Saturday, December 31, 1983

Malaysian BMF Scandal 1979 Part 2


BOLEH MALAYSIA FINANCE (BMF) PART TWOPDFPrint
Posted by admin   
Sunday, 23 August 2009 09:27
By Hakim Joe  
The US$2.5 billion loss by BMF and the subsequent Carrian Group bankruptcy were in fact Asia’s largest bank losses and largest bankruptcy case at that time. Lorrain Esme Osman became a household name in Malaysia and his intentions to takeover Bank Buruh was now left in tatters. 
Continued from Part One
During the trial of the murder of Jalil Ibrahim, Malaysian Mak Fook Than was found guilty and sentenced to life in prison. Mak vehemently denies the murder charge and told the court that he was merely acting on instructions to dispose the body and that the murder was committed by an unnamed Korean nationality who in turn was taking direct orders from a man named George (no surname). It was later discovered that Jalil was strangled with a white cotton bathrobe belt in his hotel room and his body stuffed into a large suitcase. A porter at the Hong Kong Regent Hotel remembered carting the heavy suitcase through the lobby into a taxi trunk.  
Prior to the murder and Carrian’s announcement of liquidity problems, BNM (under Special BNM Investigator Lee Kong Lam) officially investigated the BMF affairs and made a full report to the BNM Governor, Tan Sri Aziz Taha. In the Bank Negara Inspection Report on BMF (as of 30 June 1982), it stated that BMF has over exposed themselves with a total loan amount of HK$5.042 billion of which HK$3.246 billion was offered to the Carrian Group and its subsidiaries, “the bulk of which was granted on an unsecured basis.” The Inspection Report also pointed out illegal payments of Director’s fees and Consultancy fees to the directors of BMF and also to the Chairman of BBMB, Dr Nawawi Mat Awin. 
Under normal circumstances, BNM would have immediately “moved in” to clean up the mess without hesitation as with instances dealing with the Oriental Bank, Perwira Habib Bank, D&C Bank and Bank Buruh among others. However, these were extraordinary times concerning a Malaysian Government owned bank (Permodalan Nasional Berhad owns 70% of BBMB) and a bank chairman that has been tipped to become the next Minister of Finance. After many sleepless nights (I’m sure) and six weeks after the stinging Inspection Report has been finalized and submitted to the BNM Governor only did Tan Sri Aziz Taha meet up with Dr Nawawi. Any other banks would have been wrapped up, signed, sealed and delivered to BNM in half that time! 
On the 12 November 1982 meeting, Dr Nawawi personally assured Tan Sri Aziz Taha that “everything in under control and that the internal audit team of BBMB was at that moment carrying out its own audit on BMF.” Tan Sri Aziz proceeded to brief TDM on 16 November 1982 and again on 5 January 1983 on the BBMB/BMF issue. On 2 April 1983, Tan Sri Aziz officially wrote to TDM (10 paged letter on official BNM letterhead) to “provide a clearer picture as to how BMF got itself into this predicament.” (Classic case of ass covering but who can blame him?) He ended the letter seeking yet another appointment with TDM to “discuss the BMF affair and how to deal with the accounts of the Bank Bumiputera Group taking into consideration requirements of the company law, banking law, accounting practice, and possible repercussions from these problem loans as far as the public is concerned.” 
The time (delay) in which BNM failed to react and his seeking of the PM to settle such issues shows the political clout UMNO has over BNM. The provisions under Part VI of the Banking Act 1973 confer to Bank Negara the absolute power to supervise and control banks doing business in Malaysia. These powers include mandatory provisions to investigate the books, accounts and transactions of each licensed bank and of any branch, agency or office outside Malaysia opened by a licensed bank in Malaysia. The provisions under Part VI of the Banking Act 1973 additionally empower Bank Negara to take appropriate measures to direct the operations of the bank, including the power to assume full control of the bank, in the event that the bank considers that it is likely to become unable to meet its obligations or is about to suspend payment. BNM failed miserably in this aspect of its responsibilities but it can also be said that the BNM Governor was powerless to do anything after UMNO’s intervention, and had to resort to writing a letter to TDM (five months later) to remind him of the magnitude of the BMF problem. 
