The BMF Scandal – Bank Negara’s Role

Firstly, I wish to protest in the strongest possible terms against the most cavalier and arrogant attitude of the Government in refusing to give MPs adequate time to study the Banking (Amendment) Bill 1983 for the overwhelming majority of MPs would have received the Bill only this morning or yesterday.

As far as the Government is concerned, Parliament is only a rubberstamp and it does not matter if MPs do not know what is in the Bill, for they are only needed to provide the ‘ayes’ to pass the Bill upwards on its way to become law.

The DAP MPs are not prepared to be treated with such contempt and surrender their parliamentary duties to the Cabinet and I believe that the Barisan MPs are not all so supine that none of them could feel outraged by such shabby treatment of MPs. The first reading of the Banking (Amendment) Bill was tabled on July 25 and there is no reason why MPs could not be given earlier notice.

The Parliamentary passage of bills is not a question of MPs shouting their ‘ayes’ when the Government crack its whips, but a full process of deliberation and debate on the pros and cons of the various legislative proposals, which could only be made intelligently if MPs are given time not only to study the Bills but to consult with the various groups in society who are going to be affected and others who are knowledgeable about the subject-matter of the Bill, for MPs are not known-alls or walking encyclopaedia who could stand up and debate on any subject in matter of hours.

This is why we find the quality of parliamentary debate so dismally low for MPs required to debate, and at times to fill up parliamentary time to deny DAP motions from coming up for debate, on subjects they know very little about, without time for them to educate themselves on the subject matter at hand.

For example, the Banking (Amendment) Bill 1983 contains three clauses, the first one on citation of the Bill. The second clauses on ‘Scheme of transfer of the undertaking or property of a licensed bank to another licensed bank’ runs into six pages, while the third clauses on amendment to Section 26A is merely one paragraph.

I am sure that apart from what is stated in the explanatory note of the Bill, the majority of MPs do not know what the Bill is about, for the simple reason that they do not have the time to refer to the 1973 Banking Act and the 1982 Central Bank of Malaysia and Banking (Amendment) Act without which the present amendment means absolutely nothing.


I will discuss Claus 3 of the Bill to amend Section 26A of the Banking Act first, for at a time when the whole country is rocked by the shocking revelations of the $2,500 million loans scandal of Bumiputra Malaysia Finance, the wholly-owned subsidiary of Bank Bumiputra in Hong Kong, this particular amendment is not only ill-timed, but seems to signify a quick and drastic retreat from government proclamations of its seriousness in wanting to ensure integrity and propriety in banking and financial institutions and practises.

When the 2M leadership came to power in July 1981, there was great fanfare about the 2M Government’s determination to clean up corruption, malpractices and mismanagement not only in the government services, but also in areas where public trust are exercised as in the banking and financial fields.

As a result, at the end of 1981, the Government introduced the Central Bank of Malaysia and Banking (Amendment) Bill (which was gazetted on 22nd February 1982) to curb banking abuses and malpractices and to ensure that banks maintain prudent banking practices not only in the interest of their depositors but also of the country’s economy and finance.

Under the amendments, a new Section 26A in the Banking Act prohibit banks from granting advances, loan or credit facilities to their directors, officers or employees or to any firm or corporation in which any of its directors, officers or employees is interested as ‘partner, manager, agent or guarantor’ or has interest. The amendment also defined ‘director’, ‘officer’ or ‘employee’ to include a spouse, parent, or child of a director, an officer or employee.

Under Section 26A(5), all banks are given till December 31, 1982 or such further period as the Central Bank may specify in any particular case to ‘secure the repayment of such advance, loan or credit facility’ which is prohibited under the new section in the Banking Act

Section 26A only provides for three exception to this prohibition on advances, loans or credit facilities by banks to their directory, officers or employee, namely:

• Loans to bank employee or officers provided under the appropriate scheme of service (Section 26A(2));
• Loans to corporations listed on the stock exchange where the directors do not have any material interest (section 26A(4));
• Loans to public companies where the directors do not have any personal interest. (Section 26A(4))

The reasons for this new Section 26A as given to Parliament when introducing the amendment bill by the then Deputy finance Ministerm Datuk Mohd Najib bin Tun Haji Abdul Razak on 8th December 1981 was as follows:

“Larangan tersebut adalah perlu oleh kerana pemeriksaan ke atas bank-bank oleh Bank Negara jelas menunjukkan penyalahgunaan kuasa dan amalan-amalan songsang, terutama oleh Pengarah-Pengarah bank sendiri yang memberikan pinjaman di antara kalangan mereka sendiri tanpa penilaian yang sempurna. Larangan ini juga dijangka dapat menghindarkan pengawai-pengawai bank, terutama sekali pengawai-pengawai eksekutif kanan daripada melibatkan diri dalam perniagaan mereka sendiri tanpa menumpukan masa dan tenaga mereka yang sepenuhnya kepada urusan bank”

However, after a year’s operation of the 1982 Amendment Bill to ‘clean up’ the banking industry, the Government is backing down and is introducing an amendment which would nullify the 1982 amendments to prevent banking abuses and malpractices.

