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• WIKILEAKS: EMBASSY RAISES RELA ROLE WITH MALAYSIAN IMMIGRATION
• WIKILEAKS: MALAYSIAN GOVERNMENT DECIDES PROTON
• WIKILEAKS: Malaysia's 2008 Budget: Pork Sold Separately
• WIKILEAKS: Islamic Finance in Malaysia Part 2: Obstacles and Opportunities
• WIKILEAKS: Malaysia's Current Economic Performance Masks Need for Structural Change
• SUBJECT: INDONESIAN TIES WITH MALAYSIA FALL VICTIM TO ANOTHER DUST-UP
• WIKILEAKS: MALAYSIAN RACIAL ECONOMIC PREFERENCES CRITIQUED AT CONFERENCE IN KL
• WIKILEAKS: MALAYSIA'S CENTRAL BANK: LET'S MAKE A DEAL! REGULATION BY NEGOTIATION
• WIKIELAKS: 2007 UMNO GENERAL ASSEMBLY FIZZLES, BUT KHAIRY STANDS OUT
• WIKILEAKS: VIDEO OF JUDGE FIXING ROCKS MALAYSIA'S JUDICIARY

WIKILEAKS: EMBASSY RAISES RELA ROLE WITH MALAYSIAN IMMIGRATION Posted: 16 Oct 2011 01:00 AM PDT RELA, a volunteer auxiliary security force under the Home Affairs Ministry, has attracted criticism for reported abuses by RELA members primarily when rounding up illegal immigrants. RELA members receive a bounty for each illegal immigrant detained. Largely untrained RELA members have been accused of stealing the belongings of suspected illegal immigrants, extortion, using unnecessary force, and mistakenly detaining foreign tourists and legal residents. Given the lack of recognition for refugees under Malaysian law, RELA also has targeted refugee communities for immigration round ups, drawing concern from the UNHCR among others. THE CORRIDORS OF POWER Raja Petra Kamarudin 1.  (SBU) Summary:  Members of Malaysia's People's Volunteer Corps (RELA) began taking up guard duties at immigration detention centers beginning January 15, according to press reports.  Government officials describe RELA's assignment as a stop-gap measure while responsibility for the immigration detention centers shifts from the Prison Department to the Immigration Department.  Given RELA's poor reputation, Consular Chief raised questions about RELA's role with a senior Immigration official on January 22.  In response, the official emphasized the temporary nature of RELA's assignment.  Separately, RELA members reportedly raided two unsanctioned Burmese refugee camps over the past five days. We will continue to raise the issue of RELA with the Malaysian government and coordinate with UNHCR on refugee protection.  End Summary. 2.  (U) According to Malaysian press accounts, approximately 1,840 RELA members on January 15 began to take up duties as guards at immigration detention centers across Malaysia, with the exception of Sabah (due to Sabah's separate authority over immigration matters).  Home Affairs Minister Radzi Sheikh Ahmad told reporters that by March RELA would be responsible for 13 detention centers.  The GOM is shifting responsibility for the detention centers from the Prisons Department to the Immigration Department, both under the Home Affairs Ministry.  As RELA gradually assumes its new role, it takes over from guards from the Prisons Department.  Minister Radzi indicated that RELA's role would last approximately one year while the government hired 1,100 new Immigration guards. Government statements in November 2007 suggested RELA's role at detention centers could remain necessary for up to two years. 3.  (SBU) RELA, a volunteer auxiliary security force under the Home Affairs Ministry, has attracted criticism for reported abuses by RELA members primarily when rounding up illegal immigrants.  RELA members receive a bounty for each illegal immigrant detained. Largely untrained RELA members have been accused of stealing the belongings of suspected illegal immigrants, extortion, using unnecessary force, and mistakenly detaining foreign tourists and legal residents. Given the lack of recognition for refugees under Malaysian law, RELA also has targeted refugee communities for immigration round ups, drawing concern from the UNHCR among others. 4.  (SBU) Embassy's Consular Chief called on Immigration Director General Wahid bin Md. Don on January 22 and raised questions concerning RELA's deployment to the detention centers.  Consular chief noted that supervision of immigration detention facilities is a key government responsibility and Malaysia's handling of this function would attract international attention.  Wahid responded that RELA's involvement at the detention centers represented a stop-gap measure until the Immigration Department could recruit and train 1,100 new immigration enforcement officers to staff the centers.  In the interim, Wahid emphasized that RELA members would provide only security and not overall management of the detention centers, and he stressed the temporary nature of RELA's new role.  In addition, the government planned to hire another 3,000 new immigration enforcement officers to detect and detain illegal immigrants, implying that this would take away some pressure to use RELA in such a role. 5.  (SBU) Separately, Embassy received reports and documentary evidence of a RELA raid on January 19 on a refugee camp in the jungle near Putrajaya.  (Note:  The GOM does not recognize or sanction any refugee camps.  End Note.) The camp contained about 75 Chin refugees, and had received prior warnings that it should disband.  RELA reportedly burned the camp, and took or destroyed the refugees' belongings.  The New Strait Times daily also reported the destruction of the camp, but stated that RELA Director-General Zaidon Asmuni denied RELA started the fires. Instead, he pointed fingers at a local municipal council, whose president denied knowledge of the raid.  (Note:  RELA raids on camps sometimes occur following complaints by local residents or landowners.  End Note.)  The news report stated RELA detained 23 persons following the raid.  Embassy also received a report of a RELA pre-dawn raid on January 23 on a second Burmese refugee jungle camp, which contained over 150 ethnic Chin.  RELA reportedly detained 26 refugees, including a four-month old baby.  Post forwarded the information to the UNHCR. 6.  (SBU) Comment:  Post will continue to monitor actions by RELA and seek ways to impress upon the Malaysian government that RELA's treatment of refugees and illegal migrants will be a matter of U.S. and international attention.  Post continues to coordinate closely with UNHCR on matters pertaining to refugee protection and, together with Refcoord Bangkok, facilitate UNHCR and U.S. refugee processing entities' access to refugees in immigration detention. KEITH (January 2008)

WIKILEAKS: MALAYSIAN GOVERNMENT DECIDES PROTON Posted: 15 Oct 2011 01:00 AM PDT Given the political sensitivities surrounding both Proton and its pyramid of local suppliers, most of which are owned by ethnic Malays, only a foreign partner could have demanded the kinds of reforms necessary to make the company competitive. Unfortunately, as long as the government continues to subsidize Proton's losses, neither the national automaker nor its vendors will have the incentive to become globally competitive. In the case of Proton, the GOM's unwillingness to upset its spoils system has once again undercut its efforts to rationalize the economy. THE CORRIDORS OF POWER Raja Petra Kamarudin 1. (SBU)  Summary:  After nearly two years of back-and-forth negotiations with Volkswagen, the Malaysian government has decided that government-controlled auto maker Proton would no longer pursue a strategic partnership with the German auto manufacturer or any other foreign partner (including General Motors, with which it had also held discussions). Rather than look to a foreign partner to help revive the perennial loss-maker, the government announced that the firm was doing well and should be given a chance to turn around. Its auto sales were expected to more than double in Asia, particularly for its new models. Industry experts claim the government backed off the idea of Proton taking on an international partner because hundreds of local vendors would be unlikely to survive the kinds of reforms a world-class partner would demand. Many of these vendors are owned by ethnic Malays who enjoy protected status in multicultural Malaysia.  Taking action to force Proton to reform therefore would be unpalatable to part of the government's key Malay constituency, a particular concern to UMNO now with a national election on the horizon.  End summary. 2. (U) The Malaysian Cabinet has decided that national automaker Proton would no longer pursue a foreign partner. In announcing the decision on November 20, Finance Minister (II) Nor Mohamed Yackop said that recent signs of a financial turnaround by Proton had convinced the government that Proton could prosper without a foreign partner.  These signs included stronger than expected orders for Proton's new Persona model. The announcement came as a surprise to most analysts, given reports that Proton was in the final stages of negotiations with Volkswagen which would have allowed the German automaker an equity (though likely not controlling) stake in Proton. (General Motors reportedly was also still in the running as an alternative to VW).  Malaysian Automotive Association (MAA) President Aishah Ahmad publicly voiced doubts about the durability and depth of Proton's supposed turnaround, noting that a partnership with a foreign manufacturer would have been good for Proton's branding, and that Proton still needs to develop a sustainable, long term strategy to reverse its years-long slide from dominating the Malaysian market. SMOKE AND MIRROR PROFITS 3. (U) Boosted by the sale of land and the wrap-up of some project development costs, Proton posted a million-dollar profit for its second quarter ending September 30, compared to USD 75 million in losses in Q2 last year in a long succession of multi-million dollar losses.  Revenue was up 3% over second quarter figures last year due to a 1.3% increase in auto sales.  Although this growth was modest, Proton Chairman Mohammed Azlan Hashim pointed to it as an indication that Proton's sales would rise from their current levels of 30,000 to 40,000 units per model to between 100,000 and 150,000 units per model by 2011, primarily through greater exports to China, India, ASEAN, and to a lesser extent Iran. HOPES PINNED ON NEW MODELS, ASIAN DEMAND 4. (U) Ministry of International Trade and Industry Minister Rafidah Aziz told the press that Proton had its own strategic plans to capture regional markets, especially in India, China and Southeast Asia.  She said the American and European automotive markets were different and "not for us"; rather, the growth market is in Asia. Proton recently signed partnerships with the Governments of China and Thailand, including a deal to allow for the export of 30,000 Proton cars to China by the end of the year.  At an auto show in Thailand this week, Proton unveiled its new fuel-efficient model, the Savvy, its new sportscar the Neo, and its re-designed Gen.2, all of which Proton expects will help improve its sales in Asia.  As recently as July Rafidah had told the press that the government was interested in selling its 43 percent stake in Proton that it holds through government investment arm Khazanah (the government indirectly controls additional shares of Proton, including 12 percent through the Employee Provident Fund and 8.8 percent through national petroleum corporation Petronas). BUT QUALITY AND COMPETITIVENESS A PROBLEM 5. (U) At a recent panel discussion on Creating Global Champions Mr. Rameli bin Musa, Executive Vice Chairman for Ingress Corporation, a tier one vendor for Proton, said that a lot of vendors depended on Proton.  He described some of the challenges Ingress faced when the company began supplying auto parts for Honda and Toyota, including much tougher quality standards. Another panelist, Mr. Yong Poh Kon, President of the Federation of Malaysian Manufacturers, elaborated on this point, explaining that where Proton capped defective parts at 200 parts per million, Honda demanded no more than six per million, and Toyota ten per million.  