Here comes the kicker – during this period of time when BNM was delaying taking action against the BBMB senior management team, BMF and BBMB released the US$76 million to the Carrian Group to purchase the very same US Assets in which BMF had failed to secure on its loans to George Tan. 
The Inquiry Committee’s BMF Final Report also stated that at this juncture of time, the BNM Governor (Tan Sri Aziz Taha) and the Finance Minister (Tengku Razaleigh) have been effectively excluded from handling the BMF affairs and that decisions were now made entirely by Dr Nawawi and possibly Tun Ismail Ali (ex-BNM Governor and then current PNB Chairman) in consultation with TDM. 
How did this debacle be allowed to occur in Hong Kong where the banking industry is super-duper ultra heavily regulated? Ah, loopholes! In Hong Kong, all Deposit-Taking Companies (DTC) are governed by the Hong Kong Deposit-Taking Companies Ordinance, Chapter 328, and comes under the direct jurisdiction of the Commissioner of the Deposit-Taking Companies (who is also the Commissioner of Banking). Section 22(1) specifically prohibits a DTC from granting loans or credit facilities in excess of 25% of its paid-up capital and reserves (here comes the loophole) unless they are covered by a form of guarantee acceptable to the Commissioner. BMF was effectively exempted from this restriction when BBMB provided a Letter of Comfort to the Hong Kong Commissioner to the effect that BBMB would fully support the obligations of BMF. 
However, in 1981 the Commissioner introduced certain changes to the Ordinance whereby only Letters of Comfort officially approved by the parent bank and supervisory authorities of the country of incorporation of the parent bank (in BBMB’s case, the BNM) would be accepted. On 9 April 1981, BBMB issued another Letter of Comfort and this was followed up by an authorization letter by BNM (on 30 April 1981) to the Commissioner of Banking in Hong Kong. The BNM letter was signed by one Mohd. Tawfik bin Abdullah, Pengurus Jabatan Pengawalan Bank, Bank Negara Malaysia, stating that “BNM did not have any objections to BBMB’s issuance of a Letter of Comfort.” From these two letters, BMF was henceforth permitted to operate outside the normal fiduciary controls of the Hong Kong regulatory authorities. 
How was BNM able to issue such a letter? A check on BMF’s accounts and commitments would have raised alarms as the Carrian Group’s loans alone amounted to HK$1.063 billion which is 7,939 percent of BMF’s share capital and reserves, and 129 percent of BBMB’s share capital and reserves! If BNM refused to issue the letter, it would have stopped BMF’s loans to the Carrian Group from ballooning to US$3.246 billion. 
When the Inquiry Commission interviewed the Hong Kong Commissioner of Banking with regards to the Letters of Comfort issued by BBMB, the Commissioner told them that “the request for a guarantee with respect to DTC under the Deposit-Taking Companies Ordinance to be supported by specific approval of the Board of a parent Bank and with the knowledge of the Central Bank was intended as an indirect hint to the Bank concerned to exercise a greater degree of supervision on the lending activities of its subsidiary DTC.” Basically the amendment to the Ordinance in 1981 was also an indirect hint by the Commissioner of Banking to Central Banks to carefully monitor their banks and their international subsidiaries. 
BMF’s auditors (Touche Ross) must also accept culpability as they have failed to make pertinent comments on the disproportionately huge loan portfolio to the Carrian Group in its Audit Report of 1980. Arthur Tse of Touche Ross did however send an internal memorandum to Dato Mat Noor, senior partner of Hanafiah Raslan and Mohammad (BBMB’s auditors) informing that “…we have refrained from commenting on the unduly large portion of loan portfolio to Carrian and associates. It is because we were politely told that it was a management affair, not really an audit matter. In view of the sensitiveness of the situation, we thought that the best course was to keep you informed so as to let the parent bank monitoring the situation…” 
In the Audit Report of 1981, Touche Ross told BMF that they were unable to issue an unqualified audit opinion as there remained a lot of unanswered questions regarding the adequacy of collateral securities and values, and that the lack of proper guarantee of borrowers’ obligations forbid them from signing off on the Audit Report. On 15 March 1982, Dr Rais, on behalf of BBMB signed a Letter of Guarantee “undertaking to assume all the liabilities, obligations or commitments” of BMF. As a result, Touche Ross issued the unqualified audit opinion for the BMF accounts for the year ending 31st December, 1981. With this Letter of Guarantee, the responsibility of ensuring whether adequate provisions have been made in the BBMB accounts in relation to BMF was shifted to Hanafiah Raslan and Mohammad as BBMB auditors. (Talk about shifting blame…) Because of Touche Ross’s initial unwillingness to sign off on the BMF’s audit, BBMB’s audit report was also “left hanging”. Two days after Touche Ross signed the BMF’s audit report, Hanafiah Raslan and Mohammad signed the BBMB audit report. There was however no mention of the unsatisfactory security position of BMF in relation to the Carrian loans in the BBMB Audit Report. BTW, Dr Rais’s Letter of Guarantee was never formally ratified by the BBMB Board of Directors and was not mentioned in BMF Audit Report by Touche Ross. 
