Malaysian Maverick: Mahathir Mohamad in Turbulent Times Read online

  This was dynamite in Malaysia. Bank Bumiputra was considered the flagship of the Malaysian financial system and a source of ethnic Malay and national pride after overtaking Thailand's Bangkok Bank in 1981 as the largest bank in Southeast Asia. Almost everyone wanted to know why an institution set up expressly to help Malaysia's bumiputras was lending extravagantly to ethnic Chinese real-estate developers in Hong Kong. Why was BMF in property at all? When the subsidiary was licensed in 1977, executives had said it aimed to complement Bank Bumiputra's participation in internationally syndicated loans, engage in foreign-exchange trading, and finance Malaysia's trade with Hong Kong and China.

  A closer look revealed more cause for concern. BMF had persisted in a lending blitz as the Hong Kong property boom turned to bust, tripling its long-term loan portfolio. Moreover, BMF's lending for the most part was not from deposits or loans generated in Hong Kong. The money had been obtained from Bank Bumiputra in Malaysia and from other international branches, and included Petronas funds on deposit overseas. The market value of property and shares used to secure loans, when they were secured at all, was being eroded seriously by the downturn, exposing BMF to such large losses that the financial health of Bank Bumiputra itself might be at risk. With BMF operating almost autonomously, the lines of responsibility led back to Kuala Lumpur.[24] BMF's lending decisions were made by its own two-man board: Chairman Lorrain Esme Osman and Mohamed Hashim Shamsudin were both prominent directors of the parent bank. Lorrain was a member of Dr. Mahathir's panel of economic advisers, while Hashim was Bank Bumiputra's executive director, a post that ranked second in the bank's hierarchy. Ibrahim Jaafar, who ran BMF's day-to-day operations in Hong Kong as general manager, reported directly to Lorrain and Hashim.

  In an incriminating turn, the Hong Kong-based press discovered that two of these three executives, who had controlled BMF from its inception, had outside business connections with customers. Ibrahim held large personal overdraft facilities in Hong Kong banks that were guaranteed by Carrian. Hashim became a director of a small company three days before it received a cheque for RM1.1 million from the wife of the chairman of Eda, just as BMF loaned the group US$40 million.[25]

  As the controversy swirled through Southeast Asia with each fresh round of revelations in Hong Kong, the Malaysian authorities remained tight-lipped except to deny Bank Bumiputra faced a crisis. The dual nature of the bank blurred ministerial responsibility. Nobody at cabinet level admitted knowing anything about BMF's operations. As a commercial bank, Bank Bumiputra was subject to monitoring by Bank Negara, which came under the finance ministry. The public identified the bank with Tengku Razaleigh as he had been chairman from 1969 until he became finance minister in 1976. But Tengku Razaleigh said the bank was one of several government agencies answerable directly to the Prime Minister's Department. As finance minister, he ordered Bank Negara to conduct an inquiry into BMF after reading about its troubles in the regional press towards the end of 1982.[26] Bank Negara Governor Abdul Aziz Taha, in his first comments to reporters in April 1983, characterized the problem as a "situation of what you call an over-exposure of loans, which I would regard as exceeding...usual banking prudence". Bank Bumiputra's senior executives as well as the bank's external auditor were examining the subsidiary, he said, and "nobody should be alarmed" about the loans because "the government is fully behind" Bank Bumiputra.[27]

  In their annual reports for the year ended 31 March 1983,[28] Bank Bumiputra and BMF maintained the same line, minimizing problems in Hong Kong, emphasizing that the parent would give full support to its offspring, and offering no explanation for the lending spree. But figures in the reports indicated that it would be impossible to keep the lid on much longer. BMF had doubled its lending in Hong Kong in 1982, when other banks were running for cover, and it was funded entirely by head office, Bank Bumiputra.[29] After a couple of years of modest growth, BMF's total lending, including short-term money-market deposits and inter-bank loans, had ballooned 285 per cent in 1981 and 1982 to RM1.55 billion. Bank Bumiputra made only small provisions for losses that might arise from its Hong Kong loans. At the same time, though, it increased its paid-up capital by RM600 million — 126 per cent — which suggested it was preparing to cover extensive bad debts, even though the bank denied it.[30]

