Mega scandals remain entrenched in the 2000s

By Khairul Khalid

Did the wave of Malaysian mega scandals in the 80s and 90s serve as cautionary tales moving into the 21st century? No. From the early 2000s until now, massive financial and corporate deceit remain a permanent feature of our economic landscape, with no change in sight.

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In 2002, the Malaysian government inked an estimated RM6.2 billion deal for the purchase of two Scorpene submarines from French company DCNS. This set in motion one of the country’s most sensational mega scandals in recent memory, which included suspicious arms dealings and violent murder of a foreign national.

The Scorpene purchase was brokered by political analyst Abdul Razak Baginda, together with Lembaga Tabung Angkatan Tentera (LTAT) and Boustead group managing director Lodin Wok Kamaruddin. Both are widely acknowledged as close associates of Najib Razak, then defence minister and deputy prime minister who approved the transactions.

Razak’s vehicles for the Scorpene deal were Perimekar Sdn Bhd and Terasasi, two Malaysian companies based in Hong Kong and controlled by Razak and his family. Perimekar was a company owned by LTAT, Boustead and KS Ombak Laut (another company linked to the Razak family). Boustead’s Lodin was also a director in Perimekar. He resigned from the company in 2010.

Scorpene’s RM500 million commissions

Perimekar received commissions of close to RM500 million as “service management fees” in the Scorpene deals.

Things took a dramatic turn after the highly publicised murder of Altantuya Shaariibuu in 2006. The 28-year-old Mongolian woman was said to be translator and assistant to Razak in concluding the Scorpene deals and was found killed, reportedly shot in the head and blown up with explosives, in a jungle outside Kuala Lumpur.

What was Altantuya’s role in the Scorpene deal and why was she brutally murdered?

And most importantly, who ordered her killing? Until now, the case remains unresolved. It was reported that Altantuya was blackmailing Razak for US$500,000 as her share of the Scorpene deal before her untimely demise. Although Najib has vehemently denied it, Altantuya’s father insists that her daughter knew both Razak and Najib.

The French government has launched an official probe on DCNS’ role in the Scorpene deal, although the Malaysian government has remained silent on the matter.

Two of Najib’s bodyguards from the police Special Action Unit (UTK) Azilah Hadri and Sirul Azhar Umar were convicted of Altantuya’s murder and sentenced to death, but the conviction was appealed and subsequently overturned. Razak was charged with abetting Azilah and Sirul but was also acquitted. The motives for the killing have never been ascertained.

The RM7 bil Deftech navy deal

The arms and defence industry is known to be a lightning rod for scandals involving corruption and huge sums of kickbacks. The Scorpene mega scandal was a perfect example. There were other notable scandals involving defence purchases.

In 2011, the Ministry of Defence awarded a RM7.55 billion contract to produce and and deliver 237 eight-wheeled armoured personnel carriers to Deftech. The deal was sealed through direct negotiations, without open tender.

Deftech was a wholly-owned subsidiary of DRB-Hicom whose majority shareholder is Syed Mokhtar Albukhary, a billionaire businessman who has close ties with top Umno leaders  and is one of the richest men in the country

The average price per unit of the armoured carriers to be paid to Syed Mokhtar’s DRB Hicom was RM29.4 million. In comparison, at the time the Portuguese and Saudi Arabian governments reportedly only paid RM4.4 million and RM9.9 million per unit for similar types of armoured vehicles.

It was also revealed later that DRB Hicom was acquiring the armoured carriers from a Turkish company FNSS Defense Systems for only US$600 million (RM1.83 billion) or merely RM7.1 million per unit.

A similar case of gross overpayment for defence vehicles was the Malaysian navy’s purchase of six offshore patrol vessels from Boustead Naval Shipyard Sdn Bhd at RM1 billion each. The original contract was awarded to PSC-Naval Dockyard in 2004 for delivery in 2007. However, the financially troubled company couldn’t deliver in time. Only two units were completed by 2006 and there were several complaints over the quality of the vessels. PSC-Naval Dockyard was taken over by Boustead in 2005.

By comparison, the Royal New Zealand Navy only paid RM210 million each (NZ$90 million) for its patrol vessels from BAE Systems, the second largest global defence company. On paper, the amount was about five times less than what Boustead Naval Shipyard was charging.

According to DAP MP Tony Pua, the answer most usually given by the minister and defence officials to justify the much higher pricing had been that the military equipment were “customised to our specific needs” although it is in the best interests of the government that customisation is kept at a bare minimum as it disproportionately drives costs up.

1MDB a “giant ponzi scheme”

Another ongoing project that is threatening to blow up into a scandal of epic proportions is 1MDB (1Malaysia Development Bhd).

