Topic : Nature Of Fraud.

Case : Port Klang Free Zone.

1. Case Introduction and Description
The PKFZ (Port Klang Free Zone) scandals is one of Malaysias biggest financial scandals has
identified serious criminal breaches of dutiestrust in connection !ith the scandal"#lagued PKFZ
#ro$ect% !here it in&ol&ed se&eral go&ernment officials% and including a former minister. '(cer#t
from the te(t of The )ttorney *eneral% saying that+"
In the case of PKFZ, everyone involved is a big fish because we are looking at
charges that are amounting to several hundred millions of ringgit, he said.
The PKFZ scandals is due to the #ersonal greed (mainly classified as conflict of interest) of a
former general manager of Port Klang )uthority (PK)) and other interested related #arties to
PKFZ #ro$ect de&elo#ment such a former engineer !ith Kuala ,imensi -dn .hd (K,-.)% an
architect !ith .T) )rchitect% and unclear charged (February /0% 12/2) to #rominent .arisan
Nasional (.N) #oliticians such as former Trans#ort Minister Tan -ri 3han Kong 3hoy and
,atu4 -eri Tiong King -ing% !ho controls K,-..
5n addition to this te(t% The Public )ccounts 3ommittee has recommended into a further
in&estigate to (No&ember 6%1227) Tan -ri 3han Kong 3hoy% a former Trans#ort Minister !ho
!as in connection !ith the criminal breach of trust o&er the PKFZ #ro$ect. -tated in the ne!s
#ress released dated February /0 12/2 by the )ttorney"*eneral Tan -ri )bdul *ani Patail said
that% more #eo#le !ill be charged in relation to PKFZ scandal !hich the in&estigation !ill be
done in stages.
The breaches led to billions of dollars in losses at a tottering state"o!ned trans"shi#ment hub of
Port Klang Free Zone(PKFZ) #ro$ect de&elo#ment. This case had also e(#osed the go&ernment
to huge financial losses stemming from the failed PKFZ de&elo#ment &enture. 8ecalled bac4 on
the year of 1226% dated 1
nd
of $uly%
he government is confident of the future of the Port Klang Free Zone and has
committed a s!ending of about "#$.% billion for its develo!ment, but this money is
well invested,&
Deputy Prime Minister Datuk Seri Najib Razak.
The hub% the Port Klang Free Zone (PKFZ)% !as built to attract ne! in&estments into the
country% but has been dogged by contro&ersy o&er the #rice #aid for the land for the #ro$ect% a
massi&e cost o&errun and management issues.
The PKFZ issue !as in&estigated by the P)3 earlier in 1220 but that committee9s !or4 !as
ham#ered by a lac4 of information. -ince% P)3 is only being a #art of the legislature% by only
recommends action to be ta4en by the go&ernment but has no #o!ers of enforcement !hich is a
matter of the e(ecuti&e. P)3 has no resources of its o!n and is assisted by secretariat staff
#ro&ided by the Parliament office. .ut it can as4 the )uditor"*eneral9s office to #erform chec4s
and gather information to assist in its in:uiry.
The current !or4s that had been done by P)3% is by restarted its in&estigation of the PKFZ issue
!hen more information !as made a&ailable from the Price!aterhouse3oo#ers re#ort and the
122; )uditor"*eneral9s 8e#ort.
)ccording to the audit re#ort released by Price <aterhouse 3oo#ers on 1; may% sho!ed that the
cost of the 6.= hectare #ro$ect may see its costs s#iral to as much as 8M/1.6= billion (>-?@.==
billion)% si( times the original estimate% in a deal that may ha&e breached rules on conflict of
interest.
The AunusualB arrangement (relationshi#) as strange and unusual is seen as the red flag of to the
scandals and has found by the Public )ccounts 3ommittee. Ma4e you 4no! that% The main
thrust of the P)3 is to im#ro&e go&ernance in the e(#enditure of the go&ernment de#artments
#ro&ided by the national budget a##ro&ed by Parliament% !here they found the four s#ecial
#ur#ose &ehicles (-PCs ) set u# to issue bonds to raise funds for the PKFZ #ro$ect% o!ned by
the de&elo#er% Kuala ,imensi -dn .hd(K,-.) !hich is a #ri&ate com#any that had entered into
a contract !ith the go&ernment to de&elo# the PKFZ #ro$ect.
here are things that are unusual. he government has to meet obligations to bond
holders on !a!ers that were issued by a third !arty. he bond was issued !rivately
while the relationshi! between PKFZ and the develo!er is contractual,
PC c!airman Datuk Seri zmi "!a#id$%1 u&ust %''(
The issuance of bond !as also im#ro#er as it had resulted in the go&ernment suffered huge losses
as fund re:uired under the go&ernments guarantee !as not fully utiliDed to im#lement to the
#ro$ect.
