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Thread: Economy: Malaysia Illicit Outflow & Debt - Sinking deeper and deeper

   
   
       
  1. #1
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    Economy: Malaysia Illicit Outflow & Debt - Sinking deeper and deeper

    • **Sinking deeper and deeper* *
      *

      *By S. JAYASANKARAN, KL CORRESPONDENT
      Business Times (Singapore)
      *

      *MALAYSIA should take heed of the problems – the public anger, the social unrest – posed by the solutions offered to tackle rising sovereign debt in Europe. God forbid that we head that way!*


      *The Auditor-General’s recent report pointed out that Malaysia’s national debt rose 12.3 per cent to over RM407 billion (S$165 billion) in 2010. The amount is equivalent to 53.1 per cent of gross domestic product. It’s the second straight year that the national debt has exceeded 50 per cent.*


      *The figure is a reflection of the spending spree the country went on to mitigate the effects of the 2009 global financial crisis. At its peak that year, the budget deficit rose to 7.6 per cent of GDP, the highest in two decades.*


      *It has since come down to 5.4 per cent of GDP and the government projects that it will decline further to 4.7 per cent of GDP next year. But that may be overly optimistic.

    • * Everyone knows why the debt has piled up: persistently high budget deficits over 14 years. But it is the pace of the rise that’s alarming. Standout statistic: in the space of six years, total federal government debt has actually doubled from 2004. That way lies folly.*

    • *Malaysia’s debt position is close to breaching legislative levels set a long time ago by Parliament. According to the Auditor-General’s report, public debt from domestic sources rose RM41.76 billion to RM390.36 billion last year, while loans from foreign sources rose to RM16.75 billion, or up RM2.96 billion.*


      *But the Loan (Local) and Government Investment Act caps the domestic debt ceiling at 55 per cent (of GDP) for the government, while the External Loans Act 1963 limits foreign loan exposure to RM35 billion. According to the report, the domestic debt level at end-2010 stood at 51 per cent of GDP.*

      *The great irony of the situation is that it need not have come to that. The Auditor-General’s report revealed a litany of financial abuse in several government agencies. Leakages and wastage of appalling proportions were laid bare.*


      *Marine binoculars being purchased at 25 times cost? Over RM5 million to buy horses? If all the wastage was cut and proper procedures observed all the way down, one suspects that Malaysia would be a budget-surplus country.*

    • *Nor is national debt going to fall any time soon. Next year, it’s estimated that the debt will breach RM455 billion – almost 54 per cent of GDP.*


      *The danger for Kuala Lumpur is another recession stemming from the West’s economic woes. This time it cannot afford to spend its way out of it, ike
      it did in 2009. On top of that, subsidies on fuel and other essentials like cooking oil, milk, rice and sugar remain intractably high at RM32 billion this year.*


      *And the hits just keep on coming. According to the country’s central bank, the national debt as at June 30, 2011 has risen to RM437 billion, with domestic debt amounting to RM421 billion and foreign debt at RM16 billion. **


      http://blog.limkitsiang.com/2011/11/02/sinking-deeper-and-deeper/
    py

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    This article may be useful to prepare ourselves on our future.

    http://www.tindakmalaysia.com/showth...es-go-bankrupt
    py

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    Are we headed for bankruptcy?

    National debts: the screw, screwing and screwed

    By Lee Wee Tak at 11/08/2011 07:56:00 PM


    Malaysia’s growing national debt is a matter of concern for many but it also baffles many. We know the amount is huge but what exactly caused it and what it is really about. What will happen to us if the debt becomes unmanageable?


    APA ITU NATIONAL DEBT?

    I dwelled into Ministry of Finance’s Q2 2011 report for some answers.








    If a person spends more than he earns every year, he will owe a lot of money to a lot of people. Our national debts go on the same principle but just a little bigger in scale and consequence.

    The BN administration has spent more than the taxes collected (and they collect a lot – company tax, personal tax, service tax, sales tax, customs, petroleum tax etc). If expenses is more than government income, then the government will issue bonds to local and foreign lenders.

    In a nut shell, annual deficits are mainly due to

    * the oversized and under-delivering civil service,

    * huge subsidies on petrol (which I would blame it on a certain individual’s misplaced emphasis on developing national car over public transportation system) ;
    and

    * unchecked waste of tax money over stuff like project overruns (PKFTZ, Istana Negara , fantastic by election budgets, crazy defense spending etc) and routine expenses (read the AG’s report and sob).

    http://thestar.com.my/news/story.asp?file=/2011/11/3/nation/9829248&sec=nation

    MACC: No graft involved in purchase of binoculars

    From finance ministry’s website, the debt is getting bigger and bigger.



    So the amount of repayment we have to pay is also getting bigger and bigger.

    MALAYSIA IS FULL OF CASH AND DEBTS
    On page 129 of the MOF report, it read,

    Federal Government gross borrowings are projected to increase significantly in 2011 mainly on account of higher redemptions, loan repayments and deficit financing requirements. Given the ample liquidity in the financial system, the Government will continue to source its borrowing from domestic sources”

    Basically the mumble jumbo above means – government is going to borrow more money because they have to

    1) pay back old loans and
    2) pay for more wastage of funds.

    Since Malaysia has a lot of cash (you might yell ‘where got?” read on….), the government will take more of those funds from local sources instead of asking from foreigners who are more demanding & powerful creditors.

    Further down below on the same page, the report stated that

    “Total gross borrowings for the year are expected to amount to RM96.6 billion. Of this, RM90.2 billion or 93.3% constitute domestic borrowings while RM6.4 billon is from external source. Of the gross borrowings, RM51 billion is for repayments of existing debts while the balance, RM45.6 billion will be used to finance the deficit.”

    Basically it means that Najib’s MOF will increase total debts by another 1/6; more than half of the new debt is to pay old debt, and even though we have not cleared the old debts, the government is going to pile up some more debts.

