EMPLOYEE FRAUD IN MALAYSIA: A CASE STUDY YIK KOON TEH THESIS SUBMITTED TO LONDON UNIVERSITY IN CANDIDATURE FOR THE DEGREE OF DOCTOR OF PHILOSOPHY REGISTERED IN THE DEPARTMENT OF SOCIOLOGY LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE OCTOBER 1994 1 UMI Number: U153184 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U153184 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 7/-h£S£S X eP 107 (28 2-0 Abstract This thesis is a detailed case study about employee fraud in a bank in Malaysia. As this bank is set up by the Government in 1965, the fraud has political implications. This thesis discusses the internal structure of the organisation as well as the political and social climate conducive to fraud and corruption in Malaysia. Two other major financial fraud cases in Malaysia will be discussed as comparative case studies. Fraud and corruption trends in other countries will also be discussed to illustrate that the Malaysian case is not a unique one. In chapter one, a theoretical framework suitable for the studies of crime in developing countries will be formulated. In Malaysia, the historical development of the country is important. Chapter two introduces the concepts and definitions of crimes at the workplace, in particular fraud. Chapter three tries to trace the detailed movements of the funds that were defrauded in the Bumiputra Malaysian Finance Limited (BMF) case. In doing so, they give a good idea of how frauds can occur and how they can be prevented. Chapter four is an analysis of the BMF case. The chapter is divided into two sections. The first section is the micro-analysis which deals with the structure of the organisation that is problematic. The second section is the macro-analysis which deals with the wider political and social structure that is problematic. Chapter five is on the comparative case studies which tries to establish the trend of how public organisations can be defrauded in Malaysia. A comparison with other countries will also show that the Malaysian case is not a unique one. Chapter six deals with the overall commercial crime scenario in Malaysia. Chapter seven tries to give some suggestions on combating and preventing fraud. The thesis is concluded with chapter eight. 2 Table of Contents Acknowledgements...................................... 7 Abbreviations......................................... 8 Introduction and methodology......................... 10 Chapter One Theories of crime in developing countries (with specific reference to Malaysia) .......... 21 Chapter Two Concepts and definitions of crimes at the workplace (in particular fraud)...................... 62 Chapter Three The Bumiputra Malaysian Finance Limited case................................................. 74 Chapter Four Analysis of the BMF case............................ 165 Chapter Five Comparative case studies............................ 268 Chapter Six General commercial crime rate in Malaysia............ 304 Chapter Seven Combating and preventing fraud...................... 348 Chapter Eight Conclusion.......................................... 403 Bibliography........................................ 420 3 List of Tables and Illustrative Material A*I. Letter to HM Prison Brixton...................... 17 All. Letter from HM Prison Brixton to Prof. Paul Rock............................................ 18 AIII. Letter from HM Prison Brixton to Prof. Paul Rock............................................ 19 Map of Malaysia................................. 31 1.1. Peninsula Malaysia: Household Income Inequality..................... ................ 41 1.2. Ownership of assets in modern agriculture and industry, Peninsula Malaysia, 1970............ 44 1.3. Peninsula Malaysia: Employment by ethnic groups and sector, 1967-8 and 1975............ .45 3.1. Board of Directors of BBMB and BMF............... 83 3.2. People in the BBMB, BMF and the Supervisory Committee Boards............................... 112 A3.1. Differences between the Royal Commission of Inquiry and the Committee of Enquiry............ 147 A3.3a. Authorised lending limits of various overseas branches of BBMB and BMF from 1979 to 1983....... 150 A3.3b. BMF's balance sheets at the end of 1979 to 1983........................................... 151 A3.4a. Letter from Carrian to Tengku Razaleigh.....152 A3.4b. Letter from Carrian to Tengku Razaleigh.....153 A3.4c. Letter from BMF to Tengku Razaleigh.............154 A3.5b. Term loans and Money Market loans to the Carrian Group by BMF............................ 156 A3.5c. The percentage of the Carrian loans and advances to BMF's and BBMB's share capital and reserves................................... 