Malaysia: Ingenious Capital Flight

It has been going on since the government's clampdown on money transfer after the 1997 financial debacle.Now this has come to pass.

The Straits Times of Singapore reported that Bank Negara Malaysia has begun cracking down on some money changers to prevent more capital flight from taking place under its very nose. Bankers estimated this could be in excess of several billion US dollars each year.

Since early this year, BNM has closed down 49 money-changing firms after raids by its enforcement division revealed that many operators were illegally remitting funds to countries such as Singapore, the United Kingdom and the United States.

The crackdown has attracted fresh public scrutiny in recent weeks following claims by the country's opposition that several high-profile Malaysians, including a Chief Minister of a state had engaged the services of money changers to transfer vast amounts of money overseas.

Foreign exchange rules stipulate that the transfer of funds overseas can be carried out only by licensed financial institutions, such as banks.

But money changers in Malaysia, which like in many Asian cities are run by people from the Indian sub-continent, have long been a popular conduit because they offer foreign exchange rates that are far more competitive as well as low fees to carry out the fund transfers.

There is also another compelling reason.

“Money changers are used mainly because the money is illicit funds from corruption and activities such as drug trafficking and prostitution,” said Datuk Paul Low, president of Transparency International's Malaysian chapter.

The sums involved are huge. Bankers and government officials said that a single money changer can boast a turnover of roughly RM300 million each month, or about RM3.6 billion annually.

A Bank Negara official said that the crackdown was part of an “ongoing surveillance” of the activities of the country's 875 licensed money changers.

She declined to comment on whether action would be taken against those engaging the services of money changers.

Economists said the central bank's move to shutter the businesses of 49 licensed money changers underscores a deeper malaise afflicting the economy: the flight of capital.

Money leaving the country comes from several sources.

Apart from Malaysians building a retirement nest egg or squirrelling money away to pay for their children's education, bankers and money changers said a bulk of the money leaving the country comprises funds from the country's so-called black economy, which thrives on kickbacks from large public sector contracts and illegal businesses such as drug trafficking and prostitution.

Last month, Transparency International said that Malaysia fell to No. 56, from No. 47 last year, in a league table of 180 countries surveyed around the world, and that graft had hit “alarming” levels.

Bankers also said the growing number of capital flight cases is a reflection of the unease over Malaysia's political and economic future, stemming from rising crime rates and the country's increasingly chaotic politics.

“At one time, the main people taking out money were the Chinese. But these days, a large number of them are the rich Malays,” said one money changer in Kuala Lumpur, who asked not to be named.

Sad but true,smart money leaves for the distant shores when it can no longer find safe haven in a country.