SINGAPORE – Another day, another multibillion-dollar corruption scandal in Malaysia. 1Malaysia Development Berhad (1MDB), one of the world’s largest ever financial heists, had earlier put the Southeast Asian nation in the global spotlight along with newly incarcerated former premier Najib Razak, who stands accused of pilfering billions of dollars of public funds.
Another Najib-era scandal has since gripped Malaysia, this time involving the country’s largest-ever defense procurement deal. The Public Accounts Committee (PAC), a parliamentary oversight body, highlighted in an August 4 report that 1.4 billion ringgit (US$314 million) in government allocations toward the purchase of six littoral combat ships (LCS) was diverted for other purposes.
Envisioned as the lynchpin of the Royal Malaysian Navy’s (RMN) transformation program to replace aging foreign-made vessels with locally-built frontline warships, the ships were due to be delivered from 2019. Despite paying 6 billion ($1.3 billion) of the project’s total 9 billion ringgit ($2 billion) cost, not a single ship, nor even their detailed design documents, have been completed to date.
A former defense ministry official who requested anonymity described the deal as “a complete clusterfuck of a procurement” in an interview with Asia Times. “A large part of the LCS fiasco is the fact that the ministry agreed to contractual terms that would otherwise not have ever passed procurement standards in any serious organization with that much money to burn,” the official said.
While Malaysia is no stranger to defense procurement scandals, the LCS episode has hit a raw public nerve, particularly among retired servicemen who are outraged that the government ignored the navy’s own ship design requirements and instead followed alternative recommendations by local conglomerate Boustead Naval Shipyard (BNS) despite vehement protests from the RMN’s then-chief.
The deal’s contractual terms were also found to be highly unfavorable to the government, including a convoluted multi-layer subcontracting structure through which supply costs ballooned by around three to four times, prompting opposition politician Rafizi Ramli to claim “the modus operandi is no different from 1MDB,” which investigators say was fleeced of $4.5 billion in public funds.
Since the PAC report was tabled in parliament, there have been growing bipartisan calls to initiate criminal proceedings and set up a royal commission of inquiry into the troubled deal. Public uproar over the LCS scandal had also put Najib on the defensive as he tried and failed to overturn a 12-year jail sentence for 1MDB-related corruption in his final appeal before Malaysia’s highest court.
The 69-year-old ex-premier was ordered to begin serving time in prison immediately after the Federal Court upheld his guilty conviction on August 23. Najib has consistently denied wrongdoing in the 1MDB scandal and prior to his detention had similarly rejected any claim of misconduct in the LCS procurement, challenging his opponents to show proof that he profited from the project.
“I don’t think Najib can run away from having ultimate responsibility for the LCS scandal,” said opposition politician and former deputy defense minister Liew Chin Tong, citing the former premier’s dual roles as prime minister and finance minister from 2009-18 and under whose watch advanced payments were disbursed to BNS without an open tender.
Other top figures in the ruling United Malays National Organization (UMNO) have come under fire over the scandal, including UMNO president Ahmad Zahid Hamidi, who was defense minister when the six vessels were commissioned in 2011, and incumbent defense minister Hishammuddin Hussein, who also held the defense portfolio when the LCS contract was signed in 2014.
The PAC’s findings have prompted an unexpectedly forthright response from Prime Minister Ismail Sabri Yaakob, who has called on the anti-graft commission to expedite investigations into the stalled procurement deal and vowed to declassify LCS project governance and procurement reports as well as a forensic audit subject to approval from the attorney-general and auditor-general.
“On behalf of the government, I guarantee that investigations will be conducted transparently and that the government will not protect anyone involved,” said the premier earlier this month. Analysts interpreted Ismail’s remarks as an attempt to distance himself from the top UMNO officials who have been implicated in the scandal, some of whom are also widely seen to be his party rivals.
Zahid, who now faces various corruption charges in court, leads a faction that is pushing for a general election to be held this year ahead of the September 2023 deadline. Ismail, a less-senior UMNO vice-president and the first Malaysian premier who is not the head of his party, leads another faction that has resisted pressure to call early polls, largely to bolster his own position.
