Sustaining strong institutions for clean gov’t

By Group of 25
Aug 19, 2015

COMMENT The success of the transformation and development of the Malaysian economy and its financial system has been primarily due to an empowering legal framework and sound institutions that operate on structured processes and with strong accountabilities, underpinned by a good governance framework.

Malaysia is indebted to visionary leaders whose dedicated focus and emphasis on building strong institutions have provided the foundation to support the development of the Malaysian economy.

These institutions continue to be led by strong leaders with a vision, a culture of integrity and competence which is imbued with values and virtues of hard work and prudence. This institutional framework has been the most important aspect of the growth and resilience of the economy today.

The ‘invisible hand’ does not work, by itself: it requires help from the rules of the game which govern how the market and its participants interact with each other. Institutional quality not only has a significantly positive impact upon income per capita, but it is also positively auto-correlated with the level of economic integration and trade (Rodrik & Subramanian 2003).

An improvement in institutional quality raises GDP directly, as well as promotes closer integration into the global economy, hence, enabling the economy to benefit from international trade and foreign investment flows. The auto-correlation also implies that higher national income and exposure to developed markets tend to lead to demand for improved institutions, thus enforcing a benign cycle.

Today, as the country faces an unprecedented test of its governance at the highest level which unfortunately is cascading into an economic downturn and threatening financial stability, only by allowing its key institutions to undertake their functions independently can Malaysia hope to redeem itself and stall the contagion which is emerging from a governance issue into an economic and financial setback.

In today’s circumstances, Malaysia cannot blame external parties and owe to itself to quickly correct the situation. An important aspect in any corrective action is to allow institutions to continue their work, even though results may not favour the government leadership.

Key institutions in the limelight now and its senior officials being penalised for doing their jobs are the Malaysian Anti-Corruption Commission (MACC) and the nation’s central bank, Bank Negara Malaysia (BNM).

In the case of the MACC, the office of the chief secretary which governs and has oversight over the quality and performance of government agencies seems to also be under threat in recent transfers of MACC staff involved in investigations of transgressions within government.

Bank Negara Malaysia

Any actions now to cast aspersions on the integrity of Bank Negara, its governor and its senior officials will have significant adverse consequences.

Ismail Ali, the first Malaysian governor of the central bank, had built a body of traditions – a tradition of efficiency, a tradition of dependable expertise in economic and monetary affairs, and above all a tradition of absolute acceptance of the dictates of the national interest as against the interest of the individual.

He set the tradition where the impact of Bank Negara and its influence depended on the virtues and the standards that the central bank is able to develop and maintain (Zeti 2000). This culture of integrity, competence and professionalism that Ismail cultivated has been sustained and is the most important foundation contributing to the strength and soundness of financial institutions today.

‘Good Governance’ is not a discovery of the 1990s. One of the most significant heritage left by Ismail was a system, culture and practice of good governance. He set the basic requirement of good governance as soon as he became governor.

The principles of good governance are the key to the strength and independence of BNM. Further improvements in the governance framework, both at the central bank and in financial institutions were made by subsequent governors in the more recent periods.

Further, during governor Zeti Akhtar Aziz’s tenure, the reputation of Bank Negara in upholding good governance in the financial sector, as well as building the human capital and technical expertise of the central bank has made Bank Negara a role model in many parts of the developing and emerging world.

In terms of macro-economic management, governor Zeti has gained the respect of her peers globally in liberalising the financial sector while ensuring sound banking institutions and stability of the Malaysian financial sector.

While there were doubts on the independence of the judiciary and capacity of other institutions, the confidence in the strength and capability of Bank Negara in steering the financial sector to support economic growth has always been sustained and has been the single most important factor contributing to investor confidence and favourable economic prospects for Malaysia.

In this difficult time and the circumstances on the flows of funds, globally benchmarked processes require that BNM exercises its key role in the processes of investigation. While BNM will indeed have knowledge on the specifics of capital flows, it is also required by law not to divulge confidential individual information.

Malaysia has put in place regulations and processes which have been assessed as compliant with global standards. It is important that BNM be allowed to follow these processes and conduct its investigations in a fair and judicious manner. Efforts by any part of government to create doubts on the integrity of the BNM and its officials will actually tantamount to interfering with the investigation processes.

Malaysian Anti-Corruption Commission

The recent transfer of officers investigating companies involved in suspicious transactions and their reinstatement amidst public outcry of attempted cover ups do not auger well for Malaysia. It casts further suspicions that integrity and independence of institutions are again being compromised for personal objectives.