  Dr. Mahathir publicly addressed the issue of BMF's doubtful loans for the first time at a press conference in July 1983, on the completion of his second year as premier. It was eight months after the damaging disclosures began to surface, and Malaysia's normally cautious and respectful press was demanding answers. After all, the two government shareholders in Bank Bumiputra already had been required to kick in an extra RM600 million to increase the bank's capitalization in proportion to their holdings. That meant 70 per cent of the burden fell on the National Equity Corporation, which was established to hold blue-chip Malaysian corporate equity on behalf of bumiputras by selling them shares in its investment portfolio through a unit trust plan. The remaining 30 per cent was held by the Minister of Finance Inc., the ministry's holding unit. Also, there was no indication of how BMF could repay the RM1.2 billion it owed Bank Bumiputra. Whether BMF was paying interest on its debt, which would amount to RM93 million to RM124 million a year at prevailing rates, was also crucial. If the bank was not charging interest, it was tying up a huge amount in assets to subsidize the Hong Kong operation and act as a de facto reserve against BMF's possible bad debts.[31]

  Answering Malaysian reporters' questions, Dr. Mahathir was sanguine. He acknowledged that BMF erred by lending too heavily in the real-estate market, but suggested the collapse of property values was the primary cause of the problems. "Almost all" the banks in Hong Kong were similarly affected, he said. He agreed it had not been wise to provide the bulk of loans to only three groups. "It is not prudent, but you must remember the atmosphere in Hong Kong at that time. Banks were anxious to lend money simply because the economy was booming, and when somebody who is established comes to you to borrow money, you don't look too closely, although by rights you should," he said. "This was their mistake." Dr. Mahathir sidestepped the question of accountability, promising that Malaysia would "take action" if malpractices were uncovered, but said the emphasis was on trying to salvage overdue debts, not on "witch hunting". He said that "how you deal with the mistake that has been made in Hong Kong depends also on how much we can recover. The priority at the moment is on recovery and not on punishment yet".[32]

  What Dr. Mahathir did not tell the reporters was that in late 1982 he had approved a secret plan hatched by Nawawi Mat Amin, the man he installed as executive chairman of Bank Bumiputra, to maximize those recovery efforts. Much later, Dr. Mahathir admitted he was briefed by Nawawi about the plan to retrieve "as much money as possible", though he was not informed of the details and did not get involved in their implementation. "I agreed with this action," he said.[33] The most controversial part of the plan was to buy Carrian assets in the United States through an intricate web of dummy companies without informing other creditors, after Carrian declared financial difficulties. The idea was to prop up Carrian and at the same time get back some of the money it owed BMF.

  The elaborate transaction to acquire several parcels of Carrian property in California and Florida was disguised as a loan by Bank Bumiputra to a third party. It began with the bank extending an US$85 million loan to a newly established Liberian company created by the bank. Called Marmel Inc., the Liberian company in turn loaned the money to a Channel Islands-based company called Trans Pacific Trust. From there, the funds were loaned yet again to another Liberian-incorporated outfit called Darton Ltd. Darton and Dragon Base Company in Hong Kong used the US$85 million to purchase the U.S. assets. Darton appeared to belong to Yap Lim Sen, the purported third-party buyer, who had his own property development company in Malaysia. But Darton was ultimately owned and controlled by the bank, and Yap was Nawawi's friend and agreed to hold the U.S. assets as a "national service".[34]

  In 1986, a committee of inquiry
appointed by the Malaysian government concluded that Bank Bumiputra's convoluted exercise was "clumsy, unprofessional, unethical and amounted to a fraud" on Carrian's shareholders and other creditors. The panel recommended that evidence and documents related to the property acquisition be turned over to the Malaysian police for further investigation. But no legal action was ever taken in Malaysia against those involved in the arrangement.[35]