159 A3 . 6. Letter from PIL to BMF.......................... 160 \A denotes Appendix. 4 A3.7. Letter from Debenham Tewson & Chinnocks to BBMB ..................................... 161 4.1. Poverty figures for the various social economic groups between the Fourth Malaysia Plan, the Mid-term Review 1983 and the survey of the Socio-Economic Research Unit...... 219 A4.1. Peninsula Malaysia: Ration of mean and median incomes, 1970-79............................... 265 A4.2. Letter from Ibrahim Jaafar to Wong Aun Phui..... 266 6.1. Number of corruption awareness activities carried out by the Anti-corruption Agency....... 311 6.2. Commercial crime in Malaysia, 1980-89........... 316 6.3. Reported cases of commercial crime, 1980-91..... 317 6.4. Criminal breach of trust in Malaysia, 1985-90........................................ 321 6.5. Reported fraud cases involving financial institutions................................... 329 6.6. Reports received, number of people caught and number of disciplinary reports on civil servants by the Anti-corruption Agency, 1968-86........................................ 335 6.6.1. Information received and actions taken by the Anti-corruption Agency, 1987-92............. 336 6.6.2. Disciplinary reports prepared by the Anti­ corruption Agency for civil servants, 1987-92........................................ 338 6.7. Percentage of average annual growth rate of private consumption in Malaysia, 1965-95........ 342 8.1. Illiteracy rate between underdeveloped or developing countries and developed countries in 1990........................................ 408 8.2. Projected adult literacy rates, 1990-2000....... 409 8.3. Projected adult literacy rates in developing countries in the year 2000...................... 410 5 FOR MY PARENTS, UNIVERSITI UTARA MALAYSIA AND THOSE WHO DARE TO STAND UP AGAINST FRAUD AND CORRUPTION 6 Acknowledgements A number of people have assisted me during the course of this thesis. First, I wish to thank my supervisors, Prof. Paul Rock (Sociology Department) and Prof. Leonard Leigh (Law Department), for their valuable guidance and helpful comments on earlier drafts. I would also like to thank all the people whom I have interviewed and who have helped me one way or another by giving me valuable insight, information and material for my thesis. I am grateful to Looi Chin and Azadeh Medaglia who, in the difficult days, offered me encouragement and support. Thanks also go to my coursemates, friends and staff at the LSE for their lively academic discussions and encouragement. Finally, I owe a debt of gratitude to my sponsor, Universiti Utara Malaysia, which made this study possible. 7 Abbreviations BBMB Bank Bumiputra Malaysia Berhad, the parent bank bil. billion BMF Bumiputra Malaysia Finance Limited CHL Carrian Holdings Limited CIL Carrian Investments Limited EIL Eda Investments Limited HK$ Hong Kong dollars ISA Internal Security Act M$ Malaysian dollars mil. million OSA Official Secrets Act PIL Plessey Investments Limited S$ Singapore dollars UMNO United Malays National Organisation, the ruling coalition party US$ American dollars 8 H < iJ oa Introduction And Methodology This thesis is a detailed case study of employee fraud in a Malaysian financial institution set up in Hong Kong i.e. the Bumiputra Malaysia Finance Limited (BMF). Its parent bank is the Bank Bumiputra Malaysia Berhad (BBMB) in Malaysia. However, because this bank was set up by the Government in 1965, the fraud had political implications. This thesis tries to piece together the complicated BMF case in order to show how fraud offences can be committed in financial institutions. In the BMF case, M$2.5 bil. (approximately £0.625 bil.1) were lost. Two other major financial fraud cases which took place in Malaysia will also be discussed as comparative case studies to establish a trend of how corrupt politicians and elite members of society defraud institutions set up by the Government. This will entail an analysis into the internal structure of the organisations as well as the political and social climate conducive to fraud and corruption in Malaysia. Finally, the pattern of fraud and corruption in Malaysia will be compared with those in other countries of different social and political systems, and economic situations. Chapter one focuses on theories of crime in developing