Great Eastern Malaysia’s participating policyholders scammed RM2.37 billion for MySalam
A case of collusion between Bank Negara Malaysia, Ministry of Finance, and Great Eastern Life
To date, there has been no explanation given by the parties involved in the RM2.37 billion embezzlement issue affecting participating policyholders of Great Eastern Life Assurance Malaysia’s (GELM) closed participating funds. This issue was exposed here back on January 22.
Great Eastern used RM 2.37 billion of policyholders’ funds to be exempted from domestic shareholding requirement
According to a former employee Muhammad Hafiz Ipaldin, Bank Negara Malaysia (BNM) has failed to protect the rights and interests of Great Eastern Life Assurance Malaysia Berhad’s (GELM) participating policyholders, in a deal to exempt GELM’s parent company, Great Eastern Holdings Limited (GEH), from the domestic shareholding requirement.
The former Bank Negara Malaysia (BNM) Consumer and Market Conduct Insurance Analyst, Muhammad Hafiz Ipaldin, commented on the matter that commenced in the second quarter of 2018. According to Hafiz, the parent company, Great Eastern Holdings (GEH), submitted a proposal to Bank Negara Malaysia (BNM) and the Minister of Finance (MOF) involving the usage of a part of GELM's closed participating funds’ surplus to fulfill the replacement to GELM's divestment condition.
"BNM and MOF agreed to use these funds for the purposes of the MySalam trust fund, but this conflicted with the advice given by BNM's Legal Department.
"The Legal Department advised the Governor and Deputy Governors of BNM that surplus within funds should be distributed or allocated according to the 90/10 profit sharing principle and should not be linked to the divestment condition," he told HarakahDaily.
The 90/10 rule ensures surplus within funds are distributed to policyholders.
According to Hafiz, there is a 2013 Management of Insurance Funds Policy Document which stipulates that participating policyholders have a 90 percent or more interest in any allocation from any part of the participating fund’s surplus. Hafiz further elaborated that the 90/10 surplus distribution principle has been enforced in Malaysia since 1997, after the introduction of the 1996 Insurance Regulations, while GELM has been following this principle long before 1997.
"Therefore, this surplus cannot be used for purposes of the MySalam trust fund, whether related or unrelated to the divestment condition. Furthermore, the contribution to the Mysalam trust fund has nothing to do with the management and operations of GELM’s participation funds," he said.
However, BNM allowed these funds to be used for MySalam’s purposes, while GEH were allowed to maintain its 100 percent foreign ownership of GELM.
This was a dirty deal, where GELM policyholders were cheated out of what should have been paid or allocated to them by way of bonuses.
GEH granted a permanent exemption?
Free Malaysia Today (10 January 2019) reported that Lim Guan Eng, the Finance Minister at that time, granted an exemption to GEH from the condition to dispose of at least 30% of GELM's shares easily.
Lim Guan Eng was finance minister at the time.
According to the report, the exemption was given on the grounds that GEH had committed RM2 billion to the MySalam scheme even though the payment had not yet been made.
The Edge's report (February 4, 2019) identified the exemption as permanent and the use of surplus within GELM's closed participating funds in lieu and in satisfaction of the divestment condition.
"The exemption was given by the Minister of Finance at that time, Lim Guan Eng, before BNM's independent review report was ready. This was although the independent review would only have been finalized at the end of 2019,
Hafiz added, "The panel in charge of the report is responsible for taking into account the fairness of using the surplus within participating funds for shareholder purposes."
Consequently, the level of independence of BNM’s independent review report panel itself is under question, as the Finance Minister had not yet received the RM2 billion payment from GEH, but had already proceeded with the MySalam scheme.
According to the minutes of the Annual General Meeting on 18 April 2019, the former Chairman of GEH, Koh Beng Seng, had also informed GEH shareholders that there will not be any material impact on its profit and loss.
The former Chairman also clearly stated that there will not be any impact on the company’s embedded value as a result of GEH's commitment because the contribution will be made directly from GELM's surplus funds.
