How corruption, geo-politics and the IMDB Scandal is pushing Malaysia towards China

A dark shadow has been cast over US – Malaysian ties in past few years following the revelation of a scandal involving significant members of the South East Asian country’s political establishment. The Malaysian Prime Minister and his associates stands accused by the US authorities of siphoning funds from the flagship 1MDB (1 Malaysia Development Berhad) fund, causing a rift between Malaysia and the US. Beijing sensing a geo-political opportunity soon sought to strengthen its ties with Kuala Lumpur. Now speculation is rife that this newly flourishing relationship could push Malaysia and then the rest of South East Asia into Beijing’s arms.

Malaysia’s 1MDB fund was founded with noble intentions with an ambition to make sober investments guided by experienced financiers that would provide revenues for the Malaysian state and bolster its bid to credentials to become a financial hub. But in 2013 a disillusioned ex-employee of Petro Saudi (a firm closely associated with IMDB) approached the independent journalist Rewcastle Brown who had a track record of uncovering corruption in Malaysia with a confidential data dump that painted a picture of a major scandal at IMDB, which led to her digging deeper. At the same time financial analysts were querying why the fund was not producing the profits that it should be.

The story was followed up by the Wall Street Journal and soon law enforcements agencies including the US Justice Department had a major cross border investigation on their hands involving a search for a missing USD 3.5 billion from IMDB, some of which could be traced to suspicious assets including mansions in Los Angeles, corporate jets, Monets and other fine art, bankrolling the Hollywood movie The Wolf of Wall Street. The US Justice Department discovered that a total of USD 3.5 billion had been diverted into a USD 1 billion fraudulent venture between IMDB and PetroSaudi, a USD 1.4 billion bond issue which ended up in Swiss companies and a further USD 1.3 billion which ended up in Singapore based accounts.

The investigations eventually identified a number of senior government officials including the Malaysian Prime Minister Najib Razak and his associate, the man at the centre of the investigation, Jho Low, a Harrow educated playboy. These two along with family members and government officials are under investigation from Malaysian and foreign authorities from embezzling from the fund. Razak and Low have strongly refuted the allegations and the Prime Minister has acted to ruthlessly remove anyone who questioned him around the scandal including the Deputy Prime Minister, but he remains under pressure from prosecutors and the Malaysian public as the investigations continue.

Under this assault from the US law enforcement Razak has lashed out against Washington, a long-time ally, hoping to scare the US into backing off and perhaps also contemplating future long term power shifts in the region Malaysia has sought closer ties with China.

China represents Malaysia’s biggest trade partner to which it sells petroleum products, palm oil and natural gas, while buying significant amounts of Chinese manufactures, industrial equipment and consumer goods. Razak has sought to take things one step further and cultivate military ties with China. So far in reality this amounts to a deal to buy some Chinese coastal naval vessels, conduct some joint military exercises and exchange warm words. However this shift along with the solid economic ties between the two set the scene for a relationship to flourish in the future, unless the US reacts.

The US were content to put Razak in the cold following the corruption allegations, but the elections and subsequent shift towards Beijing by Philippine President Duterte and suddenly South East Asia looks far more pro-China. For some time much of the region has been at logger heads with Beijing over disputed islands in the South China Sea as well as concerns about China’s commercial dominance. How the Trump administrations acts is anyone’s guess, but riling allies and opponents alike is almost certain, so the region’s politics look set to remain in flux.

Behind the scenes Chinese state owned firms have been supposedly helping Malaysian officials hide the IMDB losses through infrastructure deals such as the East Coast rail scheme. China Communications Construction Company which cut a deal to develop a rail line along the coast of Malaysia, the project financing offered the country a generous low rate of interest – but documents received by the Sarawak Report alleged that the country had already signed up to a high interest loan which would in effect cover the IMDB losses.

Chinese firms also bailed out IMDB assets in a more open manner, China General Nuclear Power Corp and China Railway Construction Corporation took stakes in Malaysian companies connected with IMDB which helped reduce the funds high levels of debt.

China giving a helping hand to the Malaysian government in a bind undoubtedly gives it leverage over Kuala Lumpur, particularly as long as Najik Razak remains in power. The question is how they will use their power, will we see Malaysia back down from its claims in the South China Sea, break decisively from the US and accept a new reality of Chinese regional hegemony.