Graft in Malaysia’s Defense Ministry

Defence Talk.com (24/9/07): Najib Tun Razak, Malaysia’s defense minister, finds a fountain of cash in military purchases.

Despite the fact that the country’s borders have been largely secure for 40 years, Malaysia’s Defence Ministry has for decades been available to provide a river of money to defense ministers, the ruling United Malays National Organisation and any of the Sandhurst-educated generals who could get their hands into the till.

But if three separate contracts over the past several years are any yardstick, Najib Tun Razak, who became defense minister in 1999 and kept the portfolio when he became deputy prime minister, appears to have mastered the game far beyond the expectations of any previous defense leaders. Opposition figures say the three contracts, one for Russian Sukhoi jet fighters, a second for French submarines and a third for navy patrol boats, appear to have produced at least US$300 million for UMNO cronies, Najib’s friends and others.

Describing “the mundane but important element of patronage,” Foreign Policy in Focus, a think tank supported by the Institute for Policy Studies in Washington, wrote in a 2005 article that “many foreign arms manufacturers generally used well-connected Malaysians as their lobbyists for contracts. The commission paid to such representatives is estimated to range from 10 to 20 percent.” Even prior to the 1997 Asian financial crisis, Southeast Asia, which hasn’t had an external war in decades but is rich enough to spend plenty on guns, was the world’s second-largest arms market after the Middle East, representing about 20 percent of the world’s purchases.

By the end of next year, Malaysia is expected to have 18 Sukhoi-20MKM jets intended to replace 14 US-made F-5Es, which have been in service for two decades. Two Sukhois were delivered this year, and the Malaysian Air Force also has 18 MiG-29N Fulcrums.

All three of the contracts, which were approved under Najib and have been widely cited by the opposition, fit well into Foreign Policy in Focus’s patronage scale. Bringing the three together, and taking a new look at their associations, is instructive. They have been forced back into public attention by the continuing trial of Abdul Razak Baginda, one of Najib’s closest friends, who is on trial for his life in a suburban high court along with two of Najib’s bodyguards for the murder of Altantuya Shaariibuu, a Mongolian translator who was shot in the head on October 19, 2006, and then blown up with C4 explosives available only from Malaysia’s military.

According to testimony in the trial, Altantuya accompanied her then-lover Abdul Razak to Paris at a time when Malaysia’s defense ministry was negotiating through a Kuala Lumpur-based company, Perimekar Sdn Bhd, to buy two Scorpene submarines and a used Agosta submarine produced by the French government under a French-Spanish joint venture, Armaris. Perimekar at the time was owned by a company called Ombak Laut, which was wholly owned by Abdul Razak.

The contract was not competitive. The Malaysian ministry of defense paid 1 billion euros (RM 4.5 billion) to Amaris for the three submarines, for which Perimekar received a commission of 114 million euros (RM510 million). Deputy Defense Minister Zainal Abdidin Zin told the Dewan Rakyat, Malaysia’s parliament, that the money was paid for “coordination and support services” although the fee amounted to a whopping 11 percent of the sales price for the submarines. Altantuya, by her own admission in the last letter she wrote before her murder, said she had been blackmailing Abdul Razak, pressuring him for US$500,000. She did not say how she was blackmailing him, leaving open lots of questions.

Spending for defense accelerated across the board after Najib, called “the driving force” behind Malaysia’s military modernization program by Foreign Policy in Focus, became defense chief. The shopping list, the think tank reported, “includes battle tanks from Poland, Russian and British surface-to-air missiles and mobile military bridges, Austrian Steyr assault rifles and Pakistani anti-tank missiles. Kuala Lumpur is also negotiating to buy several F/A 18s, three submarines from France and an unspecified number of Russian Suhkoi Su-30 fighter aircraft.

It was the Sukhois that have become the second controversial purchase brokered by Najib. The deal, worth US$900 million (RM3.2 billion), was through a Russian state company, Federal State Unitary Enterprise 'Rosoboronexport' on May 19, 2003. IMT Defence Sdn. Bhd. was appointed the local agent for the Russian company and received 12 percent of the purchase price, US$108 million (RM380 million). The principal figure and chairman of IMT Defence is Mohamad Adib Adam, the former chief minister of Malacca, previous Land and Development Minister and a longtime UMNO stalwart.

The involvement of IMT Defence only became known because in March 2005, a former director of IMT, Mohamad Zainuri Mohamad Idrus, filed suit against several Adib-related companies, alleging that Adib and his sister, Askiah Adam, “wanted to prevent him from exposing the reality of the Sukhoi deal.” In 2006, Mohamad Zainuri lodged a police report alleging that Adib had stolen the US$108 million (RM 380 million) commission that was supposed to be channeled to the company.

