Reforming our political funding culture to be more transparent

One particular area, however, that has not received adequate coverage and attention is in the relationship between charitable bodies or social entities otherwise also known as trusts, namely foundations (yayasan), and their political patrons.

Foundations are supposed to be not-for-profit in nature and hence should be managed as such even if registered as a company/corporate entity under the Companies Commission of Malaysia (CCM) instead of typically under the Registrar of Societies (ROS).

The C4 (Centre to Combat Corruption & Cronyism) in its report on the specific nexus between foundations and political financing/funding – “Foundations and Donations: Political Financing, Corruption, and the Pursuit of Power” (Prof E Terence Gomez & Lalitha Kunaratnam) – has revealed the “shocking” extent to which such arrangements run deep in our political culture and system.

The 57-page report is replete with damning evidence of the complete lack of transparency and accountability in the source, use and purpose of the funds that flow into the foundations set up by the political elite concerned.

Due to the lack of constraint, the misuse of such funds is an “open season”. As the media release/press statement of C4 states, “[the intersection between foundations and political donations [results in murky waters] as the vulnerability for quid pro quo [something for something] arrangements exist, meaning the system itself is vulnerable to corruption by those in power”. And these, of course, include foundations or trusts set up by the federal government for the purpose of the bumiputera empowerment agenda.

And there’s the direct and straightforward cases involving criminal breach of trust (CBT). For example, the prosecution of Nasharuddin Mat Isa (former Deputy President of Pas and former Member of Parliament for Yan in Kedah as well as Bachok in Kelantan) has proceeded with 17 counts of CBT and three money laundering charges even as he was given a discharge not amounting to acquittal (DNAA) for the other 16 counts of CBT (see pp. 53-56).

The report traces back the origins of foundations as vehicles for “slush funds” (particularly for a party’s war chest to be activated for electoral campaigning) to the 1980s when patronage politics had begun to emerge under the guise of corporatisation and privatisation as part of the overall policy to expedite the nation’s industrialisation and ensure the creation of a bumiputera commercial and industrial community (BCIC) (p. 5).

For example, concessions (i.e., government awards) were directly given to selected private proxies of which the ultimate beneficiary or owner was the then ruling party of Umno – the household names in those days were Renong and UEM (now merged into the UEM Group controlled by Khazanah, our “sovereign wealth fund”).

To be sure, Malaysia isn’t unique in this as Prof Terence Gomez has highlighted in the book, Political Business in East Asia (Routledge, 2002). See also China in Malaysia: State-business relations and the new order of investment flows (Palgrave MacMillan, 2020) in relation to the nexus between politics or, more precisely, the State (government) with business, including GLCs/state-owned enterprises (from both Malaysia and China).

Hence, just as there are government-linked companies (GLCs) that are deployed to funnel low-key donations, there are Umno-linked companies (“ULCs”) which also served as conduits for the party’s source of secret slush funds. It’s from these practices involving the nexus between politics and business (corporate) that foundations too became entangled in the orbit of political patronage.

As a quick summary, according to the report, the lessons learnt from the current or on-going court cases involving prominent erstwhile ruling elites are, among others:

• (mis)use of family-controlled foundations as convenient cover for personal lucre;

• wielding absolute control over foundations in their capacity as cabinet members;

• complete lack of transparency, e.g., total absence of audit exercises;

• in most cases, donations weren’t even used for genuine party political purposes, e.g., to cover full-time staff and other expenses; and

• except for the politician concerned, the rest of the party were unaware of existence of the donations. Even if the existence is known, in terms of the subsequent expenditure trail, it’d be off-limits. This meant that these secret war chests could well have been derived from corrupt intentions. In other words, the funds weren’t donations as such in the first place but had the sinister quid pro quo aim (of securing favours in exchange for cash).

Notwithstanding, this doesn’t mean that State capitalism or pro-active government intervention in the economy in the form of GLCs is necessarily unhealthy and, therefore, bad. Rather, there needs to be (greater) transparency and accountability in how the myriads of our GLCs operate and are run.

By the same token, we need to move towards a more transparent political funding culture even as we cannot expect to, realistically, eradicate the practice and culture of “business donating to politics”, including not least in the context of foundations.

As such, the issue is corrupt practices and, thus, how best to control and minimise abuse.

The courts cases have shown that we only need the political will to prosecute wrongdoing. As for prevention which is certainly better than cure, perhaps it’s far better to:

• limit the number of foundations (e.g., to only 3 as the maximum) that can be set up and managed by politicians, family members and politically-connected persons; • establish an independent “ombudsman” or auditor whose role is to audit and monitor flow of funds into foundations and the expenses as well as act on irregularities and complaints; and that the report is available to the public online; • make it mandatory under legislation (e.g., under the Political Financing Act as called for by C4) for the financial statements of foundations to be made available to the public online.

More broadly, the National Centre for Governance, Integrity and Anti-Corruption (GIACC) is currently pushing for a rule that requires the disclosure of the source of political funding above RM10,000. To complement and supplement this policy proposal, layers of corporate veils deployed to mask the identity of the funder – as a common tactic – should be countered with the mandatory requirement for the disclosure of beneficial ownership analogous to proxy share ownership holding in trust for the real owner. In the same vein, such proposed measures would strengthen and enhance the existing Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act/Amla (2001) and Banking & Financial Institution Act/Bafia (1989).

Not least, we should be seriously studying the political funding models in other countries. In Germany, the government provides funds for political parties during elections. Germany’s Political Parties Act (1967) stipulates that the State will fund the parties to partly finance their general activities, and the criteria for the distribution of public funds would be the parties’ performance in the European Parliament, Bundestag (federal parliament) and Landtag (state parliament).

Public funding would reduce political parties’ dependency on corporate donations, thus preventing corporations from undue influence on policy-making. This system also ensures that the elected government and representatives work for the public interest, thus upholding democracy. However, a political funding system that’s completely tax-payer dependent would be unsuitable and not feasible.

In the final analysis, the right approach is probably to find or strike the right balance – with the ultimate purpose of eradicating corrupt practices.

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Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.