)t the da!n of PKFZ #ro$ect de&elo#ment% go&ernment had decided that the #ro$ect to be
de&elo#ed by PK) &ia self"financing. The inconsistency o#inion from the inde#endent bodies
!as raise u#% !hen the issuance of general"auditor re#ort !ay bac4 on the year of 122@% 1226%
122=% 122E and 1220% stated that Port Klang )uthority !as also unable to de&elo# PKFZ #ro$ect
through self" financing% the fact that PK)- financial status did not ha&e a ca#acity to fulfill its
obligation to de&elo# PKFZ.
To e(tend% the letter underta4ing issued !as against go&ernments decision as !hen the PKFZ
#ro$ect !as a##ro&ed. The decision !as out of the 4no!ledge of the *o&ernment% Finance
Ministry and 'conomic Planning >nit to obtain allocation for the #ro$ect. 5t !as ob&ious that the
ministers cannot issue any letter of guarantee on the behalf of the Malaysian go&ernment. The
only ministry allo!ed to issue a letter of guarantee !as the ministry of finance after #rocuring an
a##ro&al from the cabinet. .oth of them% Phang and the Former Trans#ort MinistryF 3han% ha&e
failed to inform the cabinet in a timely manner and didnt ha&e a##ro&al from finance ministry
on this matter.
This scandals ha##en% !hen both Former trans#ort Minister Tan -ri 3han Kong 3hoy and
Former Port Klang *eneral Manager % ,atin Padu4a O 3 Phang% had breached section '()'* of
the Financial Procedure act '+,- by issuing @ letters of su##ort by 3han to allo! the authority
to raise cor#orate bonds and @ letter underta4ing issued by Phang !ithout the a##ro&alG
4no!ledge of the finance ministry. These letters had im#licitly #laced res#onsibility on the
go&ernment to ensure there is allocation for PK) to fulfill its obligation (5ssuing bond) under the
de&elo#ment agreement. .oth of them might be sentenced for criminal breach of trust o&er the
PKFZ #ro$ect if found guilty.
)s stated in the media and ne!s #ress cited bac4% on the month of ,ecember /2th% 1227% three
of them found guilty and sentence into a hearing at the Klang sessions court in connection !ith
discre#ancies in the multi"billion ringgit Port Klang Free Zone (PKFZ) fiasco.
5n the re#orted ne!s% Phang !as charged !ith three counts of criminal breach of trust amounting
to 8M1=6 million% .oth )bo4 and Tan !as charged !ith t!o counts of cheating. .ernard Tan
has claimed trial to a total of 1E counts of cheating amounting to 8M/11 million. Follo!ed by
-te&en )bo4% the chief o#erating officer of PKFZ de&elo#er Kuala ,imensi -dn .hd% has been
charged !ith criminal breach of trust .The court had set bail of 8M@=2%222 for Phang !ho is the
former Port Klang )uthority (PK)) general manager% 8M122%222 bail for -te#hen !ho is Kuala
,imensi 3hief O#erations Officer and 8M1=2%222 bail for Tan of .T) )rchitect.
The follo!ing date% ,ecember /6
th
% Ha! Ienn ,ong% =/% is $ointly accused !ith .ernard Tan% an
architect !ith .T )rchitect% !ho !as charged last !ee4 for cheating in&ol&ing 8M/11.@ million.
Ha! is accused of cheating PK) into endorsing #ayment to K,-. for electrical infrastructure
!or4 !hich allegedly !as not carried out. 5f con&icted% he faces a ma(imum #enalty of /2 years
$ail% !hi##ing and a #ossible fine for each of the 16 charges.
Ne&ertheless% as stated in the ne!s #ress% *ani !as also e(#ressed disa##ointment by the lo!
amount of bail that !as set by the Klang -essions 3ourt on the three accused but stressed that
this !as the courts discretion.