    So the question where is the “ample liquidity in the financial system” comes from?


    If you look at the debt trend, the borrowings from foreigners goes up and down, meaning the foreigners do get paid backbut when you look at the Hutang Persekutuan Dalam Negeri, the figures only go one way – which is higher and higher, meaning the rakyat who are supposed to be diutamakan really did not get paid. We as rakyat have no way to tell the BN administration to pay us back like a foreign creditor.

    So really we are lending more and more to the fellow who recently propose to change the tax laws to say IRB can charge us any amount of tax the IRB thinks we should be paying*. And we cannot take those bureaucrats to court to dispute them.

    *(I am talking about the proposed S107D of the Income Tax Act. You might get a lower court to rule this section as unconstitutional but the government can always appeal all the way to federal court)

    We also gadai away........
    Foreigners enjoy security over Malaysians bonds they subscribe, take a look at this recently issued USD2billion debt on Islamic finance principle of Wakala:
    Wakala principle roughly means that the borrower can fix a percentage of “profits” to the lenders, anything on top of that return, goes to the borrower as his/her profit/incentive/reward.




    Note that in order to borrow from foreigners, the kerajaan has gadai some schools and a renounced medical institution, so next time when you pay your fees, the higher fees is explained by the need to pay “profits” and “incentives” to both borrowers and lenders.
    Note that the Finance Ministry’s report, which read more like a “high five myself” advertisement, celebrate us borrowing more and more. Something does not feel right here. Who feels proud to have bigger debts?






    How does Malaysia look like when we hit bankruptcy?
    With the debt getting bigger and bigger, one day we will go burst like any yuppie who charge more to his credit card than his salary.

    So, this is my prognosis in the event of a bankrupting/bankrupted Malaysia:

    1. Cutting of expenses – fuel and food subsidies will go first and we will see higher cost of living. Welfare to the poor might go too. The standard of public utilities will get worse and worse, e.g. doctors with no medicine.

    2. Risks of not able to honour withdrawals. The “high liquidity” i.e. our savings in banks, EPFs and unit trusts like amanah saham wawasan etc are tied up in loans to the federal government. In the event of sovereign bankruptcy,we can’t withdraw and use our savings earned over the years of hard labour and sacrifice.

    3. The government will try to get more taxes in – whether from GST, imposing laws like section 107(D) which can mean “IRB tell you to pay whatever amount they want no matter what your accountant explain to the IRB and you can’t take the IRB to court” kind of thing. We are already hidden borrowers by letting the IRB collecting personal and company taxes in advance. Businesses will be forced to raise the prices of goods and services, adding on the cost of living and flogging citizens more. People on reduced welfare would really have a hard time.

    4. The government will be reluctant to reduce/remove civil servants despite the auditor’s general report but as compromise, will take in less to bolster their voters’ bank


    5. The foreigners will insist on getting their money back first, so they may take over the pledged assets, like the schools above or Institute Jantung Negara, and collect directly from paying customers/selling the assets off


    6. Foreigners will lose confidence on ringgit and insist us to pay for imports in other currencies and our ringgit would devalue further and further and the cost of imported items will be more and more expensive. Although Malaysian has fertile land and great weather, we still have to import rice and vegetables, and more than half of cost of production of chicken is depended on imported chicken feed made from corn, cost of living takes another beatingand RM3 1Malaysia meal might consist of 1 spoonful of white rice with diluted ikan kembong curry.


    7. Companies suffering from high cost of business and loss of purchasing power of its customers will have to close shop. Default by debtors will lead to businesses closing down, domino effect will come in and we will have many people out of jobs. Banks, ah longs and old mother and fathers will not get their loans back. Properties would get repossessed or defaced (depends who you borrowed from)


    The non-financial impact would be some blame game by certain quarters who are most eager to deflect responsibility (a most normal human nature) and try to blame it on other countries/any race but mine or manufactured some other irrelevant crises to shift the rakyat's focus from the real issues and brewing up some more tension.


    Well, can you imagine how this “satu lagi projek kerajaan barisan nasional” will turn out? Bye now as I am tuning into that intriguing documentary series, “life after people”



    py

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    Finance: Malaysia rises in illegal money chart, RM150b lost in 2009

    Malaysia rises in illegal money chart, RM150b lost in 2009



    UPDATED @ 03:49:35 PM 15-12-2011
    By Shannon Teoh
    December 15, 2011
    KUALA LUMPUR, Dec 15 — Malaysia lost RM150 billion in illicit outflows in 2009, the fourth highest in the developing world, says US-based watchdog Global Financial Integrity (GFI).

    According to its report on illicit financial flows from developing countries released today, Malaysia lost a total of US$338 billion (RM1.08 trillion) over the first decade of the century.

    File photo of people looking at exchange rates on a board in Kuala Lumpur. According to a report, Malaysia has lost a total of RM1.08 trillion in illicit financial outflows over the first decade of the century. — Reuters pic


    “This report should be a wake-up call to world leaders that more must be done to address these harmful outflows,” GFI director Raymond Baker said in a press release.GFI had reported in January that RM930 billion flowed out of Malaysia from 2000 to 2008, growing to RM218 billion per year from an initial RM71 billion in that period.

    It said the increase was “at a scale seen in few Asian countries.”

    “The volume of illegal capital flight from Malaysia has come to dwarf legitimate capital inflows into the country in recent years,” it said earlier this year.

    Today’s report titled “Illicit Financial Flows from Developing Countries Over the Decade Ending 2009” sees Malaysia maintaining its fifth place in the world in terms of total illicit outflows since the turn of the century.

    In March, Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz said the Money Business Services Act would be tabled this year to enable the central bank to address the outflow of funds from the country.

    The Act came into force on December 1.

    The new law supports the development of a more dynamic, competitive and professional money services business industry, while strengthening safeguards against money laundering, terrorist financing and illegal activities, according to Bank Negara.