On 21 February 1983, Finance Minister Tengku Razaleigh issued a report stating that “there is nothing amiss in the BMF dealings” and that the loan situation was nothing more than a normal business problem. In the report, Tengku Razaleigh also indicated that the BBMB Board was “responsible directly to the Prime Minister” and that Bank Negara Malaysia had no jurisdiction over BMF in Hong Kong. 
In the Audit Report of 1982, Touche Ross indicated on its Audit Report (note number 8) that the provisions for bad and doubtful debts were inadequate, especially the HK$4.325 billion to the Carrian Group. Touche Ross was asked by BMF to drop Note 8 from its Audit Report and it was agreed between them on 28 February 1983 that BMF would provide Touche Ross with a Letter of Indemnity endorsed by the Malaysian Central Bank (BNM) against any liability arising from the removal of Note 8 from its BNF Audit Report of 1982. 
On the next day, Dato Hashim informed Touche Ross that BBMB Group Chairman, Dr Nawawi considered the bank to be unable to issue such a Letter of Indemnity to them as the Malaysian Companies Act forbids it. However, BBMB was prepared to issue a formal Letter of Undertaking regarding the liabilities of BMF in return for Touche Ross dropping Note 8 from their Audit Report. On 17 March 1983, Dr Nawawi wrote to Touche Ross giving them the BBMB Board of Directors’ guarantee undertaking to assume all the debts and liabilities of BMF in connection with loans given out to customers who become insolvent. Once again BMF’s report on such liabilities was shifted to Hanafiah Raslan and Mohammad. In the BBMB Audit Report of 1982, it was stated that, “…the Government of Malaysia has given an undertaking that it would back the Bank fully in case the Bank faces any difficulties in meeting its obligations…” However, this time around, BBMB’s auditors were not as easily convinced as in 1982 (maybe they were taking a cue from Touche Ross). The BBMB Audit Report was only signed by Hanafiah Raslan and Mohammad on 13 June 1983 which caused BBMB to defer their AGM. 
In the Report of the Auditor-General on the 1982 Federal Government Accounts, there was a reference to this purported BBMB Guarantee which states, “The notes to the account relating to these balances (BBMB 1982) indicate that the Government had given an undertaking that it would back the Bank fully should the Bank face any difficulties in meeting its obligations. The Treasury has however informed me that it has not issued a written statement of such undertaking other than the statement to that effect given by the Minister of Finance in reply to questions in Dewan Rakyat on 15 March 1983.” 
Touche Ross was sacked by BBMB after signing off on the 1982 Audit Report. In the same year, the Carrian Group filed for bankruptcy in Hong Kong. SHKPIL, Kevin Hsu’s public listed company followed suit.  
The Carrian Group was not the only recipient of BMF funds though it was the biggest. Kevin Hsu and Eda Investment Limited were among others of such recipients of BMF loans. However, the Inquiry Commission was unable to investigate them as such due to the fact that they were excluded from the terms of reference of the Inquiry Committee as BBMB as the “Appointing Authority” only specified the Carrian Group. It was known then that as of September 1982, the Kevin Hsu Group of Companies had loans from BMF to the tune of HK$586 million and had close business dealings with specifically four companies, namely Asiavest, Knife & Dagger, Silver Present and Hi-Heated. Asiavest and Knife & Dagger were owned by BMF General Manager Ibrahim Jaffar, Silver Present was owned by BBMB Executive Director Datuk Mohamed Hashim Shamsuddin and Hi-Heated was owned by BMF Alternate Director Dr Rais Saniman,  
As with the Carrian Group’s loans, Kevin Hsu’s loans were also obtained without the necessary and adequate loan securities. In fact Kevin Hsu had to apply for a HK$120,000 loan on 15 November 1984 from BMF just to pay off its auditor fees before they can hold an AGM, and we are talking about a public listed company!  
