How Malaysian corporate laws can recover after corruption

The 1MDB money laundering scandal was corruption on a global scale. How can Malaysia recover – and persuade the world it has changed?

For several years, Dr Vivien Chen worked as a solicitor in a law firm in Malaysia, drafting documents for corporate deals.  It was a time of political unrest. Protestors were taking to the streets to demonstrate against the arrest of Dr Mahathir’s former close ally and later his staunch critic, Anwar Ibrahim.

At the same time, corporate scandals involving politically well-connected companies were the talk of the town.  Many Malaysians wondered how these companies got away with transactions that benefitted the elite while ordinary investors lost out.

Even so, when evidence emerged around 1Malaysia Development Berhad (1MDB), a state-owned corporation, it deeply shocked Malaysians, particularly because the nation’s fortunes had been on the decline in recent years.

At the centre of the allegations is Malaysia’s recently deposed Prime Minister, Najib Razak, who was chairman of 1MDB and who so far has failed to explain adequately why more than $US1 billion flowed into his private bank account at AmBank in just two years. He says much of the money was a “gift” from a Saudi Arabian prince.

Police raids on Najib’s residence in June uncovered an extraordinary trove of luxury items and cash, including 567 handbags by designer brands such as Hermès, Prada and Chanel; 12,000 pieces of jewellery, plus hundreds of luxury watches and designer sunglasses. The haul, which took police several days to remove, was tentatively valued at more than RM1.1 billion (equivalent at the time to more than $A300 million).

Several countries are now conducting criminal investigations into transactions that extracted hundreds of millions of dollars (billions of Malaysian Ringgit) from 1MDB in less than six years.

Questions remain as to how a company, governed by seemingly strong laws, could be a vehicle for criminal activity of such proportions.

Dr Chen, from the Department of Business Law and Taxation at Monash Business School, does not take her research lightly. Her work as an academic examining shareholder protection law offers a critique of the effectiveness of the regulatory framework and examines underlying systemic weaknesses.

Malaysian corporate laws

Her thesis,  Shareholder protection law in Malaysia – its character evolution and effectiveness, was embargoed because the former government led by Najib Razak imposed “anti-fake news” laws that threatened to imprison anyone who criticised the government over the multi-billion dollar scandal that defrauded 1MDB.

Even though the Najib administration came to an end in May, various repressive laws remain in force and can be used to silence critics.


Dr Chen’s research explores the comprehensiveness and strength of Malaysian laws which are aimed at safeguarding the company from managerial misconduct, measuring it against benchmarks of international standards.

“I highlight the law’s lack of effectiveness from a range of perspectives and how particular features of Malaysia’s political economy lead to the law’s lack of substantive effect,” Dr Chen says.

It further reveals how corporate fraud may be camouflaged by systems of governance beneath the veneer of impressive laws that approximate benchmarks of international standards.

“It challenges assumptions which the World Bank has used as a basis for law reform in developing countries and is, therefore, relevant to law reformers and policymakers,” Dr Chen says.

Malaysia has laws that resemble Anglo-Australian corporate law founded on English common law principles of equity.

“Those laws, specifying directors’ duties and shareholder rights, are designed to protect investors and punish self-dealing or corrupt conduct. But in practice, enforcement is weak,” she says.

On the face of it, Malaysian law looks similar to Australian corporate law but the political and economic environment in Malaysia operates in a very different way – there is a strong nexus between politics and business.

Systemic weaknesses

Dr Chen’s doctorate, awarded earlier this year, examined shareholder protection law in Malaysia, the efficacy of those protections, and the economic, political and cultural influences that come to bear on those laws.

When compared internationally, Malaysia’s shareholder protection laws are strong.  If effectively enforced, they should safeguard shareholders from misappropriation of corporate assets by those who control companies.  However, in practice, both private and public enforcement of these laws are significantly less robust compared with Australia.

“There are systemic issues that underpin the lack of effective enforcement.  Corporate regulators need to take an active role in enforcing laws, such as directors’ duties, that protect shareholders from embezzlement,” Dr Chen says.

“The regulators must be independent of political influence.  The rule of law and an independent judiciary need to be restored.  Weak checks and balances, and suppression of civil liberties and freedom of speech have contributed to the abuse of power epitomised in the 1MDB debacle.”

The lack of transparency surrounding the governance of 1MDB and the absence of accountability with the public funds that 1MDB purported to manage are also significant.

The lack of investigation and enforcement of Malaysia’s existing laws have been highlighted by the 1MDB scandal, and it has cost the nation dearly, both in real-dollar terms and in terms of investor confidence.

Dr Chen notes foreign direct investment has been a big part of the Malaysian economy for decades, but the rorting of 1MDB “made a mockery of the laws”.

“I hope some of the people that are looking into it will try to address the systemic problems and really deal with them, and maybe foreigners will regain confidence to invest again,” she says.

Recent research

Dr Chen has described the implications of this political-business nexus in a paper (published 30 April 2019) that compares Malaysia’s corporate law and its enforcement with those in Australia. Her study highlights the extent to which business and politics are inextricably related and how this affects enforcement.  These are reflected in the ownership of companies and control over enforcement mechanisms.

Her paper Enforcement of Directors’ Duties in Malaysia and Australia: The Implications of Context also highlights the reticence of Malaysia’s enforcement agencies over many years to either investigate corporate wrongdoing or prosecute it.


She cites various sources indicating the nation’s corporate regulators are more focused on enforcing rules on filing documents than they are about routing criminal wrongdoing by the people who control companies.

Comparing the regulators

The Australian Securities and Investments Commission (ASIC) – despite its flaws – is far more independent, more willing to investigate wrongdoing, and better resourced than Malaysian regulators.

Those laws, specifying directors’ duties and shareholder rights, are designed to protect investors and punish self-dealing or corrupt conduct. But in practice, enforcement is weak.

ASIC’s policy of bringing enforcement proceedings against directors of high-profile public companies contrasts with the Malaysian corporate regulators who have been conspicuously silent on scandals involving high profile, politically well-connected companies.

At the same time, Dr Chen notes how minority shareholders in Malaysia face considerable challenges in enforcing their rights at general meetings, which are often dominated by controlling shareholders, and in getting courts to allow them to proceed with derivative actions (in which they seek leave of a court to sue errant directors).

Australian courts are more pragmatic in granting minority shareholders leave to proceed with derivative actions.   Shareholding is less concentrated in Australia and mechanisms, such as the two-strikes rule, allow shareholders to have a say on pay at general meetings.

Recent updates

The former prime minister has pleaded not guilty to multiple charges of corruption and money laundering.  His trial in relation SRC International Sdn Bhd, a former subsidiary of 1MDB, began in April.  If found guilty, he faces the prospect of spending several decades in jail.


Dr Chen would like to acknowledge her supervisors, Professor Michelle Welsh and Professor Richard Mitchell for their support with her thesis. This research was funded by the Australian Government’s research training program scholarship.

Published on 21 Nov 2018