This can only be the case if the portion that should only be allocated to policyholders was indeed established or set, from the very beginning of the independent review, for the purposes of MySalam and GELM’s shareholders.
"If this cannot be considered as valid evidence of collusion between GEH, GELM, MOF and BNM at that time, then I don't know what else to say," Hafiz told Harakah.
The matter was also brought up by the Member of Parliament for Ayer Hitam, Datuk Seri Wee Ka Siong, at that time in Parliament’s Special Chamber session on 19 November 2019.
Wee Ka Siong, on his facebook account, questioned how GEH had been exempted from the divestment condition in relation to its shares in GELM when RM2 billion was yet to be paid into the MySalam scheme’s trust fund.
The then Minister of Finance had never answered the question 'directly'.
Tax relief used as a dangling carrot to GELM
Muhammad Hafiz also mentioned that the embezzlement began on March 3, 2020 where RM2.64 billion was transferred from GELM's closed participating funds to GELM's shareholders' fund after the company was given tax relief of RM569 million.
Hafiz continued, saying that as much as RM2.37 billion (representing 90 percent of the total RM2.64 billion transferred), rightfully belonging to GELM’s policyholders within its closed participating funds, was used to pay dividends to GEH on March 4, 2020, and was then channeled into the MySalam fund.
The MySalam fund was used to cover the total takaful contribution cost of the MySalam scheme which was estimated at RM112 for each individual for five years without GEH having to spend any of its own money.
The Harakah report stated that "We should never let this issue fester as it involves money from GELM’s closed participating insurance funds and the rights of policyholders within it," explained Muhammad Hafiz.
Hafiz labelled the scheme’s nature as one of 'Robbing Peter to Pay Paul', due to the willingness of parties involved to breach trust in order to ensure GEH not having to sell 30 percent of its holdings in GELM to domestic shareholders.
“It is apparent that GEH only wants to maintain full ownership of GELM, but by doing it in a way without integrity," according to Hafiz. Hafiz left BNM in 2021 after repeatedly reporting on the issue to BNM and being ignored for it.
He added that BNM should have paid more attention, but instead, the opposite of what should have happened.
Hafiz claimed, "The rights of policyholders within closed participating funds who have been contributing their hard earnings to GELM for years should be protected, but BNM only addressed these issues at a very superficial level.”
Hafiz added that he did not agree with the implied essence of MOF's answer in the same 2019 Special Chamber session of Parliament because it assumed that the surplus within GELM's closed participating funds were accumulated before specific regulatory requirements were in place.
According to him, the rationale that because it involved the surplus attributable to previous generations it can therefore be used for other purposes, was completely without substance.
"A large part of this accumulation started in the 90s and involves financial flows that are contemporaneous with the current generations within closed funds. The 90/10 distribution principle was applied even during that period.
"This isn’t something that happened 100 years ago but is actually a relatively recent development. The surplus should not be part of the 'Estate' (surplus or asset share attributable to previous generations) but should be classified as part of the current generations’ asset share," he explained.
He said, even if there is an 'Estate' in the participating funds, the 90/10 surplus distribution principle still applies because there is a transfer of rights and interests from the previous generations to the current generations and shareholder rights and interests remain unchanged.
"This is important to understand because the use of a distribution principle or ratio that favors shareholders for the portion of the surplus attributable to previous generations causes perverse incentives.
"Shareholders will be attracted to retain more surplus than they should and this will result in lower payments to policyholders," Hafiz told Harakah.
According to Hafiz, the provisions within the Financial Services Act require safeguarding the interests and fair treatment of policyholders.
"This cannot happen without balancing the rights and interests of shareholders and policyholders within closed funds. Therefore, all surplus should be allocated in accordance with the 90/10 distribution principle before the last policyholder exits the fund," he explained.
Hafiz urged all GELM policyholders within its closed participating funds (participation policies with start dates before 2005), including past policyholders, to take appropriate measures such as lodging police reports as well as complaints with both BNM and GELM.
Originally published in Harakah Daily 15th February 2024 in Bahasa Malaysia, written by Ikmal Emir. English version written by Hafiz Ipaldin and edited by myself.
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