Combating the accumulation of wealth, concentration

THE The recent revelation that authorities are investigating the offshore assets of Malaysians involved in the Pandora securities for the source of their wealth and whether they may have been acquired illegally from public funds is welcome and overdue.

According to Datuk Seri Azalina Othman Said, Minister in the Prime Minister’s Department (Legal and Institutional Reforms), investigations are being launched, taking into account that some of the names mentioned have previously held government posts.

“These revelations underscore the importance of educating the public about suspected wealth of certain individuals. The Rakyat must know how those named (in the document) obtained or amassed their vast wealth, which is said to be stowed offshore.”

Azalina said so in a parliamentary response to Mohammed Taufiq Johari (Sg Petani-PH) on the developments surrounding the investigation into the disclosure of the Pandora papers and whether the government intended to present the findings to Parliament.

Why limit investigations to Pandora papers?

In fact, limiting the investigation to the fraud of public funds and illicit wealth accumulation identified in the Pandora papers may only examine the tip of the iceberg of the larger phenomenon of illicit wealth accumulation in Malaysia.

Since coming to power, we have seen the government embark on various economic reform measures.

Even if these reform policies and related programs are implemented, they will not be able to solve 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 in the country’s economy.

How does this deformation come about? What are its characteristics? And what can be done to reverse or correct the deformation so that we have a truly transformed economic system, capable of realizing its full potential?

The process of wealth accumulation and concentration undoubtedly plays a key role in the healthy or stunted growth of an economy.

First, we must recognize that wealth in every country – and Malaysia is no exception – is created through economic activities by individuals or corporations that bring profit to the entrepreneur.

Much of this wealth creation and subsequent accumulation is legitimate.

It is based on wages and is socially and ethically justifiable.

It arises from the willingness to take risks and from the usefulness and superiority of the products and services generated by the individual or company.

The wealth generated and accumulated by individuals through legitimate means and in accordance with the norms of legality, justice and fairness is not merely desirable. It also benefits society and the economy.

But what about wealth created or accumulated through less than legitimate or illegitimate or illegal means that is unexplained?

Is it a minor issue or not and do we just ignore it like previous governments did?

Outflow of massive illegal wealth accumulation

A key lead into the massive illegal asset scoop in Malaysia was previously uncovered by Global Financial Integrity (GFI), a US-based regulator.

In its study on Illicit Financial Flows from Developing Countries, it estimated that Malaysia has ranked fifth in the world for cumulative illicit financial flows (IFF) since 2000.

For the decade studied, the average IFF (unnormalized) was approximately US$41.85 billion (approximately RM145 billion at the exchange rate of RM3.1 = US$1) and over the cumulative 10 years the total IFF to US$418.54 billion (RM1.086 trillion).

Two estimation methods were used in the study, the World Bank residual model (using change in external debt or IED) and trade mispricing (using gross inverse method or GER).

The balance of payments (a component of CED) captures unrecorded capital outflows, ie illegal transfers of proceeds of bribery, theft, kickbacks and tax evasion.

The outflow of unrecorded remittances due to trade mispricing was recorded using the GER method.

Should the 2013 study be updated by the Treasury Department, it is almost certain that the same trend but a much larger amount of unrecorded financial outflows will result.

MNCs and illicit financial flows

According to the study, “illicit flows include capital that is illegally earned, transferred or used, and encompasses all unrecorded private financial outflows that drive the accumulation of foreign assets by residents in violation of applicable capital controls and regulatory frameworks. Therefore, illicit flows may also include capital earned through legitimate means, such as the profits of a legitimate business.”

If the illicit outflows were taxed, the country’s finances would have benefited $100 billion or more, assuming a 25% tax rate.

When the GFI results were released earlier, multinationals were initially blamed for the massive outflows.

Indeed, multinationals have been a convenient scapegoat for transfer pricing problems in developing countries where they do large businesses, although local conglomerates and government companies like our GLCs have also been found to engage in similar practices.

A local observer – a transfer pricing specialist – had previously refuted this allegation for Malaysia.

According to him, “Since the introduction of the Transfer Pricing Guidelines (in 2003), transfer pricing has been one of the most scrutinized topics by the Malaysian Inland Revenue Board.”

He has argued that MNCs “would most likely always step up and rectify the situation in cases of transfer abuse. Because “being caught by the authorities in illegal activities will most likely cause serious damage to the integrity and reputation of the company”.

He concluded that “multinational company compliance is one of the strictest that I understand from a corporate culture perspective, or at least for cases that I have seen”.

If this defense of MNCs is valid and acceptable, and if MNCs are not the culprits for the illicit financial outflows – there are critics who argue that the fairly widespread tax avoidance of MNCs should be considered tantamount to illicit financial outflows – then who are the real culprits ?

The GFI study found that, in addition to transfer price outflows, IFF was also caused by illegal transfers resulting from proceeds of bribery, theft, kickbacks and tax evasion.

Malaysia is a country where IFF is caused by a similar proportion of transfer pricing and non-transfer pricing overruns.

The next part will examine this problem in more detail and discuss what can be done to counteract this enormous drain on the nation’s financial resources.

First of a two-part article on Combating Wealth Accumulation and Concentration.

Lim Teck Ghee’s Another Take aims to demystify social orthodoxy. Comments: Combating the accumulation of wealth, concentration

Russell Falcon

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