THE Royal Commission of Inquiry (RCI) into Bank Negara Malaysia’s (BNM) foreign exchange losses in the early 1990s continues with its fourth day of the hearing at the Palace of Justice in Putrajaya.

At yesterday’s third sitting, former senior auditor P. Kanason Pothinker said Bank Negara ignored repeated warnings that leveraged foreign exchange trading were not compliant with rules and regulations.

Kanason, 78, said his team found that the central bank’s traders were “heavily engaged in the trading of currencies” amounting up to RM50 million per day.

He told the panel that he sought assistance from former Head of the Advisory Services Ainum Mohamed Saaid in the legal chambers, and was “verbally” informed that BNM’s forex trading was not in compliance with the Central Bank Malaysia Act of 1958.

“I rang up Tan Sri Ainum and I was told by her and to the best of my memory she said, “Orang atasan cakap, jangan campur tangan (The top people said don’t interfere)” and I was promised a reply, and the written advice from the Attorney-General’s office was that the issue should be resolved between the Auditor-General and the Governor of Bank Negara,” said Kanason.

“I did not ask Ainum who was the ‘Orang Atasan’ she was referring to and neither did she mention (who the person was),” he said.

Former central bank assistant governor Abdul Murad Khalid alleged on the first day of the hearing that the central bank suffered forex losses of up to US$10 billion 25 years ago.

The second RCI sitting on August 21 also heard from former central bank staff that there was lax supervision over BNM’s foreign exchange department. 

The Malaysian Insight brings you live updates from the proceedings:

4.53pm: Day 4 of hearing ends.

4.43pm: Panel member, Bursa Malaysia CEO Tajuddin Atan asks Herbert if he was aware that there had been a change in the accounting treatment of the losses.

The witness says he wasn’t.

Herbert says he also does not remember if he had met with the then Attorney-General to discuss the losses.

Haniff Khatri Abdulla, lawyer for Dr Mahathir Mohamad, requests that the panel allows his question whether BNM’s annual report for 1992 had been tabled in Parliament by the time Herbert went into the Prime Minister’s Office in late-1993.

Herbert says he is not aware of the matter but believes the report should have been prepared by then.

Haniff says that by then, the public was already talking about BNM’s forex losses incurred in 1992 and 1993. Herbert says he was not aware of that and cannot answer.

Haniff then asks Herbert why Dr Mahathir had said (upon being told of BNM’s losses) “sometimes we make profits and sometimes we make losses”, to which the witness said he could not explain.

Another lawyer for Dr Mahathir, Gurdial Singh, asks Herbert about the note he prepared for then finance minister Anwar Ibrahim on the bank’s losses.

“Do you know if Anwar relied on the (then) governor’s (Jaffar Hussein) explanation of forex trading when he replied on the matter in Parliament?” asks Gurdial.

Herbert says it must be so since Jaffar had spoken to Anwar.

4.05pm: The fourth witness, former Finance Ministry deputy secretary general (II) Clifford Francis Herbert takes the stand and tells the panel he first knew of BNM’s forex losses in 1993 and that the amount was RM30 billion.

“I asked the secretary of BNM to provide relevant information on forex losses suffered by BNM. I was provided documents by BNM and calculated the losses to amount to RM30 billion. 

“(Then finance minister) Anwar Ibrahim and myself met (then prime minister) Tun Dr Mahathir Mohamad at the Prime Minister’s Office in late 1993. We briefed him about the loss and he responded by saying ‘sometimes we make profits and sometimes we make losses’.”

Asked by the panel about Dr Mahathir’s reaction upon hearing about the losses, Herbert says: “I had expected him to be outraged. But he looked quite normal.”

3.40pm: Panel member, High Court Judge Kamaludin Said, asks Sheriff how much he knew the losses to be.

Sheriff, the former Treasury secretary-general, says the total losses were RM15 billion, of which RM9.3 billion was absorbed in the bank’s other reserve account.

“The account was set up for the purpose of absorbing losses. Reserves were build up during the years BNM was making profit,” he says.

Sheriff says BNM had been involved in trading even before 1990, and that then governor Jaafar had said that the bank had to do something about the extreme volatility of the forex market.