I am not going to .uestion the court/s decision but if you ask me !ersonally and I
think I can say this for those working so hard on the case that I am very disa!!ointed.
0ut that is !ersonal, he said.
)ttorney *eneral Tan -ri )bdul *ani Patail
%.Discussion case
a) *t!ica# issues
The ethical issues faced by the PKFZ #ro$ect can be e(#lained from a #ersonal% organiDation and
systematic le&el. The #ersonal le&el describes the causes that dri&e greed and ill concei&ed acts
!ithin an indi&idual. The organiDation le&el describes the causes of unhealthy and unethical
decisions made among grou#s of indi&iduals and the systematic le&el describes causes are
#rimarily dri&en by e(ternal influences. The insights obtained from these three le&els !ill
#ro&ide a thorough e(#lanation of the causes behind the scandal !hich e&entually lead to the
losses on the de&elo#ment of PKFZ #ro$ect.
The #ersonal le&el calls for the character e&aluation of the main indi&iduals that #artici#ated in
the &arious fraud. To the e(tend% former general manager of PK)% ,atin Padu4a O 3 PhangF
Former trans#ort Minister Tan -ri 3han Kong 3hoyF -te&en )bo4% the chief o#erating officer of
PKFZ de&elo#er Kuala ,imensi -dn .hdF .ernard Tan% the architect of .T) and much more
nominees to be announce later. The &alues and ethical beha&ior of these indi&iduals ha&e
continuously been called into :uestion. Many of the charges directed to!ards these indi&iduals
are a clear indication of ac:uiring #ersonal #rofits. The greedy managerial act of ac:uiring #rofit
based on self"interest !as seen in each character described abo&e. The ethical issues come to
:uestion the character of these indi&iduals as they #lace PKFZs #ro$ect de&elo#ment future
sur&i&al at ris4 in order to achie&e #ersonal financial #rofits.
,es#ite the &arious character fla!s of these indi&iduals% they may &ery !ell be good #eo#le that
merely influenced by the cor#orate culture !hich leads to the im#act of grou#s on the
construction of cor#orate decisions and organiDational cultures. 5ndi&iduals% for reasons tied to
cor#orate culture% ado#ted their ethics to cor#orate ethics associated !ith their roles as managers.
Many of the acts !ere committed by managers !ho felt they !ere inclined to do so by the
#ressures demanded by their managerial roles% causing them to act in an unethical manner. The
close relationshi#s that !ere formed among to# leading e(ecuti&es and ministry gre! arrogant%
thin4ing they !ere in&isible. This hard headed mentality formulated by these e(ecuti&es created
a cor#orate culture norm that dro&e the conce#t of #rofitability and success% no matter !hat the
cost. 5ndi&iduals that sur&i&ed the #ressures of this culture began to thin4 they !ere gods.
On the systematic le&el% many e(ternal factors ha&e also contributed to grou#s or indi&iduals
ma4ing decision contradictory to !hat they may normally do. )n e(ternal factor that allo!ed the
action of these e(ecuti&es !as due largely to the legal and structure. )s been stated in the article
ne!s% most of the #erson that had been charged is closely related to each other. For e(am#le% the
in&ol&ement of #arties !ho had #rior association !ith either the land used to de&elo# PKFZ or
the turn4ey de&elo#er% Kuala ,imensi -dn .hd (K,-.)% and a!arding of the PKFZ
de&elo#ment contract to K,-. before a #ro$ect master"#lan !as finaliDed% !hich is an ob&ious
conflict of interest.
.esides an o&erride of #o!er and !ea4 of #ro$ect management by both Former Ministry Of
Trans#ortation and *eneral Manager Of Port Klang is seen as a contributory factors to unethical
roles by the to# management% !hich had lead to arise of these scandals. To su##ort this
statement% PK)s failure to see4 the ad&ice of the )ttorney"*eneral !hile not com#lying !ith
certain Finance Ministry regulations% and PK)s failure to alert the 3abinet in a timely manner
of its inability to finance the #ro$ect from its internal funds follo!ing an audit re#ort by the
)uditor"*eneral in 1226 that noted that PK) did not ha&e sufficient funds to finance the #ro$ect.
