Sunday, February 23, 2014

Clean Governor? – New Revelations Over Japanese Kickback Scandal Confront Taib

Clean Governor? – New Revelations Over Japanese Kickback Scandal Confront Taib

Official documents on Regent Star
Official documents on Regent Star
SPECIAL INVESTIGATION

The out-going Chief Minister, Taib Mahmud, has worked hard to keep at bay revelations about his family’s involvement in the Japanese timber export kickback scandal, which erupted in 2007.

However, the facts of the case are laid out in Japanese tax tribunal judgements, which are available to public scrutiny.

Sarawak Report has now conducted a special investigation into the case and commissioned translations of the Japanese documents.

The new information details how Taib’s brother Onn managed to squeeze huge sums from this export trade over several years.

These are sums of money that could otherwise have been available to the state in the form of customs duties and it raises new questions for Taib, who has always claimed he had no part in the scandal.
Taib's speech acknowleged the system, but denied guilt
Taib’s speech acknowleged the system, but denied his involvement

After all, Taib abolished customs duties on timber in 1988, only for these to be replaced it would appear by a Mahmud family tax, exacted by Hong Kong companies such as Regent Star Company Limited, which was at the centre of the kickback revelations.

We have now established key links between the Regent Star web of companies and Taib’s own wife and children, as well as his brother Onn Mahmud.

Our dossier of evidence was presented in Tokyo this week to Japanese government officials and the press, as part of a wider NGO campaign to inform Japan about Taib Mahmud’s timber corruption and his destruction of the world’s oldest rainforest of Borneo.

Taib’s original denials

When the Japanese timber scandal first broke in 2007 Taib issued a personal statement to the DUN, denying he had anything to do with the company Regent Star, which had been receiving money in Hong Kong from the Japan Shipping Cartel, known as the NFA (National Freight Agreement).

His key claim in this speech on 14th May 2007 was that there was “no proof” to substantiate claims by Japanese newspapers, including the Tokyo Times, that 1.1billion yen were paid to Regent Star to “lubricate” and “facilitate” the smooth running of timber exports to Japan.

The Chief Minister thundered it was all “falsehood” and “libelous allegations” based on rumour without solid evidence.
“I take this opportunity, to categorically and completely refute all these allegations contained in the Japan Times. There are absolutely false. It must be noted that the said newspaper and those in Malaysia, have not, either before or after my publication, provided any fundamental facts to support their allegations that 1.1, billion yen was paid to Sarawak officials as “kickbacks” or “rebates” and lubricant to facilitate the timber trade. the newspapers’ publishers have not provided any fundamental facts to justify them. [Taib Mahmud, speech to DUN May 2007]
However, our translations of the Japan Taxation Appeal Tribunal’s official review of the case make clear that the newspaper quotes were not based on anonymous sources or suspicions, but on the clear evidence put forward in the original judgement on the case.  This was after an official investigation and prosecution by the Tokyo tax authorities in 2007.

These authorities decided that Regent Star Company had not been providing ‘brokerage services’, as the shipping companies had claimed in order to avoid tax, but was in fact receiving millions in ‘entertainment expenses’ (bribes) on behalf of Onn Mahmud.
“The agency that took the original action [Tokyo Tax Tribual 2007] decided to impose corporate tax corrections and heavy additional taxes on grounds that the said brokerage agreement lacked substantiality, and that the brokerage commissions paid amounted to entertainment expenses, etc., being cash gifts for the purpose of entertainment, etc., for a concerned business party [Onn Mahmud]“[Appeal Tribunal ruling, Japanese Tax Authority].
The judgement goes on to explain the definition of such entertainment expenses, which under Japanese law cannot be written off against tax.
“entertainment expenses, etc., are entertainment expenses, entertainment spending, secret expenses and other expenses that a legal entity pays to its customer, supplier, or other concerned business party in order to entertain, regale, provide hospitality, return a favor, or engage in other similar behavior.”[Appeal Tribunal ruling, Japanese Tax Authority]
All powerful - [Onn Mahmud] is not only the chairman of [Achipelago] and [Regent Star], but also, as the head of the corporate group including both companies, explained the tax investigators
All powerful – [Onn Mahmud] is not only the chairman of [Achipelago] and [Dewan Niaga], but also, as the head of the corporate group including both companies, explained the tax investigators
In short, the Tokyo tax investigators had concluded that the huge payments being made to Regent Star were in fact thinly disguised bribes to Onn Mahmud, who was identified as clearly controlling both Regent Star and the company Achipelago, which had been given the power to issue export permits by the State of Sarawak, of which his brother Taib Mahmud was Chief Minister.

This was the reason for the heavy penalties and it was the findings of this investigation, not anonymous rumours, which informed the newspaper reports at the time.

