THE BANK BUMIPUTRA SCANDAL: MORE TROUBLE AHEAD FOR MALAYSIA'S MAHATHIR?

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000101050001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: April 22, 2010
• Sequence Number: 1
• Publication Date: March 5, 1985
• Content Type: REPORT

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Central Intelligence Agency
Washinvton,D.C.2050S
DIRECTORATE OF INTELLIGENCE
5 March 1985
The Bank Bumiputra Scandal:
More Trouble Ahead for Malaysia's Mahathir?
Summary
The release in January of an investigative
committee's report on the financial scandal
involving Malaysia's government-owned Bank Bumiputra
has fueled speculation of high-level government
complicity and a coverup. Prime Minister Mahathir's
government has already been damaged because of its
poor handling of the affair. We believe
incriminating disclosures against his administration
or his party would be a serious blow and possibly
bring about his ouster. If nothing else, we believe
Mahathir is factoring the scandal into his
calculations on whether to hold early elections,
possibly late this year.
The Bank Bumi Scandal Unfolds
The reputation of Bank Bumiputra (Bank Bumi), the second
largest bank in Southeast Asia, was tarnished in 1983 by the
questionable operations of its Hong Kong subsidiary, Bumiputra
Malaysia Finance (BMF). BMF was heavily involved in lending to
three Hong Kong Chinese property speculators during Hong Kong's
property boom in the late 1970s. When the property market began
to weaken, BMF--unlike other banks in the colony--continued to
extend credit to these real estate concerns. Following the 1981-
82 collapse in the property market, BMF lost nearly $1 billion in
loans that had been made to these concerns. (See Appendix)
This memorandum was prepared by Office of
East Asian Analysis. Information available as of 25 e ruary
used in its presentation. Comment and queries are welcome and
may be directed to Chief, Southeast Asia Division on
EA M 85-10043
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Hong Kong businlessman George Tan figured heavily in BMF's
lending operations. Based on BMF documents seized by Hong Kong
police during their investigation of a BMF official's murder, Tan
and his associate were charged with fraud and conspiracy for
making ""false and misleading statements about their debt-ridden
empire. Testimony during the murder trial disclosed, moreover,
that BMF continued to authorize loans to Tan long after his
conglomerate admitted it could not pay its debts.
Circumventing Accountability?
Until recently Kuala Lumpur's response to the BMF loss was
surprisingly restrained. Prime Minister Mahathir admitted BMF's
lending practices were imprudent and pledged action if management
malpractices were uncovered, but he downplayed the bank's
culpability, maintaining that the property market collapse had
affected all Hong Kong banks. It appeared that the government's
strategy was to contain the problem while looking for the best
way to bail out Bank Bumi, and last September it announced the
takeover of the troubled bank by the cash-rich national oil
company, Petronas. 25X1
According to the US Embassy, public reaction to the Petronas
takeover was generally favorable. Many Malaysians, however,
believed that the government was attempting to avoid
accountability. Speculation of a government whitewash was fueled
by the fact that after nine months of operation none of the
findings of the Committee of Inquiry Mahathir had established in
early 1984 had been released. Public, press, and political
opposition calls for a royal commission to investigate the affair
gained strength late last year, especially from Malays who wanted
to know why a government-owned bank chartered for their benefit
had been so involved in helping Chinese property speculators.
The release of a Committee of Inquiry report early this year
marked a sharp change in the government's handling of the BMF
affair, and we believe it reflects the government's concern about
the political damage it has suffered. We also believe it is the
clearest sign to date that the government will pursue
1. Tan headed the Carrian group of companies, one of BMF's
three main borrowers in Hong Kong.
2. In July 1983, a Bank Bumi official sent to Hong Kong to
conduct an extensive internal audit of BMF's lending operations
was strangled. The accused killer linked the incident to Tan.
Moreover, on the day of his death, the Bank Bumi official was
questioning the authorization of a pending $4 million loan to
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investigations into the scandal in an effort to salvage Bank
~,umi's reputation and respond to mounting political pressure to
account for the Hong Kong lending.
Linkages to the Mahathir Administration
Circumstantial evidence suggests that the scandal extends
into the Mahathir administration. As a government-owned bank,
Bank Bumi is closely monitored by both the Finance Ministry and
Central Bank and no important decisions are made without their
agreement or knowledge. It is unlikely that the government was
unaware of Bank Bumi's increase on lending limits for its
overseas branches to allow more funds to be channeled to Hong
Kong. This action was taken after word of Tan's difficulties had
dried up funds from other sources.
Trade and Industry Minister Razaleigh's name is most
frequently mentioned in the context of the scandal because
several of the BMF officials involved were close associates which
he helped appoint.3 Mahathir also had close ties with those
implicated, as well as with Nawawi Mat Awin, under whose
chairmanship Bank Bumi continued lending to Tan.