According to Mohamad Zainuri’s report, Adib had secretly registered a new company in the federal island of Labuan, Malaysia’s offshore banking center, bearing a name similar to IMT Defence Sdn. Bhd., allegedly in order to channel the commission illegally to the new company. The report was then sent to the Commercial Crime Investigations Department Headquarters. No report, however, has ever been released to the public.

Then, over the last few weeks, a third military scandal surfaced. Malaysia’s Auditor General, in a report tabled in Parliament on September 7, alleged that a contract to build naval vessels given to PSC-Naval Dockyard, a subsidiary of Penang Shipbuilding & Construction Sdn Bhd, which is owned by another UMNO crony, Amin Shah Omar Shah, is near failure.

PSC-Naval Dockyard was contracted to deliver six patrol boats for the Malaysian Navy in 2004 and complete the delivery by last April. Those were supposed to be the first of 27 offshore vessels ultimately to cost RM24 billion plus the right to maintain and repair all of the country's naval craft. But only two of the barely operational patrol boats had been delivered by mid 2006. There were 298 recorded complaints about the two boats, which were also found to have 100 and 383 uncompleted items aboard them respectively.

The original RM5.35 billion contract ballooned to RM6.75 billion by January 2007. The auditor also reported that the ministry had paid out Rm4.26 billion to PSC up to December 2006 although only Rm2.87 billion of work had been done, an overpayment of Rm1.39 billion, or 48 percent. In addition, Malaysia’s cabinet waived late penalties of Rm214 million. Between December 1999, according to the Auditor General, 14 “progress payments” amounting to Rm943 million despite the fact that the auditor general could find no payment vouchers or relevant documents dealing with the payments.

The auditor general attributed the failure to serious financial mismanagement and technical incompetence stemming from the fact that PSC had never built anything but trawlers or police boats before being given the contract. Once called “Malaysia’s Onassis” by former finance minister Daim Zainuddin, Amin Shah was in trouble almost from the start, according to a report in Singapore’s Business Times in 2005. The financial crisis of 1997-1998 meant he was desperate to find funds to shore up ancillary businesses, Business times reported.

After a flock of lawsuits, the government ultimately cut off funding in 2004 amid losses and a net liabilities position. Boustead Holdings effectively took control from Amin Shah, reducing him to non-executive chairman.

According to the British group Campaign Against the Arms Trade, “Transparency International (UK) estimates that ‘the official arms trade (across the world) accounts for 50% of all corrupt international transactions’ and considers that ‘a conservative estimate of the level of commissions paid is 10 percent It needs stressing that this refers to the ‘official’ arms trade...Arms deals often involve huge sums of money and are always shrouded in secrecy. This combination renders them liable to corruption. Corrupt payments can generate a demand for weaponry where none should exist, potentially diverting resources from social needs, including health and development.”

It isn’t just the airplanes or the tanks or the ships themselves. A multi-engine plane, for instance, means that separate raiders can win contracts for different engines, different avionics, literally dozens of different items.

In the 1980s in particular, Malaysia became famous for two complete boondoggles, the first the purchase of British Alvis Scorpion tanks. Although the tank was supposed to be a lightly armed, fast-firing, lightly armored weapon, gun runners dealing with Malaysian military figures in managed to lumber the Scorpions by exchanging the recommended Rolls-Royce gasoline engines with slower diesel ones because the engine manufacturer managed got to the procurement team.

Another gun runner contracted to exchange the original recommended .75 millimeter gun for a .90 millimeter one so big that it had to be leveled each time a new shell was jacked into the chamber, meaning it was slow-firing. The gun was so heavy that the turret’s aluminum races had to be replaced with steel ones, making the vehicle so top-heavy that troops using it were afraid it would topple over. So instead of a fast-firing, lightly-armed and maneuverable weapon, the Malaysian army ended up with a tank that would only go about 60 km/hour instead of 90 and had to be stopped virtually every time it fired, which would have made it a sitting duck for an enemy, had there been one in the first place.

Likewise, Malaysian specifications required a wheeled armored car that could be loaded into an airplane and flown to East Malaysia in case of trouble with Indonesia or Singapore. But the contract for South African Sibmas wheeled 6x67 armored personnel carriers, armed with 90mm Cockerill guns, came up with a vehicle so big that the tires had to be deflated before it could be loaded into an airplane.

When local newspapers reported on the vehicles’ lack of military effectiveness, they were threatened with prosecution under Malaysia’s Official Secrets Act and the scandal was shelved.

But, said a foreign defense attaché privately at the time, “I hope to god Malaysia never gets into a war. They couldn’t get out of their own footprints.”