide to its lowest rate since the 1997 Asian financial crisis[3].

Since July 2015, many of our clients have expressed growing uncertainty about the sustainability of their Malaysian operations and investments. They are asking: will the 1MDB scandal affect their activities in Malaysia? Could other state-owned entities be implicated in the case? Does Najib exert the same amount of power over other government funds and companies? Will 1MDB lead to a series of investigations and possibly uncover similar issues?

In a recent visit to Kuala Lumpur, we spoke to political analysts, journalists and contacts close to the law enforcement community to assess the situation and what it means for international investors from a risk and compliance perspective. The consensus was that the 1MDB situation is an isolated instance that cannot be viewed as characteristic of how most institutions are run under Malaysia’s ruling government. However, a number of contacts raised concerns about Najib’s willingness to exert increasing control over the press, media, political opponents and critical civil society organisations and the damaging effect it may have not only on democracy, transparency and good governance, but also the ability to conduct effective due diligence investigations.

A unique situation

We were told repeatedly – including by some of Malaysia’s most vocal and critical political analysts and journalists – that the 1MDB scandal is an exceptional case and not characteristic of problems within all government-led entities in Malaysia. While everyone acknowledged that the unfolding events raise questions about standards of corporate governance, they also said that other state-owned entities are now stepping up efforts to address the serious issues brought to their boards.

A former advisor to some high-profile Malaysian politicians, thought the 1MDB scandal signalled an auspicious moment for foreign investors to return to Malaysia. He said that ‘for an investor, now is the perfect time to do business with other government entities in Malaysia’ because executives at other Malaysian (government and non-government) companies will now intensify control and surveillance to meet international compliance and audit standards and assuage investors’ concerns.

Those we spoke to in-depth about the 1MDB controversy also stressed that Najib was only able to exercise exceptionally tight control over 1MDB, including its flow of funds, because it was a newly established (2009) fund that did not – like other, older government entities – have any established audit and monitoring mechanisms in place. As the political advisor put it, ‘many here in Malaysia believe 1MDB was specifically set up by Najib to exploit his position and misuse state funds’ and added that ‘even for someone as powerful as Najib, it is not possible to take things [at other state-owned entities] as far as he did with 1MDB, which he basically controlled on his own’.

Principal concern: narrowing public space for critical discourse

Many of our local contacts raised a separate, more worrying issue. It is not new but has become more apparent since the 1MDB scandal emerged. That is the increasing level of repression of free speech in Malaysia by the ruling Barisan Nasional coalition.

Media freedom in Malaysia, where mainstream news sources are typically government-controlled, has historically been limited. But in 2014, the country hit a historic low in the World Press Freedom Index, ranking 147th out of 180 countries. The recent actions of the besieged government have marked another setback to Najib’s infamous 2011 claim that Malaysia was the ‘best democracy in the world’[4].

Malaysia’s slide down the press freedom rankings started even before 1MDB became the centre of local and international journalists’ attention. In April 2015, Najib strengthened the Sedition Act (in spite of his election promise to repeal the repressive law) which in simple terms essentially prohibits any discourse critical of the government or judiciary. Since July 2015, the crackdown on press freedom has escalated further: the government has frequently taken harsh enforcement actions, including arrests of journalists, activists, and critics, revocations of online and printing licences, and bans of websites.

International human rights organisations, such as Human Rights Watch and Amnesty International, are raising concerns about the Malaysian government’s use (and abuse) of numerous vaguely worded laws[5], such as the Sedition Act, but also the Printing Presses and Publications Act[6], the Communications and Multimedia Act[7], the Peaceful Assembly Act[8] and several provisions of the Penal Code.

An investigative journalist, who has been detained for his work several times, smiled ruefully as we discussed the recent developments: ‘Najib will never run out of laws to chase us, but we will keep going, no matter what happens’ he stated. Like several other pro-democracy activists and journalists, he was positive that Malaysia’s critical voices will not give in to the mounting government pressure.

Concluding remarks

Undoubtedly, the political and economic challenges are currently stacking up for Malaysia. However, from an investor’s perspective Malaysia has still got some of the fundamentals right: compared to its neighbours, it remains one of the easiest countries in which to do business[9], with clear investment and industry laws and regulations. It is also equipped with well-developed infrastructure and benefits from sustainable economic growth.

Najib’s activities have certainly had a negative impact on the whole business community. However, this has resulted in an increased willingness by businesses to meet the demands of foreign investors in order to secure investment. Combined with a weak national currency, we would second our sources’ opinion, that with the current challenges, there is an opportunity for well-informed investors who understand the conditions. The deepening crackdown on freedom of speech in Malaysia has a knock-on effect on the reliability of public source materials in the country, of course. It is therefore crucial to be extremely critical of what is presented in mainstream news sources and evaluate the position of those that you speak to carefully in order to assess how much credibility to give the information in your evaluation.

[1] The ban of the investigative journalism online news source Sarawak Report is the most prominent example.

[2] Foreign investors have sold a net 17.6 billion ringgit ($4.11 billion) worth of Malaysian equities so far this year, according to Maybank Kim Eng data.

[3] The ringgit lost 28 percent of its value against the USD between January 2015 and September 2015 although it has recovered around 4.5 percent since then.

[4] In 2011 Najib claimed the repeal of the Internal Security Act is an effort to make Malaysia the best democracy in the world.

[5] See ‘Creating a Culture of Fear: The Criminalization of Peaceful Expression in Malaysia’ and 'Malaysia: Court ruling on Sedition Act yet another blow to freedom of expression'

[6] Under which all printing presses require a licence by the Home Ministry, renewed every year.

[7] That regulates the communications and multimedia industries.

[8] That regulates public protests in Malaysia.

[9] Doing Business in Malaysia

Published: 20th November 2015
Categories: Company News