Under the present amendment bill, the prohibition on advances, loans or credit facilities by a bank to its directors, officers or employees expected in the three specified circumstances in Section 26A (2) and (4) could be waived completely by the Bank Negara, with or without conditions!

What is the reason for the Government’s backing down in its campaign to ‘clean up’ the banking and financial malpractices and abuses in the country?

Before the Government comes back to the House to ask for amendments to the 1982 amendments to dilute the powers to check and curb banking abuses and malpractices, the House has a right to expect a report from Bank Negara as to the operation of section 26A of the Banking Act since its gazette on 22nd February 1982.

For instance, as required by Section 26A(5), has Bank Negara been able to get all banks to comply with the 31st December 1982 deadline to ‘secure the repayment of such advance, loan or credit facility’ to their directors, officers or employees, including their spouse, parent or child, under the Section?

Is the Bank Negara in a position to give a bank-by-bank report on whether they have complied with Section 26A(5), or how many such prohibited advances, loans or credit facilities had been repaid by 31st December 1982, how many more had been given an extended period by Bank Negara to secure repayment and the performance record of such extended deadlines? And how many such loans in each bank which had not met the 31st December 1982 deadline, and also not asked for extended period to secure repayment? What is the total amount of such loans, advances and credit facilities for each bank?

In fact, we should ask the more elementary question as to whether Bank Negara has a full list of all such prohibited ‘advances, loans or credit facilities’ for every bank in Malaysia?


It is such banking and financial malpractices and abuses which has led to the BMF’s $2,500 million loans scandal in Hong Kong to three Hong Kong companies, Carrian Investments, Eda Holdings and Kevin Hsu, and the incapacity of Bank Negara to check the gross corruption, malpractices and mismanagement at both Bank Bumiputra and BMF levels.

It was only last Tuesday that Malaysians for the first time had hard information about the magnitude of the BMF loans scandal. The Hong Kong prosecutor, Warwick Reid, revealed in the Hong Kong magistrate’s court that Carrian Investments owed Bumiputra Malaysia Finance (BMF) at least HK$4.6 billion (about $1.7 billion) and no one knows what has happened to almost half the money. As Warwick Reid said: “Of the HK$4.6 billion, about Hk$2 billion (M$769 million) is unaccounted for, no one know where it is, what has happened to it, or who is responsible for it.”

Together with loans to Eda Holdings and Kevin Hsu, BMF’s total loans to these three creditors alone easily exceed M$2,000 million.

With Carrian Chairman George Tan in Hong Kong jail trying to raise HK$51 million ($19.6 million) bail for his release, the once mighty Carrian empire lies in shambles. According to the Hong Kong prosecutor, Carrian owed a total of HK$10.6 billion (M$4 bilion) to creditors, with HK$4.6 billion or some 45% to BMF!

With the impending collapse of the Carrian Group, and the BMF’s possible loss of anything from $1,000 million to $1,500 million or more, which could easily wipe out the entire Bank Bumiputra capital and reserves of $1,200 million, the question must be put as to whether Bank Negara, as presently constituted, is able to promote a sound and modern banking structure and facilitate effective supervision and control of banks and their financial institutions.

It is fortunate that Bank Bumiputra is a bank established with public funds, and the Government is fully committed to back it up, for if it had been a private bank which allows its subsidiary company to lend out monies well in excess of its total capital and reserves and which would have to be written off as ‘bad debts’ there would have been a run on the Bank seriously undermining the entire national economy.

As it is, the BMF’s involvement in the Carrian’s dubious and shady financial deals had sullied and undermined Malaysia’s international financial standing, image and even credit-worthiness, as the once might Carrian empire appears to have been the creation not only of George Tan but also the BMF.

Parliament must take a most serious view of the BMF scandal for its lack of financial propriety, probity and integrity reflects not only on Bank Bumiputra but also on the Government of Malaysia.


This is why I had sought earlier to adjourn the House on a motion of urgent, definite public importance to establish a Royal commission of Inquiry into the entire BMF loans scandal for it is only in demonstrating our clear position of not condoning any financial impropriety and shady deals that we could regain international financial confidence as well as the people’s confidence. However, on the BMF affair, the government appeared to have repealed the principle of accountability.

Thus, although the BMF loans scandal is 20 times more serious than the previous Bank Rakyat fiasco, involving some $150 million, the government’s response had been completely different. In the Bank Rakyat case, the Government, appointed a special enquiry and published its report, the Price Waterhouse report, as well as a White Paper on it. But on the BMF loans scandal 20 times more serious, there is only public indifference and persistent cover-up!