This level of quality was one reason Malaysian auto parts suppliers were reluctant to venture beyond Proton for business, he said. 6. (U) Also at the conference, Akifumi Kuchiki, Executive Vice President of Japan External Trade Organization (JETRO) pointed out that Thailand quickly was becoming the "Detroit of Asia" and that Malaysia was being left behind. He suggested that Malaysia could focus on exporting automatic compact cars, while firms in Indonesia and Thailand could engage more in exporting pickup trucks and multipurpose vehicles, respectively. He said some of the constraints facing the Malaysian auto industry included an insufficient supply of unskilled labor, a need to upgrade the skills of its skilled labor, and an inadequate supply of quality parts manufacturers. Malaysia also needed to liberalize and deregulate national auto policies if it wanted to attract foreign firms in the support industries. COMMENT: 7. (SBU) Comment:  The Malaysian Cabinet's decision to prohibit Proton from taking a foreign partner surprised most industry watchers, likely including Proton itself, which had appeared on the cusp of signing a deal with VW.  With the government focused on upcoming elections, however, politics trumped economic rationality. Although long a supporter of Proton's efforts to seek a foreign partner, the government decided in the end that it was not yet ready to permit a fundamental shift away from a 20-year tenet of Malaysian industrialization - the promotion of a national car.  Given the political sensitivities surrounding both Proton and its pyramid of local suppliers, most of which are owned by ethnic Malays, only a foreign partner could have demanded the kinds of reforms necessary to make the company competitive.  Unfortunately, as long as the government continues to subsidize Proton's losses, neither the national automaker nor its vendors will have the incentive to become globally competitive.  In the case of Proton, the GOM's unwillingness to upset its spoils system has once again undercut its efforts to rationalize the economy.  KEITH (December 2007)

WIKILEAKS: Malaysia's 2008 Budget: Pork Sold Separately Posted: 14 Oct 2011 01:00 AM PDT The issue the Prime Minister isn't bringing up for this election-year budget is the problem of declining oil revenues. Petronas provides 35 to 40% of the GOM's budget. However, Malaysia is projected to be a net importer of oil within the next several years, based on a continued trajectory of 4% annual increases in domestic demand. This is a major problem because Petronas is obliged by the GOM to provide oil and gas for the domestic market at subsidized prices and it is responsible for covering the price gap between international and domestic prices. THE CORRIDORS OF POWER Raja Petra Kamarudin 1.  Summary:  On September 7, Prime Minister Abdullah Ahmad Badawi unveiled his 2008 budget proposal. Billed as a "fiscally responsible" budget, it projects a deficit of 3.1%, down from 3.2% in 2007.   Although spending is up, the GOM projects higher GDP growth will generate more than adequate additional revenue flows to compensate for it.  The Prime Minister (PM) also announced that he expects the private sector, including foreign investors, to help fund government-initiated development plans.  While the budget contained some important new tax provisions including a welcomed decrease in corporate tax rates, simplified tax collection on dividends, and enactment of additional tax preferences for the Islamic financial sector, the most important tax reform measure, implementation of the new Goods and Services Tax (GST) proposed in 2004, was missing.  In a panel discussion following the release of the budget, Ministry of Finance officials insisted it was still on the table.  However, absent up-front support from the PM and with elections just around the corner, the GOM is unlikely to submit a GST proposal to Parliament in the coming year.  This leaves the GOM without an answer to how it will reduce its dependence on revenues from the oil sector, even though depleting oil reserves imply this revenue stream will shrink in the near future.  Absent tax broadening measures like the GST, the GOM, which currently gets 38 percent of its revenue from the national oil company, will find it increasingly difficult to maintain its fiscal deficit within manageable bounds over the next decade.  End summary. First, what the budget didn't do: 3.  For an election year budget, many Malaysians were surprised by what it did not do.  A widely anticipated voter-friendly cut in the top individual income tax bracket did not materialize, but neither did any additional "sin" taxes (on tobacco or alcohol) which the GOM tends to increase every year.  Consistent with its billing as a "fiscally responsible" budget, no large new development projects were announced as part of the budget.  However, the Prime Minister already had announced plans to invest heavily in three regions on the peninsula, including the "Iskandar Development Region" bordering Singapore, plus Northern and Eastern Corridor Regional Development Plans. Similar regional development projects are rumored to be in the works for East Malaysia as well.  The Prime Minister announced that he is relying in large part on the private sector to finance these government initiatives. Reducing the deficit?  A closer look at the numbers: 4.  A closer look at the numbers shows that the GOM's formula for lowering the deficit is a result of two underlying assumptions, both of which have been received with some skepticism by local analysts. The first assumption is that real GDP will grow by 6 percent to 6.5% - a projection that analysts find somewhat optimistic. (Currently GDP is growing at approximately 5.7%.)  The second assumption is that the private sector - particularly foreign investors - will provide the lion's share of the funding needed for the three regional development plans laid out by the Prime Minister. Spending up 2.5% from last year 5.  Total budget expenditures (operating and development) for 2008 are RM 168.8 billion ($ 48.2 billion) in 2008, up 2.5% from RM 164.7 billion ($ 47 .1 billion) in 2007. Operating expenses up: 6.  Operating costs will grow 4% to RM 128.8 billion ($ 36.8 billion) in 2008.  Salaries comprise 28.1% ($ 10.3 billion) of operating expenditures and fixed charges and grants 49.6% ($ 18.3 billion). $ 11.4 billion for development: 7.  Gross development expenditure is budgeted at RM 40.0 billion ($ 11.4 billion), 2.1% lower than the revised allocation of RM 40.9 billion ($ 11.7 billion) in 2007 as the government intends to count on the private sector to drive economic growth. This 8% reduction came as a surprise to many analysts, some of whom had projected an allocation of RM 48 to 50 billion ($ 13.7 to 14.3 billion) for 2008. However, the Ministry of Finance also may tap into its supplementary allocation of US$ 2.35 billion when the government does a mid-term review of the Ninth Malaysian Plan in mid-2008. 8.  The biggest slice of the $ 11.4 billion development budget will go to education and training with $ 2.1 billion (18.4%), transport $ 1.9 billion (16.9%) and security $1.4 billion (15.2%).  Trade & Industry and agriculture will receive $ 1.1 billion (9.7%) and $ 1.05 billion (9.4%) respectively. Plans to cut subsidies? 9.  Subsidies will constitute 7.9% ($ 2.9 billion) of operating expenditures, declining 15.8% from 9.8% ($ 3.5 billion) of operating expenditure in 2007, indicating the government will possibly reduce fuel subsidies (perhaps on gas) in 2008.  Fuel subsidies are about three quarters of the total subsidy payment.  So far, the government has kept its promise not to raise domestic fuel prices this year as crude oil prices continue to rise. High oil prices to keep a lid on deficit, for now: 10.  Despite the increase in public spending, the government announced that it expected the fiscal deficit to remain under control at RM 20.9 billion ($ 6.0 billion) or 3.1% of GDP in 2008, down from an estimated RM 19.9 billion ($ 5.7 billion) or 3.2% of GDP in 2007.  The government projected revenue to increase 3.7% to RM 147.1 billion ($ 42 billion) in 2008 from RM 141.8 billion ($ 40.5 billion) in 2007, based on an assumption that oil prices will average $ 74 per barrel in 2007 and $ 75 per barrel in 2008. Oil-related revenues are expected to contribute $ 15.9 billion or 38% of total revenue in 2008, up marginally from $ 15.3 billion or 37.9% of total revenue in 2007. (Comment: As the petroleum income tax collection is based on preceding year's income, the government can be confident of its oil revenue in 2008.  National oil company Petronas' dividend payment to the government will accelerate to $ 6.9 billion in 2007 from $ 5.1 billion in 2006.) New tax provisions: 11.  Following are the most significant changes to the tax code proposed in the 2008 budget: --  Corporate tax, reduced from 28% in 2006 to 27% in 2007, will be reduced further to 26% in 2008 and 25% in 2009. This compares favorably to most countries in the region, with the exception of Singapore (18%) and Hong Kong (17.5%).  Vietnam, China, Thailand, India, Indonesia and the Philippines all have higher corporate tax rates, ranging from 28% to 35%.  (Taiwan's corporate tax rate is also 25%, but there is an additional 20% withholding tax on dividends.) --  Tax on dividends will no longer be adjusted to meet the recipient's tax rate.  Currently, taxpayers in brackets above the corporate rate are required to pay the difference; taxpayers in brackets below the corporate rate are eligible for a refund. (Dividend payments are not subject to double taxation in Malaysia.) Companies may opt for a six-year phase-in of this new provision. -- Small and Medium-sized Enterprises (SMEs) will be exempt from filing monthly tax estimates and paying monthly installments for the first two years of operations.  Tax for the full two years will be liable upon filing at the end of the two years.  A SME is defined as a company with ordinary paid-up share capital of less than RM 2.5 million (US$ 727,000). --  Information & Communication Technology (ICT) companies will be required to locate within specified geographic areas to retain current tax incentives.  ICT companies will qualify for an exemption of import duties and sales tax for broadband equipment not produced in Malaysia. --  Income derived from trading of Certified Emission Reduction (CER) certificates will be tax exempt. --  Tax relief will be provided for post-graduate studies, sports and exercise equipment, children's educational accounts, computers, broadband subscription fees, and some retirement benefits. -- Expatriate income tax will be calculated according to the number of days physically present in Malaysia. --  A 7% cap on deductions for approved charitable contributions will be extended to individual taxpayers as well as companies. (Currently only companies are subject to the cap.) --  Companies located in the Labuan Offshore Financial Center can make an irrevocable election to be taxed at the regular Malaysian rate, allowing them to benefit from bilateral tax treaties that otherwise would exclude them. --  Taxpayers will be permitted to make mortgage payments out of their retirement savings accounts. --  A number of new incentives will be enacted for companies engaged in Islamic finance, including Islamic insurance (reftel). Comment: 12.  The issue the Prime Minister isn't bringing up for this election-year budget is the problem of declining oil revenues. Petronas provides 35 to 40% of the GOM's budget.  However, Malaysia is projected to be a net importer of oil within the next several years, based on a continued trajectory of 4% annual increases in domestic demand.  This is a major problem because Petronas is obliged by the GOM to provide oil and gas for the domestic market at subsidized prices and it is responsible for covering the price gap between international and domestic prices. This of course eats away at its profits and its taxable income which is so essential to government revenue flows.  While Petronas increasingly expands its operations overseas, it is unlikely to be able to do so rapidly enough to compensate for lost revenue when oil imports exceed exports.  The problem of preventing a ballooning fiscal deficit when that happens is the elephant that everyone pretends not to see. KEITH (September 2007)

