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The Big Story

Malaysians gripped as Najib’s 1MDB hearing looms

Trial a litmus test for Mahathir’s war on corruption

CK TAN, Nikkei staff writer | Malaysia

KUALA LUMPUR -- Toh Yen Kee was filled with optimism when Prime Minister Mahathir Mohamad was swept into power last May. She was so optimistic, in fact, that she quit her job as a top executive at a multinational company in Singapore, where she lived for 23 years, and returned home to work for the Malaysian government. Her new position in the finance ministry pays about 90% less, but she says it was worth it.

"When the new government won the election, I basically told myself, 'if not now, when?'" Toh told the Nikkei Asian Review.

Like many in Malaysia, Toh saw the defeat of the decadeslong ruling party led by former Prime Minister Najib Razak as a turning point for the country. Now was the moment, Toh believed, to do her part to reduce pervasive inequality and the rampant graft that had long plagued her nation -- and drove many people like her to abandon their homeland for opportunities elsewhere.

"I did not like the corruption, and I [hoped to help] clean up the country because I thought a lot of people suffered" as a result of it, she added.

For Toh and millions of other Malaysians, a key test of the country's ability to tackle corruption is expected to begin on Feb. 12, when Najib will face court on dozens of charges related to the scandal-plagued 1Malaysia Development Berhad, widely known as 1MDB. Najib's legal team is attempting to delay the trial date.

The looting of 1MDB, a state fund set up to create economic opportunities for Malaysia, has been called "kleptocracy at its worst" by the U.S. Department of Justice, which alleges that public officials conspired with others to steal public funds worth $4.5 billion.

Najib himself has been hit with 42 counts related to 1MDB, including money-laundering and receiving $681 million of proceeds from illegal activities in his private bank account. He has denied the allegations.

Since his arrest on July 3 last year, Malaysians have been transfixed by the case. The authorities have hauled sacks of cash, jewelry and luxury goods worth an estimated value of 1.1 billion ringgit ($268 million) from 10 properties linked to Najib and Rosmah Mansor, his wife.

Rosmah has been charged with some 20 counts of corruption, money laundering and tax evasion. Revelations about her vast collections of jewelry, watches and designer handbags have captivated -- and angered -- ordinary citizens. She has denied the allegations.

"How did she accumulate such wealth when the majority of us live a modest life?" asked Abdul Aziz, a courier deliverer.

Najib's trial in the Kuala Lumpur High Court marks the first time a former Malaysian leader has had to defend himself against criminal charges. "I remain hopeful that justice will be done. It will be a long process, I expect," said Bridget Welsh, a Malaysia expert and associate professor of political science at John Cabot University, Rome.

There is also a lot riding on the hearings for Mahathir, who has pledged to get to the bottom of the 1MDB scandal and crack down on corruption. Yet many still remember when, during his first stint as prime minister in the 1980s, his decision to sack three Supreme Court judges sank the country into a constitutional crisis.

Now, after nine months in power, backing for the ruling party remains intact, though grumbles over slowing economic growth are beginning to grow louder. A deeper slowdown could shake the feeble foundations of Mahathir's four-party coalition, formed with the sole purpose of unseating Najib.

"Never again," said Mahathir on Jan. 29 at the launch of the National Anti-Corruption Plan. He reminded the hundreds of civil servants and corporate leaders who gathered to stay away from graft, considering the "tremendous damage" wrought by the 1MDB scandal.

The government captured international attention with its forceful moves against Goldman Sachs and two of the U.S. investment bank's former employees, who have been indicted in relation to bond issues that raised $6.5 billion for 1MDB between 2012 and 2013.

Lim Guan Eng, Malaysia's finance minister, announced in January that the government was seeking $7.5 billion in compensation from Goldman connected to the scandal. Tim Leissner, a partner at the bank during the 1MDB fundraising, and two individuals -- including Malaysian businessman Low Taek Jho, known as Jho Low -- are accused of misappropriating $2.7 billion in proceeds from the bond sales. Goldman has publicly apologized for Leissner's role in defrauding the Malaysian government.

Jho Low, the flamboyant financier who is accused of using 1MDB funds to buy artworks by Van Gogh and Monet, remains at large. Malaysia and Singapore have requested assistance from the International Criminal Police Organization to track down the 37-year-old Malaysian, who is believed to be in China and has maintained his innocence through a spokesman.

Yusmadi Yusoff, a lawyer and senator from the ruling coalition, said the scale of the case is "unprecedented" for Malaysia.

"The accused will try to do anything to protect themselves," he said. "Legally, it is about the law and the evidence presented in court. It can only get to the bottom of the case if the stakeholders focus until the end, and are not distracted by its political dynamics."

Strains in the coalition

Apart from going after the alleged perpetrators, the Mahathir-led government has embarked on plans to cut spending on infrastructure projects -- some of which may also be tied to official corruption. The government is probing whether payments made on certain China-backed projects signed by Najib's government were used to bail out 1MDB, including the 81 billion ringgit East Coast Rail Link, construction of which has been suspended pending a review.

But 1MDB is not the only scandal that the Mahathir government has to deal with. Authorities have unearthed similar cases of embezzlement in at least two other key state institutions under the purview of the Prime Minister's Department.

One is at Tabung Haji, or the Hajj Pilgrims Board, that manages the 73.5 billion ringgit worth of savings by Muslims for pilgrimage to Mecca, Saudi Arabia. The board invests in equity, fixed income and properties to provide returns to the depositors.

