Topic : Nature Of Fraud.

Case : Port Klang Free Zone.

1. Case Introduction and Description

The PKFZ (Port Klang Free Zone) scandals is one of Malaysia’s biggest financial scandals has

identified serious criminal breaches of duties/trust in connection with the scandal-plagued PKFZ

project, where it involved several government officials, and including a former minister. Excerpt

from the text of The Attorney General, saying that:-

“In the case of PKFZ, everyone involved is a big fish because we are looking at

charges that are amounting to several hundred millions of ringgit,” he said.

The PKFZ scandals is due to the personal greed (mainly classified as conflict of interest) of a

former general manager of Port Klang Authority (PKA) and other interested related parties to

PKFZ project development such a former engineer with Kuala Dimensi Sdn Bhd (KDSB), an

architect with BTA Architect, and unclear charged (February 17, 2010) to prominent Barisan

Nasional (BN) politicians such as former Transport Minister Tan Sri Chan Kong Choy and

Datuk Seri Tiong King Sing, who controls KDSB.

In addition to this text, The Public Accounts Committee has recommended into a further

investigate to (November 4,2009) Tan Sri Chan Kong Choy, a former Transport Minister who

was in connection with the criminal breach of trust over the PKFZ project. Stated in the news

press released dated February 17 2010 by the Attorney-General Tan Sri Abdul Gani Patail said

that, more people will be charged in relation to PKFZ scandal which the investigation will be

done in stages.

The breaches led to billions of dollars in losses at a tottering state-owned trans-shipment hub of

Port Klang Free Zone(PKFZ) project development. This case had also exposed the government

to huge financial losses stemming from the failed PKFZ development venture. Recalled back on

the year of 2004, dated 2nd of july,

“The government is confident of the future of the Port Klang Free Zone and has

committed a spending of about RM2.0 billion for its development, but this money is

well invested,"

Deputy Prime Minister Datuk Seri Najib Razak.

The hub, the Port Klang Free Zone (PKFZ), was built to attract new investments into the

country, but has been dogged by controversy over the price paid for the land for the project, a

massive cost overrun and management issues.

The PKFZ issue was investigated by the PAC earlier in 2007 but that committee's work was

hampered by a lack of information. Since, PAC is only being a part of the legislature, by only

recommends action to be taken by the government but has no powers of enforcement which is a

matter of the executive. PAC has no resources of its own and is assisted by secretariat staff

provided by the Parliament office. But it can ask the Auditor-General's office to perform checks

and gather information to assist in its inquiry.

The current works that had been done by PAC, is by restarted its investigation of the PKFZ issue

when more information was made available from the PricewaterhouseCoopers report and the

2008 Auditor-General's Report.

According to the audit report released by Price Waterhouse Coopers on 28 may, showed that the

cost of the 4.5 hectare project may see its costs spiral to as much as RM12.45 billion (US$3.55

billion), six times the original estimate, in a deal that may have breached rules on conflict of

interest.

The “unusual” arrangement (relationship) as strange and unusual is seen as the red flag of to the

scandals and has found by the Public Accounts Committee. Make you know that, The main

thrust of the PAC is to improve governance in the expenditure of the government departments

provided by the national budget approved by Parliament, where they found the four special

purpose vehicles (SPV’s ) set up to issue bonds to raise funds for the PKFZ project, owned by

the developer, Kuala Dimensi Sdn Bhd(KDSB) which is a private company that had entered into

a contract with the government to develop the PKFZ project.

“There are things that are unusual. The government has to meet obligations to bond

holders on papers that were issued by a third party. The bond was issued privately

while the relationship between PKFZ and the developer is contractual,”

PAC chairman Datuk Seri Azmi Khalid-21 August 2009

The issuance of bond was also improper as it had resulted in the government suffered huge losses

as fund required under the government’s guarantee was not fully utilized to implement to the

project.

At the dawn of PKFZ project development, government had decided that the project to be

developed by PKA via self-financing. The inconsistency opinion from the independent bodies

was raise up, when the issuance of general-auditor report way back on the year of 2003, 2004,

2005, 2006 and 2007, stated that Port Klang Authority was also unable to develop PKFZ project

through self- financing, the fact that PKA’S financial status did not have a capacity to fulfill it’s

obligation to develop PKFZ.