The most potentially damaging aspect of the affair is the
alleged connection of Tan to officials of the United Malays
National Organization (UMNO), headed by Mahathir and the dominant
party in the government coalition.
3. Razaleigh took over the Trade and Industry portfolio in
July 1984, after having held the Finance portfolio since 1976.
4. Nawawi served as chairman from April 1982 until December
1984 when Bank Bumi's board of directors was replaced in the wake
of the Petronas takeover. Although Nawawi has not been accused
of any wrongdoing at the bank, he has been harshly criticized for
his failure to act quickly and decisively as facts about BMF's
errant operations became known.
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Assessing the Political Damage
Thus far no direct links have been established between
Mahathir and the corruption at BMF. Nonetheless we believe, the
hint of association has damaged the po'.itical standing of the
Mahathir administration, which was elected in 1981 under a banner
of clean government.
In our view, the government also has been tarnished because
the scandal involves the financial arm of the politically-
sensitive New Economic Policy. Bank Bumi was founded expressly
to help Malaysia's comparatively poor Malay businessmen. The
bank's huge losses on loans to Hong Kong Chinese businessmen are,
therefore, particularly embarrassing to the ethnic Malay
leadership.
Equally damaging to the administration has been the
perception that the government has only half-heartedly pursued
the issue. The secrecy of the government's investigation--
defended as necessary under Malaysia's Banking Secrecy Laws--and
a year's delay after the problems surfaced in effecting any
management changes at BMF have made the government suspect.
Moreover, despite the vigor the government has shown in pursuing
the BMF debacle more recently, many businessmen and bankers
believe that the government is using the six accused BMF
officials as scapegoats in an effort to avoid implicating senior
government officials.
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Potential Trouble Spots
There are several other problems connected with the Bank
Bumi scandal which could further damage the Mahathir
government. We would not rule out the possibility, moreover,
that if damaging evidence continues to materialize, Mahathir
could be forced to steD down under pressure from certain elements
in UMNO's new guard.
--The George Tan trial. Testimony in the ongoing Tan trial in
Hong Kong may implicate Malaysian government officials. We
believe that the Hong Kong Government, under pressure from
Malaysia, may block release of testimony damaging to Kuala
Lumpur. Trial proceedings could be leaked, however, and we
believe the Hong Kong press would not hesitate to publish such
information.
--The trials of the BMF officials. We would be surprised if
trials of the six BMF officials implicate high-ranking government
officials. If the BMF officials are returned to Kuala Lumpur to
stand trial, we believe they may be "bought off" to deny any
If the BMF officials cannot be coopted, we
believe the extradition effort to return them to Malaysia will
conveniently fail.
--Committee of Inquiry report. It is unlikely that the
Committee of Inquiry's final report (due to the government in
April) will implicate high-level government officials. In the
event that it does, however, the government holds control over
the public release of the report and would be able to expunge
incriminating portions. On the other hand, a publicly released
abridgement would provoke charges of a government whitewash.
--More corruption at Bank Bumi. Following the latest Inquiry
report, former Prime Minister Hussein Onn, now an adviser to
Petronas, publicly alleged that Bank Bumi "has a domestic loan
problem as bad as the BMF loan scandal." He contends that the
bank extended large amounts of credit backed by doubtful
securities. If Onn's allegations--which some observers believe
may be well-founded--are proven, Mahathir will find the affair
much more difficult to handle.
--The Islamic opposition party, PAS. It is probable that PAS
will continue its attempts to capitalize on public speculation of
government corruption. Although Mahathir contends that the
standard under which the government operates obviates the need
for the more Islamic state demanded by the Islamic
fundamentalists in PAS, he may find it necessary to make some
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concessions to deal with PAS' criticisms. These might take the
form of stricter enforcement of Islamic law on the Muslim
population, such as prohibition of alcoholic beverages, or making
gambling illegal.
Early Elections?
The public perception of "guilt by association" on the part
of the Mahathir administration and the threat of additional
damaging disclosures may enter into Mahathir's decision whether
to call for elections earlier than April 1987, when his current
term expires. Elections could be called as soon as mid-1985.
The timing, in our view, would fit conveniently with the schedule
of the recently announced criminal investigation by a special
police panel. The Attorney General has announced that the panel
will take at least a year to complete its work. Presumably this
could give Mahathir time to stage elections before any criminal
charge could be brought against BMF officials and trials
Other factors also argue in favor of early elections,
namely a currently strong economy, and the political boost given
UMNO by its victory over PAS in a recent hotly contested by-
election.
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APPENDIX
Bank Bumi/BMF Chronology
October 1982: First sign of trouble at BMF with the news that
two of its main borrowers are experiencing financial crises.
Bank Bumi characterizes media reports as "speculative, misleading
and unfair." Extent of BMF's problem loans estimated in the
$250-300 million range
December 1982: Bank Bumi quietly dispatches a team to Hong Kong
to conduct an internal audit. Malaysian Central Bank also
investigating BMF.