“By declassifying the documents, Ismail has given an indication that he has the guts to deal head-on with Zahid, and potentially other rebelling UMNO leaders with linkages to corruption or breaches of law,” said Hafidzi Razali, a senior analyst with strategic advisory firm BowerGroupAsia. “By allowing the investigation to run its course, the facts will speak for themselves.”
Though Zahid denies involvement in the procurement scandal, arguing that the project was awarded after his tenure at the defense ministry, a recently declassified 2019 forensic audit showed handwritten instructions to the ministry’s procurement division secretary to produce a letter of intent for BNS as proof of the government’s mandate and consent for the LCS project.
The report also corroborated that then-defense minister Zahid was behind a controversial ship design change objected to by the RMN, which had instead endorsed a Sigma-class LCS design built by the Dutch company Damen Group. Zahid had initially agreed to this, but in July 2011 abruptly switched to the Gowind-class by DCNS of France, now known as Naval Group, at the behest of BNS.
“Documents implicating Zahid are another blow to the former defense chief, as he’s already bogged down by various other corruption charges,” Hafidzi added. “As party president, Zahid still holds party-wide influence. But Ismail has the government’s machinery at his disposal, particularly when there is adequate evidence for the cases to move past the prima facie stage.”
Former RMN chief Abdul Aziz Jaafar testified to the PAC that he had written 10 letters, including to then-premier Najib and then-defense minister Zahid, objecting to the design change on grounds that the French Gowind design was not a tested platform in service anywhere, while the Dutch Sigma design had a track record of use including by the Indonesian navy.
French defense company Thales, which owns around a third of Naval Group, was notably charged with complicity in bribery over the 2002 sale of two Scorpene-class submarines to Malaysia by a French court in April. Malaysian rights group Suaram has alleged the sale resulted in some $146 million of commissions being paid to a company linked to Najib, who was the then-defense minister.
The PAC report directly names Naval Group and accuses the French company of taking advantage of a “lack of knowledge and skills in the planning of warships” on the part of BNS’ then-LCS program director Anuar Murad and BNS’ then-managing director Ahmad Ramli Mohd Nor. “Naval Group exploited this opportunity for their benefit, leading to escalating costs,” the committee concluded.
“BNS was never qualified to do the intellectual heavy lifting of designing the ship and fitting non-proprietary parts and systems to it,” the anonymous ex-defense official told Asia Times. “The question is whether Zahid and Najib received bribes from the Naval Group or BNS in exchange for changing the ship designs. This would require a relatively high burden of proof.”
On August 16, Malaysian prosecutors charged Ramli, a former navy chief who served as the LCS steering committee chairperson, with three counts of criminal breach of trust involving fraudulent payments worth 21 million ringgit ($4.6 million), which carries a maximum jail term of 20 years and a fine. No other individuals have yet been charged in relation to the LCS scandal.
The former defense official said they were inclined to think the LSC deal was structured for purposes of “illicit political financing and patronage” but said it was unclear how Najib and Zahid are directly linked to the actions by Ramli and Annuar, who the source noted, “curiously does not seem to have been arrested or brought to court for his involvement, nor mentioned in the news at all.”
“The snippets of the forensic audit report provided in PAC only demonstrate that a complicated system of subcontractor layering was put into place to complicate scrutiny and oversight to enable monies to be taken out of the project. But it has yet to demonstrate where that money has gone and for what purpose,” said the same anonymous ex-defense official.
Former deputy defense minister Liew, who held the position from 2018-20 when the Pakatan Harapan (PH) opposition coalition led the government, has questioned whether Najib’s administration intentionally structured the LCS project as a conduit for settling bad debts linked to an earlier project the ex-premier had overseen during his stints as defense chief from 1990-95 and 1998-2008.
Initiated in 1993, the New Generation Patrol Vessel (NGPV) project sought to acquire 27 Kedah-Class Offshore Patrol Vessels (OPVs) for the RMN, though only six ships were eventually completed and delivered far behind schedule. The cancellation of the project bankrupted local contractor PSC Industries Bhd, which BNS acquired in 2005, inheriting all associated liabilities.
According to the PAC’s findings, 400 million ($89.1 million) of the 1.4 billion ringgit found to be misdirected from the LCS project was used by BNS to pay old debts from the NGPV project, a fact that Ahmad Nazim Abdul Rahman, chief executive of the Armed Forces Pension Fund (LTAT) – BNS’ biggest shareholder – confirmed in a Facebook post after the tabling of the committee report.
