The 1MDB scandal saw Malaysia’s former Prime Minister jailed for 12 years with a fine of 210m Malaysian Ringgit (USD $46.8m) - and the end of the 61-year political dominance of the country’s Barisan Nasional coalition political party.
It all started on 22 June 2015 when Thai armed police arrested retired Swiss banker Xavier Justo at his brand-new boutique hotel in Koh Samui, Thailand. Six months later, Justo provided a British journalist with thousands of documents that started a much larger chain reaction. The documents appeared to shed light on massive regulatory compliance breaches and the alleged theft of hundreds of millions of dollars from a state-owned Malaysian investment fund known as 1MDB.
In 2022, several aspects of the scandal resulted in devastating outcomes for those involved. For example, the former head of Goldman Sachs in Malaysia, Roger Ng, was convicted of conspiring to launder money and violating anti-corruption laws. Additionally, the former Prime Minister of Malaysia, Najib Razak, was convicted on charges of criminal breach of trust, money laundering, and abuse of power.
The ongoing 1MDB scandal also aided opponents of the United Malays National Organisation (UMNO) and Barisan Nasional coalition in highlighting corruption within the country’s political system, leading to the party’s defeat in the 2018 Malaysian elections.
UMNO is a founding and principal dominant member of the Barisan Nasional (BN) coalition, which held a monopoly over the country’s political governance since Malaysia gained independence in 1957. Najib was the former President of the country’s UMNO (from 2008) and the Chairman of the Barisan Nasional party (from 2009) until May 2018. The Malaysian Anti-Corruption Commission (MACC) arrested Najib in July 2018, and he was subsequently found guilty of seven counts involving a total of 42m Malaysian Ringgit (USD $9.4m). Najib was also sentenced to 12 years in prison.
The 1Malaysia Development Berhad (1MDB) scheme has been described as “one of the world’s greatest financial scandals”. See more in-depth detail about the 1MDB case here.
In 2019, following the country’s political change and arrest of its former PM, Malaysia reached its high score of 53 on the Transparency International 2022 Corruption Perceptions Index (CPI) - a reflection of the knee-jerk tightening of compliance and regulation in the country since 1MDB made national and global headlines. A new clarity exists about the zero-tolerance policies of regulatory bodies concerning bribery and corruption.
However, the last few years have seen the country’s CPI score slide again. Regulatory authorities are now scrutinising company and individual operations within major firms with a particular focus on insider trading. It is, therefore, more critical than ever for organisations to ensure their people are behaving ethically and avoiding the mistakes of the country’s past (and present) scandals.
SC Issues Harsh Penalties to Uphold Capital Market Integrity
On 13 April 2023, the Malaysian High Court ordered Toh Kai Fatt, the Managing Director of plastics company Ban Seng Plastic Industries & Assembly Sdn Bhd, to pay a penalty of RM2.36 million to the Securities Commission Malaysia (SC) on account of insider trading.
In 2011, Toh acquired 974,000 shares of HPI Resources Berhad (HPI) while in possession of material non-public information (MNPI). The information in question related to a proposed acquisition of HPI by Oji Paper Co. Ltd. and saw Toh make a substantial profit from the deal. However, the fines imposed due to Toh’s insider trading are three times the amount of those profits.
Toh will also need to pay a civil penalty of RM250,000 and costs of RM100,000 to the SC. In addition, The SC has barred Toh from being appointed as a director of any publicly-listed company and from trading any securities on the Malaysian stock market (Bursa Malaysia) for five years.
The SC’s press release about the case explains, “Insider trading is a major concern, and the SC will continue to monitor and take action against any suspicious conduct to protect the integrity of the capital market.”
Insider Trading Under the Microscope
In another recent ruling, the Malaysian High Court recently agreed that the Securities Commission Malaysia (SC) had successfully proven its claim in a civil suit against former Deputy Chairman of Patimas Computers Berhad (Patimas), Raymond Yap, for insider trading.
The Judicial Commissioner ordered Yap to pay a sum of RM3.28 million, an amount three times the losses avoided by him as a result of the insider trading activity. Yap had disposed of 43,823,600 Patimas shares held by Law Siew Ngoh, former Managing Director of Patimas, from June to July 2012. The breach happened while Yap was in possession of non-public information related to audit queries and issues regarding suspicious transactions between Patimas and its top debtors.
In addition, Raymond Yap was also ordered to pay the SC a civil penalty of RM1 million and barred from being a director of any publicly-listed company for five years, commencing 7 April 2022. Patimas was also delisted from Bursa Malaysia on 21 March 2014.
The enforcement of severe penalties (as shown in the Patimas case) demonstrates the intense scrutiny of regulators, including the Securities Commission in Malaysia, on insider trading and related activities right now.