To extend, the letter undertaking issued was against government’s decision as when the PKFZ

project was approved. The decision was out of the knowledge of the Government, Finance

Ministry and Economic Planning Unit to obtain allocation for the project. It was obvious that the

ministers cannot issue any letter of guarantee on the behalf of the Malaysian government. The

only ministry allowed to issue a letter of guarantee was the ministry of finance after procuring an

approval from the cabinet. Both of them, Phang and the Former Transport Ministry; Chan, have

failed to inform the cabinet in a timely manner and didn’t have approval from finance ministry

on this matter.

This scandals happen, when both Former transport Minister Tan Sri Chan Kong Choy and

Former Port Klang General Manager , Datin Paduka O C Phang, had breached section 14(1) of

the Financial Procedure act 1957 by issuing 3 letters of support by Chan to allow the authority

to raise corporate bonds and 3 letter undertaking issued by Phang without the approval@

knowledge of the finance ministry. These letters had implicitly placed responsibility on the

government to ensure there is allocation for PKA to fulfill its obligation (Issuing bond) under the

development agreement. Both of them might be sentenced for criminal breach of trust over the

PKFZ project if found guilty.

As stated in the media and news press cited back, on the month of December 10th, 2009, three

of them found guilty and sentence into a hearing at the Klang sessions court in connection with

discrepancies in the multi-billion ringgit Port Klang Free Zone (PKFZ) fiasco.

In the reported news, Phang was charged with three counts of criminal breach of trust amounting

to RM254 million, Both Abok and Tan was charged with two counts of cheating. Bernard Tan

has claimed trial to a total of 26 counts of cheating amounting to RM122 million. Followed by

Steven Abok, the chief operating officer of PKFZ developer Kuala Dimensi Sdn Bhd, has been

charged with criminal breach of trust .The court had set bail of RM350,000 for Phang who is the

former Port Klang Authority (PKA) general manager, RM200,000 bail for Stephen who is Kuala

Dimensi Chief Operations Officer and RM250,000 bail for Tan of BTA Architect.

The following date, December 14th, Law Jenn Dong, 51, is jointly accused with Bernard Tan, an

architect with BT Architect, who was charged last week for cheating involving RM122.3 million.

Law is accused of cheating PKA into endorsing payment to KDSB for electrical infrastructure

work which allegedly was not carried out. If convicted, he faces a maximum penalty of 10 years’

jail, whipping and a possible fine for each of the 24 charges.

Nevertheless, as stated in the news press, Gani was also expressed disappointment by the low

amount of bail that was set by the Klang Sessions Court on the three accused but stressed that

this was the court’s discretion.

“I am not going to question the court’s decision but if you ask me personally and I think I can say this for those working so hard on the case that I am very disappointed. But that is personal,” he said.

Attorney General Tan Sri Abdul Gani Patail

2.Discussion case

a) Ethical issues

The ethical issues faced by the PKFZ project can be explained from a personal, organization and

systematic level. The personal level describes the causes that drive greed and ill conceived acts

within an individual. The organization level describes the causes of unhealthy and unethical

decisions made among groups of individuals and the systematic level describes causes are

primarily driven by external influences. The insights obtained from these three levels will

provide a thorough explanation of the causes behind the scandal which eventually lead to the

losses on the development of PKFZ project.

The personal level calls for the character evaluation of the main individuals that participated in

the various fraud. To the extend, former general manager of PKA, Datin Paduka O C Phang;

Former transport Minister Tan Sri Chan Kong Choy; Steven Abok, the chief operating officer of

PKFZ developer Kuala Dimensi Sdn Bhd; Bernard Tan, the architect of BTA and much more

nominees to be announce later. The values and ethical behavior of these individuals have

continuously been called into question. Many of the charges directed towards these individuals

are a clear indication of acquiring personal profits. The greedy managerial act of acquiring profit

based on self-interest was seen in each character described above. The ethical issues come to

question the character of these individuals as they place PKFZ’s project development future

survival at risk in order to achieve personal financial profits.

Despite the various character flaws of these individuals, they may very well be good people that

merely influenced by the corporate culture which leads to the impact of groups on the

construction of corporate decisions and organizational cultures. Individuals, for reasons tied to

corporate culture, adopted their ethics to corporate ethics associated with their roles as managers.

Many of the acts were committed by managers who felt they were inclined to do so by the

pressures demanded by their managerial roles, causing them to act in an unethical manner. The

close relationships that were formed among top leading executives and ministry grew arrogant,

thinking they were invisible. This hard headed mentality formulated by these executives created

a corporate culture norm that drove the concept of profitability and success, no matter what the

cost. Individuals that survived the pressures of this culture began to think they were gods.