WIKILEAKS: Islamic Finance in Malaysia Part 2: Obstacles and Opportunities Posted: 13 Oct 2011 01:00 AM PDT The concept of the time value of money is ignored, and the difference between the purchase and resale price is attributed solely to risk. A blind eye is turned to the fact that compensation for "risk" is equal to what a conventional bank would charge in interest, and this "risk" even can be compounded daily. Practitioners acknowledge this and other "impurities" in how Islamic finance is carried out, but hope that someday the industry will grow big enough to establish its own benchmarks. THE CORRIDORS OF POWER Raja Petra Kamarudin 1.  (U)  Summary:  Malaysia is determined to become a global hub for Islamic Finance, and already accounts for two thirds of outstanding Islamic bond issuances (reftel).  However, at a recent conference in KL, financial experts discussed a number of obstacles holding back development of this niche market.  Chief among them was the inadequacy of the secondary market and the lack of Islamic derivative products.  Higher legal fees and complications arising out of the need for Sharia compliance were a burden as well. Nevertheless, the Malaysian government remains optimistic and content to have a pragmatic approach to development rather than get hung up on the need for a "purist" approach to Sharia compliance. End summary. Central Bank Governor Claims 40% Annual Growth in Islamic Bonds 2.  (U)  At the 2nd Malaysian Islamic Finance Conference in Kuala Lumpur last month, Central Bank Governor Dr. Zeti Akhtar Aziz announced that Malaysia accounted for about two-thirds of outstanding Islamic bonds throughout the world, amounting to roughly US$47 billion in 2007.  High savings rates in Asia and the Middle East were driving demand, she said, resulting in an average growth rate of 40% per year in the scale of the Islamic bond market. How to Build the Industry 3. (U) While Governor Zeti focused largely on Malaysia's success with Islamic bonds, other speakers at the conference focused on what needed to be done to build the industry.  Malaysia's RHB Islamic Bank chairman Vaseehar Hassan urged Malaysian Islamic banks to venture overseas and establish links with Middle Eastern markets, while also calling for non-Malaysian banks to issue Islamic bonds in Malaysia. Still a Developing Capital Market 4. (U) Investors at the conference complained that the Islamic derivative market was inadequate, and that there was almost no secondary domestic market for Islamic products.  There are simply too few players and intermediaries, they commented, so most investors prefer holding their investments.  Moreover, few Islamic derivative products exist.  Some investors also accused banks of not being transparent in risk management due to the lack of Islamic derivatives for hedging purposes.  Similarly, international rating agencies have noted the difficulty in rating Islamic products as there are few products for benchmarking.  In the case of Islamic REITs (Real Estate Investment Trust), Moody's Representative Director Christina Maynes said it was very much a conventional REIT in Malaysia's case.  However, she commented that Middle Eastern investors generally preferred to invest in real estate directly. Double the Legal Fees 5. (U) Issuers complained about the difficulty and higher cost in coming up with Sharia-compliant products.  Legal fees essentially double with the added layer of a board of Islamic scholars who must adjudicate Sharia-compliance. Sharia-compliance a high bar to meet 6. (SBU) In addition, Sharia compliance is stringent:  in addition to the basic prohibitions, like alcohol, gambling, etc., income from interest and debt to asset ratios must be below certain thresholds. Ed Teather, Executive Director and Senior Economist for ASEAN Research, told ECONOFF that these kinds of requirements made Islamic finance theoretically viable for refinancing existing assets, but nearly impossible to finance a new initiative that exists only as a blueprint or a business plan.  In addition, he pointed out that with the current excess liquidity in the market it simply did not make economic sense for corporations to go to the added trouble and extra expense of issuing Islamic products. Shortage of experts 7. (U) Yet another barrier is a lack of skilled Islamic finance professionals.  Banking professionals are seldom proficient in Sharia, while Islamic scholars are seldom proficient in finance. The GOM is providing scholarships to Malays who want to study Islamic finance and has established a training entity funded and coordinated through the Central Bank.  The 2008 budget proposes to exempt expatriate Islamic finance professionals from paying income tax in an effort to attract more talent from the Middle East. Working Towards Becoming "Purely Islamic" 8. (U) Islamic finance, as it is currently practiced, is not regarded as "pure" by many practitioners and scholars.  However, there is a general consensus among these experts on the need to build the industry until it can become independent of the global conventional finance system.  Until then, interest rates remain the fundamental benchmark for pricing and the mingling of Islamic and conventional assets will continue. 9. (U) Islamic finance, which forbids charging interest, uses an underlying asset to structure a "trade" as a substitute for a loan. For example, a contract is written to buy a specific amount of wheat and then re-sell the wheat at a specified later date at a different price.  The price difference can be used to finance an entirely unrelated transaction.  The concept of the time value of money is ignored, and the difference between the purchase and resale price is attributed solely to risk.  A blind eye is turned to the fact that compensation for "risk" is equal to what a conventional bank would charge in interest, and this "risk" even can be compounded daily. Practitioners acknowledge this and other "impurities" in how Islamic finance is carried out, but hope that someday the industry will grow big enough to establish its own benchmarks. 10. (SBU) The concerns of some practitioners go further.  Rafe Haneef, Citibank's Head of Islamic Finance for Asia, told ECONOFF that in order to truly practice Islamic finance, one had to be concerned about what the next customer did with the wheat even after the Islamic bank no longer held title to it.  The wheat could be sold for consumption, but once it had been used in an Islamic transaction, it should not be used in any interest-bearing transaction. He said this would be "like selling grapes to a winemaker." 11. (SBU) Because the market for Islamic finance remains small, some mingling of funds is inevitable, as there simply are not enough Islamic financial products available.  "All roads lead to U.S. Treasury bonds eventually," explained David "Daud Abdullah" Vichary, a longtime Islamic finance practitioner and British national. As the same money gets circulated, it is impossible to shelter it from conventional finance, he told ECONOFF. Comment 12.  (U) Whether or not Islamic finance will overcome its obstacles and become a major global industry remains an open question. The vision of its promoters is to tolerate a bit of un-Islamic "impurity" for now out of necessity, but to gradually move toward a "purer" form as the industry grows.  In Malaysia, with the government in an activist mode, the approach to Islamic finance is more pragmatic than pure, and it appears to be a growing reality. KEITH (September 2007)

WIKILEAKS: Malaysia's Current Economic Performance Masks Need for Structural Change Posted: 12 Oct 2011 01:00 AM PDT Education was among Ariff's primary concerns. Ethnic Malays were poorly prepared for university, he explained, largely due to a separate one-year "fast track" matriculation which was designed to enable them to secure a place in college more easily. Non-Malays were required to complete a more rigorous two-year program and pass an exam. The end result was that the non-Malays did better once they entered university. Moreover, separate education before college led to patterns of self-segregation at the university, and Ariff observed that the various ethnic groups had little interaction. THE CORRIDORS OF POWER Raja Petra Kamarudin 1. (SBU) Summary:  Malaysia's central bank Deputy Governor considers the country's banking sector unexposed to the turmoil in the US sub-prime mortgage market and believes that the economy remains on track for six percent GDP growth in 2007.  Private sector economists, however, point out that Malaysia's economy is performing under its potential growth rate by as much as two percentage points due to poor government policy.  The racial preference policies set out in the New Economic Policy (NEP) are viewed as the primary source of growth-restraining distortions which primarily have served to enrich political cronies.  In the process, not only has the NEP failed to reduce poverty among ethic Malays, it has directly contributed to greater income inequality and poverty.  It continues to crowd out of healthy private sector investment by government linked corporations.  Perverse education policies have chipped away at Malaysia's ability to produce a competitive work force for a global economy.  Prime Minister Abdullah Badawi is not perceived as a politician prepared to make the hard decisions necessary to reform the policies upon which his political supporters have come to depend.  Middle of the road rates of economic growth prevent a greater sense of urgency among policy makers, but over time these structural policy failures are expected to create even stronger constraints on Malaysia's ability to deliver on robust economic growth. End summary. CENTRAL BANK: LOOKING ON THE BRIGHT SIDE 2. (U) In a meeting with Economic Counselor and Financial Attach for Southeast Asia, Ooi Sang Kuang, Deputy Governor of Bank Negara, Malaysia's central bank, expressed confidence that the Malaysian economy would remain largely on track to reach government forecasts of 6% growth for 2007, even in light of the U.S. sub-prime lending problems. Ooi said that, although Malaysia was fairly insulated from the U.S. sub-prime lending market, he was concerned about how the "sentimental effect" of a significant reduction in financial markets could impact the global economy.  He described the U.S. Federal Reserve's decision to lower interest rates by fifty basis points as having done "wonders" for the global economy. MANUFACTURING SECTOR MUST IMPROVE 3. (U) Ooi described Malaysia's overall manufacturing sector as "not robust" and said it would need to become more competitive.  The sector that would suffer the most from an economic downturn in the U.S. was electrical & electronics (E&E), which was largely dependent upon U.S. demand for semiconductors, he explained.  He said Malaysia was not moving up the value chain rapidly enough, and that the country needed to transform its economy, particularly in light of a strengthening currency that would make Malaysian exports more expensive. 4. (U) Ooi pointed out that the ringgit's long-term value was increasing, and said Malaysian manufacturers would be forced to either "move up the value chain" or relocate if necessary.  