Where did the money go? (part 2)

SPECIAL REPORT ON SABAH’S LOGGING SCANDAL
Raja Petra Kamarudin

ASIAN WALL STREET JOURNAL
TUESDAY, MARCH 14, 1989
Front page, lead story

SABAH LOG-SHIPPING CARTEL DEFEATS RIVALS
Japanese-Led Monopoly Flourishes Despite State Efforts to Break It

This article was prepared by staff reporters Raphael Pura in Kota Kinabalu, Malaysia, and Steven Jones in Hong Kong, with contributions from staff reporter Masayoshi Kanabayashi in Tokyo.

Monopolies die hard

In the timber-rich Malaysian state of Sabah, a 10-year-old log-shipping monopoly is flourishing despite recent changes in state government shipping policies intended to break it up.

Dominated by Japanese shipping cartel and a well-connected Sabah businessman, the monopoly has scuttled an upstart fleet of rival ship-owners for the lucrative business. The state government appears to have embraced the old cartel and the door has again been closed to competition.

The beached would-be competitors are crying foul. They charged that cartel members have been paying hefty commissions to a secretive company in Hong Kong in return for retaining their exclusive rights to the Sabah timber trade.

Politics and business traditionally inter-twine in Sabah, a chunk of Malaysian Borneo with a Wild West reputation. The story of the log-shipping cartel illustrates the extent to which a tiny commercial and political elite controls the resource-rich state of 1.3 million people.

It also shows how difficult it is to break up a monopoly that boasts a powerful membership, plenty of cash and political influence. And the saga demonstrates how erstwhile political rivals and their associates frequently end up doing business together, often shielded from public accounting.

The stakes in the timber shipping business are high. Logs are Sabah’s biggest export. During 1979-1988 log exports have averaged about nine million cubic meters a year and brought in more than M$15 billion (US$5.5 billion). About 80% of the state’s log exports go to Japan, with Taiwan and South Korea the next most important destinations.

In 1985, Sabah Chief Minister Joseph Pairin Kitingan won the election, in part on promises to clean up the patronage and cronyism that characterized the nine-year administration of Harris Salleh. It was Datuk Harris who gave his blessings to the cartel and to its Malaysian partner, Sabah timber tycoon Wong Chik Lim. Within weeks of Datuk Pairin’s election, his brother, Jeffrey, the new director of the influential state government-owned Sabah Foundation, declared that the cartel should be broken.

In early 1987, that goal appeared to be in sight. After eight years of monopoly control, competition was returning to the log trade. But today, the rival shipping lines have run aground – despite changes in the state government’s policy that initially appeared to favour them.

Datuk Wong and the old cartel again dominate Sabah’s log-shipping business. And the upstart challengers, including several Japanese lines, face big losses and complain that they have been cheated by policy reversals.

Critics of Datuk Pairin’s nearly four-year-old administration say that, despite his campaign promises, the log-shipping dispute shows that doing business in Sabah hasn’t changed.

The monopoly originated in 1979, when a Japanese-dominated shipping cartel sought to bring order to Sabah’s competitive, but chaotic, log trade. The cartel, a legal entity registered with the Japanese government, is known as the Nanyozai Freight Agreement, or NFA. According to Japan’s Transport Ministry, the NFA was set up in 1962 to stabilize freight charges in Southeast Asia by allocating lumber cargoes among member companies.

The NFA currently represents 39 Japanese shipping companies, which transport timber between Southeast Asia and Japan. Among the members are such major shipping lines as Mitsui O.S.K. Lines Ltd., Nippon Yusen K.K. and Showa Line Ltd. According to Akira Nakaya, NFA’s chairman, the cartel’s membership has been closed since 1972 because of a chronic oversupply of ships in the region.

In 1979, the NFA and then-Chief Minister Datuk Harris agreed to allow the cartel to establish itself in Sabah, in effect creating a virtual monopoly on logs shipped from the state.

A local monopoly was established to work with the Japanese. In June 1979, the Sabah United Chinese Chamber of Commerce and the Sabah Bumiputra Chamber of Commerce agreed to form a joint-venture company that would become sole agent for log export.