    It said the new law introduces strengthened prudential requirements, focusing particularly on ensuring the effective oversight and control of the conduct and operations of licensed entities to safeguard the integrity of, and confidence in the money services business industry.

    The GFI report, penned by economists Sarah Freitas and Dev Kar, a former senior economist at the International Monetary Fund, saw China maintain its position at the top with US$2.5 trillion in illegal outflows.

    Malaysia’s closest-ranked regional neighbour was the Philippines, in 13th spot at US$121 billion.

    Others like Zimbabwe (79th) and Myanmar (83rd) recorded US$3.9 billion and US$3.05 billion respectively in the list of 116 countries that GFI had full data on.

    The Finance Ministry had said early this year that Bank Negara was probing the matter.

    But the central bank has yet to make any statement on the progress of its investigations despite GFI offering its assistance.
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    Finance: M'sia hit by RM 150 B in illicit outflows in 2009


    M'sia hit by RM150bil in illicit outflows in 2009

    EXCLUSIVE Malaysia saw a whopping RM150 billion (US$47 billion) in illicit money siphoned out of the country in 2009, making it the top four countries suffering the highest illicit capital flight.

    This amount is in addition to the staggering loss of RM927 billion (US$291 billion) over a period of nine years - between 2000 and 2008 - says the latest report by Washington-based financial watchdog Global Financial Integrity (GFI).

    In January, GFI sparked an uproar when its ground-breaking report, ‘Illicit Financial Flows from Developing Countries', ranked Malaysia at No 5 among the countries with massive outflow of illicit capital.

    In an update to its earlier report - this time supplemented by figures from 2009 - GFI said Malaysia, which has suffered a cumulative lost of RM1,077 billion (US$338 billion) over the past decade, maintains its No 5 spot.

    The rankings of the top four countries remain relatively the same - China (with a loss of US$2,500 billion) is ranked No 1, followed by Mexico (US$453 billion), Russia (US$427 billion) and Saudi Arabia (US$366 billion).

    The latest GFI report, ‘Illicit Financial Flows from Developing Countries Over the Decade Ending 2009', is penned by economists Sarah Freitas and Dev Kar (right), who is a former senior economist at the International Monetary Fund.

    Bribery, theft, kickbacks, tax evasion

    According to the authors, the estimates are based on balance of payments, bilateral trade and external debt data reported by member countries to the IMF and the World Bank.

    "Unrecorded capital leakages through the balance of payments capture illicit transfers of the proceeds of bribery, theft, kickbacks and tax evasion," says the report.

    Asia accounted for almost half the global share of illicit financial outflows (45 percent), driven largely by China and Malaysia.

    However, GFI found that there was a dip in illicit capital outflows in 2009, but this was attributed to the global financial crisis instead of systematic improvements in governance or economic reform in these countries.

    "This is a breathtakingly large sum at a time when developing and
    developed countries alike are struggling to make ends meet," said GFI
    director Raymond Baker.

    "This report should be a wake-up call to world
    leaders that more must be done to address these harmful outflows."

    GFI pointed out that the financial flows from Malaysia have more than tripled from US$22.2 billion (RM71 billion) in 2000 to US$68.2 billion (RM218 billion) in 2008.

    "This growth rate, seen in few Asian countries, may be a result of significant governance issues affecting both public and private sectors," it lamented.

    Bank Negara launches probe, but...

    Following the release of the report in January, Prime Minister Najib Razak, who is also the finance minister, pushed the ball to Bank Negara's court, saying that it would provide an explanation on the findings.

    "There can be many reasons, but let Bank Negara provide more specific comments on that," Najib told journalists when quizzed about the matter.

    Soon after, Deputy Finance Minister Donald Lim announced that Bank Negara has launched a probe.

    But to date, Bank Negara has yet to announce the result of its investigations nor explain the massive illicit capital flight, despiteoffers of help from top GFI economists.

    However, Deputy International Trade and Industry Minister Mukhriz Mahathir (left) has dismissed GFI claims as "bizarre".

    "We do not see the need to look into it. If you go through the report, they have made quite a few bizarre claims against several countries," Mukhriz said.

    "Going by Bank Negara's figures, we know how much exactly is going out, so you can hardly consider those figures (from GFI) as factual."

    Capital flight: Errors and omissions

    Earlier reports

    Capital flight: Ball in Bank Negara's court
    Najib: Bank Negara to comment on illicit outflow
    Anwar: Impossible to hide RM208b in illicit outflows
    Weak ringgit due to massive illicit outflows
    Donald Lim: Illicit fund outflows probe launched
    Call for multi-agency probe into capital flight
    Mukhriz dismisses GFI claims as 'bizarre'
    Illicit outflows: GFI ready to help Bank Negara
    Will Bank Negara take up GFI offer?

    View comments (64)
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    Friday, 16 December 2011 08:50



    http://malaysia-chronicle.com/index....world&Itemid=2

    Written by
    Maclean Patrick, Malaysia Chronicle








    For the first decade of the new century, Malaysia has lost a
    staggering RM1.08 trillion (US$338 billion) in illicit outflows which is
    the fourth highest in the developing world.


    In the period 2000-2009, China lost US$2.74 trillion in illicit
    financial outflows and was the developing country with the largest
    illicit outflows, according to a country ranking published in the
    report. Mexico ranked second, with US$504 billion and Russia third with
    US$501 billion while our closest-ranked regional neighbour is the
    Philippines, who at 13th place lost US$121 billion.


    Illicit outflows can be taken as a benchmark or indication of the
    scale of corruption. This means Malaysia has the most corrupt set of
    leaders in Southeast Asia, who are also the 4th most corrupt in the
    world, stashing the massive amounts of money they plunder overseas.