All Malaysians are concerned about the BMF scandal and in particular over the recent injection of $600 million into the Bank Bumiputra shareholders fund by Permodalan Nasional Berhad (PNB). Is the $600 million PNB fund going to disappear into the bottomless pit of Carrian and BMF in Hong Kong?

With the latest development in Hong Kong and the start of the process of liquidation of the Carrian Group, the people have right to know what contingency plans the government has to salvage Bank Bumiputra from being dragged down by the BMF scandal.

Before Parliament is asked to confer greater powers on Bank Negara, as in the case of the present amendment bill, Bank Negara must give Parliament an accounting of its ability to effectively supervise and control banks and their financial operations, especially over the Bank Bumiputra and BMF affair.

I understand that under existing regulations, Bank Bumiputra must get the approval of Bank Negara for all the BMF’s massive loans in Hong Kong to Carrian, Eda and Kevin Hsu.

Why did Bank Negara authorise such BMF loans? Or it is true that Bank Negara had disallowed such BMF loans but had been overridden by more powerful personalities, who rode roughshod over the objection of not only the head of the Securities and Exchange Division of Bank Negara but also the Bank Negara Governor himself

If this is the case, then Parliament must insist on knowing who had overridden the Bank Negara and had been responsible for the BMF $2,500 million loans scandal, seriously and adversely affecting Malaysia’s economic position. This is clearly an exercise of illegal and unconstitutional power by the Executive, and the Parliament must consider ways of providing greater unchallengeable autonomy to Bank Negara before we are asked, as is now, to give Bank Negara the power to decide whether Section 26A should be exempted or not. For there is then the very great likelihood that this new power would be exercised not only Bank Negara, but by the political masters!

Secondly, hadn’t the Bank Negara inspectorate been aware of the gross malpractices and abuses committed by Bank Bumiputra and BMF officials?

Thus, the Asian Wall Street Journal of March 18-19, 1983 reported that Bank Bumiputra director as well as BMF director, Hashim shamsuddin, becomes a director of a tiny Hong Kong company, called Silver Present Ltd., on September 5 1981. His wife, Margaret Rose Pinder, owned half the company.

Three days later, Silver Present received a HK$3.6 million cheque from the account of property speculator Chung Chin-Man’s wife. Two days after the cheque was issued, BMF lent Mr. Chung’s Eda Group US$40 million. The only collateral was 115 million Eda shared with are now virtually of no value as Eda went into liquidation with HK$2 billion in debts.

The Asian Wall Street Journal also reported that on the same day that Silver Presents got the HK$3.6 million cheque, another private Hong Kong company, Knife & Dagger Ltd, received a cheque for the same amount from the account of Mr. Chung’s wife. The Journal reported that the Hong Kong government records indicate that Knife and Dagger’s only shareholders were Carrian Chairman, George Tan and his secretary, Carrie Woo. Knife & Dagger was incorporated in November 1979. In January 1980 the company deposited HK$372,000 with Wing Lung Bank Ltd. To guarantee a banking facility for Ibrahim Jaffar, BMF’s general manager. The Journal reported that at about the same time, Ibrahim also received a Hong Kong $1 million facility guaranteed by Carrian Holding Ltd.


What is shocking is that the persons named in this public fashion did not take any legal action to clear themselves and Bank Negara and the government authorities closed their eyes and ears to the revelations!

Again, what has Bank Negara done with regard to the reported $10-$20 million which Bank Bumiputra and BMF senior executives had received in connection with the BMF loans to Carrian, Eda and Kevin Hsu as one percent commission for the BMF loans in Hong Kong.

The Star’s report yesterday said the four principal officers involved in the BMF loans scandal are Bank Bumiputra Director and BMF Chairman, Lorraine Esme Osman, Bank Bumiputra Director as well as BMF Director, Datuk Hashim Shamsuddin, Bank Bumiputra’s Senior General Manager, Dr. Rais Saniman, and BMF General Manager, Ibrahim Jaffar. I have been told that three of the four are out of the country.

Bank Negara has let the people of Malaysia down badly in the Bank Bumiputra and BMF affair for Bank Negara must bear its full responsibility in allowing a Bank to lend out to one creditor amounts in excess of its capital and reserve together, as in the case of Carrian Group.

There must not only be a Royal commission of Inquiry into the BMF loans, there must be a separate inquiry into the Bank Negara to ascertain why it had fallen down so badly on the Bank Bumiputra and BMF affair.

(Speech by Parliament Opposition Leader, DAP Secretary-General and MP for Kota Melaka, Lim Kit Siang in Dewan Rakyat on the Banking Amendment Bill 1983 on October 10, 1983)