He said many Malaysian companies were investing overseas, with labor-intensive manufacturing moving to Vietnam and Indonesia. "MANAGING" FOREIGN EXCHANGE RATES 5. (U) Ooi said Bank Negara continued to intervene in the foreign exchange market, but only to "smooth it out" and "manage" volatility, since large volumes could "disturb or excite markets" if they were not kept within "tolerable levels" of flexibility. He claimed that the central bank intervened in both directions - to smooth both the highs and the lows.  (Note:  when asked about this, one private sector banking professional responded that this might be true on a one-to-ten ratio, with the central bank mitigating the "lows" once for every ten times it intervenes to mitigate the "highs.")  ECONOMY STILL CHUGGING ALONG 6. (U) In spite of the setback in E&E, strong domestic demand continued to fuel the economy, explained Ooi.  Demand was being driven largely by higher rural incomes resulting from high commodity prices, a recent 35% civil service salary increase, and large government projects being implemented under the Ninth Malaysia Plan. He estimated that the government projects would remain the primary driver of domestic demand until mid-2008, by which time he expected the private sector would strengthen and the government-funded projects taper off.  The economy would also benefit by the imminent opening of the Kikeh oil field, Malaysia's first deepwater operation. FINANCIAL SECTOR LIBERALIZATION 7. (U) For its part, the Government of Malaysia (GOM) would continue to enact financial liberalizations, just as it had been doing for the Islamic finance sector.  According to Ooi, the GOM had been adhering to the ten-year Financial Sector Master Plan and in some areas was ahead of schedule.  This, coupled with the GOM's recent announcement that corporate tax rates would be reduced to 25% in 2009, would help boost the Malaysian economy. AN ANALYST'S VIEW 8. (U) While Ooi was upbeat about the Malaysian economy's resilience, Dr. Mohamed Ariff, President of the Malaysian Institute for Economic Research (MIER), was more willing to discuss the weaknesses as well as the strengths.  He cited similar economic indicators and pointed to the same strengths - strong domestic demand, government stimulus, and a reasonable forecast of 5.3 to 6 percent growth.  But Malaysia had much more potential than that, he said.  Malaysia would need to "move up the value chain" to position itself to complement, rather than compete with, China and other low-wage manufacturing centers in the region.  In fact, he said the GOM had rejected many applications to bring low-tech labor-intensive manufacturing to Malaysia, some of which had requested bringing in a few thousand (low-wage) foreign workers.  Rather, the GOM was approving higher-tech manufacturing in the E&E sector, but these more capital-intensive investments were not bringing in many jobs for Malaysians, with 20% of new jobs going to foreigners. REFORMS NEEDED 9. (SBU) To surmount the hurdles and achieve Malaysia's full potential for economic growth, Ariff argued that the GOM would need to enact some politically sensitive - and perhaps unlikely - reforms.  First on the list would be to address the "New Economic Policy" (NEP), a system of race-based preferences for ethnic Malays. Most benefits were going to cronies; intra-ethnic inequality was increasing, especially among Malays; and the entire system was creating a "dependency syndrome," putting low priority on academic achievement, he said.  10. (U) Education was among Ariff's primary concerns.  Ethnic Malays were poorly prepared for university, he explained, largely due to a separate one-year "fast track" matriculation which was designed to enable them to secure a place in college more easily.  Non-Malays were required to complete a more rigorous two-year program and pass an exam.  The end result was that the non-Malays did better once they entered university.  Moreover, separate education before college led to patterns of self-segregation at the university, and Ariff observed that the various ethnic groups had little interaction. 11. (SBU) Government-linked companies were another politically sensitive issue that would need to be addressed, as they were crowding out other players in the market, according to Ariff.  In 1985 the GOM privatized a number of companies, but these simply went to cronies, he said.  It was time for another round, but this would need to be done fairly. 12. (SBU) The race-based preferences in general and the poor educational system in particular were impediments to reaching Malaysia's full potential, but Malaysians were afraid of change, he explained.  "We need a new NEP," said Ariff, "and a free press not owned by the Barisan Nasional" (the ruling coalition which has been in power since independence in 1957). 13. (U) Ariff also was disappointed that the newly released 2008 budget contained no reference to the proposed Goods and Services Tax (GST) which had been pending since 2004.  The GST, similar to a value-added tax, would be desperately needed in several years' time when Malaysia was expected to become a net importer of oil. Currently Petronas, the national oil company, provides 38% of the federal government's revenue, and the country's tax regime will need to be restructured to avert a crisis.  14. (U) Comment:  There is widespread agreement on what to expect in the near term for the Malaysian economy: not much.  The economy will continue to chug along, growing at five to six percent; cronies will continue to benefit from the current system; and, despite Malaysia's greater potential, there will be little demand for change until things get measurably worse.  With elections near, no one expects the GOM to take actions that are politically difficult - least of all changes to the NEP, which is the Malays' sacred cow. KEITH (October 2007)

SUBJECT: INDONESIAN TIES WITH MALAYSIA FALL VICTIM TO ANOTHER DUST-UP Posted: 11 Oct 2011 01:00 AM PDT On October 6, members of a private, volunteer Malaysian militia (RELA) detained the wife of Indonesia's cultural attache to Malaysia. The latest incident follows on the heels of several cases of alleged mistreatment of Indonesian migrants working in Indonesia. For example, Indonesians were outraged when an Indonesian soccer coach was roughed up in August and when a young Indonesian woman, 20-year-old Suriyani Nas, alleged that in April she was bound, gagged and raped for a month by a Rela volunteer. THE CORRIDORS OF POWER Raja Petra Kamarudin Classified By: Pol/C Joseph Legend Novak, reasons 1.4 (b)(d). 1.  (U)  This message was coordinated with Embassy Kuala Lumpur. 2. (C) SUMMARY:  The brief detention--on illegal immigration charges--of an Indonesian diplomat's wife based in Malaysia has sparked an uproar in Indonesia.  Despite a formal apology, the Indonesian national legislature (DPR) has demanded that the GOI take steps to freeze ties with Malaysia.  The Indonesian government has rebuffed those demands and ties remain stable, but Indonesians--who are already inflamed over cases of alleged migrant labor abuse in Malaysia--are feeling increasingly touchy toward their neighbor.  END SUMMARY. A BRIEF DETENTION 3. (U) On October 6, members of a private, volunteer Malaysian militia (RELA) detained the wife of Indonesia's cultural attache to Malaysia.  The uniformed personnel--officially authorized to pick up illegal immigrants and deliver them to detention centers--reportedly failed to recognize Nurdin's diplomatic ID.  Rela detained the woman for about two hours while her daughter fetched her passport, according to media reports.  The Indonesian Embassy filed a formal protest.  Embassy official Shanti Utami Retnaningsih was quoted as saying -- "They treated her like an illegal immigrant...It's unacceptable.  This incident shows disrespect to members of our embassy." MALAYSIANS APOLOGIZE 4.  (SBU) Reacting to the incident, Malaysia's Ambassador to Indonesia gave an official apology on October 10.  Despite this, Malaysian Deputy Prime Minister Najib Tun Razak went on to deny publicly that Nurdin was detained at all, claiming that she was merely asked to wait while authorities verified her credentials, according to a Malaysian media report which also received coverage in Indonesia. BACKLASH IN INDONESIA 5. (C) For their part, Indonesian legislators reacted strongly in the week following the incident.  Several DPR members spoke out publicly, calling for withdrawal of the Indonesian ambassador to Kuala Lumpur, freezing the export of Indonesian migrant labor to Indonesia, and halting annual joint military exercises.  Foreign Minister Hassan Wirajuda said--given the official protest and official apology--the matter should now be laid to rest.  Based on Pol/C's soundings over the October 13-14 weekend, Indonesian politicians were still angry over the incident, claiming that it shows that Malaysians have "no respect" for Indonesians. 6.  (SBU) Sentiments of bruised nationalism have spilled over into culture as well, with recent calls by prominent Indonesians to boycott Malaysian products because of allegations that Malaysia has infringed upon the copyrights of popular Indonesian folk song "Rasa Sayang" ("Feeling of Love").  A song with the same tune and near identical lyrics has recently been employed to promote Malaysian tourism. Theo Sambuaga, Chairman of the DPR's Commission I which deals with foreign and security affairs, stated publicly on October 9 -- "We ask Malaysia, its apparatus and the media, to stop denigrating Indonesians." TIES A BIT BRUISED -- BUT STABLE 7. (C) The latest incident follows on the heels of several cases of alleged mistreatment of Indonesian migrants working in Indonesia.  For example, Indonesians were outraged when an Indonesian soccer coach was roughed up in August (ref B) and when a young Indonesian woman, 20-year-old Suriyani Nas, alleged that in April she was bound, gagged and raped for a month by a Rela volunteer (ref A). 8. (C) In spite of all the problems, Indonesian-Malaysian ties remain stable.  The perception is growing among Indonesians that they are somehow not being treated with respect, however.  At the heart of the matter, is sentiment among Indonesians that Malaysians have a superiority complex and treat Indonesians as if they are second-class citizens. A bit embittered, Indonesians increasingly are taking a touchy, nationalistic stance toward their cousins across the strait --  "They just treat us like dirt," said one official to Dep/Pol/C. HUME (October 2007)