The company, Dewaniaga Sdn. Bhd., was formally created three months later with M$6 in paid-up capital. Its chairman was Datuk Wong, president – then and now – of the Chinese chamber. At the time of its formation, all six of the company’s shareholders were senior officials of the two chambers and the company’s registered office was the same as the headquarters of the Chinese chamber.

Although Dewaniaga was publicly conceived and described in press reports of the time as a joint venture between the chambers, Datuk Wong, in a written reply to questions submitted by The Asian Wall Street Journal, says that “it is incorrect” to call Dewaniaga a joint venture of the two chambers. Instead, he terms it “a private company owned wholly by individual share-holders (no relationship with either chambers) to perform agency work.”

Dewaniaga in turn nominated another new company, Achipelego Shipping Sdn. Bhd., to be its subagent. Achipelego was formed in October 1979 by Abdul Samad Johari and Zulkifli A. Orow, who was also a director and shareholder of Dewaniaga.

Two months later, following a new share issue, Achipelego was 75%-owned by Datuk Samad, a longtime business associate of Datuk Harris (and father-in-law to Anifah Aman, Musa Aman’s brother). Datuk Samad’s family has substantial interest in Gaya Shipping Sdn. Bhd., which is active in the log-shipping business.

Datuk Wong became a shareholder in Achipelego in September 1981 and held at least 10% of the shares in 1987, company records show. His younger brother William Wong Chik Hing, 38 years old, joined Achipelego’s board in 1983.

Once in place, Dewaniaga quickly signed “lumber-transport agreements” with the NFA and with smaller cartels shipping logs to Hong Kong and Taiwan. The agreements named Achipelego “sole agent” for all shipping lines carrying logs from Sabah.

Datuk Harris, in an interview, acknowledges that Achipelego and Dewaniaga enjoyed a de facto monopoly under his administration. But he says that the “idea was to control the smuggling of logs out of the state” – a then-prevalent practice that cost Sabah tax revenue – and to help Dewaniaga raise funds for social-welfare work.

However, beyond the assertions of charitable intentions by Datuk Harris and also by Datuk Wong, there is scant evidence to suggest that Dewaniaga was more than a toll gate for foreign log carriers. According to company documents filed in Kota Kinabalu, Sabah’s capital, Dewaniaga lists its sole business as “commission receipts.”

From 1979 until late 1987, the only way to ship logs from Sabah was by joining a cartel in which Dewaniaga was a party and by using Achipelego as an agent.

Under the log-transport agreement with the NFA, the cartel members paid Achipelego agent fees – initially US$1,000 – every time vessels called in Sabah. Achipelego also was authorized by the federal government to collect official port fees and taxes.

Outside these fees, however, much bigger transactions took place, in the form of commissions that ship-owners, say were meant to guarantee the NFA’s dominant role in log shipping.

From 1979 to 1985, ship-owners say, the commission for logs headed to Japan was US$1.38 a cubic meter. This was raised to US$1.55 a cubic meter in 1985, where it remained at least into 1987.

Based on an annual average of nine million cubic meters of log exports, such commissions could have amounted to as much as US$100 million since the arrangement started. One foreign shipping executive estimates that commissions could have ranged from US$800,000 in busy months to US$300,000 during slower months.

At least some of the commissions were paid into Hong Kong bank accounts held by an entity known as Mawa Shipping Agency Co., according to Japanese ship-owners and officials of the NFA and the Japanese Transport Ministry.

In Tokyo, Mr. Nakaya, the NFA chairman, says Datuk Wong designated Mawa Shipping in Hongkong as an agent to which Japanese members should pay commissions. He adds his members paid commissions to protect their position in Sabah, but declines to comment on the amount paid.

Japanese and Sabah-based shipping executives allege that Mawa Shipping was a Dewaniaga nominee. They describe the payments as the price of admission to Sabah’s log-shipping business. “If you’re in the trade, you’ve got to do it,” says a Hong Kong-based shipbroker.

However, Datuk Wong, in his written responses, says: “Dewaniaga has no nominee named Mawa Shipping or any other nominee.” He adds, “I am certainly not in any position to instruct the NFA to pay commissions to Mawa Shipping and I am in no way related to Mawa Shipping and I am not aware of the purpose and amount of commissions (if any) paid to Mawa.”