What the Tokyo Tax Investigators found out

The lengthy judgement of the Tribunal is now available in English [click here]. For those those aware of the background to the case it is easy enough to follow, despite many redactions (blacked out names) intended to protect identities in the case.

Indeed, the names of Achipelago Shipping and DNS (Dewan Niaga Sarawak) still accidentally appear in some of the published judgements, confirming that this is the Regent Star ‘entertainments’ case.

Achipelago and DNS (Dewan Niaga Sarawak) are both named in the documents
Achipelago and DNS (Dewan Niaga Sarawak) are both named in the documents (translation)

The Japanese documents point back to an original deal in 1981, which Taib Mahmud acknowledged in his own speech, when the state owned Sarawak Economic Development Commission (SEDC) signed an exclusive agreement with the NFT shipping cartel of Japan to give them a monopoly of timber exports from the state.
The deal was signed with Dewan Niaga Sarawak (DNS), a company that was 100% owned by SEDC.  Although in his later speech Taib, who was Chief Minister /Finance Minister/ Planning Minister at the time, claimed he knew nothing about the secret monopoly and that it was not his responsibility anyway.

Moreover all those who might have been responsible for making decisions in the matter were now sadly deceased, according to the Chief Minister.
 “From documents obtained by my solicitors and which I only saw very recently, in December 1981, an Agreement was signed between a Japanese Shipping Cartel operating wider the NANYOZAI FREIGHT AGREEMENT and Dewan Niaga (Sarawak) Sdn. Bhd which, at that time, was wholly owned by SEDC. The Minister responsible for SEDC at that time was the then Deputy Chief Minister and Minister for Finance, the late Tan Sri Datuk Amar Sim Kheng Hong…. The Agreement was signed in Tokyo on 26 December, 1981 and was stated 
to be (and I quote): “For the purpose of securing a smooth operation of the transportation of logs produced in Sarawak…. As it was a commercial or business arrangement, no approval of the State Government or the Chief Minister need to be sought”[speech 14th May 2007, Taib Mahmud]
The Chief Minister came back time and again in this key speech with the same range of excuses and denials for permitting this blatant abuse of free trade in the case of Sarawak’s largest export business.  

Although SEDC was a government department, he claimed the matter was somehow not a government responsibility.  Anyway the players were now all dead.
“That arrangement, although made with a wholly owned subsidiary of SEDC, was made on a purely commercial basis, with no influ­ence from the State Government of Sarawak, including myself as the Chief Minister…The Minister of Forestry at that time was the late Datuk Haji Nor Tahir. I was not informed by him that there was any impropriety the business or contractual arrangement between the parties concerned.”
Taib also denied in the speech that he had ever heard of Regent Star.
“The Sarawak Government and the Chief Minister have no knowledge of Regent Star, and have not received any remuneration or other payments from the alleged Hong Kong company called Regent Star or any agent of the Japanese shipping companies to Regent Star (as alleged), the Sarawak Government and myself as the Chief Minister, are totally unaware of such payments.”
Yet Sarawak Report’s later investigations into Regent Star have recently revealed very close links between the company and Taib Mahmud’s immediate family – not just through his brother Onn, but through Taib’s own wife Leila and his sons, who sent millions of dollars to Taib’s daughter Jamilah in Canada to invest in her property company Sakto back in 1996.

That money was funneled through a sister company Richfold Investments, which was incorporated on the same day and at the same address as Regent Star in Hong Kong, with a mutual Director Shea Kin Kwok, who was an employee of Onn Mahmud.

Room 1001, Yardley - Regent Star, Richfold and Natalite (companies used by Taib's wife and kids) all share the same office address in Hong Kong.
Room 1001, Yardley – Regent Star, Richfold and Natalite (companies used by Taib’s wife and kids) all share the same office address in Hong Kong.

Another company which shared the same office address as Richfold and Regent Star in Room 1001, Yardley Common Building, Connaught Road, Hong Kong was called Natalite Investment (above).

As late as 2006 Taib Mahmud’s own children and his brother Onn together registered their main contact address as being at Natalite Investment when filing an official return to the United States government regarding their other property company Sakti based in California.

Room 1001 was the contact address for Taib's wife and kids in two company dealings, same as Regent Star
Room 1001 was the contact address for Taib’s wife and kids in two company dealings, same as Regent Star

How strange, therefore, that a year later in 2007 Taib was claiming that he had never heard of Regent Star, even though his family were clearly operating from at least two related companies also managed by his own brother out of the same office in Hong Kong!

From taxation to kickbacks

In his speech to the State Assembly Taib Mahmud also acknowledged some further key changes to the management of this secret export agreement, that supposedly he hadn’t known about and didn’t need to know about and which had nothing to do with him.

