THE recent revelation that authorities are probing into the offshore assets of Malaysians implicated in the Pandora Papers on the source of their wealth and whether they may have been illegally obtained from public funds is welcome and overdue.
According to Minister in the Prime Minister’s Department (Law and Institutional Reform) Datuk Seri Azalina Othman Said, investigations are being initiated taking into account the fact that some of the names mentioned have previously held government positions.
“These revelations show how important it is to explain to the public the suspicious wealth of certain individuals. The rakyat needs to know how those named (in the document) obtained or accumulated their tremendous wealth which is said to be stowed offshore.”
Azalina said this in a parliamentary reply to Mohammed Taufiq Johari (Sg Petani-PH) on developments relating to the investigation of the Pandora Papers revelation and whether the government intended to table the findings in Parliament.
Why confine investigation to Pandora Papers
Confining the investigation to the swindling of public funds and illegal accumulation of wealth identified by the Pandora Papers in fact may just be exploring the tip of the iceberg of the larger phenomenon of illegal wealth accumulation in Malaysia.
Since coming to power, we have seen the government broach various 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?
The process of wealth accumulation and concentration is one which undoubtedly plays a key role in an economy’s healthy or stunted growth.
For a start, 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 profit to the entrepreneur.
Much of this wealth creation and subsequent accumulation is legitimate.
It is based on rewards arising from work and is socially and ethically acceptable.
It comes from risk-taking and from the utility and superiority of the products and services generated by the individual or enterprise.
The wealth generated and accumulated by individuals through legitimate means and conforming to the norms of legality, justice and fairness is not only desirable. It is also beneficial to society and the economy.
But what about wealth that is created or amassed by less than legitimate or illegitimate, or illegal means and is unexplained?
Is it a minor or non-issue and do we just ignore it as is the case with past governments?
Outflow of massive illegal wealth accumulation
One important clue to the massive wealth capture by illicit means in Malaysia was previously exposed by Global Financial Integrity (GFI), 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 the decade studied, the average IFF (non-normalised) amounted to approximately U$41.85 billion (approximately RM145 billion at the exchange rate of RM3.1 = US$1) and over the cumulative 10 years, total IFF amounted to US$418.54 billion (RM1.086 trillion).
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.
The outflow of unrecorded transfers due to trade mispricing was captured under the GER method.
Should the 2013 study be updated by the Treasury, it is almost certain that the same trend, but a much larger amount of unrecorded financial outflow, will be the outcome.
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 also 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 US$100 billion or more, assuming a taxable rate of 25%.
When the GFI’s findings were made public earlier, the finger of blame for the massive outflows was initially placed on multinational corporations.
Indeed, MNCs have been a convenient scapegoat for transfer pricing woes in developing countries where they have major operations although it has also been noted that local conglomerates and government enterprises such as our GLCs also engage in similar practices.
One local observer – a specialist in transfer pricing – had earlier rebutted this accusation for Malaysia.
According to him, “transfer pricing has been 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”.
If this defence of MNCs holds true and can be accepted, and if MNCs are not the culprit for the illicit financial outflows – there are critics who argue that MNC tax avoidance which is quite rampant should be considered equivalent to illicit financial flows – who are the real culprits?
The GFI study has noted that besides transfer pricing outflows, IFF was caused by illicit transfers arising from the proceeds of bribery, theft, kickbacks and tax evasion.
Malaysia is one country where IFF is caused by a comparable proportion of transfer and non-transfer pricing transgressions.
The next part will examine this issue more closely and discuss what can be done to address this huge drain on the nation’s financial resources.
First of a two-part article on “Tackling Wealth Accumulation and Concentration”.
Lim Teck Ghee’s Another Take is aimed at demystifying social orthodoxy. Comments: letters@thesundaily.com