It started off as a state fund called Terengganu Investment Authority (TIA) formed in 2009. Backed by the state and federal governments, TIA was modelled after the the sovereign wealth fund of Abu Dhabi Mubadala Development Co to promote the economic development of Terengganu.

Najib Razak who was then deputy prime minister announced TIA days before the Kuala Terengganu by-election in 2009. Also influential in the deal was Low Taek Jho (Jho Low),a well-connected young businessman who has close links to Najib’s wife Rosmah Mansor. Low was also said to have played a key role in getting Mubadala involved in 1MDB.

TIA quickly ran into problems and after some political wrangling, the federal government took control of the project and morphed it into 1MDB in September 2009.  Najib announced that TIA was “being expanded to a federal entity called 1MDB with the aim of investing billions of ringgit in energy, real estate and hospitality sectors in the country.”

The chairman of 1MDB is Lodin, the top man in Boustead and LTAT, who was also mentioned earlier in the Scorpene scandal through his involvement in Perimekar.

1MDB was now being labelled a strategic fund, but critics quickly slammed a succession of its dealings as anything but strategic. Opposition MP Tony Pua called 1MDB “a giant ponzi scheme”, referring to its opaque transactions and reliance on paper transactions and revaluation, without which 1MDB could conceivably not make any profits.

1MDB’s RM36 bil debts “could bankrupt us”

Even in its early days, 1MDB’s dealings raised plenty of eyebrows. For example, in May 2009, 1MDB issued bonds of RM5 billion via an Islamic facility at such favourable discounted rates that 1MDB actually raised RM4.4 billion, and not RM5 billion. 1MDB’s first investment of US$1 billion was for a 40% stake in a US$2.5 billion joint-venture with PetroSaudi International Ltd.

The JV was supposed to bring investments into Malaysia from the cash rich Middle East but instead funds were moving in the opposite direction. If anything, it looked like 1MDB that was bankrolling PetroSaudi’s attempts to develop the Caspian sea oil reserve.

1MDB eventually sold its stake in the JV back to PetroSaudi, but strangely opted for an 11-year PetroSaudi bond payable in 2021 in lieu of upfront cash payment. Effectively, almost all of the RM4.4 billion barring some RM260 million that 1MDB raised through bonds was used to finance PetroSaudi.

Five years after it was set up, 1MDB is still plagued by allegations of shady dealings and uncertainties over its viability. As of this month, 1MDB has missed its own seven-month deadline to lodge its audited annual report with the authorities. Its last available annual report was accurate to March 2013.

The investment fund was a year late in submitting the last available annual report accurate to March 2013 after it went through a change of auditors. 1MDB’s last available annual report for the financial year ended March 2013 revealed that the fund would have posted losses if not for RM2.7 billion in land revaluation gains.

It also revealed that the strategic investment fund is sitting on a cash-pile of RM23.6 billion against even larger borrowings of RM36.3 billion from various loans and government-guaranteed bond issues. By allegedly mispricing bonds to provide very attractive yield, 1MDB could have lost out on some RM4 billion in the initial stages and more later as it raised more funds.

1MDB has had to postpone its RM9 billion IPO (initial public offering) twice due to unattractive valuations. It has been forced to twice reschedule and restructure an overdue RM6.7 billion loan incurring heavy costs and penalties. It has also been criticised for placing RM7 billion worth of offshore investments with a Cayman Islands fund manager.

To date, the strategic investment fund has made three major purchases of power-generation facilities, some of which have been heavily criticised for not undergoing an open tender process. The flagship development of RM26 billion Tun Razak Exchange (TRX) has commenced preliminary ground work, while Bandar Malaysia at RM20 billion is projected to cost more than Putrajaya and is still in the planning stages.

Recently, 1MDB came under fire for paying US$479 million in “certain commissions, fees and expenses” to international investment bank Goldman Sachs for US$4.75 billion (RM15.5 billion) worth of bond issues in 2012 and 2013, which works out to a whopping 11.2% and 9.4% of the funds raised. Industry norms for commissions in similar types of bond issues usually do not exceed 2%.

Even former prime minister Mahathir Mohamad has recently expressed his doubts over 1MDB and fears for its astronomical debt levels.

“Funds for 1MDB are not from the country’s surpluses. These are debts. Billions of ringgit owed will add to the country’s very high debts. Debts that the country must pay. If not, we will become bankrupt like Argentina. A country with a yearly deficit cannot possibly pay debts as high as this,” Mahathir said in his blog.

Yesterday: Mega scandals spiral deeper in the 1990s.

Tomorrow: Can we prevent more mega scandals?