In 1987 the ownership of the company concerned, Dewan Niaga, was altered in a very significant way – a matter that he admitted DID need the approval of the state government.  Dewan Niaga was privatised from being a state asset into the hands of a private company:
“In 1987, there was a re-structure of shareholding in Dewan Niaga (Sarawak) Sdn. Bhd., whereby the company became owned by the Kuching Chinese Chambers of Commerce and Industry, Koperasi Koppes Bhd and Archipelago Shipping Sdn. Bhd. This change in shareholding of Dewan Niaga (Sarawak) Sdn. Bhd was done by SEDC pursuant to a decision of its own Board Members, and the new shareholders, and required approval of the Sarawak Government.”[Appeal Tribunalpapers]
The key fact glossed over by the Chief Minister in his account of these significant developments was that Achipelago Shipping, which became the dominant shareholder of Dewan Niaga from this deal, was owned and controlled by none other than Onn Mahmud, his own brother and a key business manager in Taib’s other family businesses.

If questions had been allowed during this bizarre personal statement of the Chief Minister, some might have queried the blatant conflict of interest involved in handing a major public asset to the brother of the Chief Minister in this way.

After all, Onn at this time was the Chairman and major shareholder of CMS as well as being involved in setting up the Taib family’s overseas property companies in Canada and the USA!

Taib also referred to a second significant development in his speech, occurring 1988, when the state government removed customs duties on timber exports.
“Custom duty on export timber is exempted vide Customs (Exemption) Order, 1988. Once royalty is paid to the State Government, export of logs was done as a matter of course and needs no approval of any government authority and discretion. The export is exempted from further control or intervention by any government agency.”[Appeal Tribunal]
Taib chose to argue that this decision excused the government from responsibility for the (much earlier) ‘commercial agreements’ between Dewan Niaga and the NFA.

But, what reason or justification did he have for removing such a valuable tax from the state and ending the state’s control over timber exports in this way?

Our new evidence from the Japanese Tax Tribunal suggests a clue. Because the tax investigators provided details of a series of separate secret deals at this time that elaborated on the monopoly agreement between Dewan Niaga and the NFA.

We learn from the documents that three connected contracts were framed between the NFA, Achipelago and a ‘broker’ company set up to manage the arrangement between them.

That broker company was Regent Star, which the Japanese investigators were certain was controlled by Onn Mahmud, who used it as a way of extracting huge sums money from the NFA shipping cartel, in exchange for his cooperation through Achipelago/Dewan Niaga in permitting timber exports.
“It is asserted that [Onn Mahmud] is not only the chairman of [Dewan Niaga Sarawak] and [Achipelago], but also for practical purposes controls the corporate group including the two companies, [Onn Mahmud] decided the important matters pertaining to the scheme at his own discretion, and [Onn Mahud] viewed [Regent Star] to be an important source of funds, in light of which it could readily be surmised that the brokerage commission of the current case was being paid to [Onn Mahmud]. [Appeal Tribunal]
The tax inspectors said they concluded that this broker arrangement was forced on the timber exporters, who were originally reluctant to enter the arrangement.

However, they believed Mahmud was able to exact pressure through his control of exports because of his ownership of Dewan Niaga. There was also a huge incentive, which was a monopoly over exports if those ‘brokerage fees’ were paid.
“It is acknowledged that…. though [NFA] felt attracted to [the arrangement], it felt anxious about handling the brokerage commission as a deductible expense.  However, ultimately, it came to accept the scheme, motivated by the fact that rejecting the request for payment of said brokerage commission entailed the risk of losing the right to participate in [shipping timber], and the fact that [competitors] would be excluded by concluding the [agreements]…Thus, it is acknowledged that there was no choice but to accept.  Specifically..[NFA] would not have been able to engage if it had not concluded the agency agreement of the present case with said company.” [Appeal Tribunal]
In this manner it can be concluded that money that had once been paid by exporters to the people of Sarawak through customs fees, was now being diverted to the Mahmud family through ‘brokerage fees’.

This money was regarded by Onn as a major source of income said the tax inspectors.
And they observed it was clear that the NFA saw no difference between payments to Regent Star and Onn Mahmud himself.

Indeed on one occasion they saw that separate payments to Regent Star and to Onn himself (for a “share adjustment fee”) were made in the same wire transfer from the NFA. This made clear that both destinations were regarded as one and the same by the Japanese participants in the scheme.

Sarawak Report has now further established that the Director of Regent Star, Shea Kin Kwok, was Onn’s employee, acting as the office manager who answered the phone at the office No 1001, Yardley Common Buildings, 1-6 Connaught Road in Hong Kong.
This office also housed other companies owned directly by Onn Mahmud and provided a contact address for Taib’s own wife Leila and his two sons when doing business in Canada and the United States.

The investigators, according to the evidence in the Tax Appeal document, were also certain that Onn Mahmud had on a number of occasions used his power to increase the ‘brokerage fees’ and played hardball every time the renewal of the agreement was negotiated.