    The Global Financial Integrity (GFI) reported in January that RM930
    billion flowed out of Malaysia from 2000 to 2008, growing to RM218
    billion per year from an initial RM71 billion in that period. Malaysia
    lost RM150 billion in illicit outflows in 2009. The report elaborated
    further by stating that the increase was “at a scaled seen in few Asian
    countries” and continued added, “The volume of illegal capital flight
    from Malaysia has come to dwarf legitimate capital inflows into the
    country in recent years.”


    Bribery, theft and kickbacks

    The warning bells were sounded as early as January 2011 by the likes
    of Opposition Leader Anwar Ibrahim, who questioned the apathy shown by
    the government towards the problem of illicit outflow via corruption and
    tax evasion practices.


    Corruption – bribery, theft and kickbacks – accounts for the other
    half of illicit flows and dominate the Middle East, North Africa and
    developing Europe, the report said.


    The falsification of import/export invoices, known as trade
    mispricing, accounts for just over half of all illicit financial flows
    and is particularly prevalent in Asia and the West.


    To stem the tide, Bank Negara Governor, Dr Zeti Akhtar Aziz, tabled
    the Money Business Services Act in March; an act that has since came
    into effect on December 1st. The new law supports the development of a
    more dynamic, competitive and professional money services business
    industry, while strengthening safeguards against money laundering,
    terrorist financing and illegal activities, according to Bank Negara.


    Half-hearted Act

    Yet, the Act seems too little too late, since it is a mere knee-jerk
    reaction to a decade old problem. After a decade where Malaysia has lost
    RM1.08 trillion, in-action by the Barisan Nasional government has cost
    us dearly. This is a governement that has been bleeding money for the
    longest time and is prime for an economic implosion that would default
    the country.


    With inflation clocking in at 3.4% in September after touching a
    27-month high of 3.5 per cent in June, food inflation remains the
    biggest concern, increasing to 5% year-on-year in September from 4.6 per
    cent in August. Malaysians are headed for hard times with less value
    for the ringgit in their pockets as opposed to the cost of living. And
    what has been the Finance Minister’s response to this?


    None.

    Not a sound, only grandiose announcements from Najib

    Instead, we have had a grandiose announcements to make Malaysia a
    high income society and the further abuse of public funds to sponsor
    failed projects such as the NFC, a national cattle livestock project.
    The sudden rush to have a revision of the public service pay-scheme is a
    veiled attempt at soliciting more tax money yet at the same time to
    secure the civil service as the “fixed-deposit” for the upcoming 13th
    General Election. The arresting measures that were rushed into place
    have merely been a means to secure an election win, whilst the whole
    country steams towards default.


    The fact that annual illicit outflows from Malaysia has grown from
    RM71 billion to RM218 billion per year points to the ineffective
    counter-measures placed by the Finance Ministry and Bank Negara to stem
    the problem. Put bluntly, the measures failed. Prime Minister Najib
    Razak, who is also the Finance minister, has nothing to show for his
    time in office, despite having taken over the top job in April 2009.


    The silence of the Finance Minister is telling. One cannot help but
    ask if Najib, the person responsible for the financial health of the
    nation, is on top of things. Is it a priority of the Finance Minister?
    Is the Barisan Nasional government working hard at fixing the financial
    state of the nation?


    Such issues concerning Malaysia’s financial state only enforces the
    notion that Malaysia is truly heading towards default much like Greece,
    and as forecast by Minister in the PM's Department, Idris Jala, who
    predicted bankruptcy by 2019 due to inability to service ever growing
    debt.


    Malaysia Chronicle
    py

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    Bank Negara did not contact us, says GFI

    http://malaysiakini.com/news/184642



    Washington-based think-tank Global Financial Integrity dismisses remarks by Deputy Finance Minister Donald Lim that it is in touch with Bank Negara.

    The Global Financial Integrity has dismissed remarks by a deputy minister that the Washington-based think-tank is working with Malaysia's central bank on the issue of the nation's staggering illicit capital flight.

    "While I wish that I could say that we'd been in touch with Bank Negara, it is not true. They have not reached out to us, and we have not spoken with them," said GFI communications director Clark Gascoigne (left) in an email response toMalaysiakini.

    On Saturday, Deputy Finance Minister Donald Lim told Malaysiakinithat GFI had been in touch with Bank Negara to work on the matter.

    He said that RM150 billion reported by GFI to have flowed illicitly out of Malaysia in 2009 was "not a new issue" and measures were already being taken to plug the leak.

    Lim's statement echoes police chief Ismail Omar, who last Friday put the blame on money laundering activities and said that action was being taken to freeze the assets of those involved in such organised crime.

    According to GFI last Thursday, Malaysia saw a whopping RM150 billion in illicit money siphoned out of the country in 2009, making it the top four countries with the highest illicit capital flight.

    This amount is in addition to the loss of RM927 billion over a period of nine years between 2000 and 2008. In total, Malaysia has suffered a cumulative lost of RM1 trillion over the past decade.

    Still willing and ready, says GFI

    In the wake of a previous GFI report in January, Prime Minister Najib Razak said that Bank Negara would provide an explanation on the findings.

    Soon after, Lim (left) announced that Bank Negara, which is headed by governor Zeti Akhtar Aziz, hadlaunched a probe.

    But to date, Bank Negara has yet to announce the result of its investigations nor explain the massive illicit capital flight, despite offers of help from top GFI economists.

    Gascoigne reiterated that if Bank Negara is interested, GFI would be happy to work with Bank Negara and the Finance Ministry to address the problem of illicit capital flowing out of the country.

    "We stand by the op-ed from our lead economist, Dr Dev Kar, from this past January: We're willing and ready to collaborate with the Malaysian government, if we're invited to do so.

    "However, as of yet, we have not been invited to do so," he said.
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    Illicit outflows: MNCs not the only culprits



    http://malaysiakini.com/news/185121 Two weeks ago, the Global Financial Integrity, a US-based watchdog released the ‘Illicit Financial Flows From Developing Countries Over The Decade Ending 2009’ study where it estimates that developing countries around the world lost a massive US$8.44 trillion.