With over 6,000 pages of incriminating evidence, Malaysian Attorney-General Tan Sri Abu Talib Othman “could not find” any “substantial” evidence to prosecute and moreover his office was not prepared to prosecute any Malaysians for alleged crimes committed outside the country. Prime Minister Dato Seri Mahathir Mohammad (now Tun) called the BMF scandal a “heinous crime” but made no mention of the heinous criminals. 
The Inquiry Commission finished their BMF Final Report in January 1986 consisting of 13 volumes. The BN machinery was up in arms when the full implications of the report were revealed as nobody (not even the Opposition) had expected such comprehensive, unbiased and detailed findings, especially with such a narrow term of reference. A concerted attempt to suppress it was initiated but to no avail after a public outcry. However, only a limit of 2,000 copies was printed and each priced at RM250 per set were offered to the public (Parliamentarians get the copies free except without the 2-volume Special Brief One – Ha! Ha!) and RM250 in 1986 is quite a sum to pay for a report. The Government of Malaysia even attempted to renege on its promises to print the 2,000 copies, quoting General Orders 17 which prohibits written or oral statements that could undermine the Government, and finally agreed to do so only after reclassifying the BMF Final Report as a non-parliamentary paper and to be specifically published in English only. Additionally, because the BMF Final Report is now not a parliamentary paper, the Government of Malaysia need not recognize the Inquiry Commission’s recommendations, let alone implement them.  
The aftermath 
Lorrain Esme Osman fled to London in 1983 to avoid being extradited to Hong Kong to face corruption charges. On 6 December 1985, the British police entered the uptown home of Lorrain Osman to arrest Datuk Hashim who was there on a visit and Lorrain Osman. Less than a year later in 1986, waiving his rights to a Hearing on a Writ of Habeas Corpus in order to avoid extradition to Hong Kong, Datuk Hashim Shamsuddin admitted to assisting in the defrauding of Bumiputera Malaysia Finance Ltd of about HK$1.05 billion. He also admitted that he had accepted HK$15 million in bribes for his corrupt activities. He was initially sentenced to a jail term of 4½ years in Stanley Prison, Hong Kong in 1987 but the Court of Appeal increased his jail term to 10 years after a successful appeal by the prosecution team. 
In that same year, George Tan Soon Gin and Bentley Ho, along with Rogerio Lam and Stephen Lam, the Chairman and a Director of publicly listed Bylamson and Associates (Enterprises) Limited respectively, David Begg and Anthony Lo, both of the accounting firm of Price Waterhouse, as the firm was then known, were all charged with conspiracy to defraud between 1st January 1981 and 31st July 1982.  
The charges against these 6 defendants were that they had conspired to defraud shareholders, or potential shareholders, of Carrian Investments Limited, and/or creditors, or potential creditors, of any other person or company, who might have been induced to accept shares in Carrian Investments Limited as collateral for loans to the 6 defendants or to Carrian Investments Limited, Carrian Holding Limited, or any company in which the 6 defendants had a legal or beneficial interest, by false and misleading statements and by concealments as to the profits, liquidity and financial integrity of Carrian Investments Limited.  
The trial judge was a former Court of Appeals Justice, Mr. Justice Barker QC, who after reading the 25,000 pages of the Crown’s case against the 6 defendants was of the opinion that the defendants had no case to answer. He was proven correct because in 1987 and after a 281-day trial, which cost Hong Kong taxpayers more than $HK40 million, he stopped the trial and delivered his determination: “The defendants had no case to answer.” This is despite a mountain of irrefutable evidence and the fact that gathered evidence also revealed that loans were given without proper collateral. In some instances, they were secured only by post-dated cheques. Additionally, almost 70% of lending by BMF was to the Carrian Group. The bibulous Barker's decision was later trashed by a judicial review of his peers and he was asked to resign from the bench, but there was no going back on his verdict on George Tan. It was later revealed that Barker was good friends with George Tan. Barker retired to Malta where he died. 