WIKILEAKS: MALAYSIAN RACIAL ECONOMIC PREFERENCES CRITIQUED AT CONFERENCE IN KL Posted: 10 Oct 2011 01:00 AM PDT In response to Lim's presentation, a number of members of the audience spoke out angrily, including a member of the Government's Economic Planning Unit (EPU) who resorted to a personal attack on Lim rather than on the points he raised. Another critic in the audience, Ms. Aminah binti Pit Abdul Rahman who had been a government employee for 23 years, became visibly agitated and reminded the audience that ethnic Malays comprised 60 percent of the population; therefore, she argued (or rather shouted) that the government targets should be raised from 30 percent to 60 or 70 percent. THE CORRIDORS OF POWER Raja Petra Kamarudin 1. (SBU) Summary:  Malaysia's race-based economic preferences were roundly criticized at the annual National Economic Outlook Conference hosted by the Malaysian Institute of Economic Research (MIER). In the keynote address, the Crown Prince of the State of Perak called for national unity and pragmatic economic policies designed to improve the country's competitiveness, essentially a polite rejection of race-based policies. Stronger attacks on Malaysia's racial preferences were made by a former World Bank economist and an Australian academic who argued that incentives in Malaysia's economy were becoming increasingly distorted, leading to a loss of competitiveness.  While no one expects the government of Malaysia to undertake policy change in this sensitive area in the near term, it is notable that a government-funded think tank provided the forum for this much needed debate.  End Summary. CROWN PRINCE OF STATE OF PERAK CALLS FOR CHANGE 2.  (U) In his keynote address the Crown Prince of the State of Perak called for "pragmatism and fairness," a subtle attack on the government's current policies in terms of both its economic agenda and its divisive racial preferences.  On the economic front, he described Malaysia as "squeezed between the low-cost economies of China and Vietnam and the high-technology economies of Japan and South Korea," and called for "the most competitive, innovative and flexible responses." 3. (U) He cited the oft-repeated mantra that Malaysia needs to move "up the technological ladder"; however, a far greater part of his address focused on social and human capital, which he said were essential to development.  He said Malaysia must foster networks among its different ethnic, religious, and territorial groups.  He called for "increasing opportunities for bonding and bridging in residential neighborhoods, classrooms and the workplace, all with the understanding that more cultural mix is better." 4. (U) Alluding to the ongoing brain drain, the Crown Prince asked, "Can entrepreneurs, scientists, and technologists be nurtured without an enabling political, social, economic and cultural environment?  Can they flourish in the presence of perverse incentives and disincentives? ...There are countries today whose citizens are highly educated and whose scientists and engineers are at the leading edge in their fields but who want nothing more than to leave their countries.  Countries must change in line with the aspirations of their citizens or they risk losing their best and brightest." MEASURING WEALTH BY RACE 5.  (SBU) Lim Teck Ghee, a leading economic analyst and former World Bank staffer, calmly explained his earlier study on distribution of wealth among Malaysia's racial groups (reftels) which concluded that the wealth of ethnic Malays had already exceeded the government's targets.  His conclusion effectively challenged the stated basis of the government's racial preference policies. Lim also briefly reviewed several other studies that had reached similar conclusions. Two studies from the late 1980s suggested that that the lower classes bore the highest social costs of the racial preference policies, while a small group among the upper classes enjoyed the benefits.  Two other studies, one from 1989 and another from 2002, concluded that the government's wealth targets for ethnic Malays had been reached or exceeded, as did Lim's own 2006 study. 6. (U) Lim reviewed some of the findings and recommendations of his earlier study on the impact of Malaysia's racial policies on the economy and society. First, he pointed out that the government holds more than a third of publicly traded corporate equity, but that government-controlled companies reflected little entrepreneurial or manufacturing capacity.  He recommended that government-owned entities be managed by competent professionals with expertise in the business of the company under their charge.  Senior management positions should not be determined on the basis of race. 7. (U) Second, he pointed out that the current practice of distributing 30 percent of initial public offerings (IPOs) to individual ethnic Malays generally benefited only an elite few who often divested the shares immediately for huge profits.  Lim recommended that Malay IPO allocations not go to individuals unless a mechanism could be introduced to ensure that the beneficiaries played a prominent role in the management of these companies.  One option would be to make such allocations to existing trust agencies for Malays and to community-based trust agencies for Malaysian Indians and residents of Malaysian Borneo.  [Note:  among these two groups are some of Malaysia's poorest people.  End note.] 8. (U) Third, Lim said GOM regulations and policies were stymieing entrepreneurial development and hindering domestic and foreign investment.  Ethnic preferences undermined entrepreneurial endeavors and the creation of a competitive economic environment.  The GOM could better achieve its goals through capacity building efforts such as education and skills training rather than through forced equity restructuring. ECONOMIC FREEDOM: FROM 9TH TO 60TH PLACE 9. (U) More Malaysian feathers were ruffled when Wolfgang Kasper, Emeritus Professor of Economics, University of New South Wales, Australia, displayed graphs demonstrating a direct correlation between economic freedom and prosperity and cited the Cato Institute's "Economic Freedom of the World" 2007 Annual Report which ranked Malaysia as 9th most free country in 1990 but as 60th in 2005.  Kasper described Malaysia as having reached that halfway point in its development and outlined the elements of the rest of the journey: secure property rights, free markets, and a small, rule-bound, non-corrupt government.  He summed up his analysis of Malaysia as follows:  "The politicization of economic life leads to stagnation and social convulsion, a prospect that only the unrealistic and naive can face with self-satisfied complacency.  It seems to me that it would be much more naive and unrealistic to tolerate the cancer of crony capitalism and heavy reliance on pervasive, top-down bureaucratic controls and big government.... It is the big political challenge of the present generation of decision makers to abandon short-sighted, selfish rent-seeking in order to ensure that the vision of the developed-country shore ahead can be attained." RESPONSES FROM THE AUDIENCE 10. (U) In response to Lim's presentation, a number of members of the audience spoke out angrily, including a member of the Government's Economic Planning Unit (EPU) who resorted to a personal attack on Lim rather than on the points he raised.  Another critic in the audience, Ms. Aminah binti Pit Abdul Rahman who had been a government employee for 23 years, became visibly agitated and reminded the audience that ethnic Malays comprised 60 percent of the population; therefore, she argued (or rather shouted) that the government targets should be raised from 30 percent to 60 or 70 percent.  Some respondents in the audience were upset about Kasper's comments, with one indignantly noting that Malaysia should be praised for progress achieved. 11. (SBU) Comment: In the run-up to national elections, due by April 2009 but expected before April 2008, there has been increased attention paid to the GOM's economic and social policies in general and its 37-year old race-based economic preference policies in particular. There is widespread concern among non-Malays that these policies are marginalizing them and therefore breaking down Malaysia's social cohesion.  Many of the country's best and brightest non-Malay youth are migrating, perceiving little long-term hope of being treated as anything but second-class citizens in Malaysia. Many ethnic Malays, on the other hand, maintain a more defensive posture, apparently convinced of the rhetoric that they are more deserving of special protections because of their past disadvantage.  Their outbursts at the conference in response to criticism of the status quo [except, of course, that of the Crown Prince of Perak] were more emotional than pragmatic. Despite a handful of such outbursts, the overwhelming majority of the audience remained silent.  At lunch a Malay who had been government employee for many years expressed gratitude for Kasper's presentation on economic freedom, telling econoff, "We need foreigners to say these things."  While little change can be expected in the near term, the biggest news is that these kinds of issues can be discussed at all in a conference hosted by a government-funded think tank.  The conference would appear to be another example where Prime Minister Badawi's government is ready to allow more open debate as a first step toward possible revisions in policy at a future date when it becomes politically feasible to do so. KEITH (December 2007)

WIKILEAKS: MALAYSIA'S CENTRAL BANK: LET'S MAKE A DEAL! REGULATION BY NEGOTIATION Posted: 09 Oct 2011 01:00 AM PDT Similarly, BoAM has not been able to take advantage of its global internet bank because the server for that was located in Hong Kong. According to one BoAM representative, BNM said connecting to a server outside of Malaysia -- whether for internet banking or credit risk management -- was "outsourcing." When the bank argued that connecting to the box would not result in any Malaysians losing their jobs, BNM countered that, in the event of a financial crisis, foreign banks were likely to "flee the country" unless they had sufficient "brick and mortar" invested here. BoAM responded that, in the event of a disaster, there was no back-up system for its Malaysian customers without a connection to an outside server as is done elsewhere in the region. THE CORRIDORS OF POWER Raja Petra Kamarudin Classified By: ECON COUNSELOR MATT J. MATTHEWS, FOR REASONS 1.4 (b) and (d) 1.  (C) Summary:  A number of U.S. financial services firms operating in Malaysia have described various informal practices undertaken by staff at Bank Negara Malaysia, the Central Bank, designed to encourage US firms to shift investment and jobs to Malaysia in return for regulatory approvals.  In some cases the staff's demands to support Malaysian government policies are quite direct, while in other more subtle cases, the central bank's regulatory and licensing approvals conveniently and predictably follow investment decisions made by U.S. firms that contribute toward the government's development initiatives.  U.S. firms attribute these actions by Bank Negara to an effort to earn bragging rights for its support of the GOM's development plans.  Unfortunately, the use of regulatory oversight authority by Bank Negara staff to prod U.S. firms to expand investment and jobs in Malaysia raises serious questions about the central bank's role as a neutral regulator safeguarding financial stability. U.S. firm in Malaysia believe concluding an FTA that includes obligations to liberalize the financial services sector will be the most effective way to address this issue.  End Summary. GETTING CONNECTED REQUIRES "REINVESTING" IN MALAYSIA 2.  (C) In one case reported to Economic Counselor and Treasury's Financial Attache for Southeast Asia, Bank of America Malaysia (BoAM), a wholly-owned subsidiary of Bank of America (BoA), has been unable to expand its business up to now largely because the central bank, Bank Negara Malaysia (BNM) would not permit the subsidiary to connect to the parent company's Electronic Credit File (ECF), the bank's centralized credit-decision making and risk management tool. Across the globe, BoA approves credit decisions and maintains all its credit files electronically on a single system.  In Malaysia, however, BoAM has been forced to make loan applications on paper and send them via fax, maintaining originals in a bulletproof safe. 3.  (C) In April, after several years of negotiation, BoAM finally secured approval from BNM to connect to its global server by promising to "compensate" for using off-shore credit analysis and risk management tools by "reinvesting" in Malaysia.  BNM had cited data secrecy provisions in disallowing the connection, but this prudential issue was not part of the negotiation.  Instead, BoAM reported that the key part of the negotiation revolved around the question of what the bank would "bring back into Malaysia" if it were allowed to "take this out." 4.  (C) Similarly, BoAM has not been able to take advantage of its global internet bank because the server for that was located in Hong Kong. According to one BoAM representative, BNM said connecting to a server outside of Malaysia -- whether for internet banking or credit risk management -- was "outsourcing."  When the bank argued that connecting to the box would not result in any Malaysians losing their jobs, BNM countered that, in the event of a financial crisis, foreign banks were likely to "flee the country" unless they had sufficient "brick and mortar" invested here.  