Billions of losses accrued during Mahathir’s tenure

In the book Malaysian Politics under Mahathir (by Diane K Mauzy and R S Milne) published in 1999, the first two years of his leadership is described as a “cautious, careful period”. It is not surprising, considering that it took time to consolidate his power in Umno and, following the 1982 general election, in the government. 

But even as early as 1981, when Tun Dr Mahathir Mohamad was sworn in as prime minister, some of the country’s biggest financial scandals were already brewing. In an interview with Time magazine, a Morgan Stanley economist says Malaysia might have lost as much as US$100 bil since the early 1980s due to corruption. 

Petty “coffee money” to police and government officials can only amount to so much. No, it would take a lot more behind the scenes to amass such financial losses. 

Focusweek recalls the most damaging financial scandals of the Mahathir’s years in office.

Maminco-Makuwasa Affair (1981) 

Malaysia was once a leading producer of tin. In 1979, the country produced almost 63,000 tonnes, or 31% of the world’s output. More than 41,000 people were employed in this sector and it was a major contributor to the national economy. 

In 1981, Maminco Sdn Bhd, a RM2 company, was set up to secretly buy futures contracts and physical tin to artificially raise prices on the London Metal Exchange. To finance its activities, Maminco obtained a RM1.5 bil loan from Bank Bumiputra Malaysia Bhd.

The scheme helped to push up tin prices for a spell, but the higher prices also led to increases in tin production, resulting in the United States releasing its strategic stockpile. Unable to maintain the artificial high prices, the tin market collapsed. Maminco became a RM1.5 bil liability. 

To recoup its investment and repay the bank, money was siphoned out of another RM2 company called Makuwasa Security Sdn Bhd. New shares reserved for bumiputras and allocated to the Employees Provident Fund (EPF) were discreetly diverted to Makuwasa at par value. The cheaply-acquired shares were then sold at market value for a profit. 

On Sept 18, 1986, Mahathir was forced to admit that Makuwasa was created to recoup losses accrued by Maminco to repay the bank loans.

The BMF scandal (1983) 

Bank Bumiputra – a government-owned financial institution run by Umno-linked civil servants and politicians – and EPF also featured in another financial scandal. 

Incorporated in 1965 to provide credit and financing facilities to rural communities, Bank Bumiputra was at the same time moving aggressively into new ventures overseas. 

In July 1983, it was discovered that Bumiputra Malaysia Finance (BMF), a subsidiary of Bank Bumiputra, had given up to US$1 bil in bad loans to developers in Hong Kong – the now-defunct Carrian Group and HK$2 company Plessey Investment Limited. 

Carrian boss George Tan wasted no time running his company into the ground. Billions disappeared into thin air. 

BMF assistant general manager Jalil Ibrahim, who was sent to conduct an audit in Hong Kong, was murdered for allegedly “knowing too much”. 

A committee was set up to investigate the scandal but no one in Malaysia was prosecuted, whereas in Hong Kong, swift action was taken against the “perpetrators” whom many considered were mere scapegoats. One of them was Lorrain Esme Osman, then chairman of BMF, who later fled to London.

A white paper prepared by an independent commission cited minutes of Cabinet meetings stating that Mahathir gave the green light to expend more money to contain the scandal, but no Malaysian politician has been held to account for the fiasco.

Apart from the RM2.5 bil in bad loans, another RM10 bil was spent to contain the scandal, bringing the total loss to RM12.5 bil. 

Mahathir has denied involvement in the scandal. For the record, he never acted as advisor to the bank.

Perwaja Steel (1982 – 1995) 

Perwaja Steel was set up in 1982 as a joint venture between government-owned Heavy Industries Corporation and the Nippon Steel Corporation of Japan. It was touted as a showcase of Mahathir’s industrialisation effort. A plant costing RM1 bil was built in Terengganu to meet local demand for steel. 

Faced with production problems, Perwaja became increasingly burdened by large debts. Money borrowed was in yen, which appreciated significantly at that time to balloon interest payments. Nippon Steel eventually pulled out in 1987. 

