Wednesday, December 21, 2011

Illicit, Illegal, Not Quite Right

Ok, second speech, this time from Lim Guan Eng:

Pakatan blames BN for turning Malaysia into ‘king of black money’

KUALA LUMPUR, Dec 16 — Pakatan Rakyat (PR) leaders faulted the Barisan Nasional (BN) government today for bleeding the country’s coffers through corruption, saying its mismanagement of the economy had turned Malaysia into the “king of black money”.

Pointing to the Global Financial Integrity’s (GFI) findings that Malaysia had lost RM150 billion in 2009 through the siphoning of illicit money, the leaders warned of a bleak future for the country should the ruling pact be allowed to continue its reign.

According to the Washington-based financial watchdog, the country also lost RM927 billion between 2000 and 2008, with Malaysia’s loss in terms of illicit capital flight at RM1.07 trillion in 10 years. DAP secretary-general Lim Guan Eng said it was time to get rid of “the robber barons in this country”, reminding Malaysians that the staggering loss of funds through illicit capital flight could never be recovered…

…The Penang chief minister blamed projects like the scandal-ridden Port Klang Free Trade Zone; the RM52 billion Bumiputera share scandal; the RM250 million National Feedlot Centre controversy; and the government’s multibillion ringgit submarine purchase as some of the causes behind the staggering loss of funds…

…PKR vice-president Nurul Izzah Anwar said she was “fearful” of Malaysia’s future and the government’s purported penchant for fashioning development initiatives to gloss over alarming realities…

…Unless the administration begins to plug the leaks through good governance, added the Lembah Pantai MP, “Malaysia will be looking at a future filled with illegal outflows”.

I’ve analysed and commented on the GFI report before – here. I’m not going to repeat what I’ve already said, there’s nothing new that’s changed in the meanwhile.

For a summary: the methodology used in the GFI report doesn’t capture “illegal” flows, only uncategorised flows. Given that apart from offshore currency convertibility Malaysia has almost no exchange controls to speak of, it’s a stretch to label all unaccounted flows as “illicit”.

The BOP data includes non-cash flows as well, not just money leaving the country. That means if I make a profit from an overseas venture and leave that money outside the country, it counts in the BOP data as well. Malaysia’s external assets that have been accounted for total RM900 billion as at 2010, from just RM226 billion in 2001 – a near four-fold increase. Malaysia is one of those rare birds – a developing economy that is also a net international creditor. The government has explicit supported Malaysian GLCs and companies to expand operations overseas over the past decade – think there’s a link?

Some of the capital loss can also be explained by transfer pricing of cross-border transactions for tax purposes within MNCs, which dominate Malaysia’s trade. And some of it is also probably due to money trying to circumvent China’s capital controls – a full sixth of the reported RM1 trillion leaving the country is tied to Malaysia’s trade with China.

So it’s not a given that Malaysia’s outward capital flows is directly tied to governance or is a result of corruption. The way the numbers are calculated in the GFI report means that perfectly legitimate outward investment would be classified as “illicit”. I said in the comments to my previous post on this issue, “Their position seems to be that if you're a developing country, it's a ‘crime’ for anybody to take money out. But if we had excess capital, it'd be a crime not to put it to some use.” To me, that’s still true.

Here’s a thought experiment for you: If every member of Parliament (292 including the Dewan Negara) had an NFC-sized kitty of RM250 million each and took that money out of the country, that would only amount to RM73 billion, not even close to the numbers quoted for Malaysia.


  1. Well said! Sometimes its really frustrating how they manage to come to such a coclusion. If based onnthose illicit outflow of funds then Malaysia would not be in existance anymore!

  2. Granted that the GFI findings may have lumped in legitimate outflows with the illegal/illicit. But the general concensus is that Malaysia's balance of payments have been in negative territory for some years now and that's substantially due to capital flight. Like China, people in Malaysia take their money overseas (sometimes never to return) because they feel that foreign shores offer better educational opportunities for their children, a better health system or simply just a better life for them and their family - and this dissatisfaction leading to capital flight is caused by dysfunctional/counter-productive government policies.

  3. Dukuhead, I don't doubt that dissatisfaction with governance is leading some Malaysians to take their money out. Thing is, while the desire might be there the usually is not. The number of households with unencumbered net liquid assets is pretty small. Most Malaysians' net worth is tied up in their homes, not cash or financial instruments. I don't think individuals are contributing much to capital flight. Fully half of the RM1 trillion that has left the country comes from trade price discrepancies, not something individual households would be involved in.

  4. The illicit figures are a bit hard to accept. That is more than 10% of Msia GDP. If we add the non illicit outflows, Msia Economy would have tanked.

    But then again, Taib asset empire overseas for example needs to be investigated.

  5. I don't think it's hard to accept at all. Half the outflow is from trade mispricing, which suggests MNC's; e.g. Intel, Seagate, Wrstern Digital and the like. For the other half, consider that Malaysian companies are increasingly entrenched regionally - for example, something like half of Malaysian owned palm oil plantation acreage is now on in Indonesia. Maybank and CIMB have been active in buying up financial companies in Indonesia and Vietnam among others. Petronas is digging wells and building capacity in Central Asia and Africa.

    How much is CMS worth? It looks big on an individual scale, but in corporate terms, they're bit players. Not to say MACC shouldn't have a look, but the scale of the outflows suggest something more fundamental going on. It might be a better priority to investigate MNC transfer pricing practices. How many tax dollars are we losing through that channel alone?