“Losses in 1992 and 1991 were covered by the reserve account. By 1993 the reserves were insufficient to absorb losses for that year. 

“That is why only RM9.3 billion was absorbed by the reserves and the RM5.7 billion was put under deferred expenditure. That was the amount put in BNM’s report. The RM9.3 billion was not mentioned.”

Sheriff then wrote to the Auditor-General about the RM5.7 billion losses in a letter dated March 16, 1994.

Asked by Kamaludin why he has kept the letter from the Auditor-General informing him (Sheriff) of RM15.29 billion in losses, Sheriff says, “We knew about the losses. It was remedied. RM5.7 billion was openly acknowledged as deferred expenditure, while RM9.3 billion was absorbed by other reserves. All these were settled earlier.”

3.35pm: Sheriff tells the RCI panel that he disagrees with former BNM assistant governor Abdul Murad Khalid’s interview given to a newspaper where he had said the central bank was involved in speculative transactions in foreign currencies such as the pound Sterling, the US dollar, Deutsche Mark and the yen.

“In the interview, Murad said BNM was involved in speculative transactions in foreign currencies.

“From 1991 to 1994, forex trading by BNM was not a speculative activity.

“Murad said BNM may be hiding facts on losses by charging the bank’s other reserves. (But) BNM made accounting treatment by charging other reserves with the agreement of the auditor-general.

“Murad said in the interview that there was no committee in BNM which oversaw forex trading and it was all done by one person.

“My take on this is the bank’s board of directors knew about the forex losses after reading the internal audit report that all forex trading was done under the instruction of Nor Mohamed Yakcop. I am not aware if Nor Mohamed reports to any committee in BNM,” said Sheriff.

3.18pm: Sheriff says BNM’s board of directors never set any rules regarding forex trading.

“But they voiced their regrets over the absence of rules in forex trading after they saw the internal audit report dated January 21, 1994. Forex trading done then was for reserve management and was not for profit.”

The former Treasury secretary-general told the RCI he was not a member of the bank’s external reserves committee (ERC), nor was he in the board of director’s audit committee.

He also did not believe BNM had tried to cover up the losses; instead the adjustments made to the accounts on profit and loss and reserve management “was done to protect BNM and the country by avoiding complications that might be faced by the country and currency”.

3.12pm: Sheriff said he also had a discussion with Anwar regarding the forex losses but he was unaware if other ministers were told of the problem.

“I believe the governor or the finance minister would have updated the then prime minister, Dr Mahathir Mohamad, because the losses received wide media coverage and was questioned by ministers,” the former Treasury secretary-general told the RCI panel.

RCI conducting officer Suhami Ibrahim then asked about the letter Sheriff had written to the government asking for its commitment to support BNM over the losses.

“How was the government to have reimbursed?” Suhaimi said.

“If they had to, then they will provide support. Without the letter, the Auditor-General cannot sign the account,” Sheriff said.

“With this letter, the Auditor-General was to sign the account of BNM?,” Suhaimi asked.

Sheriff replied, “Yes”.

2.50pm: The third witness for today is Mohd Sheriff Mohd Kasisim, who was Treasury secretary-general from 1991 to 1994.

He said his role was to manage the government’s finances including revenue from the Customs Department and the Inland Revenue Board, and would report to then finance minister Anwar Ibrahim. He also represented the Treasury on BNM’s board of directors.

He said he knew about BNM’s losses from forex trading because it became public knowledge. The central bank’s board of directors had asked then governor Jaafar Hussein about it and the matter was only talked about in one meeting.

“The BNM management gave the internal audit report to the board of directors. 

“I then received a letter from (then) governor Jaafar asking me to send a letter to the government, asking for its support for BNM should the central bank have trouble bearing the losses.

“I wrote a letter dated March 16, 1994 to Jaafar, verifying that the government will give its support.”

2.24pm: Hearing resumes.

1.05pm: Session ends and will resume at 2:20pm.

12.30pm: RCI chair Mohamad Sidek Hassan questioned Lin on how Jaafar, whom he said was known to be “conservative in nature and well-respected”, could have ignored the red flags and allowed the forex losses to accumulate to such large amounts.

“Only the profits were reported to him regularly. He was very happy. I told him that’s not how we operate. It’s not that we did not alert him, but for some reason I can’t fully explain, all I know is that all profits were reported to him.