Under fire over the revelation, Najib earlier this month insisted that he was not involved in the scandal-plagued contractor’s decision-making at the time but justified repayment of the debt by arguing BNS had needed to ensure the continuity of the suppliers it paid for the NGPV project as they were the same firms that would supply parts and services for the LCS.
Liew contends that those admissions and use of procurement funds as an effective “bailout” of BNS constitute a criminal breach of trust under Malaysian law. “This was a vendor-driven project with the intention of trying to siphon off money in order to deal with old problems. But that is actually illegal. So, for Najib and the CEO of LTAT to justify that is really crazy,” he told Asia Times.
Funds used to pay off PSC’s liabilities constitute only a part of the misappropriated sum, with an estimated 1 billion ringgit allegedly siphoned by an associate company of BNS, Contraves Advanced Devices (CAD), which was specially set up for the LCS project but in effect functioned only to procure equipment from the Naval Group and supply them to BNS at an inflated price.
According to PAC testimony, CAD, a subsidiary of BNS’ parent company Boustead Heavy Industries Corporation (BHIC), sub-contracted works to the French company for just a third of their value. Sharifuddin Zaini, BHIC’s chief executive, told the committee that instead of BNS purchasing directly from manufacturers, “once it went to CAD, the price would rise to three or four-fold for no reason.”
BHIC’s forensic audit on the LCS project traced its mismanagement to then-LTAT chief executive Che Lodin Wok Kamaruddin, a former 1MDB chairperson with close ties to Najib. Kamaruddin approved a controversial joint venture that saw Boustead Holdings, BHIC and BNS’ parent company cede control of CAD to German defense contractor Rheinmetall Air Defense (RAD).
Despite RAD holding only a 49% stake in CAD, the audit report found that Lodin had ceded to it control of CAD on grounds of its “internal management expertise,” effectively allowing representatives from RAD to have a free hand in CAD’s finances and approve payments of lucrative equipment contracts without involvement from majority stakeholder BHIC.
“It is difficult to find a justification for such logic because expertise was needed for the LCS program but not for the management [of CAD],” the audit report read. “[The decision] seriously jeopardized the interest of BHIC and BNS in the hands of CAD.” Lodin reportedly claimed he could not recall making such a decision when asked for comment by local media.
“It is impossible that Tan Sri Lodin was not involved or aware of these arrangements given his position at LTAT and Boustead Holdings at this time,” said the anonymous former defense official. Lodin notably resigned from his positions as LTAT chief, Boustead Holdings managing director and BHIC chairperson in late 2018 in the months following Najib’s election loss.
Senior Defense Minister Hishammuddin Hussein has said his ministry has “nothing to hide” and that guilty parties will face justice once probes into the LCS debacle are carried out. He maintains that the RMN continues to be in favor of the procurement, stating earlier this month that the first of the overdue littoral combat ships would only be scheduled for delivery “in one or two years.”
Hishammuddin has claimed that the ongoing construction of the first ship will not involve any new allocations from the government and that its completion would be a prerequisite for the disbursal of any additional allocations needed for the other five vessels. According to the Straits Times, a government-commissioned independent study in 2019 found BNS to be insolvent.
“Solvency is certainly an issue,” said the same former defense official, adding that they were “not confident at all” in Hishammuddin’s delivery timeline. “There are some serious questions that still need to be asked about BNS’ technical and project management capabilities, particularly with regard to solving a major progress bottleneck and also a lack of contingency measures built into the plan.”
Prime Minister Ismail, meanwhile, in a recent interview raised the prospect of PH and other opposition parties leveraging the LSC scandal on the hustings in the same way voters were galvanized by the 1MDB saga in 2018, handing UMNO its first-ever general election defeat. The premier stressed that his administration must learn from the mistakes of the previous Najib-era scandal.
“The previous government failed to explain 1MDB to the rakyat (people). This led to the people speculating and deciding what really happened. But what is essential now, as I have also told my cabinet, is to explain to the rakyat. That is why I decided to declassify the forensic audit report. We must be transparent, so the rakyat can see,” Ismail was quoted by local media as saying.
Follow Nile Bowie on Twitter at @NileBowie