In later years as the volume of timber exports dwindled, Onn started to demand higher fees to make up for the lowering revenues from this lucrative ‘brokerage’.  This put great pressure on the Japanese exporters who were themselves getting far less from the trade as the timber started to run out in the late 90s.
“Difficulties were experienced [by NFA] during the previous negotiations in 1994 and the negotiations in 1992 because the other party [Regent Star] made severe demands regarding share and brokerage amounts.”  
“During negotiations in 1992, [Regent Star] demanded concessions from [NFA] with [Achipelago’s] aggressive strong-arm tactics (by refusal to undertake agent operations), to which [NFA] had no countermeasures and ultimately had to make major concessions.” [Appeal Tribunal]
The situation put the Japanese companies under strain as they had little bargaining power and Onn Mahmud on occasion acted to prevent their exports in order to exert pressure to increase, according to the Tokyo Tax Tribunal’s evidence.
“As [Achipelago] took the action of refusing to undertake agency operations ..December 6, 1992, it was decided at the extraordinary steering committee meeting on the 8th of the same month to make an urgent trip ..from the 9th of the month in order to search for a way out of this situation”. [Appeal Tribunal]
In effect, Taib had given his brother total control over timber exports and in turn his brother was using strong arm tactics to extract as much money as possible from the Japanese Shipping companies.

Off the hook?

The NFA cartel were originally fined high penalties by the Tokyo Tax authority for getting involved in Onn’s brokerage demands and trying to write them off against tax.
This initial investigation had concluded it was evident that Regent Star was a shell company set up just a month before the conclusion of the agreement with Achipelago/Dewan Niaga and the NFA to accept ‘entertainment’ payments on behalf Onn Mahmud.

However, the cartel companies appealed and in 2008, having reviewed the case, the Appeal Tribunal gave the shipping companies the benefit of the doubt and cancelled the penalties.

The grounds for dropping the prosecution, according to the Appeal Tribunal, were that the tax investigators had not done sufficient work to prove their conclusions that Regent Star’s ‘brokerage fees’ were ending up in the hands of Onn Mahmud and that Regent Star was merely a shell company, not a genuine broker with Achipelago/ Dewan Niaga Sarawak.

The Appeal Tribunal therefore decided that the millions of ringgit in ‘brokerage fees’ paid to Regent Star could after all be written off against tax by the Japanese Shipping companies.

The companies were let off the tax penalty and Regent Star meanwhile was quickly closed down in Hong Kong as Taib Mahmud moved to make his claims that he had never heard of this company or been involved in his brother’s export monopoly of Sarawak timber.

What the Tax authorities did not know

Sarawak Report has since revealed a number of key pieces of evidence not available to the Tax Appeal Tribunal.
Shea Kin Kwok, the nominee behind the Regent Star web of companies in Hong Kong
Shea Kin Kwok, the nominee fronting the Regent Star web of companies in Hong Kong

In particular we have established that the Director and Shareholder of Regent Star, Shea Kin Kwok, was not an independent broker, but merely a direct office employee of Onn Mahmud.

His job was to answer the telephone in Onn’s Hong Kong office and, it appears to function as his nominee for a number of his shareholdings.

The other named Director and Shareholder in these companies Kho Eng Ben  was likewise a mere employee of Onn.

Sarawak Report has also identified that Taib’s own wife and children were closely linked to this same group of companies, joining Regent Star’s sister company Richfold Investments in providing a loan to Taib’s daughter Jamilah’s company in Canada Sakto in 1996.

Likewise, another Regent Star sister company, Natalite was used as the address of Taib’s own children when registering their ownership of Sakti, a property company in the US.

These facts establish that, despite Taib’s denials that he had ever heard of Regent Star, this company was not only owned and controlled by his brother Onn Mahmud, but that it was part of a network of Hong Kong companies that was extensively tied up with Taib’s own family members.

Taib sued and demanded apologies from newspapers and individuals in Malaysia who had reported on the Japanese newspaper reports about the Regent Star kickback allegations.

Stripping out the wealth - exporting Sarawak's timber.
Stripping out the wealth – exporting Sarawak’s timber.
However, 5 years later it has started to become plain that the Chief Minister first allowed the privatization of the licencing of timber exports and then allowed huge payments to be channeled instead into a company that was owned and controlled by his own family members.

We urge the authorities in Tokyo to take notice of a police report that will be shortly be lodged requesting the re-opening of the Regent Star case in relation to the potential bribery and corruption of a public official.

We also urge Japan’s tax inspectors to take another look at Sarawak’s current timber exportation business and look at what arrangements there might be in place at the moment to ‘smooth and facilitate’ the permits needed from the private company that now controls them.

That company is now CMS shipping (part of the Taib family conglomerate CMSB), which took over Achipelago after Taib Mahmud broke business ties with his brother Onn in 2004.

~ Sarawak Report

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