Regulatory Changes Creating Clear Guidance
In recent developments, the Central Bank of Malaysia (Bank Negara Malaysia) released Regulation and Guidance surrounding conduct risk. In particular, the Code of Conduct for Malaysia Wholesale Financial Markets (December 2021) and subsequent Wholesale Market Conduct Practices Guidance.
The market conduct guidance urges wholesale financial market firms to prepare a market conduct risk assessment. This practice involves reviewing the firms’ products on offer, the likelihood and consequence of producing misconduct, and how to mitigate or control the impact. Many risk assessments have found that firms have various surveillance mechanisms but lack a proper risk assessment to gauge overall exposure.
Bank Negara also describes ways in which your organisation can mitigate or manage potential misconduct risk once their risk assessment is completed, including:
By monitoring dealers’ trading activities, you can detect patterns that warrant further scrutiny more effectively.
Technology solutions such as MyCompliance Office (MCO) Trade Surveillance Software can significantly help your firm, even without large volumes of trading activity, if you wish to move away from manual spreadsheets and processes to maintain and monitor internal activity.
This particularly involves monitoring dealers’ written and verbal communications to detect collusion (for example, what was seen globally with benchmark rigging) or the disclosure of confidential information.
Guidance for Detective and Preventive Controls
Bank Negara continues its guidance by highlighting the importance of your internal control environment, including the usage of both detective and preventive controls. Bank Negara talks to:
Gifts and Entertainment
- Robust policies and procedures should be implemented to identify and collate any gifts received or given by employees to clients or counterparties.
- A central register should exist for ease of declaring all gift activities.
- Perform periodic reviews of gifts and entertainment records to detect any irregularities or breaches of policy.
The MCO Gifts and Entertainment Manager module allows firms to record and detect risk within declared gifts and entertainment. It will enable your firm’s policies to be embedded with a rules-based approach to identifying potential misconduct and bribery risk.
Handling of Material Non-Public Information (MNPI) and Chinese Wall Policy
- Firms often come across inside information that could be used to derive financial gain, particularly in capital markets, advisory, corporate lending and research departments.
- Your company needs suitable systems in place to handle the receipt of inside information, wall-crossings (Chinese wall management), and insider lists.
- Further, these insiders must be tracked and monitored for any proprietary trading risk and personal account dealing management.
- You need a distinct physical separation between insiders and other departments.
The MCO Material Non-Public Information and Inside Information module can give your firm confidence that you have documented receipt of inside information, wall crossings, and approval processes and can automate your insider list generation and restricted list management.
Personal Account Dealing
- Your organisation needs the appropriate policies and procedures to deter employees from acting on inside information.
- Implement processes for pre-clearance for requests to trade, in particular for equities.
- Ensure you can perform checks against restricted lists.
The MCO Personal Account Dealing module will help your firm automate the pre-clearance and post-trade review process to make monitoring personal trading activity much more efficient. This includes automatically checking against any internal restricted and watch lists, applying rules based on a user’s group (e.g. a ‘Has Inside Information’ group) and reconciling against trades after execution.
Conflicts of Interest
- Your organisation should maintain a ‘Conflicts of Interest Register’ to identify potential conflicts in your business activities.
- These registers should allow your business units to quickly assess the impact and likelihood of potential conflicts - and what the mitigating actions should be if a conflict occurred. Your register should be reviewed regularly, and when introducing new products, business activities, or changes in business.
The MCO Know Your Risk Module will help your firm prepare a Conflicts of Interest register and facilitate regular reviews of business unit conflicts.
Compliance Rising in Malaysia
At MyComplianceOffice (MCO), we have seen increasing interest from Malaysia-based firms with regard to our Personal Trading and Control Room functionality.
It’s never been more vital for organisations to ensure material non-public information (MNPI) remains in compliance with securities laws and regulations within Malaysia. Unfortunately, many investment and compliance professionals are still using inefficient and error-prone methods to track insider lists, such as static spreadsheets and local files. The critical data contained often does not comply with standardised data management formats in line with regulatory guidelines.
MCO automates and standardises insider trading list management. Our solution identifies people who present potential conflicts due to the nature of their roles. Those with temporary NMPI visibility due to specific deals, corporate events, or publication of financial statements and profit warnings are also included. Compliance professionals can build and manage insider lists quickly and efficiently with our Insider & MNPI Management module.
As compliance continues rising in Malaysia, firms need to ensure they have the right processes and technologies to mitigate risk and avoid the severe penalties imposed for compliance breaches.
Enacting regulatory compliance (in its many forms) is vital for enterprise risk management.
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