In Hong Kong, in a written reply to questions submitted to Mawa Shipping, J. Lee, who didn’t state his full name, says: “In no uncertain terms, we deny the allegation that shipowners must pay commissions to Mawa Shipping for the privilege of carrying logs from Sabah.” (Mr. Lee responded to letters sent to Mawa Shipping at the Hong Kong address supplied by Japanese shipowners. Attempts to reach the company either by phone or by visits to the address were unsuccessful. “We are in the process of moving,” Mr. Lee says in a letter).

Normal Business

Mr. Lee adds that Mawa Shipping is registered in Hong Kong and describes the company as a “general shipping agent which represents several companies in the normal agency business in the Asian region.” He says he is “a manager” and that the shareholders are all Hong Kong citizens. “We act for Japanese shipping companies and we do not know if those companies include members of the NFA or not.”

Futao Sekine, a Japanese Transport Ministry official, describes the commissions to Mawa Shipping as “legitimate compensation” for lumber transport.

Mr. Sekine says the government doesn’t know how the commission money is used “or to whom it is channelled.” He emphasizes that the NFA is “just paying at the request of the other side. (It is) complying with a payment request from a company in Hong Kong.” He declines to provide figures for the commissions but says that the commission rates are roughly in line with those provided by Japanese ship-owners.

Both the NFA’s Mr. Nakaya and Japanese ship-owners say that Japanese tax officials have recently sought to determine whether the commissions could legitimately be regarded as tax-deductible expenses.

It isn’t possible to determine whether Dewaniaga ultimately received any commissions – or indeed any kind of revenues – from its pre-eminent position in the log-shipping business. The company’s financial statements aren’t available at Kota Kinabalu’s registrar of companies.

In March 1983, according to documents that are on file with the registrar, Datuk Wong requested that Dewaniaga be exempted from having to submit annual financial reports. An Exemption apparently was granted, and instead of an annual report, the company’s auditors, Kan & Associates, have stated each year that Dewaniaga can meet its liabilities.

Without public financial records, it isn’t possible to determine either the amount of money Dewaniaga received from its shipping business or the ultimate recipients of the money. This has led to widely held suspicions that at least some of the funds may have ended up with Datuk Harris or his Berjaya political party. Datuk Harris denies this.

Under Malaysian law, receiving commissions is legal. Dewaniaga wouldn’t have to pay taxes on the commission income if it was received abroad and not remitted to Malaysia.

The issue of commissions aside, problems began to surface with Achipelego. Despite its seemingly guaranteed success as sole agent to all log shippers, the company was in financial difficulty, posting losses from 1981, according to records on file. Also, the company’s auditors, Hanafiah Raslan & Mohamad, an affiliate of Touche Ross International, qualified their reports for 1981, 1982 and 1983 because “proper records were not kept”.

In 1984, the auditors again qualified Achipelego’s accounts stating that the company “has a deficiency in capital” following a M$4 million extraordinary loss on a shipping venture in the neighbouring state of Sarawak. The auditors said the company needed new financing to stay afloat.

By the end of 1986 – the last financial year reported to the Kota Kinabalu registrar – Achipelego had net liabilities of M$5.2 million.

On top of its financial woes, the Dewaniaga-Achipelego arrangement was coming under fire from the new government. In June 1985, Datuk Jeffrey, Datuk Pairin’s brother and the influential director of the Sabah Foundation, told Malaysian reporters that the foundation intended to take charge of log shipping and to appoint an agent to re-register all vessels in the trade. (Set up in 1966 by an act of the state legislature, the foundation is part tax-exempted conglomerate, part welfare fund and, at times, part political cash register.)

“Dewaniaga appointed Achipelego as its agent to nominate and service log ships, although there was no official authorizations from the government.” Datuk Jeffrey says. “Because of that, (Dewaniaga) had a virtual monopoly on shipping during this period and assumed a regulatory role that should have been a government role.”

However, the new Sabah government found it no easy task to break the monopoly. The Pairin government was still shaky politically and under siege from Harris supporters as well as the federal government, which had backed Datuk Harris in the 1985 Sabah election. Ship-owners hesitated to leave their existing arrangements until the smoke cleared.

But in October 1987, a new Malaysian shipping agency with political clout of its own entered the fray. S.B.Ocean Shipping Sdn Bhd. informed shipping lines that it had received a government license to act as an agent for log shipping.