The MACC has undergone various stages of reforms to ensure a certain degree of independence. The lack of prosecution of high level corruption is a dent in the reputation of the MACC. Now that the MACC leadership is showing commitment to doing what is right, it is detrimental to transfer its investigation officers before completion of their work.

It inevitably smacks of interference with investigations. It is a relief that the two officers have been reinstated to their posts and continuing with the investigations.

The civil service and the office of the chief secretary

The transfer of the two MACC officers has raised questions on the role of the chief secretary. The Federal Constitution provides for the separation of Parliament, judiciary and the executive as the

foundation of the governance structure and providing the checks and balance in ensuring an effective, ethical and fair administration.

A quote from the foreword by Tengku Razaleigh Hamzah (photo) in the book, the Shafee Yahaya Story: Estate Boy to ACA Chief, is most apt at this time of confusing actions by the administration. It is apt not only for the timely reminder to all of its message, but that Shafee started a career in the civil service as the private secretary to (former premier) Abdul Razak, rising to the position of director-general of the Anti-Corruption Agency:

“It is not easy being a civil servant…. The civil servant must be aware that he has an important role to play—the implementor of government policies and enforcing and upholding the laws of thecountry.

He should be a person of high integrity, thrifty in managing government coffers, selfless and loyal to the nation and the Yang di-Pertuan Agong. I believe it should not be blind loyalty if the instructions are not right and in accordance with government policy and the general orders. In other words, a civil servant must direct, be truthful and be brave enough to say ‘No’ if asked to do things that are not right.”

The other even more significant quote from the same book is one by Razak made in 1967:

“As civil servants, I hope you will stand up to us as politicians, and not allow yourselves to be dominated by us, because in a true democracy, the civil servants has a duty to perform… to place

fairly and squarely facts before the politicians, based on balanced, unbiased judgement, which the politician ‘can take it or leave it’ as he so wishes. After all civil servants are pensionable; you have nothing to lose…. The future of our country’s democratic way of life is dependent on you…”

Recent events show the adverse consequences when the civil service is not strong enough to exert its “balanced unbiased assessments” and “serve our government with dedication”.

Religious authorities, Jakim and others

Key institutions like BNM and MACC have been set up under explicit legislations and report to the prime minister/finance minister. The integrity of these institutions are being threatened by actions which appear to be intended to influence the investigations being undertaken.

Yet, religious institutions like Jakim which is not supported by federal legislation are NOT being sanctioned for failing to fulfil their functions. Ironically, in practice, these institutions appear to be given more authority and independence and freedom than respected institutions like BNM.

Jakim officials have taken actions of moral policing to detect and bring about criminal charges on personal sins by Malaysian Muslims. Yet, there have been no efforts by Jakim to condemn corruption which is a personal sin and a crime against society in Islam, and of course a civil crime under the Penal Code and the MACC Act, and a predicate crime under the Anti-Money Laundering and Financing of Terrorism Act.

While Jakim cannot enforce civil acts covered by legislation outside its remit, it can undertake the education and advisory roles to promote anti-corruption behavior among Muslims.

G25 seeks corrective actions as follows:

Attempts to raise doubts on integrity of the leadership in BNM and the transfer of the MACC officials erode public confidence that investigations will be thorough and objective.

Now that BNM has completed its investigations and submitted its report to the AG, credibility of the AGC is dependent on the actions that it will be taking on the report.

This is critical at this juncture when there is mistrust of the government and concerns that civil service and the office of the chief secretary will be undermined, and concerns of more civil servants being penalized for doing their jobs.

Corrective actions should include the following:

Greater safeguards needed on the appointment and dismissal of the AG. In addition, the office of the AG should not combine the advisor role to the government and the public prosecutor. G25 supports recommendations made by other CSOs to transfer the prosecutorial powers to an independent office of the director of prosecutions;

Reforms in legalizing political contributions with pre-requisite rules of transparency benchmarked against principles and standards set by the OECD;

Application of regulations to require declaration of assets by politicians and senior civil service officers; the declaration is made to an independent audit firm, which is able to take measures to verify, including checking against bank accounts;

Independence of the MACC as a public authority reporting to Parliament, and it should be given prosecutorial powers in addition to strengthening its investigative powers.

There is no role for Jakim in moral policing of personal sins. Jakim to focus only on education and research, as well play an advisory role. In the area of corruption, Jakim can use its advisory role to urge condemnation of corruption and influence development of a culture of zero tolerance for corruption through khutbahs delivered at Friday prayers, for example; and

The government implements the proposals to set up the office of the Ombudsman as recommended in the report commissioned by the cabinet in 1990/91

The Group of 25 is a group of individuals dedicated to the cause of a moderate Malaysia.

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