Less than one year after the trial in 1988, a former executive of Barclays Asia Limited, the Hong Kong subsidiary of Barclays Bank PLC, was tried for accepting bribes in relation to the Carrian Case. Stuart Leslie Turner was convicted and sentenced to one year jail (1½ after appeals by the prosecution team). 
A leading German banker Dr. Uwe Rameken escaped to Latin America and is still, in theory, wanted by Hong Kong authorities, while his local deputy did 3 years for corruption. 
Lorrain Esme Osman was held at Brixton Prison in UK for 90 months, awaiting extradition to Hong Kong while his lawyers filed one writ of Habeas Corpus after another to keep him out from Hong Kong. ICAC submitted over 30,000 pages of evidence to the British High Court, the Court of Appeals and finally to the House of Lords. This continued until Lorrain exhausted all his legal avenues and was escorted by Scotland Yard on a plane back to Hong Kong in 1992. 
ICAC proffered 43 charges against Lorrain but despite the mountain of evidence, they knew that this was not a cinch-pipe affair. Lorrain was after all only the non-executive Chairman and was not directly involved in the day-to-day operations of BMF. So they offered a deal. One ICAC officer asked of Lorrain, “You have been fighting all this while for the benefit of others. Isn’t it time to do something for your own benefit?” So a deal was concluded. As Lorrain would not plead guilty to corruption and certainly not to all the 43 charges, the Hong Kong prosecutors suggested 1 single charge of financial negligence, which Lorrain finally accepted. 
George Tan was again charged with corruption and fraud in 1992 but his team of top legal representatives kept him out of jail once again. In 1996, he finally pleaded guilty to 2 charges of conspiracy to defraud and received three years in Stanley Prison. He walked out from prison in 1999 a free man. 
Dr Rais Saniman fled to France to avoid being extradited to Hong Kong and remained a fugitive from law but was arrested by French authorities in Paris in 1987. As France did not have any anti-corruption laws, Rais was released as the extradition order fell through. The Hong Kong prosecution team had to amend the initial charges from “corruption” to “conspiracy to defraud” before the gendarmerie rearrested him in 1990. Although the French courts had ruled that the man should be extradited back to Hong Kong for trial, the French government considered extradition unnecessary and revoked the courts’ ruling. Only after repeated extradition applications through French lawyers that the Hong Kong Government was able to persuade the French Constitutional Court to grant leave for them to challenge the French government's refusal. On February 1994, Rais was finally extradited to Hong Kong to face charges of corruption and pleaded guilty to 2 charges and was sentenced to 5 years imprisonment. 
Ibrahim Jaffar was never convicted, even after he admitted to receiving bribes, because he turned Crown witness in the Carrian Case and was offered immunity from both criminal and civil prosecution (from the Hong Kong authorities) and civil liability from BBMB. He was also permitted to keep his job with BMF/BBMB and the bribes he admittedly had taken while he was the GM of BMF were never asked for or returned. 
Warwick Reid, the State Prosecutor who initiated the prosecution of Lorrain Osman was himself sentenced to 8 years imprisonment in March 1990 for financial corruption. 
Mak Fook Than’s lengthy 24-paged statement about his “ministerial business” trip to Hong Kong went missing during the trial. During his interrogation by the Hong Kong police, Mak has admitted that he was in Hong Kong at the behest of a senior Malaysian Minister to collect “some money” from a Malaysian nationality residing in Hong Kong. He denied having said so after the disappearance of his 24-paged statement. 
George Tan Soon Gin of the Carrian Group is not a Hong Kong resident but a Singaporean civil engineer working in Hong Kong (he arrived in 1972) as a project manager for a land development company before he started his own pest-control company and prior to his establishing the Carrian Group. Mr. George Tan continues to be involved in business in Hong Kong and has a house in the New Territories, which he built at a cost of about HK$200 million.  
Gammon House is the current Bank of America Tower in Hong Kong’s CBD.  
Lorrain has retired to London after formally serving 2 months in Stanley prison. (He had in fact already served 6 months at the Lai Chi Kok Detention Centre while awaiting trial, and another 4 months for remission.)  
The Carrian Case is the longest criminal case in Hong Kong judiciary history spanning over 17 years at a cost of HK$210 million and with over 4 million pages of exhibit.  
Rais Saniman is currently an active UMNO member and pro-NEP activist.

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