“He became very buoyant about his operation. Even when Siew Kuan reported it, he was in disbelief.” 

11.23am: Proceedings resume.

Lin said he was called in for a meeting with then-deputy prime minister and finance minister Anwar Ibrahim over the losses.

“Anwar was unhappy the losses occured and agreed with me whatever open position still existed should be closed as soon as possible.”

10.40am: Hearing breaks for 40 minutes.

10.02am: Second witness former BNM deputy governor Lin See-Yan is called up to give his statement.

Lin, who was deputy governor from 1980 to July 1994, said the forex trade section of the central bank was established in the 1960’s and was placed under the responsibility of the manager and advisor of the banking department.

“I have no role in the detailed operations on the forex operation by BNM,” said Lin.

He said he first came to know the forex losses suffered by BNM through BNM adviser Lee Siew Kuan in the early 1990’s, and also from “friends from the IMF (International Monetary Fund)”.

He said he then approached Jaafar, who confirmed the news of the losses.

“Jaafar told me Nor Mohamed Yakcop was chief dealer. I told him since he does not know the amount of the losses, he should investigate to get details of losses. Jaafar agreed and I think it was Lee Siew Kuan, with the help of Murad, who carried out investigations.

“As a result of the investigations, I was told by Lee Siew Kuan and Murad that BNM has huge and large open forward positions in multiple currencies, and means this bank will suffer more losses in time.

“To me, the risk is not acceptable.

“I told the governor, Nor Mohamed should not be allowed to deal anymore and Murad should take over.

Lin said Jaafar then said “I got the bank into this mess, and I will fix it”.

Lin told the panel that Jaafar was aware that the bank had incurred forex losses, but did not know the exact amount as well as the details of the trades. Lin, Lee and Murad then obtained the listing of all individual transactions from Nor Mohamed.

“I was horrified when I saw the list. We went far into the future with huge amounts. Which will result in more losses. I told the governor we have to close it. Not just for our sake, but also for the counterparties.”

When asked by panel member Saw Choo Boon how it was possible that Lin was not aware of the forex operations, Lin said the overall financial situation of the bank showed no signs of trouble.

“I was monitoring benchmarks that all these forex would have affected, but all these benchmarks looked good.”

Lin said he believed that Jaafar would have closed the transactions had he found out about the volume of losses at an earlier time.

“I wish I knew it earlier. I know Jaafar well. He’s an honourable man and well-intentioned. I think he let his guard down and was not aware of what was going on.”

10am: Witness steps down.

9.45am: Panel member Tajuddin Atan asked if Jaafar had only found out about the losses from Lee.

“When I told him (Jaafar), I think he was taken aback. I think he did not know the amount. He just could not believe it.”

9.30am: When questioned by panel member K. Pushpanathan on his position as adviser in the account department of BNM, Lee repeatedly denied being a member of any committee related to the forex trading at the central bank and also denied being an adviser of the External Reserve Committee (ERC).

When pressed on who was in charge of the account department during his time at BNM, Lee said he was unsure but that it “could be one deputy or one of the advisors”.

9.15am: Lee said Jaafar was “shocked” when he informed him about the forex losses, which he placed at “about RM9 billion”.

“He (Jaafar) was shocked. I told him I was just reporting to him because no one (else) was, so he could do something about it.

“It is really about RM9 billion. The governor said ‘Can you help me?’ I said ‘Why?’

“He told me, ‘Please inform the auditor-general (of) the loss’. So I went there and see the auditor-general (Ishak Tadin) and told him, ‘I think we have a big loss in BNM. And I think it is about RM9 billion. The governor asked me to see you and tell you about it. To save Malaysia’s reputation. Save the country’.”

9.05am: First witness called to the stand. Lee Siew Kuan, bank special assistant to BNM governor, was a contract officer tasked to look into the accounts of the central bank.

“I can’t recall what year but (BNM governor) Tan Sri Jaafar Hussein told me to look into the account of BNM.

“There were big losses suffered by BNM from forex transactions. And the governor told me to take a second look at the accounts,” said Lee.

Lee said he informed the government of the losses, but “the government did not believe me that the losses could be that much”. – August 30, 2017.