By: Simon Wilson
Money Week
06/02/2016

A state fund transferring a $681m donation to the PM’s account, dissenting ministers sacked and $4bn misappropriated – Malaysian democracy is under threat, says Simon Wilson.

What’s going on in Malaysia?

The government of Prime Minister Najib Razak has been rocked by a huge corruption scandal that gets more bizarre with every new twist, threatening to blow a hole in Malaysia’s credibility with international markets. At its heart is a state investment fund known as 1MDB, set up at Razak’s behest shortly after he came to power in 2009, and whose advisory board he chairs. Its purpose
was to borrow money so that it could attract foreign investment to stimulate Malaysia’s economy.

But according to The Wall Street Journal, which has been at the forefront of investigating and reporting the scandal, while 1MDB was good at borrowing money, it has been less adept at actually investing it. In early 2015, it defaulted on payments on the roughly $11bn it had raised from international investors, setting off alarm bells and sparking investigations into the fund.

What did they discover?

Here’s where it gets odd. In July 2015, Malaysia’s then attorney-general, Abdul Gani Patail, who had set up a special task force to investigate the claims, announced that his team, including police, central bankers, and the country’s specialist anticorruption unit, had uncovered a paper trail suggesting that $681m had been transferred in 2013 from the coffers of the state investment fund into the personal bank account of Prime Minister Najib himself. It also found evidence that Najib had received $14m from another government-owned firm called SRC International (a subsidiary of 1MBD until 2012).

Presumably Najib resigned?

You might have thought so – and many Malaysians would have agreed. Last summer, tens of thousands took to the streets of Kuala Lumpur in rare mass demonstrations, calling for him to quit. Najib, however, had other ideas. The attorney-general was obliged to retire on “health grounds”.

The deputy prime minister, who had criticised Najib’s handling of the crisis, was sacked, along with several other dissenting Cabinet ministers. Having thus shored up his position, Najib then got some good news: the anti-corruption body said it had found evidence to support his claim that he hadn’t stolen the money from 1MDB. Instead, it said, the money had been sent to Najib from an unnamed Middle Eastern monarchy – later revealed to be Saudi Arabia.

Was it some kind of bribe?

To find out, the new Najib-appointed attorney-general, Mohamed Apandi Ali, launched an investigation into why the Saudis were sending $681m to a foreign head of government. Last week, he concluded: “I am satisfied that there was no evidence to show that the donation was some form of gratification given corruptly”.

Instead, it was a “personal donation” from the Saudis to Najib. In any event, said Apandi, the prime minister had later returned $620m (though he declined to say why). As for the $14m from SRC, Najib hadn’t known about that money – any money that he’d spent had been the Saudi money, not the SRC money. Everything was above board, no action would be taken against Najib – and the matter was now closed.

Yet something still seems amiss?

Quite a few people think so. Influential former prime minister Mahathir Mohamad (from the same ruling UMNO party as Najib) continues to call for him to step down. A source at the Malaysian anti-corruption commission says they were surprised by Apandi giving Najib the all-clear – they had recommended he be charged with criminal misappropriation.

The Swiss authorities have launched a criminal investigation into allegations of fraud committed in Switzerland in connection with 1MDB; the Swiss say they have found “serious indications” that about $4bn was misappropriated. In America, the FBI is investigating, according to The Wall Street Journal. And Singapore says it is freezing a large number of bank accounts on suspicion of money-laundering linked to 1MDB.

Why does all this matter?

The scandal is eroding confidence in an economy already vulnerable to the oil-price slump, a tumbling currency and ballooning debt. What’s at stake is “whether one of southeast Asia’s leading nations, and a strategic ally of the US and Europe… can maintain its equilibrium as a prosperous, free-market democracy that blends an adherence to moderate Islam with an internationally recognised legal system”, says the FT.

Democracy in Malaysia already looks tattered, with UMNO tightening its grip on the state, and an opposition leader in prison on trumped-up charges of sodomy. Now “Kuala Lumpur risks reinforcing an impression that its democracy is being shredded by a self-serving Malay elite. Najib is already vulnerable to such charges.”

What did the $681m pay for?

According to a “well-placed Saudi source” cited by the BBC’s security correspondent, Frank Gardner, the $681m paid to the Malaysian prime minister was to help him shore up his ruling party against the threat from Islamist extremists. In particular, it was to help UMNO win the 2013 elections amid fears over the rising global influence of the Muslim Brotherhood, which at that time – spring 2013 – had taken power in Egypt.

At the Malaysian election, the opposition alliance included the Pan-Malaysian Islamic Party (PAS), whose founders were inspired by the Brotherhood (regarded by the Saudis as a terrorist organisation). This explanation seems plausible, but does leave a question unsolved: why did Najib give back $620m?