  In 1991, a minority shareholder in the defunct Carrian group, Bahamas-based Capri Trading Corporation, filed a lawsuit in the United States claiming it was denied a fair share of the proceeds from the sale of the property.[36] The suit alleged that Bank Bumiputra and its senior officers at the time acted "in concert and in conspiracy...to fraudulently conceal the looting" of the property from Carrian's minority shareholders and creditors. It claimed they engaged "in a pattern of racketeering" by paying less than one-third of the property's market value, depriving minority shareholders of adequate compensation and "significantly diminishing" the value of Capri's stake in Carrian.[37] After several hearings extending over 14 months, a U.S. Federal Court judge dismissed the suit on a technicality, that Hong Kong would be the most appropriate venue for such a case.[38]

  News of the suit being filed in California, first reported in early 1992 by Bernama, Malaysia's national news agency, buffeted stock markets in Malaysia and Singapore. They were unsettled by the prospect, however remote, that Bank Bumiputra might have to cough up the U5$3 billion being sought in damages.[39] The government immediately imposed a domestic news blackout on the story. Bernama was ordered to delete the report from its electronic news system and editors of the country's newspapers were told not to publish it.[40] Although the suit essentially repeated allegations made by the committee of inquiry five years earlier, it was an unacceptable reminder of Malay outrage and Mahathir administration culpability.

  The practical flaw in Nawawi's 1982 secret rescue plan, in which Dr. Mahathir invested so much hope, was that it left in place the executives at BMF who were responsible for its predicament. Directors Lorrain Esme Osman and Mohamed Hashim Shamsudin in Kuala Lumpur, and General Manager Ibrahim Jaafar in Hong Kong were, at the very least, guilty of reckless lending that almost defied belief. As it turned out, press investigations showing that two of them had improper dealings with borrowers were not only accurate but merely the tip of the iceberg. Nawawi had taken the precaution of setting up a special supervisory committee to monitor BMF's lending in Hong Kong when he took over Bank Bumiputra in 1982. But Lorrain, Hashim, Ibrahim, and an alternate director of BMF, Rais Saniman, effortlessly circumvented the committee and continued lending to George Tan and Carrian. To avoid detection on one occasion, they arranged for China-owned Bank of Communications (Nominee) Company Ltd. to make a US$40 million loan on BMF's behalf.[41]

  All the double dealing, back-room scheming and obfuscation began to fall apart days after Dr. Mahathir's press comments, when a BMF executive, Jalil Ibrahim, was murdered in Hong Kong.[42] Bank Bumiputra's head office had secretly dispatched Jalil, an internal auditor, specifically to inspect BMF's books covertly while occupying the post of assistant general manager.[43] Lured to Hong Kong's five-star Regent Hotel,[44] he was later found strangled in a remote banana grove in the New Territories. Mak Foon Than, 32, a little-known Malaysian businessman, was soon arrested, convicted and jailed for his murder. At the trial, the prosecution linked the crime to an attempt to bail out Carrian.[45]

  With Hong Kong homicide detectives joining investigations by the police fraud squad, the securities commission and the anti-corruption agency, events moved swiftly. Police raided Carrian's offices on suspicion that someone was siphoning off assets from the group. Carrian and George Tan companies were found to owe BMF much more than either side had disclosed, effectively sinking a ten-month effort to rescue the conglomerate.[46] Tan and his principal assistant were arrested and charged with making false and misleading statements in their roles as company directors.

  It was a different Dr. Mahathir who faced the press again three months later, in October 1983. Now he called BMF's lending "a heinous crime" and "a betrayal of trust". He identified five men responsible for the fiasco, said they had accepted consultancy fees from BMF that were "morally wrong" but not illegal, and indicated the four still in their jobs would be asked to leave.[47] But he made no mention of the reported financial transactions between some BMF executives and their Hong Kong customers, which had been reported in the press. Lorrain, Hashim and Rais duly quit their posts at both BMF and Bank Bumiputra. Ibrahim followed. The surprise was not that they were forced out, but that they had been retained so long as part of Bank Bumiputra's strategy of using the people responsible for the bad loans to try and salvage the debts.[48]

  As the government tried to parry increasingly strident calls for a full account of what happened in Hong Kong, BMF sued George Tan for failing to repay seven loans for which he stood as guarantor. The banking industry interpreted the move as a shallow and belated effort by Bank Bumiputra to show it was serious about recovering its loans and to dispel rumours of a separate recovery effort.[49]

