1MDB is tip of the iceberg of illicit outflow of funds

Many Malaysians heaved a sigh of relief when the US Department of Justice announced that fugitive Jho Low would be indicted over his role in the 1MDB scandal.

Nov 09, 2018

By Anil Netto
Many Malaysians heaved a sigh of relief when the US Department of Justice announced that fugitive Jho Low would be indicted over his role in the 1MDB scandal.

A couple of other foreign bankers would be reined in as well for their role in facilitating this siphoning of money from 1MDB.

The hope is that some of the missing billions would eventually be recovered and returned to Malaysia so that these funds can be used, for say, public education, public healthcare and rural development.

Certainly, it would provide welcome relief to the federal government’s tight financial situation, especially when it has to service the interest on its debts totalling several hundred billion ringgit, perhaps almost a trilion.

The amounts lost or siphoned out in the 1MDB scandal is staggering, running into several billion ringgit, perhaps tens of billions. And yet, despite the large amounts involved, 1MDB could be just the visible tip of the iceberg in terms of illicit financial outflows.

Global Financial Integrity (GFI) estimates that Malaysia lost US$419bn in 2004-2013 (www.gfintegrity.org). That is a stupendous RM1.7 trillion. About 80 per cent of this was lost through “trade misinvoicing outflows,” according to GFI.

Trade misinvoicing is a trick to move money illicitly across borders through the deliberate falsification of invoice values or volumes in international transactions involving goods or services. This trick is often used for money laundering, evading or minimising taxes and customs duties, claiming tax incentives, or circumventing a country’s capital controls. So it is not just politicians and civil servants who are involved but presumably those in the private sector as well.

Funds siphoned out are typically moved from a developing country to secret bank accounts in more developed countries or to accounts in offshore havens. Along the way certain banks in developed nations earn huge profits while bankers and lawyers who facilitate such transactions and money laundering are handsomely rewarded. We saw this pattern playing out in 1MDB —and this is only what we know of.

A recent column here discussed what drives some people to incredible greed. We might shake our heads at how leaders in the previous administration allowed this to happen and their penchant for expensive watches, jewellery, artwork, handbags.

But for all the focus on the key political leaders and flamboyant players involved, the scandal was by no means confined to them. Many times, it takes two (or more parties) to tango.

Oversight personnel in private banks, local and foreign, failed to follow-up on red flags raised. Bankers in key positions succumbed to temptation and rewards, whether above board or under the table. External auditors dutifully signed off on financial statements even though there were gaping holes in the accounts.

Certain foreign governments did not ask enough questions about the large amounts of money flowing in and out of their respective countries. Banking regulators here and abroad kept silent in the face of huge transfers. Offshore tax havens allowed shell companies to be used to mask the layers of cover-up and bank transfers to hidden account holders.

Eight years ago, someone representing a group of Australian retirees highlighted how they lost their retirement savings after being duped by Australian consultants who suggested they could earn high returns by “investing” their funds in Labuan, our very own offshore haven.

The retirees’ predicament was eventually raised in the Malaysian Parliament under the previous administration. The then deputy finance minister said he would ask the Labuan regulatory agencies to look into this case and keep the Australian retirees informed. But to this day, despite the numerous letters the retirees have written to the Malaysian regulatory bodies and officials, they have not yet recovered their savings. How could did this happen? What happened to the oversight?

Back to the illicit outflows of funds. Many parties, institutions, syndicates, even the national economies of certain countries are profiting from such illicit transactions, not to mention the masterminds. But as is always the case, such siphoning has its victims. In the case of 1MDB, it was the Malaysian people. In many cases, it is the people in developing countries who lose out on loss of development funds, either directly or through tax evasion.

This is a tragedy for the common good, as funds that could be allocated for essential public services for the the ordinary people are ferreted abroad into hidden bank accounts and opaque offshore havens.

Hopefully, the new government will stem such illicit outflows of funds that ultimately hurt the ordinary people in ways we often cannot see.

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