RM2.6 billion in the Spotlight When RM2.6 billion was deposited into the private account of Malaysian Prime Minister Datuk Seri Najib Razak, we were told that this was a “donation” from a Middle Eastern donor. Najib, also the president of UMNO, stressed that these “public funds were not used for personal gain.” This issue sparked questions about the use of money to influence the electoral process, necessitating a call by Najib to institute reforms dealing with the financing of politics. Such reforms are imperative as this saga has underscored serious gaps in the oversight of political financing in Malaysia, bringing to the fore two long-standing issues about our political system: First, it confirms that slush funds exist and are controlled by individuals or trustees of political parties. Second, it establishes that parties are being funded by foreign sources.

Money in Politics: Why Political Financing in Malaysia needs Reforming

This booklet sheds light on Malaysia’s way of financing politics (the what); why it may not be the best way (the why); and suggests reforms to improve accountability and transparency (the how). What is this Big Term called “Political Financing”? “Political Financing,” also called “Political Funding,” refers to the sourcing and spending of funds for party activities during and outside of the election campaign season. Political Finance, also called Political Funds, is essentially money used for electioneering. How is Malaysia Performing in terms of Political Financing? In Malaysia, there is little transparency and accountability involving the givers and receivers of political funds, on both sides of the political divide. We need proper oversight of donations to parties in order to return integrity to Malaysia’s electoral system and to ensure free and fair elections.

Urgent reforms of the relevant legislation and key institutions are needed, in order that you and I will be duly informed about how we can financially support political parties, and how our support is being used.

How did my Member of Parliament or State Assemblyman raise the money needed to run election campaigns and get elected?

Why do some politicians or political parties run bigger, better and stronger campaigns? What kind of good fortune helps one politician rise to the top over another?

A business I frequent donates to a ruling political party. Did the business benefit from government contracts?

Why do Political Parties need Money anyway? How Political Funds/Finances are spent Money is needed to cover costs of running the party, including:

How and From Where do Politicians or Parties obtain their Funds? Broadly speaking, political financing is split into two categories: Private Financing and Public Financing. In Malaysia, political financing is privately-sourced. In Malaysia, party membership fees constitute only a small share of a party’s annual income. The reality is that parties and candidates rely heavily on donations, from people and businesses, to fund their activities.

Maintaining Permanent Offices

Carrying Out Policy Research And Polls

Political Education And Campaigns

Running Advertising Campaigns On Policies Mobilising Voters Paying Party Workers

Public Financing

Indirect Public Funding Direct Public Funding

• Tax exemptions • Subsidized access

to media, meeting rooms, etc.

• Monetary transfer to parties / candidates

Private Financing

Donation Membership fees Personal wealth

Business ownership

Donation (monetary or in-kind) from like-minded supporters

Regular membership fees collected from party members

Financing of party activities using personal wealth of politicians

Financing from profit-making and not-for-profit businesses

Raising money legitimately; not involving the transfer of government resources to themselves or their donors.

Direct and indirect transfers of financial resources from the government, including allocations from the national budget; tax-payer funds.

What’s the Problem, Really? The proper functioning of Malaysia’s political system is undermined by the deep-seated problem of money politics. It alludes to the buying of votes during general elections and internal party elections. It also refers to politicians and parties being involved in business, whether directly (through active ownership of companies) or indirectly (via proxies or trustees), which causes unfair competition in the corporate sector.

The issue is in the methods through which the money is raised and how it is spent. It is impossible to speak of politics without talking about funding. Wealthy individuals and businesses try to create close links with parties to influence policy decisions or gain access to projects. Of course, individuals have the right to support the party of their choice. But political contributions in Malaysia are frequently associated with cronyism, preferential treatment by the government and corruption. The monetisation of politics is damaging to the economy. It opens up the political sphere to the undue influence of wealthy individuals. Political decisions are no longer decided by the public, but by a handful of influential figures. How will Money Politics Affect Me? When politics is monetized, it becomes less centered on ideology, policy, service to public, national interests or leadership. Politics becomes about who can easily raise and disburse money in return for support. Within a party, monetization leads to factionalism, causing sub-groups (called factions) to form within a larger group (party). The primary interest of these factions is to find avenues to enrich themselves. With political financing in Malaysia taking on a covert form (there is no need for mandated disclosures by donors as private funds flow into the political arena), it is possible for businesses to shape the making of policies. In this situation, “corporate funding of politics” should not be seen as “philanthropy” or “national service”. The business stands to gain from funding the party or politician. Each year, billions of Ringgit is lost due to leakages in government spending. There is a serious lack of accountability and governance in the management of Malaysia’s national resources and taxpayer funds, and in the granting of licenses and concessions. Project proposals to the government offering the best services at the lowest costs may not be selected. This could be due to prior agreements involving a business and a party. Eventually, the government ends up paying more for subpar projects.

