Great Eastern used RM 2.37 billion of policyholders’ funds to be exempted from domestic shareholding requirement

Where the law and moral ethics become murky

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.

During 2018, BNM under the governorship of Nor Shamsiah Mohd Yunus, it was agreed with GEH that estate funds belonging to GELM’s participating policyholders be used to deposit at least RM 2 billion into the MySalam trust fund to finance the scheme’s premiums, used to make benefit payments to some 3.69 million eligible Malaysians between the ages of 18 and 55, who earn RM3,000 per month or less for health emergencies.

The MySalam National Health Protection Scheme was started by the Pakatan Harapan (PH) government in 2019. Great Eastern Takaful Berhad (GET), GELM’s sister company, was announced as the Takaful operator (Wakeel) of the scheme, where GEH would be responsible for any shortfalls, in case the scheme’s premiums were insufficient to meet benefit payments. This was undertaken without any tender process.

BNM complicit in short-changing GELM’s participating policyholders

Under an agreement brokered by BNM, GEH’s exemption from divesting 30% of its stake in GELM was conditional on its participation in MySalam by depositing at least RM 2.0 billion into the MySalam trust fund. To achieve this, GELM utilized estate funds belonging to its participating policyholders with the express permission of BNM and the ministry of finance (MOF). During the first quarter of 2020, GELM transferred RM 2.64 billion from its estate funds to its shareholders' fund. It then made a dividend payment of RM 2.37 billion (90% of RM 2.64 billion) to GEH on 4 March 2020. Using the dividend proceeds, GEH then paid the MySalam trust fund RM 2.37 billion on 5 March 2020.

The requirement of insurance and takaful companies to have at least 30 percent Malaysian shareholding is in accordance with BNM’s guidelines issued back in 2009. However, BNM has the discretion to negotiate any variation of this requirement on a case by case basis.

When the former finance minister Lim Guan Eng announced that GEH would be contributing RM 2.0 billion to MySalam in exchange for exemption of the 30 percent Malaysian shareholding requirement, he espoused this agreement would benefit the B40 (bottom 40 percent of income earners).

However, this agreement forced GELM to not comply with the 90/10 surplus distribution rule, where the majority of funds distributed (90%) must be allocated to participating policyholders in the form of bonuses (bonuses can be an immediate payment or additional guaranteed benefits which will be paid contingent on future events such as death or maturity occurring). This ratio has been embedded in Malaysian insurance regulations since 1997. GELM had been following this ratio for decades.

GEH’s negotiations with BNM allowed GELM to not comply with the 90/10 ratio and instead adopt the 0/100 ratio. Denying policyholders their legitimate rights and interests as prescribed within BNM regulations

Consequently, the formation of MySalam was fully subsidized by GELM’s participating policyholders without their knowledge.  GELM’s participating policyholders have been short-changed RM 2.37 billion worth of bonuses. In contrast, GEH benefits from GELM being given RM 569 million in income tax exemptions, which translated into RM 2.37 billion dividends being tax free, GEH receiving management fees of over RM 130 million for running MySalam during initial 5 year period (2019 -2023), and by having permission to remain operating in Malaysia with 100 percent foreign ownership. GEH also benefited as the RM 2.37 billion deal didn't appropriately reflect the fair value of a 30% stake in GELM. Based on GEH’s 2018 reporting, Hafiz estimated the 30% stake to be worth at least RM 4 billion. Including the tax exemption, GELM conservatively gained RM 2.2 billion at the expense of Malaysians.

This generous agreement was signed off both by BNM and the minister of finance at the time.

GELM has letdown and defrauded its policyholders of RM 2.37 billion and GEH gained at least RM 2.2 billion at the expense of Malaysians from this one-sided deal. This appears to be in collusion with BNM and the MOF.

Whistleblower Muhammad Hafiz was treated with distain by the senior management of BNM, being eventually terminated for pointing out this one-sided agreement favouring GEH, at both the cost to Malaysians, due to the loss of revenue, and GELM policyholders.

Muhammed Hafiz later went to the Malaysian Anti-Corruption Commission, with an official complaint, but was not even accorded a case file number for his complaint.

The mirky regulatory waters of the banking and finance industry allow cover for deals that lack total transparency. BNM is charged with upholding these laws and regulations, but in this case its diligence has been found wanting. This is not a victimless act, the participating policyholders of GELM miss out on RM 2.37 billion worth of bonuses, where the shareholders received a very beneficial deal. This was with the complicity of BNM and MOF.

Such governance of the financial industry, where favours are given out to parties at the cost of other stakeholders is totally unethical. This must be fully investigated.

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