How does corruption affect Sarawak?Is this a wider problem?

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This investigation provides undercover footage of the corruption and illegality at the heart of governance in Sarawak, Malaysia’s largest state, on the island of Borneo.

For over thirty years, Sarawak has been governed by Chief Minister Abdul Taib Mahmud, who controls all land classification, forestry and plantation licenses in the state. Under his tenure, Sarawak has experienced some of the most intense rates of logging seen anywhere in the world. The state now has less than five per cent of its forests left in a pristine condition, unaffected by logging or plantations and continues to export more tropical logs than South America and Africa combined.

The film reveals for the first time the instruments used by the ruling Taib family and its lawyers to skirt Malaysia’s laws and taxes. It shows how they cream off huge profits at the expense of indigenous people, and hide their dirty money in Singapore.

Taib and the local lawyers we approached denied Global Witness’s allegations of corruption. A summary of their responses is included at the end of the film.

New corruption questions over role of Sarawak Chief Minister and son in waste deal

New information and documents handed to Global Witness and The Centre to Combat Corruption and Cronyism (C4) raise questions about the role of outgoing Chief Minister Abdul Taib Mahmud and his son Mahmud Abu Bekir Taib in a lucrative waste disposal agreement with a German firm. A joint venture was formed between the Sarawak Government and German waste management company Trienekens in 1998, and is still in operation. Trienekens engaged a local company – Sarawak Capital – under the ownership of Taib’s son Mahmud, to provide up to RM6.6m (US$2 million) worth of “consultancy services” as part of the deal.

A memorandum of understanding formalising the joint venture – Sarawak Wastes Management Sdn Bhd – was signed on behalf of the Sarawak Government by Hamid Bugo, State Secretary in the Chief Minister’s Department. The agreement was also signed by Taib’s son, Mahmud Abu Bekir Taib, as a witness to the deal.

“While it is standard that the State Secretary, on behalf of his boss the Chief Minister, would represent the government in such a deal, it is very unclear why the son of the Chief Minister would be witnessing a multimillion dollar agreement between the government and a foreign firm,” said Tom Picken of Global Witness. “The fact that such large fees were paid to Taib’s son’s company as part of that agreement appears to be a conflict of interest.”

Chief Minister Taib remains the subject of a graft probe by the Malaysian Anti-Corruption Commission (MACC), and is stepping down as Chief Minister on 28 February. Taib is expected to be appointed to the position of Governor immediately following this.

A consultancy agreement was drawn up between Trienekens and Sarawak Capital which required payment to Taib’s son’s firm of up to RM6.6 million for “consultancy services”. It is believed that this represented 16.5% of Trienekens’ investment in the joint venture. Under the consultancy agreement, Sarawak Capital was engaged as Trienekens’ “exclusive consultant and advisor to assist TG [Trienekens] in the achievement of its responsibilities and obligations in the JVC [joint venture company]”. Lawyers representing Chief Minister Taib stated that “the particular contract that you appear to refer to was not executed in the terms that you imply.”

Legal opinion of the consultancy agreement that Global Witness has seen is that the contract has characteristics of a ‘sham agreement’. Specifically, it contains no binding contractual obligations on Sarawak Capital in its “Scope of Works”. Instead it lists a range of activities whereby Sarawak Capital only “agrees to offer” services. Furthermore, payment is tied to Trienekens’ proportion of equity in the joint venture rather than being calculated by the nature of the consultancy services (e.g. time costs, lists of personnel etc), and there are no standard termination clauses as would be found in normal consultancy agreements. The only significant binding contractual obligation in the agreement relates to payments due to Sarawak Capital from Trienekens.

“In our view, this agreement bears all the hallmarks of a thinly disguised kickback; it does not appear to commit Sarawak Capital to do anything for this money, and does not seem to make commercial sense,” said Tom Picken.

London law firm Mishcon de Reya, representing Chief Minister Abdul Taib Mahmud and Mahmud Abu Bekir Taib, told Global Witness: “the particular contract that you appear to refer to was not executed in the terms that you imply… our clients deny receiving any ‘kickback’ and/or corrupt payment, whether amounting to 16.5% of an unknown amount or otherwise… you ignore the fact that what you allege to be a 16.5% kickback was paid according to contractual project milestones. These milestones are laid out clearly in the contract… As it was, some of these milestones did not happen, and accordingly the full fee was not paid… SC was a regulated financial advisor and provided genuine commercial services to Trienekens, including conducting feasibility studies, assisting with the operations on the ground and assisting Trienekens to establish itself to its best advantage… The agreement you refer to is not a sham agreement, nor is it evidence of corruption or of “kickbacks”, whether disguised or otherwise.”

Global Witness has seen in many instances where deals of this sort oblige the foreign investor to make payments to politically connected individuals or companies, as a condition upon doing business in the country.

“There is significant public interest in this case being fully investigated by the MACC” said Cynthia Gabriel of C4. “We urge the Najib administration to delay Taib’s ascent to Governorship until the matter has been properly examined. Corruption blights the lives of all Malaysians; we need to mobilise and demand that it is rooted out of government.”

In 2005, Trienekens’ CEO, Hellmut Trienekens, was convicted of facilitating millions of euros in bribes to local officials via Switzerland to build a waste incinerator in Cologne, Germany. These payments were made in 1999, the year after the Sarawak deal was arranged.

Neither Trienekens nor Sarawak Capital responded to Global Witness’ enquiries.

Figure 1
Figure 1. Signatures of the Sarawak parties to the joint venture agreement.
Figure 3
Figure 2. Part of the Scope of Works clause in the consultancy agreement.
Figure 2
Figure 3. Part of the payment clause in the consultancy agreement.

Contact: Tom Picken (UK), Campaign Leader - Global Witness, tpicken@globalwitness.org, +44 (0)781 055 8247.
Cynthia Gabriel (Malaysia), Director of C4, +6012 3792189


HOW DOES CORRUPTION AFFECT SARAWAK’S PEOPLE?

Corruption is destroying the fabric of Sarawak’s society and squandering the state’s natural resources. The region’s indigenous people have borne the brunt of this. Ancestral land to which they have claims has been routinely licensed for logging and plantations, badly damaging their livelihoods and violating their rights under Sarawak and Malaysian law. This has trapped many communities in a cycle of poverty and dependency.

Moreover, corruption affects the future well-being of all Malaysian citizens. This investigation demonstrates how money that should be driving development is being lost to corruption and hidden in secrecy jurisdictions overseas. Malaysia is thought to be the world’s third largest source of such illicit financial flows, which lost the country an estimated US$285 billion (RM863 billion), or over US$43,000 (RM130,000) per household between 2001 and 2010. This is money that could have been spent on improving key services and quality of life for ordinary Malaysians.

IS THIS A WIDER PROBLEM THAN SARAWAK?

The timber rush which occurred during Taib’s three decades in office has spawned some of the world’s largest logging companies. These companies have had a catastrophic effect on forests and indigenous communities in almost every major tropical forested region in the world, and are regularly implicated in major illegal logging scandals.

Global Witness’ analysis shows that Sarawak’s logging companies are currently logging or converting forests to plantations in at least 12 countries. Their operations cover an area of 18 million hectares worldwide, an area roughly three times the landmass of Norway.