A review of the board's financial position allegedly found accounting fraud dating back to 2014, forcing the new government to step in with a 19.9 billion ringgit bailout plan to acquire the board's underperforming equities and properties. Abdul Azeez Rahim, the board's former chairman and a lawmaker in Najib's political party, was charged in January with graft and money-laundering amounting to 144.6 million ringgit.

The other is the Federal Land Development Authority, or Felda, an agency set up in 1956 by Razak Hussein -- Malaysia's second prime minister and Najib's father -- to eradicate poverty among rural Malays by giving them jobs on plantations.

New management, installed by Mahathir's government last July, discovered that the agency's cash flow was "almost empty." Corruption was alleged in its subsidiaries, and poor management was blamed.

Its former chairman, Isa Samad, was accused in December of graft related to real estate investments with the board's approval. Like the pilgrims board's Azeez, Isa was appointed by Najib to chair Felda under the former ruling party's practice of awarding corporate leadership positions to loyalists.

Felda's management has now turned to disposing of assets, including international hotels, to pare its debts and raise cash.

Mahathir says all of these probes into alleged corruption by the Najib government are crucial to restore confidence in the economy.

"Previous offenders will be prosecuted, but more importantly, we must curb and stop future corruption," the 93-year-old leader has said.

But its efforts to fight corruption are beginning to be overshadowed by other pressing issues -- including a slowdown in the economy, driven by sinking prices for key exports like palm oil and liquid natural gas, and signs of policy drift by the Mahathir government. The economy is projected to grow by 4.9% in 2019, a modest improvement from the 4.8% estimated for 2018.

In a survey released on Jan. 30 by the Malaysian Institute of Economic Research, indexes that gauged consumer and business sentiment declined in the last quarter of 2018, compared to the optimism that prevailed in the aftermath of the May 9 election.

"I feel those [second quarter] figures are a reaction or overreaction [to the election win]. After that, people start to rationalize, and when they start to rationalize, the figures start going down," said Zakariah Abdul Rashid, MIER's executive director.

In a research note, Singapore's United Overseas Bank said that recent anti-corruption initiatives "reinforce" the government's commitment to reform and addressing economic issues.

But the analysts also noted that the implementation of these measures may face hurdles because some of the changes will require a two-thirds majority in parliament. Mahathir's Alliance of Hope holds less than two-thirds of the seats.

"Investors have remained on the sidelines as they wait for greater clarity on reforms and policies," the report said.

Malaysia's 1MDB fund, created in 2009, was intended to fund nation-building projects for the country.   © Reuters

In a risk analysis on Feb. 4, Fitch Solutions warned of a possible decline in the popularity of the Mahathir-led government. The inability of the ruling coalition to reduce living costs and inequality among different ethnic groups could lead to infighting, the researchers said.

"The already strained unity of the coalition could be further tested, and while a dissolution of the coalition is not our core view, the risks are rising."

(Too) great expectations

Cracks in the Mahathir-led coalition are beginning to show, surfacing recently as politicians disputed the status of the East Coast Rail Link, or ECRL. Its construction has been suspended since July pending renegotiations with the contractor, state-backed China Communications Construction Company.

On Jan. 26, the future of the project seemed to have been decided when Azmin Ali, minister of economic affairs, told reporters that the cabinet had decided to scrap the project for good, due to the high annual interest payment demanded by CCCC.

Hours later, however, the statement was flatly denied by Finance Minister Lim Guan Eng.

Relations between Malaysia and Beijing have already been strained since Mahathir's election, but poor handling of an issue as important as ECRL could do more damage, warned Peter Mumford of Eurasia Group, a risk advisory.

A sense of "general disappointment" among supporters of both the ruling party and the opposition has started to sink in after nine months of coalition government, said Welsh of John Cabot University.

"The measure of the government is less than expectation, in part because expectations were too high."

Ethnic relationships continue to dominate politics in the country, "indirectly sidelining" Malaysians who voted for a change from the Najib government's racial rhetoric and policy, observed Welsh. The power struggle between Mahathir and his designated successor, Anwar Ibrahim, continues to fuel uncertainty, she added.

"It is a product of lack of trust between individuals within the system, and this has actually been quite destabilizing for the nation," she said.

Malaysians who voted in the Mahathir-led government likely want a quick ending to the court cases surrounding 1MDB to dispel the country's kleptocratic image. But graft cases involving high-ranking officials are often complicated and lengthy.

"Never underestimate white-collar criminals. Some of them are so powerful and rich that they will buy witnesses to win," said Akhbar Satar, president of the Malaysian chapter of Transparency International, a nongovernmental organization based in Germany.

In the recently released Corruption Perception Index calculated by TI, Malaysia managed to advance just one notch to 61 out of 180 countries in 2018.

Cracks are emerging in the ruling coalition: Mahathir, center, with coalition supporters Mohamad Sabu, left, and Tan Sri Muhyiddin Yassin, right, following their election win in May 2018. (Photo by Takaki Kashiwabara)

But the fact that action has been taken against the perpetrators may result in a better ranking in the future for Malaysia, Satar added.

"It looks like only Mahathir is the one chasing down those involved in corruption," said Transparency International's Akhbar. "We hope to see all ministries show to the public that they are also anti-corruption."

After the euphoria of last spring's election, Malaysians are beginning to accept that the hard work of banishing corruption in the country may well be a long-term project. The country seems encouraged by the steps made so far, but a more pragmatic sensibility is taking root.

"I told myself, there is honestly nothing for me to lose" by taking the government job back home in Malaysia, Toh said. "If I can't make it here, I can always go back to the private sector."

A graphic in an earlier version of this story misstated the previous estimate for Malaysia's GDP growth in 2018. The correct range is 5.5%-6.0%.

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