March 1983: Central Bank governor admits BMF officials strayed
from usual banking practices and imprudently overexposed the
bank. Magnitude of the affair discounted, however, with
assurances that Bank Bumi could handle the situation.
June 1983: Bank Bumi's annual report, released three months
late, reveals little new information. Outstanding loans of
approximately $700 million shown for BMF, virtually all listed in
good standing.
July 1983: Mahathir breaks his silence and admits BMF's heavy
lending to a handful of Hong Kong property concerns was imprudent
and pledges action if investigations disclose management
malpractices.
BMF assistant general manager found strangled in Hong Kong.
September 1983: George Tan and associate arrested in Hong Kong
and charged with fraud and conspiracy. Extent of BMF outstanding
loans to Carrian also disclosed--a staggering $530 million.
During a press conference, Mahathir confirms press reports that
five senior bank officials accepted approximately $600,000 in
consultancy fees in connection with the costly loan exposure at
BMF. Although these fees are technically legal, Mahathir terms
them morally wrong and indicates the officials will be asked to
leave the bank shortly.
November 1983: First major shake-up in Bank Bumi's boardroom.
Ousted are BMF's two-man board of directors, Lorrain Osman and
Hashim Shamsuddin, and Rais Saniman, a BMF alternate director and
Bank Bumi senior general manager for international lending.
Estimates of BMF's potential losses rises to $700 million--nearly
its entire loan portfolio.
Parliamentary call for the establishment of a royal commission to
investigate the BMF affair is denied by Finance Minister
Razaleigh. Central Bank investigation deemed sufficient.
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January 1984: Under political pressure, Mahathir compromises and
establishes a three-member Committee of Inquiry. This closed-
door commission, however, has no legal power to summon witnesses,
subpoena documentary evidence from outside Bank Bumi, or require
testimony under oath.
April 1984: Testimony from the murdered BMF official's trial in
Hong Kong links the defendant to Razaleigh and other unnamed
cabinet officials. Connection vehemently denied by Razaleigh.
Extent of BMF's loss now estimated at nearly $1 billion.
September 1984: Government announces Petronas takeover of Bank
Bumi to restore financial solvency.
November 1984: First interim report of Committee of Inquiry
released. The 13-page expunged version proves disappointing. It
does, however, contain details of lending limit increases by the
bank's overseas branches to allow more funds to be channeled to
the Hong Kong branch after word of Carrian's difficulties dried
up funds from all other souces.
Second and third reports issued later in the month. Reports
detailed specific loans which involved irregularities warranting
police action and recommends Bank Bumi file criminal complaints
against the BMF officials. Committee also discloses it is unable
to account for about half of the $1 billion BMF funds allocated.
December 1984: Government files two complaints with Malaysian
police in connection with wrongdoing alleged in the committee's
reports. Complaints related to payment of consultancy fees and
granting of a $40 million loan without Bank Bumi approval.
Attorney General announces creation of a special police panel to
investigate BMF operations. He states that the government's
decision to prosecute will rest solely on this criminal
investigation which will take another year or two.
January 1985: Government releases latest Committee report which
alleges 10 cases of corruption on the part of six named BMF
officials. Police complaints also lodged against those named and
court petition to freeze their assets granted. A $47.5 million
civil suit also filed against them for repayment of bad loans
made to George Tan in 1983. Extradition efforts begun to return
former BMF Chairman Lorrain Osman--who is alleged to have
received $12.5 million in bribes--to Malaysia from the UK.
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SUBJECT: The Bank Bumiputra Scandal: More Trouble Ahead
for Malaysia's Mahathir?
Original - OEA/SEA/ITM
1 - Alan Kitchens, State
1 - Joe Winder, State
1 - Corazon Foley, State
1 - Paula Causey, State
1 - Lt. Col. William Wise, Pentagon
1 -
1 -
1 - Richard Childress, NSC
1 - Lt. Col. Richard Rice, Pentagon
1 -
1 -
1 -
1 - B i l l Quinn, Treasury
1 - Bob Emery, FRB
1 -
C/DO/PPS
1 - DDI Rep CINCPAC
1 - OEA/C/SEAD
1 - OEA/DC/SEAD
1 - OEA/SEA/IB
1 - OEA/NEA
1 - OEA/CH
1 - D/OEAA
1 - OEA/Research Director
1 -
1 ~
1 - PDB Staff
1 - C/NIC
1 - NIO/EA
1 - DDI
1 - Executive Director
1 - CPAS/ILS
5 - CPAS/IMC/CB
1 - C/PES/DDI
1 - OCR/ISG
1 -
1 -
1 -
1 - DDI/OCR/EA/A
OCR
C/Analytical Group
A/NIO Economic
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