S.B. Ocean, formed a year earlier, was controlled by its 31-year-old chairman, Mohamed Salleh Mohamed Said, a son of Sabah’s appointed head of state.

Intent on rounding up a rival fleet to compete with the Dewaniaga-NFA cartel, S.B. Ocean named a Sabah-owned Hong Kong company, Newtune Development Ltd., as its sole agent.

“All the outsiders took this opportunity to join in,” says a Japanese shipping executive. By the end of 1987, companies owning a total of 47 ships had signed up with S.B. Ocean.

The rival system also required foreign ship-owners to pay commissions, but unlike the cartel’s system, the commissions were spelled out in written agreements with the ship-owners. The commission rate was the same as Dewaniaga charged, at least for the Japan market, executives say.

S.B. Ocean emergence angered the NFA, whose members told Datuk Wong in September 1987 that the appearance of a second shipping agent breached their monopoly arrangement with Dewaniaga – an arrangement they were paying commissions to retain.

Datuk Wong responded that S.B. Ocean wasn’t a threat. Nevertheless, he began manoeuvring to thwart the newcomer.

The 54-year-old businessman has a reputation for brass and flash. He began his career as a teenager working in his family’s barter-trade business in Sandakan. He later moved to the Malaysian island of Labuan and, by the 1970’s, had become a major figure in Sabah’s timber industry.

Datuk Wong’s timber and real-estate businesses grew steadily during the administration of Datuk Harris, who also hails from Labuan.

A canny entrepreneur who cultivated an image of wealth and political influence in Sabah, Datuk Wong was fond of the grand gesture. One Sabah acquaintance recalls how the tycoon once chartered a Malaysian Airline System jet to carry guests to his son’s wedding in Hong Kong.

Sabah businessmen say Datuk Wong’s empire was shaken in 1985 when Datuk Harris’s electoral defeat coincided with a downturn in property and timber prices. That, they say, left Datuk Wong with substantial debts and reduced clout in the Sabah timber business.

For this reason, Sabah businessmen say, he has become a resilient defender of his more successful venture, especially the log-shipping business. A Malaysian shipping executive says, “He needed that shipping business and he’s a big player. His business style is ‘bang!, here’s a stack of parliaments (slang for M$1,000 notes because the parliament building is depicted on the notes) on the table. Now we talk.”

In defending his stake in the log-shipping business in 1987, Datuk Wong attempted to form political and business links to the Pairin government through Datuk Jeffrey and the Sabah Foundation. In October 1987, Datuk Jeffrey joined the board of Achipelego, a company he had earlier decried for its undue influence on the state’s shipping policy.

In his written reply, Datuk Wong says he wasn’t in a position to invite Datuk Jeffrey to join the company’s board. However according to company records on file with the registrar’s office, Datuk Wong was a share-holder of Achipelego, at least through 1987.

Datuk Jeffrey says he agreed to join the board because Achipelego had “offered shares” to the foundation. He says he wanted to study the company from within. But Datuk Jeffrey says talks on a purchase of Achipelego shares ended when the foundation insisted on obtaining a controlling interest in the company and when it sought – but never received - more financial information. He resigned from Achipelego’s board in February 1988.

Meanwhile, foreign ship-owners were furious with Achipelego in 1987-88 because it wasn’t passing along their official fees to the state government, which had threatened to seize their vessels. The NFA began with-holding commission payments, using the money instead to pay off outstanding port fees and taxes.

Last July, Achipelego unsuccessfully tried to raise capital through the Sabah United Chinese Chamber of Commerce. With Achipelego apparently moribund and the NFA cartel in disarray, Datuk Pairin’s government finally moved to reorganize logging exports around the Sabah Foundation.

The foundation’s position in the log-shipping business was legally established in September, when it was empowered by the Sabah government to nominate and approve vessels on the state’s behalf for exporting logs from Sabah. The foundation named S.B. Ocean as an agent. Company officials, believing they had pulled off a coup against Datuk Wong, went to Japan to try to sign up the members of the NFA.