To the e(tend of this te(t% cost o&erruns to de&elo# PKFZs #ro$ect !as also de#ict the failure
and !ea4nesses of the #ro$ect de&elo#ment !here% PK)s #ro$ections that it !ould be in a
cumulati&e cash deficit #osition in 12/1 and !ould not be able to re#ay the Finance Ministry soft
loan to a sum of 1 billions installments on time and PKFZs ha&ing a lo! occu#ancy rate of /6J
!hich is not generating sufficient re&enue to co&er its o#erating e(#enses and incurring losses
since its incor#oration.
Finally% most com#anies ha&e codes of ethics that #rohibit managers and e(ecuti&es from getting
in&ol&ed in another business related. >nfortunately% due to the lac4 of regulations enforcement%
these codes of ethics are &oluntary and can be set aside by the #erson in chargedF !hom
theoretically had the #o!er to con:uer the !orld of business.
b) +ui#ty parties and nature o, -ron&doin& in t!e case
1ame itle 2harges "esult
,atin Padu4a O 3 Phang Former *eneral Manager K@ counts 3riminal .reach of Trust LFound *uilty
L.ail Of 8M@=2 K
-te&en )bo4 3hief O#erating Officer K 1 counts of cheating LFound *uilty
L.ail Of 8M122 K
.ernard Tan )n )rchitect K 1E counts of cheating LFound *uilty
L.ail Of 8M1=2 K
Ha! Ienn ,ong )n )rchitect K 3harged For 3heating L5f con&icted% ma(
#enalty/2 years
$ail and #ossible
fine for each 16
charges.

c) Injured Parties In T!ese Case
a3!ayers 4 5ocal 2ommunity 4 6ociety
Fraud also de#resses the o&erall moral climate in a society. 5t affects you and me and
others !ho are Malaysian% since the local communities are the ma$or contributory to the
go&ernment through ta( #ayment. 5t can lead to a general lac4 of faith in the integrity of
the ministry to managed the #ublic fund% erosion in the confidence of the #ublic to the
*o&ernment. )fter a sluggish start% the *o&ernment !ith the hel# of other inde#endent
bodies such Pubic )ccount 3ommittees and Malaysian )nti"3orru#tion 3ommission
becomes more in&ol&ed in this issues.
7overnment
)s been highlighted before% the go&ernment needs to bare a huge of losses on the failure
of PKFZs #ro$ect de&elo#ment. This might be a lesson for the go&ernment to #ut those
eyes more on the de&elo#ment of huge #ro$ects% since !e are tal4ing about billions of
ringgits. Members of the administration must be held accountable to the #romise of
#rotecting #ublic9s interest. They need to res#onse to any action% be trans#arency%
accountable and ste!ardshi# to their actions% ans!ered the :uestions that left ans!ered
by the #ublic% e(amine dee# on the budget been #ro#osed in the #arliament and they must
do more than tal4 the tal4 in order to establish and sustain a better leadershi# of the
country.
PKFZ
-ince 122@ to 1220% the )uditor *eneral had re#eated !arned the Port Klang )uthority
that it may find it difficult to meet the financial commitments on PKFZ. -ur#risingly%
most of PK) board members did not come for!ard to e(#lain ho! this o&ersight !as
#ossible. The members of PKFZs board #resently should ta4e a #ro"action to correct the
#ast mista4es of the board% by ensuring the !ea4 #ractices of the #ast are not re#eated.
They need to be res#onsibility on fi(ing this gigantic scandal !hich has im#acted to the
image of PKFZ #ro$ect de&elo#ment as a !hole.
.. Conc#usion
Former PK) e(ecuti&es% Trans#ortation Ministry% se&eral architects and 3hief O#erating
Officers of K,-. #laced their o!n #ersonal !ealth abo&e the !elfare of the #ublic. Personal
gain% greed% lac4 of ethics% and a general feeling of being abo&e the la! !ere the factors that
brought to the PKFZ #ro$ect scandals in Malaysia. 'ssentially most of the #roblems faced by
PKFZ #ro$ect deri&e from the immoral and unethical actions ta4en on by the To# '(ecuti&es and
se&eral ministry in their attem#t to achie&e #ersonal #rofits.
5n order to #re&ent these unethical actsG !rongdoings from occurring% there needs to be an
enormous em#hasis on the truthfulness and integrity amongst the #layers. There need to be
su#er&ision o&er inde#endents bodies such *enera auditors% Public )ccounts 3ommittee and
others as they (To# e(ecuti&es) e(ercise their o!n roles on business $udgment about !hat is the
best interest for the organiDation as a !hole.