How funds are raised

Political Financing Issues: Two Key Areas

Use of Funds by Source of Funds to

Political Party/

Candidate

1

How funds are spent 2

This can affect us in a twofold manner:

1. As taxpayers, we directly bear the higher costs of expensive projects. 2. As citizens, we suffer from inefficient delivery of public services (resulting from subpar projects) which

leads to higher prices for goods and services, and in turn, higher costs of living. As taxpayers and citizens, would we not be interested in knowing where tax money is channeled to, how it is managed, or whether it is used in an accountable manner? More so, don’t we have the right to know? The consequences of money politics are far-reaching; it not only undermines public confidence in politicians and governance, but also makes Malaysia less competitive in the international arena as the cost of doing business will rise. So then, what should be done? “Is there a way out?” we may ask. This is a valid question because the current laws and institutions that oversee the functioning of elections are less than adequate to deal with the unfair financing of politics. Politics is a number game; the more you get, the better off you will be – be it votes or money. Thus, politicians and parties should not be allowed to self-regulate. The onus to regulate should fall on independent institutions, which enforce legislation and issue guidelines on how parties can raise and spend their funds. Parties should publicly disclose their sources of income and mode of expenditure. In Malaysia, we are starting at almost ground zero in the demand for reform. Show me a Breakdown of Malaysia’s Issues Here is a snapshot of the six key issues plaguing Malaysia today.

Monetization Unequal Access Factionalism

Covert Funds Inadequate Laws Weak

Institutions

What Needs to be Reformed? Here is a look at the present situation in Malaysia and the proposed reforms in greater detail:

1. Review of Legislation Legislative amendments and a new law have to be enacted to strengthen transparency and accountability of political funding.

Legislation Current Weakness Proposed Solution

Federal Constitution

The Prime Minister exerts high influence over the appointment of EC members. This compromises the EC’s autonomy and impartiality.

Federal Constitution amendments must safeguard the independence and impartiality of the EC.

Election Offences Act 1954

• There is no law restricting how much parties can receive from individuals, corporations and politically-linked third-party donors.

• It is not mandatory to reveal the identity of anonymous donors.

• There are expenditure limits on candidates standing for election but only during the official campaign period.

• There are no spending limits on expenditures incurred by a party, whether directly or indirectly for the benefit of its candidates.

• There are no spending restrictions outside the election period.

• A new law should include rules on campaign contributions, limits on expenditures for parties and mandate disclosure and reporting of funding sources and spending.

• This law should strengthen the monitoring and enforcement capabilities of the EC.

• This law must limit how much money can be given to parties. This applies to contributions in the form of loans, cash or in kind, such as sponsorship of goods, venues or services. It applies to all types of donors: individuals, companies and politically-linked third party entities.

• Anonymous contributions must be banned to prevent covert financing.

Societies Act 1966

• A key issue requiring reform involves disclosures. Reporting requirements and public disclosure of political financing and spending are minimal.

• Candidates must submit their financial statement detailing their income and spending during the election campaign period but are not obliged to account for their expenditures outside of the campaign period.

• Existing reporting requirements are extremely basic and not subject to much oversight. Public disclosure requirements remain weak.

• At present, parties are registered under the Societies Act 1966, under the purview of the Registrar of Societies. This Act must be amended to enhance the independence and impartiality of the Registrar of Societies.

• A new law is required to oversee the conduct and financing parties. This includes the financing of internal party elections, not just elections for state or federal representation.

• Legislative reforms must address reporting requirements and public disclosure to enhance transparency and accountability.

• Parties and candidates should be mandated to report itemised contributions and spending. Reporting frequency should be higher during election periods.

• The reforms must open up public access to updated information on the income and expenditure of parties (and candidates during general elections). Members of the public should be able to access such information with ease.