On the systematic level, many external factors have also contributed to groups or individuals

making decision contradictory to what they may normally do. An external factor that allowed the

action of these executives was due largely to the legal and structure. As been stated in the article

news, most of the person that had been charged is closely related to each other. For example, the

involvement of parties who had prior association with either the land used to develop PKFZ or

the turnkey developer, Kuala Dimensi Sdn Bhd (KDSB), and awarding of the PKFZ

development contract to KDSB before a project master-plan was finalized, which is an obvious

conflict of interest.

Besides an override of power and weak of project management by both Former Ministry Of

Transportation and General Manager Of Port Klang is seen as a contributory factors to unethical

roles by the top management, which had lead to arise of these scandals. To support this

statement, PKA’s failure to seek the advice of the Attorney-General while not complying with

certain Finance Ministry regulations, and PKA’s failure to alert the Cabinet in a timely manner

of its inability to finance the project from its internal funds following an audit report by the

Auditor-General in 2004 that noted that PKA did not have sufficient funds to finance the project.

To the extend of this text, cost overruns to develop PKFZ’s project was also depict the failure

and weaknesses of the project development where, PKA’s projections that it would be in a

cumulative cash deficit position in 2012 and would not be able to repay the Finance Ministry soft

loan to a sum of 2 billions installments on time and PKFZ’s having a low occupancy rate of 14%

which is not generating sufficient revenue to cover its operating expenses and incurring losses

since its incorporation.

Finally, most companies have codes of ethics that prohibit managers and executives from getting

involved in another business related. Unfortunately, due to the lack of regulations enforcement,

these codes of ethics are voluntary and can be set aside by the person in charged; whom

theoretically had the power to conquer the world of business.

b) Guilty parties and nature of wrongdoing in the case

Name Title Charges Result

Datin Paduka O C Phang Former General Manager ~3 counts Criminal Breach of Trust √Found Guilty

√Bail Of RM350 K

Steven Abok Chief Operating Officer ~ 2 counts of cheating √Found Guilty

√Bail Of RM200 K

Bernard Tan An Architect ~ 26 counts of cheating √Found Guilty

√Bail Of RM250 K

Law Jenn Dong An Architect ~ Charged For Cheating √If convicted, max

penalty10 years

jail and possible

fine for each 24

charges.

c) Injured Parties In These Case

Taxpayers @ Local Community @ Society

Fraud also depresses the overall moral climate in a society. It affects you and me and

others who are Malaysian, since the local communities are the major contributory to the

government through tax payment. It can lead to a general lack of faith in the integrity of

the ministry to managed the public fund, erosion in the confidence of the public to the

Government. After a sluggish start, the Government with the help of other independent

bodies such Pubic Account Committees and Malaysian Anti-Corruption Commission

becomes more involved in this issues.

Government

As been highlighted before, the government needs to bare a huge of losses on the failure

of PKFZ’s project development. This might be a lesson for the government to put those

eyes more on the development of huge projects, since we are talking about billions of

ringgits. Members of the administration must be held accountable to the promise of

protecting public's interest. They need to response to any action, be transparency,

accountable and stewardship to their actions, answered the questions that left answered

by the public, examine deep on the budget been proposed in the parliament and they must

do more than talk the talk in order to establish and sustain a better leadership of the

country.

PKFZ

Since 2003 to 2007, the Auditor General had repeated warned the Port Klang Authority

that it may find it difficult to meet the financial commitments on PKFZ. Surprisingly,

most of PKA board members did not come forward to explain how this oversight was

possible. The members of PKFZ’s board presently should take a pro-action to correct the

past mistakes of the board, by ensuring the weak practices of the past are not repeated.

They need to be responsibility on fixing this gigantic scandal which has impacted to the

image of PKFZ project development as a whole.

3. Conclusion

Former PKA executives, Transportation Ministry, several architects and Chief Operating

Officers of KDSB placed their own personal wealth above the welfare of the public. Personal

gain, greed, lack of ethics, and a general feeling of being above the law were the factors that

brought to the PKFZ project scandals in Malaysia. Essentially most of the problems faced by

PKFZ project derive from the immoral and unethical actions taken on by the Top Executives and

several ministry in their attempt to achieve personal profits.

In order to prevent these unethical acts@ wrongdoings from occurring, there needs to be an

enormous emphasis on the truthfulness and integrity amongst the players. There need to be

supervision over independents bodies such Genera auditors, Public Accounts Committee and

others as they (Top executives) exercise their own roles on business judgment about what is the

best interest for the organization as a whole.