BoAM responded that, in the event of a disaster, there was no back-up system for its Malaysian customers without a connection to an outside server as is done elsewhere in the region. 5.  (C) BNM came back to the "brick and mortar" question, pointing out that HSBC had invested $28 million in back-office operations in Cyberjaya, making a significant contribution toward the government's goals of becoming a regional hub for back-office operations and building up the government-initiated cyber-city.  BoAM responded that their operations in Malaysia were much smaller than those of HSBC and that $28 million represented roughly half their total business in the country; therefore they could not possibly commit to such an investment.  BoAM asked what was required to "reinvest" in Malaysia, but BNM told them, "We do not have a framework for that."  So it became clear, according to the bank representative, that BoAM was expected to bring something to the table.  Finally, BoAM offered to build a $1.5 million Global Disaster Recovery Center for its internet banking system and hire two Malaysians to operate the system. BNM then agreed to allow them to connect to the server in the U.S. DIRECTED LENDING FOR HOUSING AND SMALL BUSINESSES 6.  (C)  Directed lending also has been a problem.  BNM set an individually-determined housing loan quota for all banks. BNM instructed BoAM to finance 50 low-income housing units (at less than RM60,000 each).  BoAM pointed out several difficulties they would have in meeting this quota.  First, BoAM did not do private mortgage lending in Malaysia, only corporate lending, and as such would have difficulty in assessing credit risk in this consumer market.  Second, very little housing was available at that price in Kuala Lumpur and BoAM had no presence outside the capital city, due to BNM restrictions on foreign conventional banks.  Homebuyers from outside the city were unlikely to travel to KL to apply for a mortgage loan, the bank pointed out. 7.  (C) BNM relented, imposing instead a RM 20 million quota in loans to small and medium-sized enterprises (SMEs).  BoAM had been able to meet only about RM 5 million of that quota, so every year it paid a fine.  Bank headquarters, however, became increasingly concerned about its reputation risk for not complying with BNM's quota, and sent BoAM back to the negotiating table with BNM.  Finally, BNM removed the official quota but established a "target" whereby BoAM was expected to make RM 5.6 million in loans to SMEs, 50% of which must be to SMEs owned by ethnic Malays. GE COURTS BANK NEGARA 8.  (C) Separately, Stuart Dean, General Electric President for Southeast Asia, described a similar approach to getting approval from BNM.  GE has not been able to enter the Malaysian market because BNM will issue licenses only to banking institutions and GE Money is a finance company. According to Dean, Malaysia has the largest consumer finance market among the five countries in Southeast Asia in which it operates, which also include Thailand, Indonesia, Singapore, and the Philippines.  If they could enter the consumer finance market, he argued, GE could double its business in Malaysia. 9.  (C) Dean described his company's relationship with BNM as "excellent" and said he was optimistic that GE would get the approval they needed.  In working with the Malaysian government, it was necessary to show them how Malaysia would benefit from any proposal, he explained.  GE recently decided to move 100 of its "backroom" positions to Cyberjaya to serve its clients in Singapore, Hong Kong, and the Philippines. This supports three key goals of the GOM:  back-office operations, regional operations, and a boost to the cyber-city.  GE also provides scholarships -- another high priority for the GOM which recognizes that the country's acute shortage of skilled labor is one of the major barriers to its development.  Last week, press reports announced that GE planned to invest in yet another high-priority government initiative, the "Iskandar Development Region" bordering Singapore, in partnership with the government-linked company UEM World. AMERICAN INTERNATIONAL ASSURANCE GROUP 10.  (C) Brad Bennett, CEO of American International Assurance Group (AIG) said he was confident that the company would get the approvals it needed because it was contributing to the country's explicit development goals.  While the GOM does not state outright that it will award approvals to companies that invest in the government's targeted sectors and initiatives, the company makes the investments and then "trusts" that the regulators will come through.  A year ago, Bank Negara was very helpful in working out a solution for AIG's requirements to incorporate locally and meet foreign equity thresholds, and is assisting the company in navigating the approvals required from various ministries for a data/call center to service the region.  Bank Negara specifically requested AIG not to publicize its plans to invest in the data/call center.  Bennett believes this is to allow Central Bank Governor Zeti to take credit for bringing in this high priority investment.  "It will be a political feather in her cap," he told Econoff.  AIG's next priority is to get a license for Islamic insurance, as the company perceives that its market share will decline as customers switch from conventional insurance to a Sharia-compliant product. 11.  (C) Comment:  Malaysia has a complex regulatory system whereby approvals are awarded on a case-by-case basis after what often are lengthy negotiations.  U.S. companies operating here have spent years investing time and money in the negotiating process and in developing good relationships with Malaysian regulators.   U.S. firms do not wish their various ongoing negotiations with Bank Negara to become the subject of government-to-government discussions that could undermine the deals these companies are working so hard to complete.  However, these financial sector companies do hope that the successful conclusion of an FTA with Malaysia will create a more transparent and liberalized operating environment which will eliminate the need for such interactions with Bank Negara in the future.   Finally, the aggressive effort by Bank Negara to use what should be prudential or regulatory tools for the benefit of unrelated government policies should raise some questions about how it will implement any "prudential carve outs" in the FTA. Clearly some of the policies imposed by BNM on the banks actually undermined their global risk management capabilities.  End Comment. KEITH (OCTOBER 2007)

WIKIELAKS: 2007 UMNO GENERAL ASSEMBLY FIZZLES, BUT KHAIRY STANDS OUT Posted: 08 Oct 2011 01:05 AM PDT UMNO Vice President and controversial Chief Minister of Malacca Mohd Ali Rustam, just weeks after telling the press that UMNO did not need the votes of the ruling coalition's Chinese or Indian constituents, pledged that "in the coming election, BN (Barisan Nasional) will win in Kelantan." Mohd Ali claimed the Islamic Party of Malaysia (PAS) only won control of the Kelantan State Assembly in 2004 because UMNO members in Kelantan had failed to register to vote. THE CORRIDORS OF POWER Raja Petra Kamarudin Classified By: Political Section Chief Mark D. Clark for reasons 1.4 (b, d). 1.  (C) Summary:  The United Malays National Organization (UMNO) held its 58th Annual General Assembly in Kuala Lumpur from November 5 - 9 and despite the usual fanfare proved to be little more than a pep rally for the upcoming general election.  Although party elections remain a year away, changes were bothrumored and evident in UMNO's Youth, Women's, and Young Women's organizations.  Son-in-law to the Prime Minister and Deputy Youth leader Khairy Jamaluddin appeared to be the heir apparent for the Youth chief post and rumors continued to float that Youth and Sports Minister Azalina Othman Said would challenge International Trade Minister Rafidah Aziz for the top Women's post next year. Considerably toned down from last year's convention, delegates abandoned attacks against other ethnic groups as the party focused on issues of unity, solidarity and electoral preparedness.  Khairy Jamaluddin was the charismatic star of the assembly and seemed to set the agenda for his father-in-law, party president and Prime Minister Abdullah Badawi.  Khairy and Abdullah spoke on a number of similar issues, including the necessity of ending fuel subsidies and of the need for the police to deter illegal street demonstrations.  Abdullah threatened the opposition not to challenge his authority and resolve, but found himself and the whole assembly upstaged by a mass street protest on November 10 (ref A).  Recent mass demonstrations seem to have undermined UMNO's election optimism, and Abdullah finds himself in a particularly difficult position of having to repeat his performance of the 2004 general elections when his coalition parties won 90 percent of the seats in Parliament. End Summary. Focusing on the general election 2. (SBU) UMNO's 58th Annual General Assembly, which ran November 5 - 9, was little more than a pep rally for the upcoming general election, and one whose impact lasted less than 24 hours as public attention shifted to the successful opposition-led Bersih rally on November 10 (ref A) and the ensuing street demonstrations that dominated November and December.  Gone were the television cameras which showed to Malaysia's minorities the hate speeches of the 2006 assembly and the political maneuvering of the Abdullah - Mahathir rivalry.  Instead, UMNO politicians from the grassroots to the Supreme Council pledged solidarity, tolerance, and above all else, electoral success.  Leaders warned members to steer clear of divisiveness ahead of the general elections, focused on interracial themes, and promised that party elections and internal politics could wait until after the general elections were held.  Throughout the week UMNO owned and controlled newspapers ran headlines with themes of "SOLIDARITY" and "WE'RE READY". Auxiliaries look toward succession 3. (SBU) As is the annual fare for all UMNO General Assemblies, the Youth, Women's and Young Women's assemblies occupied the first two days of the conference.  Despite pledges to delay maneuverings for party leadership positions until after the general elections, rumors continued to circulate that Youth and Sports Minister Azalina Othman Said would challenge International Trade Minister Rafidah Aziz for the top Women's post next year.  Young Women's leader Noraini Ahmad has already surpassed the maximum age for membership in UMNO's Puteri organization, and her speeches clearly indicated this was her farewell year as Young Women's (Puteri) chief.  Youth Chief and Education Minister Hishamuddin Hussein was also on his farewell tour, evidenced by nearly every Youth speech thanking him for his leadership and honoring him as the inspiration of UMNO Youth.  At one point early in the Youth assembly, a video was played with accolades for Hishamuddin's leadership and concluded with a clip of Deputy Youth chief Khairy Jamaluddin raising the national flag during the recent Independence Day celebration. Hishamuddin then began his address by speaking of unity and continuity within UMNO Youth, symbolically placing the future of UMNO Youth into the care of his deputy Khairy. Abdullah's leitmotif 4. (C) UMNO President and Prime Minister Abdullah Badawi opened the 2007 General Assembly in his typical lack-luster, uncharismatic style, but touched on his standard tranche of issues that promised to be campaign topics for the upcoming elections.  While a noticeable number of UMNO delegates read newspapers or napped, Abdullah spoke for some 80 minutes on Islam, government linked companies (GLCs), public services, growth corridors, human capital and education.  