In a bid to turn it around, Mahathir placed businessman Tan Sri Eric Chia in charge of Perwaja in 1988. Another RM2 bil consisting of government funds and loans from Bank Bumiputra and the EPF was allegedly pumped into the plant. New downstream facilities were built in Terengganu and Kedah. 

Chia remained in Perwaja for seven years before resigning abruptly in 1995. Soon after, further problems with the project began to surface. Losses were initially estimated at RM2.56 bil, but Mahathir himself publicly admitted in 2002 that Perwaja lost RM10 bil in total.

An internal report prepared by Perwaja’s new management claimed the project was crippled by inaccurate accounting reports, unauthorised contracts amounting to hundreds of millions of ringgit, dubious maintenance contracts (including RM200,000 per month to a company just for gardening, cleaning and vehicle maintenance), and a RM957 mil contract to companies of Chia’s long-time associate. 

In 2004, Chia was charged with dishonestly authorising a payment of RM76 mil. He was acquitted in 2007, but the RM10 bil loss was never accounted for.

The forex losses (1992–1994) 

While the potential for a big payoff is great, the risk in foreign exchange (forex) trading is extremely high. When things go sour, the losses can be massive. 

Bank Negara took that gamble from 1992 to 1994. The country ended up losing RM30 bil, and raised concern among banks across Asia. Bank Negara reportedly traded US$1 bil to US$5 bil per day on some days, which was highly unusual. 

Generally, central banks only enter the forex market to influence their own currency rates. Even the Bank of Japan rarely trades more than US$1 bil when it needs to intervene and protect the yen. But Bank Negara was trading to profit – something central banks should never do.

As with most trading disasters, all it takes is one unfortunate event to result in a deluge of losses. Bank Negara was betting on the pound sterling to go up, but when Britain withdrew from the European Exchange Rate Mechanism, the currency collapsed. The resulting losses were estimated to be as much as RM16 bil in those two years. 

In June 2012, retired Bank Negara deputy manager Dr Rosli Yaakop named Mahathir as among the “forex scandal elite club masters”, though he noted that ex-Bank Negara governor (the late Tan Sri Jaffar Hussein) and former Minister in the Prime Minister’s Department in charge of the Economic Planning Unit, Tan Sri Nor Mohamed Yakcop, were the “biggest culprits”.

Other financial scandals 

The Maminco, BMF, Perwaja and forex losses were the most damning of the scandals that plagued the Mahathir administration. There were others, albeit smaller ones, that happened during his administration. 

The 1994 Malaysia Airlines System (MAS) scandal is one of them. Businessman Tan Sri Tajudin Ramli took over MAS, which had RM600 mil cash in reserves, that year. When he left seven years later, the company had accumulated losses of over RM8 bil. According to Mahathir himself, the losses amounted to RM9.4 bil as of 2000.

Over the years, several costly lawsuits were filed against Tajudin. He claimed that he was forced to purchase MAS shares as a “national service” disguised as a commercial deal because the government needed to appease the public and investors. 

In his autobiography, published in 2011, Mahathir denied he and former finance minister Tun Daim Zainuddin had forced Tajudin to bail out MAS. 

Mahathir has also been accused of abusing his position to help bail out his eldest son from corporate failure. In early 1998 Petronas purchased Konsortium Perkapalan Bhd (KPB), which was owned by his son, Mirzan. The Petronas-controlled national shipping carrier, Malaysian International Shipping Corporation Bhd (MISC), was used to acquire KPB’s shipping assets with cash said to amount to RM1 bil. 

And then there were, of course, the scandals involving EPF in the 1980s, most of which were raised by DAP stalwart Lim Kit Siang. They include non-trustee stock investments of the EPF, as pointed out by the Auditor-General in the 1985 EPF Annual Report, where the statutory body defied Section 4(2) (b) of the 1951 EPF Act by investing RM50.79 mil in non-trustee stocks. 

The report also indicated that the fund’s RM517.52 mil investment in equity holdings was concentrated in eight out of 86 companies, which raised eyebrows.

Mahathir himself was never personally implicated in any of these scandals. But his critics have argued that these were proof that there was insufficient control over the management of public funds when he was prime minister, and this led to massive abuse.

This article was first published in the July 11-17, 2015 issue of Focusweek. Visit www.focusweek.my