  The three-man committee of inquiry announced by Dr. Mahathir in early 1984 was headed by Malaysia's Auditor General, Ahmad Noordin Zakaria, a veteran civil servant known for his thorough and often critical audits of state agencies. He was joined by a lawyer and an accountant. Dr. Mahathir said they would have a broad mandate to probe all aspects of BMF's lending, including any possible wrongdoing, and the findings would be presented to Malaysia's Parliament. But his decision to have the committee operate within the framework of Bank Bumiputra gave the impression that it was more in-house inquiry than independent investigation. It lacked the legal powers of a royal commission to secure evidence, call witnesses and cite for contempt those who did not appear. Dr. Mahathir saw no difficulties in getting former bank executives and others to cooperate. "The government is interested in getting to the bottom of this," he said.[50]

  As the committee embarked on a two-year paper chase to reconstruct tangled records, however, the government continued to give the impression it was still reluctant to see the sordid details exposed. Noordin, the chairman, complained that he and his colleagues received better cooperation from Hong Kong authorities than they got at home in Malaysia.[51] After the committee delivered a series of interim reports detailing irregularities by BMF's former senior executives, Bank Bumiputra filed complaints with the Malaysian police and initiated legal action against some of the ex-staff. By now, most of the suspect bankers were living abroad. Malaysia's attorney general said his decision on whether to prosecute the case would not depend on the committee's findings, indicating the police criminal investigation was starting from scratch and would ignore the voluminous evidence already gathered by the committee.[52]

  In a characteristic move, Dr. Mahathir discovered enemies abroad plotting to take advantage of the situation to blacken Malaysia's name, a familiar ploy to gather public support and deflect attention from domestic difficulties. He said Hong Kong police improperly passed BMF documents, obtained during the Jalil murder inquiry, to the colony's securities commission, and he refused to discount suggestions that Hong Kong or British officials might have manipulated the investigations to embarrass Malaysia.[53] But former premier Hussein Onn, for one, was not impressed. He joined some other members of UMNO, the Malaysian press, opposition parliamentarians, intellectuals, labour unions and consumer groups clamouring for the truth, many persuaded that responsibility reached deep into the political establishment.

  The committee's final report, which consisted of two volumes and totalled 1,075 pages, was eventually published in early 1986, but not before a rancorous exchange between the committee and the government. Committee members applied maximum political pressure by addressing a press conference and calling on the Mahathir administration to keep its promise to make the findings public. While they declined to discuss their conclusions, they tantalized the public with the statement that the Malaysian authorities could
have saved at least US$150 million if they had taken resolute action when Carrian declared its liquidity crisis in October 1982.[54] Dr. Mahathir accused the committee of acting "beyond its authority" in seeking publication of the report. Citing legal concerns, he told Noordin that "you don't care what happens to others so long as you satisfy your righteousness".[55] There was little doubt how taxpayers felt. The extensively documented allegations made the three committee members instant folk heroes. After praise for them poured in from readers, the Star, an English-language daily owned by the Malaysian Chinese Association, a senior partner in the National Front government, named them Men of the Year in 1984.[56]

  Nobody connected with BMF was brought to trial in Malaysia, contributing to the belief among many Malaysians that the politics of the story remained untold. It was left to the Hong Kong government to extradite Rais from France, and Lorrain and Hashim from Britain, and to prosecute them successfully. They were all jailed for short periods, along with George Tan and several others.

  Bank Bumiputra's 1983 results, announced in 1984 later than usual while the government arranged the bank's resuscitation, set records for all the wrong reasons. The loss of RM973.6 million for the year was the biggest in the history of the Malaysian banking system. It was Bank Bumiputra's first loss since opening its doors 19 years earlier. A RM1 billion write-off on the Hong Kong loans exceeded by far the total of all after-tax profits ever earned by the bank.[57] A decision to transfer almost all BMF's Hong Kong loan portfolio to Bank Bumiputra on the last day of 1983 proved controversial, since it masked the subsidiary's 1983 lending to Carrian, and enabled the bank to stretch out the write-offs so it was harder to link them with Hong Kong. Just the same, the absorption of the heap of bad debt was devastating, wiping out Bank Bumiputra's paid-up capital almost twice over.[58]