    On a local context, Malaysia was placed fifth in the world on cumulative total illicit financial flows (IFF) since 2000.

    For 2009 alone, IFF (non-normalised) amounted to approximately US$46.86 billion (about RM145billion at an exchange rate of RM3.1 = US$1) and over the cumulative nine years, total IFF amounted to a massive US$350.47 (about RM1,086.46 billion).

    Even on a more conservative estimate, Malaysia lost US$337.87 billion over the same period (about RM1,047.4 billion).

    Two methods of estimations were used in the study, one being the World Bank Residual model (using the change in external debt, or CED), and secondly, trade mispricing (using the Gross Excluding Reversals method, or GER).

    Through the balance of payments (a component of CED), it captures unrecorded capital leakages, i.e. illicit transfers of the proceeds of bribery, theft, kickbacks, and tax evasion. Meanwhile, outflow of unrecorded transfers due to trade mispricing was captured under the GER method.

    Based on the study, Malaysia’s nine-year average normalised, i.e. conservative IFF amounted to US$14.17 billion (42 percent; RM43.9 billion) due to CED, while GER accounted for US$19.62 billion (58 percent; RM60.8 billion).

    Meanwhile, average non-normalised IFF was US$15.43 billion (44 percent; RM47.5 billion) due to CED and US$19.62 billion (56 percent; RM 60.8billion) due to GER.

    Malaysia is the only country where both channels of IFF, CED and GER, are roughly in comparable portions.

    Definition of Illicit Financial Flows


    Under the notes on methodology of the IFF, the Global Financial Integrity has detailed out the following:


    “Illicit flows involve capital that is illegally earned, transferred, or utilised and covers all unrecorded private financial outflows that drive the accumulation of foreign assets by residents in contravention of applicable capital controls and regulatory frameworks.

    “Hence, illicit flows may involve capital earned through legitimate means such as the profits of a legitimate business.

    “It is the transfer abroad of that profit in violation of applicable laws (such as non-payment of applicable corporate taxes or breaking of exchange control regulations) that makes the outflows illicit.”

    A more layman interpretation is IFF involves cross-border movement of money that is illegally earned, transferred, or utilised.

    IFF generally involves the transfer of money earned through illegal activities such as corruption, transactions involving contraband goods, criminal activities, and efforts to shelter wealth from a country’s tax authorities.

    What’s in the law?

    The Malaysian Transfer Pricing Guidelines (TP Guidelines) was introduced in July 2003 by the Inland Revenue Board (IRB).

    The TP Guidelines provide guidance to taxpayers on the application of arm’s length principle, which is espoused through the anti-avoidance provisions of the Income Tax Act 1967.

    With the introduction of the TP Guidelines, a specialist group was set up within IRB to deal with transfer pricing issues. Desk audit and field audits were rigorously carried out since its set-up.

    The statutory law that governs transfer pricing is provided under the anti-avoidance provision in Section 140 of the Income Tax Act; where it provides the power to the IRB director-general to disregard transactions that are deemed not arm’s length and make necessary adjustments to revise or impose additional tax liabilities.

    Section 140 has been used widely by the IRB for local and cross-border transactions, adjusting any transfer pricing abuses.

    The arm’s length definition was not defined in the Income Tax Act; however the concept and its application were provided under the TP Guidelines.

    Under self-assessment system, the burden of proof lies with taxpayers to justify such transactions.

    The IRB further introduced a new section, Section 140A, which came into effect on Jan 1, 2009, that empowers the IRB director-general to make adjustments on transactions of goods, services or financial assistance between related companies based on the arm’s length principle.

    Additionally, all related parties’ transactions are required to be submitted, under Section N of the Form C, where the categories of related party’s transactions consist of:

    • Total sales to related companies in/outside Malaysia;

    • Total purchases from related companies in/outside Malaysia;

    • Other payments to related companies in/outside Malaysia;

    • Other payments to related companies in/outside Malaysia;

    • Loans to related companies in/outside Malaysia;

    • Borrowings from related companies in/outside Malaysia; and

    • Receipts from related companies in/outside Malaysia.

    There is no specific provision for non-compliance or not having transfer pricing documentation in place under the TP Guidelines.

    However, where transfer pricing adjustments are made, any additional taxes resulting from such adjustments will be subjected to additional penalties of as high as 45 percent.

    MNC’s transfer pricing

    As detailed above, Malaysia has in effect the necessary laws and guidelines in place to deal with transfer pricing and money laundering activities.

    So it was rather surprising when our learned Kota Belud MP Abdul Rahman Dahlan suggested that multinational companies (MNCs) are largely the cause of such massive amount of IFF, basing on Global Financial Integrity director Raymond Baker’s speech and certain parts of the study.

    Perhaps, the question to ask is why despite having such laws in place; there is still a massive amount of IFF out of the country.

    Instead, our learned MP has suggested that MNCs’ under/over transfer pricing under Western global financial system is to be blamed and chose to downplay the effect of corruption.

    So what is the MP trying to imply? Is he suggesting that the likes of Intel, Agilent, Western Digital, and a whole host of Japanese and other MNCs, are involved in transferring IFF? Let’s just not be too quick to point fingers.

    Having been in the transfer pricing environment for close to a decade, I must say that transfer pricing has been the one of the most scrutinised subject by the IRB since the TP Guidelines were introduced, where transfer pricing desk audits and field audits were conducted.

    Even during routine tax audits, transfer pricing has been one of the hot subjects.

    Transfer pricing is not cast in stone. A lot factors are considered to arrive at certain pricing, where different pricing strategies are adopted taking into account both quantitative and qualitative considerations, i.e. business strategies, characteristics of services, functions performed, and economic conditions.

    For example, companies may go on a low pricing strategy of certain products, as they are able to recover profitability based on volume (economies of scale).

    Or they could also be the need to maintain low margin products where profitability can be recovered through high margin products. The numbers do tell a story.