Noticeable sound-bites for upcoming Barisan Nasional campaigns were scattered throughout his speech, and Abdullah made frequent reference to harmony among Malaysia's various communities and national development projects that would address the needs of all Malaysians. Nevertheless, the Malay agenda remained an underlying message and attracted the most audience interest. Abdullah ensured that threats to Malay supremacy would not be tolerated: "Other communities must appreciate the sensitivities of Malays," Abdullah said. "Basic matters relating to the sanctity of religion, beliefs and practices, Malay interests and the social contract between the communities are sacred to us and should not be raised. Similarly, the basic issues that were agreed upon at the time the Federal Constitution was drafted are non-negotiable." 5. (SBU) As he has done every year since 2004, Abdullah gave particular attention to Islam and reiterated his concept of Islam Hadhari or "Civilizational Islam".  Of note, Abdullah stated: "UMNO is committed to strengthening Islam and will not apologize for doing it.  Islam promotes moderation. . . We give the assurance that UMNO will not endorse a narrow interpretation of Islam.  UMNO opposes the culture of violence...Islam must be identified as a religion that dispenses justice, prohibits inequity and rejects violence." Abdullah spent considerable time touting Malaysia's efforts and successes in the Islamic finance sector and in the halal food sector.  He promised that Malaysia would continue its efforts aimed at becoming "a premier global Islamic center." "We're ready, Pak Lah. Call the elections" 6. (C) Over the proceeding two days, dozens of delegates addressed the assembly with their usual calls for limiting the number of foreign workers in Malaysia, demanding expanded use of the Malay language in public schools, and encouraging development in the Malay heartland.  However, notwithstanding the usual ethno-centric appeals to the UMNO base, the topic of the coming general elections always returned.  UMNO Vice President and controversial Chief Minister of Malacca Mohd Ali Rustam, just weeks after telling the press that UMNO did not need the votes of the ruling coalition's Chinese or Indian constituents, pledged that "in the coming election, BN (Barisan Nasional) will win in Kelantan."  Mohd Ali claimed the Islamic Party of Malaysia (PAS) only won control of the Kelantan State Assembly in 2004 because UMNO members in Kelantan had failed to register to vote.  "I hope after this assembly, the delegates can prepare a list of members who have yet to register as voters and register them so that they can vote in the coming elections."  Indeed, delegates throughout the convention waited with baited breath for the Prime Minister to call the elections, but such an announcement was not forthcoming.  As one Puteri delegate said in her closing speech, "We're ready, Pak Lah.  Call the elections.  We just can't stand it anymore." UMNO is not racist, says Khairy 7. (SBU) Even the first son-in-law, Khairy Jamaluddin, spoke of the upcoming elections and warned BN's component parties to be happy with their share of the pie.  "No one should accuse UMNO of being a racist party or label the Malay agenda as being a racist agenda," he said. "If we look at the allocations of electoral seats, the truth is UMNO could have contested more seats than what it has now, but this was not the case, as we are willing to give way for our BN partners to be better represented.  If we are racists, we would not give away Malay majority seats," Khairy argued.  With echoes of the 2006 assembly, Khairy warned that if any minority group wanted to raise issues of political equality among the races, then UMNO Youth would reciprocate by asking for equal economic clout. Khairy sets Abdullah's agenda 8. (C) Khairy's speeches, emotionally eloquent and charismatically superior to almost all the other delegates, were not limited to defending the Malay agenda.  He also set the tone for many of the topics that would later be covered in his father-in-law's final address to the assembly.  Two of the principal topics which Khairy introduced for Abdullah were, firstly, the need to end gasoline subsidies, and secondly, a demand for a police crackdown on the November 10 Bersih rally (ref A). 9. (C) Venturing away from his typical racial and political pandering, Khairy ventured into new waters by addressing issues of the nation's economic longevity, and tied future budgetary concerns to the government's RM40 billion in yearly subsidies for gasoline, natural gas, and agricultural produce.  Khairy recognized the political suicide in ending subsidies outright, but argued that RM40 billion each year in the government coffers could "build at least two cities just like Putrajaya, nine bridges like the Penang bridge, or about 500,000 low-cost houses."  Khairy argued that the government should implement a tiered subsidy system; continue subsidies for the poor but not the rich: "Why should we be giving subsidies to well-to-do people? This is not fair."  With oil prices hovering at USD100 per barrel, Khairy argued, the current subsidies could not continue, or it would eventually bankrupt the country.  Just "don't do it drastically" he asked. "Give us notice so that we can brace ourselves and not make it too burdensome on the people." 10. (C) In his final speech on November 8, Khairy also lambasted the opposition for calling on 100,000 people to take to the streets to demand "a clean election" (ref A). Khairy boasted that UMNO could certainly match their numbers in the streets, but such an act would only cause a riot. Instead, he called on "the police to arrest the organizers of the illegal rally."  Nevertheless, despite his charismatic delivery, Khairy utterly missed the irony of his words when he issued the challenge: "To these people, I call on them to stop going to the streets and behaving like monkeys, and instead go to the polls if they want to challenge us," for only five weeks prior Khairy was leading street demonstrations in front of the Burmese embassy to protest the junta's violent crackdown on pro-democracy protesters (ref B). Abdullah agrees subsidies cannot continue 11. (SBU) In his closing remarks to the 58th General Assembly, Abdullah Badawi returned to his Wagnerian leitmotif and preached of economic prosperity, religious tolerance and the need to "grow human capital".  Highlighting the economics section of his speech, however, were talks of ending subsidies.  Abdullah agreed that fuel subsidies could no longer be sustained with the steep rise in global oil prices. He proposed a two-tier structure to ensure the impending price increase was affordable to those in the lower income groups. "For those who can pay, we set the price a little higher," said the UMNO president, but he did not indicate when the price increases would take effect.  "We will restructure and subsidize at suitable rates and this will be the approach we will take in the future," Abdullah said, admitting that the RM40 billion-a-year subsidy for fuel was too much for the government to bear.  "If the subsidy is reduced, we will have a lot of money to develop our country," he said, echoing Khairy's words from the day before. Abdullah: I will not be challenged! 12. (C) As calls from the Coalition for Clean and Fair Elections (Bersih) resonated through the alternative media, NGO, and opposition network for a November 10 march on the national palace (ref A), Abdullah again was compelled to echo the words of son-in-law Khairy and called on the police to arrest the leaders of the "illegal demonstration."  "They challenge our laws and our public order.  They challenge the people because the people want safety, security and lasting stability.  That's what they challenge, not me.  But I say, I will not be challenged," declared Abdullah.  "What changes do you want?  Wait until the elections, then we will see together who will win.  Or are you afraid of the elections, " Abdullah mocked.  On the morning of the Bersih demonstration, Malaysia's newspapers headlined his warning: "I will not be challenged!"  And yet, as the morning rose on November 10, and tens of thousands assembled in Kuala Lumpur from around the country to participate in the Bersih rally, UMNO's week-long annual general assembly was upstaged and lost all public resonance. Comment 13. (C) So similar were the key points of the PM's speech with Khairy's that some observers half-heartedly joked that Khairy must have written Abdullah Badawi's closing remarks. It seems improbable that there was no correlation of the two men's speeches, but it was Khairy and not Abdullah that had the most to gain from this year's assembly.  Khairy's foray into the technical and economic realms of UMNO politics marked a strong departure from his previous role defending issues such as Hishamuddin's love affair with the Malay dagger (keris) and championing calls for Palestinian independence.  The 2007 UMNO assembly marked a new era for the heir apparent, and his path to the UMNO Youth chair currently appears unchallenged and unimpeded. 14. (C) UMNO's principal objective in this year's assembly was to saddle the horses and prepare the foot soldiers for battle in the upcoming general elections.  UMNO also intended the general assembly's messages to reassure its BN partners, particularly MCA and its Chinese voters, in sharp contrast to last year's divisive racial rhetoric that went out unfiltered to the Malaysian public.  The ensuing street demonstrations of November and December, however, sapped away any momentum from this year's UMNO gathering.  The government's counter-attack through its harsh law enforcement approach following the November 25 ethnic Indian protest appears to be an attempt to retake the initiative.  Nevertheless, the recent mass demonstrations seem to have undermined UMNO's election optimism, and Abdullah finds himself in a particularly difficult position of having to repeat his performance of the 2004 general elections when his coalition parties won 90 percent of the seats in Parliament. KEITH (December 2007)

WIKILEAKS: VIDEO OF JUDGE FIXING ROCKS MALAYSIA'S JUDICIARY Posted: 07 Oct 2011 01:00 AM PDT The reference to Wee Choo Keong seems to confirm that Lingam was talking to Chief Justice Fairuz as it was Fairuz who in 1995 as an election court judge upheld an election petition contesting DAP candidate Wee's victory as a Member of Parliament in Kuala Lumpur's Bukit Bintang district. Instead of calling for fresh election, Fairuz made an unprecedented decision by dismissing Wee and naming the losing Barisan Nasional MCA candidate Dr. Lee Chong Meng the winner. THE CORRIDORS OF POWER Raja Petra Kamarudin Classified By: Political Section Chief Mark D. Clark for reasons 1.4 (b and d). Summary 1. (C) Former Deputy Prime Minister Anwar Ibrahim rocked Malaysia's legal establishment on September 19 when he held a press conference to release an eight minute videotaped conversation purportedly showing a phone conversation between a famously corrupt Malaysian attorney and the current Chief Justice of Malaysia's Federal Court engaged in a judge fixing scheme.  The Malaysian Bar Association and opposition parties called for immediate inquiries into the allegations and for the establishment of a royal judicial commission to investigate the Chief Justice.  Malaysian political leaders, including current Deputy Prime Minister Najib Razak, downplayed the revelations in the press, calling into doubt the authenticity of the taped conversation.  Government controlled and influenced newspapers printed but downplayed the release of the tape, often burying the article to the lesser-read center pages, and avoided printing the names of the judges and political leaders discussed in the tape. There is speculation that Anwar released the tape at this time in an effort to strengthen his appeal in a recently dismissed defamation suit against former Prime Minister Mahathir.  