Malaysian corporate scandals and how to avoid them

The multi-billion dollar 1Malaysia Development Berhad (1MDB) scandal has been described as ‘kleptocracy at its worst’. 1MDB was incorporated in 2009 as a state-owned company to promote economic growth for the Malaysian people through strategic overseas investments and domestic infrastructure projects. Its benevolent mandate camouflaged a complex web of transactions that diverted billions of taxpayer funds for close to ten years in one of the world’s worst financial scandals. 

1MDB’s sole shareholder was the Minister of Finance Incorporated. Former Malaysian Prime Minister Najib Razak, who was also Minister of Finance and Chairman of 1MDB’s advisory board, and who stood at the apex of power. Najib and his co-conspirators were aided by professionals, such as investment bank Goldman Sachs’ partners, in elaborate schemes. Money was laundered through accounts in various countries including banks in Singapore, Switzerland, Luxembourg and the United States.

Evidence of impropriety at 1MDB began to emerge as early as 2010. By 2015, probes were launched in Hong Kong, the UK, the US, Switzerland and Singapore. Yet, in Malaysia, early investigations were disrupted, and the Attorney-General was dismissed before he was able to file proceedings. The then Prime Minister was cleared of wrongdoing, and critics were silenced through sedition charges and anti-fake news laws. 

News of forfeiture proceedings in the US and bankers imprisoned overseas for money laundering spread via the internet and social media. In May 2018, Najib lost the general elections. Malaysian investigations into the scandal began in earnest after the new government came into power. 1MDB’s schemes left the country deep in debt estimated at RM51 billion.

The 1MDB scandal is renowned for its magnitude and global reach but it was not an isolated incident. Previously, Port Klang Free Zone (PKFZ), a government initiative to transform a port close to the nation’s capital into a regional transshipment hub, suffered from a series of unexplained transactions that resulted in the loss of billions. Taxpayers were left to shoulder the burden. Details of the wrongdoing which investigators uncovered were suppressed. Until today, the PKFZ debacle remains a ‘scandal with no culprits’.

These share common features with another scandal involving the Federal Land Development Authority (FELDA), established to eradicate poverty among rural communities. All three scandals involved prominent politicians who held sway over business entities engaged in development or investment projects that were ostensibly meant for the public benefit. These were incorporated as unlisted public or proprietary companies subject to minimal disclosure requirements. Opaque corporate entities provided a smokescreen for the diversion of public funds camouflaged as business transactions. 

Collectively, the three scandals suggest that political capture of corporate governance can occur through various configurations and corporate ownership structures. 1MDB was owned and controlled by the Minister of Finance Incorporated, while the FELDA debacle exemplified the risks posed by a public land authority’s investment companies. The mechanism for wealth tunnelling in the PKFZ scandal was the turnkey contractor whose ownership, apart from a major shareholder and politician, remains an unsolved mystery. 

Malaysia’s liberal democracy has been described as ‘precarious’. Laws have been used instrumentally to suppress civil society, silence critics, and deter whistle-blowers. For civil servants, dissent could lead to disciplinary action or precarious employment.

The influence of politics also extends to the corporate world. The synthesis of economic and political power is posited as vital to the ruling coalition that governed the country from independence until 2018. Decolonisation and privatisation policies led to the emergence of well-connected corporate magnates who depended on political patrons for contracts, licences and other benefits, and returned favours in various ways such as shareholding through nominees and political donations. Azmi and Zainudin observe that corporate funding is an important source of political financing. 

Malaysian company law incorporates many international benchmarks aimed at deterring managerial misconduct. Yet, it lacks the safeguards necessary to protect the public from expropriation by powerful individuals at the helm of state-owned companies. Anglo-Australian company law was designed to deal with agency problems that commonly arise in the context of relatively dispersed corporate ownership structures. 

Corporate accountability mechanisms are rendered relatively meaningless when juxtaposed with the ubiquitous Malaysian state-owned company. In 1MDB, the Minister of Finance Incorporated was the sole shareholder who appointed the board. The Malaysian public, who were the ultimate beneficiaries, had no rights to disclosure or any say on how public monies were administered, either directly or through elected representatives. Further, public enforcement by the Malaysian regulators is relatively subdued compared to other common law countries such as Australia, Hong Kong and Singapore.

The 14th General Election in 2018 was a watershed moment for Malaysians. Yet, many of the systemic weaknesses that led to the 1MDB scandal remain. Stronger gatekeeper obligations have been introduced to curb professional facilitation of money laundering in recent years, but we still need reforms to improve transparency and accountability vis-à-vis the governance of state-owned companies. 

For a start, laws could require public disclosure of state-owned companies’ annual financial statements. Mandatory disclosure along the lines of that required of listed companies would enable better scrutiny of how public funds are managed. Parliamentary oversight of state-owned companies’ financial affairs could also be increased. For instance, the Public Accounts Committee could have greater powers of investigation and an independent chair. The Malaysian Bar has called for reforms to strengthen the independence of the anti-corruption commission and more transparency, such as asset declarations from senior public officials and Members of Parliament to guard against ‘illicit wealth accumulation’. For the rakyat (ordinary Malaysians) weary of corporate scandals, initiatives to strengthen accountability and transparency will be a welcome deterrent against the misuse of public funds.

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Vivien Chen is Associate Professor at the Department of Business Law and Taxation, Monash Business School. 

This post draws on the forthcoming chapter, “Malaysian Corporate Scandals: Opaque Business Structures and the Political Economy Conundrum," in Corporate Scandals in Asia: Legal and Policy Implications (Luh Luh Lan, Ernest Lim & Joon Hyug Chung eds., Cambridge University Press, 2027), which was presented at the Conference "Corporate Scandals in Asia and Beyond: Legal and Policy Implications", held in Singapore and hosted by NUS in collaboration with ECGI. Visit the event page to explore more conference-related blogs.

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