    Something wrong in monitoring system

    However, having said that, not all are fairy tales. There is no denying that MNCs do get their transfer pricing wrong at times, and from my years of experience, it is rather that companies have got their projections wrong or made bad business decisions.

    And in some cases, as a consequence, transfer pricing adjustments running into hundreds of millions in additional taxes were paid. Not to mention, penalties as well.

    More likely than not, where there are cases of transfer mispricing, MNCs would always step forward and rectify the situation.

    This is so because being in the corporate and business environment, getting caught by authorities in doing illegal activities will most likely cause serious damage to business integrity and reputation.

    Compliance is one of the most stringent as far as I understand from a corporate culture perspective, or at least for cases I have seen.

    The Kota Belud MP also suggested that there was not enough information disclosed by MNCs, hence it is hard to trace IFF due to transfer mispricing. I beg to differ.

    There are actually considerable amount of information disclosed in the Form C for monitoring and triggering transfer pricing or tax audits.

    In addition to related companies’ transactions that need to be disclosed as explained earlier, companies will also need to disclose details of main shareholders in Part P of the Form C if it is a controlled company.

    Similarly, the related party’s transactions and details are disclosed in the notes to profit and loss accounts; and disclosure requirements are even more stringent if it is a public-listed company.

    The Kota Belud MP has brought out the point where MNCs were using tax havens as a conduit for the IFF.

    I do not deny this happening, but based on experience, a lot of MNCs have a strong requirement in terms of substance over form and more often than not, IRB is able to pick up these structures in the first instance.

    Let us not forget that our very own Labuan, an international financial centre, is deemed a tax haven by other foreign jurisdictions. It would be interesting to know how much financial transactions flow through Labuan.

    Perhaps, the question to ask is what is wrong with our current monitoring, enforcement and implementation system that despite having the necessary laws and conducting rigorous audits, there are still such leakages. This is something that the Kota Belud MP should look into.

    Local conglomerates and GLCs

    While I have mentioned that MNCs are subjected to more scrutiny on its cross-border transactions, the same cannot be said for local conglomerates and government-linked companies (GLCs).

    Based on past experience, local conglomerates and GLCs have not been the main focus of IRB and I have not seen as much transfer pricing audit being carried out (perhaps this has changed).

    Mind you, local conglomerates and GLCs have a lot of cross-border dealings and transactions as well.

    Only a few days ago, Prime Minister Najib Razak announced that an additional RM22 billion (US$7billion) of tax was collected for 2011 to plug leakages.

    Let’s us then theoretically apply the same collection amount to the 2009 figure, taking into account half - i.e. 50 percent is caused by the GER - and it still leaves US$16.43 billion (RM50.9 billion) unaccounted for.


    Could all this amount due to transfer mispricing caused by MNCs? How much of this unaccounted amount can be apportioned to local conglomerates and GLCs? Do they also have some form of tax haven structures in place as well? And I have not yet mentioned dealings of the rich and powerful individuals.


    This is something I would love to find out and I do agree with the Kota Belud MP on this with regards to a more detailed analysis on Malaysia.


    Bribery, theft and kickbacks


    Interestingly, what has not been pointed out by the Kota Belud MP is that Malaysia’s IFF was also caused by CED, which relates to illicit transfers of the proceeds of bribery, theft, kickbacks, and tax evasion.


    It is pointed out in the study that Malaysia is the only country where IFF is caused by a comparable portion of CED and GER.


    So what does this mean? It is effectively saying that an IFF totaling US$21.47 billion (RM66.6 billion) in 2009 alone was due to the activities of involving bribery, theft, kickbacks and tax evasion.


    The comparable size of 50 percent to transfer mispricing is definitely an alarming cause of concern itself, would it not?


    It is not known what proportion relates to bribery, theft, kickbacks and tax evasion.


    So far, where tax evasion is concerned, there has not been any reported case where large MNCs were caught in such an act, which carries a fine and/or imprisonment with an additional penalty of 300 percent on amount undercharged.


    And the inspector-general of police has openly acknowledged that such IFF is not something new and is aware of such leakages. So my question would be what has been done to address this?


    This is extremely worrying as there are no accounts or methods to track such IFF, as these outflows are not available to public eyes.


    Instead of trying to just point fingers to the MNCs, I believe efforts should be channeled by the government to work on addressing these issues. I rest my case.




    ADRIAN NG is a transfer pricing specialist and has worked with multinational companies across various industries ranging from manufacturing, trading, electronics, automotive, property development, construction, power, oil and gas, amongst others.

    py

  9. #9
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    Good! More supply contracts for scanners. More commission. What about cars driving out of the country? Do we need car-scanners as well like those used in the ports?

    M'sia uses scanners to stem money smuggling



    Malaysia is installing scanners to detect bank notes at airports and border crossings to curb illegal money outflows believed to be in the hundreds of billions of dollars over the past decade.

    The move comes after Washington-based watchdog group Global Financial Integrity said in a recent report that Malaysia lost US$338 billion (RM1.03 trillion) between 2000 and 2009 to such outflows, ranking it fifth in the world.

    The Star daily quoted customs deputy director-general Zainul Abidin Taib as saying seven such scanners were already operating at KL International Airport and the rest would be installed by the end of the year.

    A customs official confirmed the report to AFP.

    Prime Minister Najib Abdul Razak announced in December a special task force to check the illegal flight of funds.

    He has come under fire from the political opposition which accuses his government of massive corruption, incompetence and inefficiency that is costing the country dearly.

    Global Financial Integrity said Malaysia was fifth behind China, Mexico, Russia, and Saudi Arabia in illicit outflows.

    Its report did not specify the causes of the Malaysian outflows but a earlier report by the group said possible causes were corrupt business practices and the large population of about 2 million illegal foreign workers in the country.