It may also be true that the tape is intended to force the retirement of Chief Justice Ahmad Fairuz whose ordinary contract expires in October 2007.  End Summary.  Anwar alleges Chief Justice involved in "judge fixing" 2. (U) Malaysia's judiciary came under the spotlight again on September 19 after former DPM and de facto Peoples Justice Party (PKR) leader Anwar Ibrahim released an eight-minute video clip showing senior Malaysian lawyer VK Lingam in a mobile phone conversation allegedly with current Chief Justice Tun Ahmad Fairuz Sheikh Abdul Halim fixing the appointment of "friendly" senior judges.  The video supposedly filmed in 2002, was posted on the online news portal Malaysiakini and on PKR's party website.  At the time the tape was allegedly recorded, Ahmad Fairuz was the Chief Judge of Malaya, in charge of all High Court judges in Peninsular Malaysia.  Among the cases "discussed" by the chief justice and the senior lawyer were Anwar's appeals and the potential appointment of Ahmad Fairuz as the Chief Justice of the Federal Court-- an event which eventually took place in 2003 when he bypassed several other senior judges in line for the position.  At the September 19 press conference, Anwar claimed the revelations proved that his previous appeals against his sodomy and abuse of power convictions were tainted and that he was denied a proper and fair trial. Explosive Conversation 3. (U) In the video clip, VK Lingam is heard telling a person alleged to be Fairuz that "key players" should be nominated for judicial appointments in order to hear cases and deliver judgments accordingly.  He exhorted Fairuz's loyalty and "sacrifices" and added that even former Chief Justice Tun Eusoff Chin had told him that Fairuz is "110% loyal."  Lingam stressed, "We want to make sure our friends are there for the sake of the (then) PM (Mahathir) and the sake of the country. Not for our own interest, we want to make sure the country comes first." 4. (U) Also implicated in the conversation were business tycoon and former PM Mahathir crony Vincent Tan and his business partner Tengku Adnan Tengku Mansor, then minister in the PM's Department, and currently the Tourism Minister. Based on Lingam's conversation, both Tan and Adnan had apparently played an instrumental role in the appointment of judges as well to secure the honorific title of 'Tan Sri' for Ahmad Fairuz.  Towards the end of the eight-minute video clip, Lingam acknowledged, "you (Fairuz) have suffered... so much you have done, for the election, Wee Choo Keong, everything. . .nobody would have done all this. . . God bless you and your family."  The reference to Wee Choo Keong seems to confirm that Lingam was talking to Chief Justice Fairuz as it was Fairuz who in 1995 as an election court judge upheld an election petition contesting DAP candidate Wee's victory as a Member of Parliament in Kuala Lumpur's Bukit Bintang district.  Instead of calling for fresh election, Fairuz made an unprecedented decision by dismissing Wee and naming the losing Barisan Nasional MCA candidate Dr. Lee Chong Meng the winner. VK Lingam "Judge Fixer Extraordinaire" 5. (SBU) VK Lingam is a senior lawyer who came into the spotlight during former Chief Justice Tun Eusoff Chin's term (1994 - 2000) in office.  Dubbed locally as the "judge fixer extraordinaire," Lingam was a sought after lawyer as he had the ears of the then Chief Justice and his clients won all their cases.  Lingam's relationship with the former Chief Justice was so close that their families were known to go on joint holidays paid for by Lingam.  There were also allegations that Lingam wrote some of the judgments for his own cases.  In one example of a defamation case involving his client Vincent Tan against journalist the late MGG Pillai, it was alleged Lingam who wrote the judgment in his firm and dispatched the "floppy disc with the judgment" to the judge's chambers.  He was also implicated in the Perwaja Steel Mill fiasco (a failed development project during Mahathir's era) where government appointed auditors investigating the failure of the project found exorbitant fees paid to Lingam's firm "for unsubstantiated services."  However, Lingam's influence within the judiciary waned during the term of Chief Justice Dzaiddin (2000 - 2003) until Fairuz was named the Chief Justice in March 2003.  Lingam represented former PM Mahathir in a defamation suit filed by Anwar Ibrahim for calling him a homosexual at a press conference in 2005.  In July 2007, Judicial Commissioner Tengku Maimon Tuan Mat dismissed the suit without hearing the merits of the case and ruled that the suit was "obviously unsustainable" and "clearly an abuse of the court process."  The former DPM has filed an appeal against the decision.  Reactions to the Expose 6. (U) Former DPM Anwar stated that the revelations proved his appeals against his sodomy and abuse of power convictions "were tainted" and that he was denied a proper and fair trial.  He added that the "scandalous" expose, "serves to collaborate our allegations of a political conspiracy of the highest level and corruption of the highest judicial office, seriously bringing into question the impartiality of judicial proceedings, including mine."  Anwar, who was sacked as Deputy Prime Minister in 1998, spent six years in jail after he was convicted of sodomy and corruption charges.  Although his sodomy conviction was later overturned, the corruption verdict was upheld.  He added that the People's Justice Party will file a special appeal with the Conference of Rulers (a constitutionally formed council of Malaysia's nine sitting monarchs and four non-royal governors), to assume their "constitutional roles" and take appropriate action.  The party has also lodged a report with the Anti-Corruption Agency (ACA) and the Bar Council. 7. (SBU) Responding to the expose, Bar Council President Ambiga Sreenevasan urged the government to establish a royal commission of inquiry to investigate the video and the judiciary.  She pointed out that rumors and allegations of such machinations have been rife and therefore, "With the emergence of this video clip, the concerns expressed by various quarters in relation to the judiciary can no longer be swept aside."  Echoing the Bar Council President's call, former UN Rapporteur on the Independence of Judges and Lawyers Param Cumaraswamy (who helped represent Anwar Ibrahim in his defamation suit against Mahathir) told poloffs that only an independent commission of inquiry and "nothing less" will be able to clear the tainted image of the judiciary. However, he acknowledged that the UMNO centric government does not have the "political will to investigate the shenanigans in the judiciary." 8. (U) Opposition leader Lim Kit Siang stated in a letter to PM Abdullah that Chief Justice Fairuz should be suspended citing constitutional provisions that allow the removal of a Federal Court judge for ethical breach.  He added that he had asked the Prime Minister to appoint an Acting Chief Justice and take "concerted efforts to restore public confidence in the independence, impartiality, professionalism, and integrity of the judiciary."  Human Rights NGOs have also called on the Chief Justice to resign and urged the government to conduct a judicial review of all politically connected cases including former DPM Anwar Ibrahim's cases, appointment of judges and the sacking of the former Chief Justice and two Supreme Court Judges in 1988. A Mooted Response from GOM and Local Media 9. (SBU) The GOM's response to the allegation has been extremely feeble.  Minister in the Prime Minister's Department Mohd Nazri Abdul Aziz, who handles the law portfolio, stated that anyone with evidence of wrongdoing involving the appointment of judges should forward it to the proper authorities to investigate.  He added he would wait for the ACA to complete its investigations before making further comments.  Similarly, Attorney General Gani Patail opined, "No criminal offense appears to have been committed in the video recording" but added that he was getting further opinion on the matter and studying other information in the video clip.  Current Deputy Prime Minister Najib Razak commented to the press that the "Government will first confirm the authenticity of the video before deciding on the next course of action." 10. (SBU) Interestingly the mainstream newspapers, all government controlled or heavily influenced, carried the story but downplayed the news by placing it far from the front page and by not naming the people mentioned in the clip.  Instead the printed press chose terms like "a prominent lawyer", a "very senior judge", "a number of prominent judges", "a prominent businessman and a politician, both of whom were close to the then Prime Minister". UMNO-owned, Malay language newspapers did not publish former DPM Anwar Ibrahim's press conference September 20 but instead carried pictures of the Chief Justice breaking fast with the King and the Prime Minister at an official function. However, in the September 21 edition although they still had pictures of the Chief Justice breaking fast with prominent UMNO politicians, the Malay papers carried a brief report on the issue, buried in the back pages of the paper.  Even "The Sun", an English language newspaper considered "more independent" than the other newspapers buried the news among other reports, seemingly because Vincent Tan, who is mentioned in Lingam's conversation with Fairuz, owns the paper.  Former High Court judge Visu Sinnadurai opined to poloffs that the poor response from the government and the press was because, "it was former DPM Anwar who released the video."  He told poloffs that the GOM will naturally maintain a distance when any issue involves the former DPM. Comment 11. (C) Malaysia's judiciary has suffered from allegations of corruption and political interference since the constitutional crisis of 1988 when the PM Mahathir fired the Chief Justice and several other judges and stripped from the constitution clauses guaranteeing the independence of the judiciary.  Anwar's allegations and video-taped evidence came as little surprise to the nation, but highlighted and reinforced long-held doubts concerning the lack of independence in Malaysia's judicial system.  The allegations of judge fixing involve several senior UMNO leaders and supporters, and it is highly doubtful the Government will find the political will to thoroughly and honestly investigate the veracity of the claims.  Set against the back-drop of Malaysia's pending elections, Anwar's release of the tape appears to have political, as well as personal, motivations.  Anwar's PKR party, and the opposition in general, have focused many of their recent campaigns on anti-corruption platforms, and this story adds another anti-corruption arrow in the opposition's campaign quiver. These accusations also give weight to Anwar's claims that he was unjustly convicted in 1998 and therefore should not be prevented from contesting a seat in parliament in the next election.  While such a contention will undoubtedly fail before the UMNO-controlled election commission, it reinforces Anwar's PR-influenced role as a victim of a corrupt system. 12. (C) Given the story's limited billing and self-censorship among the mainstream press, it is likely the story will wither on the vine.  In general, only Fairuz's contract extension lies on the chopping block.  Fairuz has reached the mandatory retirement age for judges of 66, but it is common practice for the Chief Justice to receive an intial six-month extension possibly followed by subsequent extensions up to the age of 68.  It is commonly held among Malaysia's legal professionals that Fairuz was seeking his initial extension in October when his current contract was set to expire. Whether the axe will swing remains a question. KEITH (September 2007)

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