But corporate records indicate Datuk Wong had been preparing to meet S.B. Ocean’s challenge. Last May, Datuk Wong’s brother Wong Chik Kiong and Alexander Khoo Kay Hian, formed a new concern called Syarikat Perkapalan Selatan Sabah Sdn. Bhd., or PSS, with M$2 in paid-up capital. (Mr. Khoo is the Dewaniaga company secretary and also legal adviser to the Sabah United Chinese Chamber of Commerce, which Datuk Wong heads.) In July, another brother of Datuk Wong, William, who is an Achipelego director, joined the PSS board.

Sometime between August and October, PSS obtained from the federal government a license to become an agent for log-shipping. Achipelego ceased to be an agent for the log cartel.

The move “came as a surprise to everybody,” according to a Japanese shipping executive, and it put Datuk Wong’s family back in the log-shipping business. In his written reply, Datuk Wong says he has no role in PSS and isn’t a shareholder.

The NFA and other members of the old cartel were in a dilemma. They had to choose between S.B. Ocean – which the Sabah Foundation initially appeared to favor – and PSS, the new vehicle set up by the brother of their outstanding monopoly partner, Datuk Wong. Once again, they chose Datuk Wong.

“Most (foreign ship-owners) believed Wong was still strong and influential in Sabah and had friends in the federal government,” says a Sabah shipping executive.

“They thought, better deal with the devil you know than to go to a new devil.”

With the appearance of PSS as a alternative agent to S.B. Ocean, the Sabah government delayed implementation of its new timber policy until Nov. 1. A Japanese ex-executive says the NFA members urged Datuk Wong to organize meetings between Datuk Jeffrey and the NFA shipping lines in early October. Datuk Jeffrey and Datuk Wong subsequently met in Sabah and in Hong Kong.

The result of these meetings, shipping executives say, effectively restored Datuk Wong’s and the old cartel’s domination of the Sabah log trade. “All of a sudden the arrangement was changed,” says a shipping manager who had signed up with S.B. Ocean.

What happened next was that all vessels carrying Sabah logs were asked to re-register with the Sabah Foundation. All the companies – except one – that had joined with S.B. Ocean to break the original Dewaniaga-Achipelego orchestrated cartels in 1987 were informed by the foundation in early November that their applications for re-registration were rejected. No reason was cited for the rejection.

All the companies – including NFA members – that had been parties to the original lumber-transport agreements and the old Dewaniaga-Achipelego monopoly signed up with PSS as their new agent. Their ships were accepted for re-registration by the Sabah Foundation.

Asked about the apparent abrupt reversal that saved the old cartels, Datuk Jeffrey says that, although he requested it, “The NFA refused to sign with S.B. Ocean. They wanted to go with Wong, saying that the new agency (S.B. Ocean) was so new that they didn’t know whether it could do the job.”

NFA chairman Mr. Nakaya says the NFA decided against working with S.B. Ocean because his organization had long experience with Dewaniaga and Achipelego. Mr. Nakaya says PSS has taken over Achipelego’s staff, though Achipelego’s chairman, Datuk Samad, isn’t with the new company.

Datuk Wong says that “the former principals of Achipelego, faced with the inability of Achipelego to continue its services, had to appoint one of the two agents designated by the Sabah Foundation. About 55% of the principals appointed PSS as their agent, while others did not.”

‘Lots of Rumours’

However, shipping lines dispute Datuk Wong’s description of PSS’s market share. According to S.B. Ocean officials and others, all the shipping lines siding with PSS have had their vessels approved by the Sabah Foundation while only one of S.B. Ocean’s clients has received approval.

Datuk Jeffrey, asked about the unofficial commissions that allegedly were part of the old monopoly, acknowledges that he had heard “a lot of rumours about the commissions” paid by Japanese ship-owners, but says he doesn’t know whether they were paid.

He says, however, “We (the Sabah Foundation) don’t have that kind of arrangement with these people.” Datuk Jeffrey adds that the foundation has no connection to Dewaniaga, which is no longer active in the log-shipping business.

In any event Datuk Wong – through family-controlled PSS – and the NFA members continue to dominate the log trade, this time with a fresh mandate from a state government that once vowed to break up their cartel.

“This is the aim of the NFA and Wong Chik Lim – to kill competition and go back to the original monopoly situation,” complains a rival shipper outside the cartel. “We felt S.B. Ocean would be a good bet, while Wong was on the way out. It didn’t turn out that way.”