    - AFP
    py

  10. #10
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    Breaking up wealth concentration

    Lim Teck Ghee
    February 1, 2012


    The time is right for a national discussion on what are the pros and cons of the current economic system which encourages the concentration of wealth and its illegal outflows.
    COMMENT


    The past year has seen the government and the opposition unveil their respective economic reform policies. Even if these reform policies and their attendant programmes are implemented they will not be able to resolve the country’s economic problems. This is because the policies advocated by both sides of the political divide are merely palliative. They do not address the root or fundamental cause of the problem of structural deformation of the country’s economy.


    How has this deformation come about? What are its characteristics? And what can be done to bring about a reversal or correction of the deformation so that we have a really transformed economic system that can live up to its full potential?


    First we need to recognise that wealth in any country – and Malaysia is no exception – is created by economic activity engaged in by individuals or enterprises that bring profits or gains to the entrepreneur. Much of this wealth creation and subsequent accumulation is legitimate. It is based on material reward arising from work (or gift) and is socially and ethically acceptable. It comes from risk-taking and from the social utility and superiority of the products and services generated by the individual or enterprise.


    Wealth generated and accumulated by individuals through legitimate means and conforming to the norms of justice and fairness is not only desirable but beneficial to society and the economy.


    But what about wealth that is created or amassed by less than legitimate or illegitimate or illegal means? Is it a minor or non-issue and do we just ignore it as is the case with the Barisan Nasional government?


    Outflow of massive illegal wealth accumulation

    One important clue to the massive wealth capture by illicit means in Malaysia was exposed recently by the Global Financial Integrity, a US-based watchdog.


    In its study on “Illicit Financial Flows from Developing Countries” it estimated that Malaysia was fifth in the world on cumulative total illicit financial flows (IFF) since 2000.


    For 2009 alone, IFF (non-normalised) amounted to approximately U$47 billion (approximately RM145 billion at the exchange rate of RM3.1 = US$1) and over the cumulative nine years, total IFF amounted to US$350 (approximately RM1,086 billion).


    Two methods of estimation were used in the study, one being the World Bank residual model (using the change in external debt or CED), and secondly, trade mispricing (using the Gross Excluding Reversals method or GER).


    Through the balance of payments (a component of CED), it captures unrecorded capital leakages i.e. illicit transfers of the proceeds of bribery, theft, kickbacks, and tax evasion. Outflow of unrecorded transfers due to trade mispricing was captured under the GER method.


    Based on the study, Malaysia’s nine-year average normalised i.e. conservative IFF, amounted to US$14.2 billion (42%; RM43.9 billion) due to CED while GER accounted for $19.6 billion (58%; RM60.8 billion). Meanwhile, average non-normalised IFF was US$15.4 billion (44%; RM47.5 billion) due to CED and US$19.6 billion (56%; RM60.8 billion) due to GER.


    MNCs and Illicit Financial Flows

    According to the study, “illicit flows involve capital that is illegally earned, transferred, or utilised and covers all unrecorded private financial outflows that drive the accumulation of foreign assets by residents in contravention of applicable capital controls and regulatory frameworks. Hence, illicit flows may involve capital earned through legitimate means such as the profits of a legitimate business”.


    If taxes were levied on the illegal outflows, the country’s finances would have benefitted to the tune of close to US$100 billion. When the GFI’s findings were made public recently, the finger of blame for the massive outflows was placed by the MP for Kota Belud, Abdul Rahman Dahlan, on multinational corporations (MNCs). Indeed, MNCs have been a convenient scapegoat for transfer pricing woes in developing countries where they have major operations.


    One local observer – a specialist in transfer pricing – has demolished this accusation for Malaysia. According to his letter of Dec 27, 2011 to Free Malaysia Today, “transfer pricing has been the one of the most scrutinised subjects by the Malaysian Inland Revenue Board since the Transfer Pricing Guidelines was introduced [in 2003].”


    He has argued that “more likely than not, where there are cases of transfer mispricing, MNCs would always step forward and rectify the situation. This is so because “getting caught by authorities in doing illegal activities will most likely cause serious damage to business integrity and reputation.”


    He concluded that “compliance by MNCs is one of the most stringent as far as I understand from a corporate culture perspective, or at least for cases I have seen.”


    So if MNCs are not the culprit for the illicit financial outflows, who are the real culprits?
    The Global Financial Integrity study has noted that besides transfer pricing outflows – MNCs alone are not to blame for this; local conglomerates and GLCs also play the same game with greater insider knowledge – IFF was caused by illicit transfers arising from the proceeds of bribery, theft, kickbacks, and tax evasion.


    Malaysia is in fact the only country where IFF is caused by a comparable proportion of transfer and non-transfer pricing transgressions.


    Real culprits in illegal wealth accumulation

    While the study has been helpful in providing some hard data on the quantum of the illicit financial outflows, it does not provide much assistance on other key details such as who are responsible for the outflow; the countries of fund relocation; etc.


    At this stage, we can only hazard a guess as to the likely individuals or parties involved in the non-transfer pricing illicit outflow. The most likely culprits are those who have been able to accumulate enormous wealth and who for various reasons find it expedient or necessary to conceal their wealth accumulation as well as to diversity their wealth havens and assets away from Malaysia.


    The GFI study does not cover the illicit wealth accumulated locally and not yet remitted to foreign shores. The size of this locally retained illicit wealth is likely to be several if not many times more than that sent abroad.


    A crude estimate of the extent of legal wealth concentration in the country can be obtained from the 40 individuals identified by Forbes as the richest billionaires for Malaysia. Collectively this group was worth $62.5 billion in 2011. In addition there must be many other extremely wealthy individuals who have avoided making the list through their ability to conceal their wealth and others who though not making the top 40 list still possess enormous wealth.


    The most widely rumoured name not making the Forbes list has to be Taib Mahmud, the chief minister of Sarawak, who together with his family is reputed to have shares in more than 330 companies in Malaysia alone and more than 400 companies around the globe worth several billion US dollars.


    Various quarters have questioned the legitimacy of the wealth accumulation engaged in by the chief minister. A recent article in the blogsite Sarawak Headhunter provides in-depth details into what is alleged to be the income stream of the chief minister’s financial vacuum machine.


    These include:

    1. Income from timber licences
    2. Surcharge on timber exports
    3. Kickbacks from timber shipping companies
    4. Agency and other fees levied on shipping companies
    5. Privatization of government companies
    6. Illegal logging receipts
    7. Federal government contracts
    8. Alienation of state land to plantations

    State contracts

    The chief minister has refuted these claims and has argued that that his daughter’s considerable property empire was amassed through the daughter and son-in-law’s business acumen in investing wisely the gratuity which Taib earned from his earlier service in the federal government.


    This may well be true but if so, it needs to be substantiated by an opening of the financial records and bank accounts of the family and the companies owned or controlled by the family in Malaysia and abroad. Only then can the authorities and public determine the truth of the allegations of financial and political impropriety.




    That the chief minister and his family own an extraordinary amount of wealth – held locally and abroad – at least is not denied. Some idea of the enormous size of the Taib family wealth emerged when Taib’s daughter-in-law filed a RM400 million claim on her estranged husband, Mahmud Abu Bekir Taib, in court recently, including what she claims is her share of property worth RM300 million.


    These tantalizing details of the extraordinary wealth accumulation by Taib and a small group of Malaysians show a common pattern. Firstly, they have all been beneficiaries of the BN government and its policy aimed at working with an elite few individuals in driving the economy forward.


    Many if not all of the names that appear on the Forbes list are regarded as cronies of past prime ministers Dr Mahathir Mohamad, Abdullah Ahmad Badawi and the present Prime Minister Najib Tun Razak, and are widely perceived as owing their considerable wealth to their political loyalty to BN.


    All the business empires of the former “Sugar King” Robert Kuok, Genting Highlands’ late Lim Goh Tong, Public Bank’s Teh Hong Piau, YTL’s Yeoh Tiong Lay, Astro’s Ananda Krishnan, Air Asia’s Tony Fernandez and the rising Syed Mokhtar Al-Bukhary – deservedly or undeservedly – are seen as built on government preference and patronage. This connection is what has provided them with head starts and privileged monopolies without which their enterprises could never have come about, let alone flourish.


    Getting to the bottom of how the business empires of our richest Malaysians have taken shape may be a useful way of dealing with the thorny question of how wealth concentration – whether legitimately derived or under a cloud of illegitimacy – has occurred.


    We should have no illusions about the obstacles that lie ahead of such investigative efforts. We should also be mindful that in countries where illegal wealth accumulation by the leaders of impoverished countries has drawn national and international ire, attempts at recovery of the wealth, much of which has been spirited abroad and stashed in overseas banks and assets, has been a long-drawn and difficult process.


    Admittedly the hope for any confiscation of illicit or illegitimate wealth is distant and dim. The time may not even be ripe to insist on a full-blown opening up of the records and having the truth come out on how the crème de la crème of our business and political leaders have accumulated their fortunes.


    But there may be need for public scrutiny in a few special cases in Malaysia despite the concern that such efforts may be construed as an anti-capitalist or anti-BN witch hunt.


    National discussion on wealth accumulation

    The time is right at the least though for a national discussion on what are the pros and cons of the current economic system which encourages the concentration of wealth and its illegal outflows on such a systemic basis, and whether this is the right economic model for the country.


    The time is also right to focus on sectors and processes which have been the main playgrounds of unfair or illicit wealth accumulation; and to implement actions aimed at decisively containing or neutralising them.


    Best practice examples are readily available for example, in the natural resource sector of countries with the same natural wealth as us. These countries such as Norway have been able to avoid the mistakes that we have made in exploitation of our mineral and forest resources which have permitted opaque policies and procedures, and condoned corrupt or shady businesses that have reaped windfall illicit gains.


    For the national discussion on wealth concentration and outflows to take place, we need to break the conspiracy of silence by our political elites that have befitted from the system and that have collaborated in the accumulation of illicit wealth and wealth generated from dubious means.


    We need the professionals to play their role. We need more studies by academics and civil society to uncover where illicit and less than legitimate accumulations are taking place and what can be done to plug up leakages and bring to justice the offenders and culprits. We need more whistle blowers to step forward.


    Discussion needs to be followed by action, whether by the Barisan or Pakatan government.

    This action needs to be more than just the tweaking of economic policy as envisaged by the Pakatan parties. It needs to be a fundamentally new paradigm of development based on the de-concentration of wealth and its more equitable distribution.

    New paradigm of development

    The radically new paradigm of development that puts the spotlight on the wealth of the country (within and outside) as well as on the wealthy, and with a major focus on the eventual breaking down of wealth concentration – beginning with illicit wealth – is needed for three reasons.


    Firstly, it is a superior approach to the narrowly race-based New Economic Policy model that has dominated the country’s economic life and which is based on a simplistic caricature of affirmative action policy.


    Secondly, our oil wealth is rapidly depleting and our treasury is depleted. Going after wealth that has been illegally accumulated or rightfully belongs to the state will provide the country some breathing space until we get our act together on the other pieces of the bigger economic transformation jigsaw.


    The final reason is that the primary cause of poverty and stunted development in Malaysia is an economic system that promotes excessive concentration of wealth. So long as the excessive concentration of wealth exists, our poverty and deformed development problem will remain unresolved.


    It has been said that economics is not only about production and wealth creation. It is also about morality, and the first moral principle is that the strong owe a duty towards the weak. It is the role of government to ensure that the strong and wealthy fulfil their duty and not to encourage them in wrongdoing in their obsessive wealth accumulation.
    Lim Teck Ghee is the director of Centre for Policy Initiatives.

    Also read:

    Illicit outflows: Investigate Malaysia’s heavy losses

    Malaysia’s illegal capital outflow tripled in last decade
    py

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