A three-pronged approach is needed to strengthen transparency and accountability in the financing of politics, enable good leaders to emerge and create a level playing field during elections.

• Focus: Federal Constitution, Election Offences Act 1954, Registration of Societies Act 1966

• Aims: Relevant legislations have to be reviewed to ensure better regulation of political financing for the democratic process to prevail

1. Review of Legislation 2. Reform of Institutions

• Focus: Election Commission and Registrar of Societies

• Aims: Institutions overseeing parties and the electoral system must have the autonomy to monitor and enforce the political funding regulation framework

3. Internal Party Elections Monitoring

• Focus: All registered political parties

• Aims: Exert oversight of internal party elections to curb vote-buying, money-based factionalism, rent-seeking and patronage

• Legislative reforms must address issues of limits on contributions and spending, sources of funding and detailed disclosures of political financing

2. Reform of Institutions Public institutions that play a role in oversight of the electoral system need a boost in autonomy and impartiality to enable them to carry out their duties without fear or favour.

Institutions Current Weakness Proposed Solution

Election Commission (EC)

The EC and Registrar of Societies have little regulatory capacity to act independently against parties violating electoral regulations. The Registrar of Societies falls under the ambit of the Ministry of Home Affairs, rendering it subservient to the executive. Both institutions do not have sufficient capacity to monitor compliance of political finance regulations as they are not empowered with investigative power to carry out independent investigations and audits.

Reforms should seek to boost independence and impartiality involving appointments, membership and reporting, as well as monitoring and enforcement capabilities. The EC’s autonomy and impartiality must be protected and tasked with registering and supervising political parties.

Registrar of Societies

Reforms should enhance their Independence and impartiality including reporting line and execution of duties. Parties should be registered by and under the purview of the EC, not the Registrar of Societies.

3. Internal Party Elections Monitor There is a crucial need to exercise relevant oversight of internal party elections.

Current Weakness Proposed Solution

All Registered Political Parties

Internal party elections are governed by a party’s own constitution. There is little oversight of election spending and financing. Keeping a tab on internal party elections is a crucial part of regulating political financing. This is because the volume of funds distributed during party elections often exceeds that used during general elections. It is typically in the form of vote-buying through lavish meals and gifts, cash handouts and economic concessions. This drives money-based factionalism where elections are based on one’s ability to provide contracts rather than genuine leadership.

Independent external oversight is required of the conduct of internal party elections, from the grassroots level to the top leadership. At the intra-party level, there must be accountability and transparency in fund-raising and expenditure during elections. This covers expenditure incurred before, during and after a party election.

Three demands of this political financing reform initiative:

1. How do you do an Institutional Reform to Strengthen the Election Commission (EC)? The EC or Election Management Body (EMB) is the key institution in charge of electoral system oversight. There are three models the EMB can take:

•  The government had earlier mooted such a law, but it has yet to be tabled in parliament.

•  This law should ban secret and foreign funding, limit political contributions and expenditure, establish reporting requirements and public disclosure, introduce guidelines for a caretaker government and ban party ownership of business.

Enact Political Parties Act

•  Election Commission's autonomy and impartiality must be protected. •  Election Commission to be tasked with registration and supervising of political parties.

•  Election Commission should have stronger monitoring and enforcement capabilities.

Empower Election Commission

•  This new form of funding comes from public coffers. It is for all political parties, whether they are in government or in opposition.

•  Public financing can help reduce reliance on private sources of funding, paticularly the wealthy and corporate interest groups. This will help level the playing field for new and smaller parties as well as independent candidates.

Introduce Direct Public Funding

Election Management Body (EMB) Models

• EMB is institutionally autonomous and independent of executive branch of government

• Malaysia’s EC falls under this model

Independent1 Governmental

• Elections managed by executive branch through ministry (e.g. Ministry of the Interior) and/or local authorities

Mixed

Two structures: • Policy-monitoring or

supervisory EMB independent of executive branch of government

• Implementation EMB similar to the governmental model

2 3

Issues

Appointment of EC members

1

Criteria for candidates to

the EC

2

Term of office of EC members

3

Accountability of EC

4

1.1 Appointment of EC Members

1.2 Membership Criteria to the EC

• The Prime Minister • The leader of the Opposition • The chair of the Parliamentary Select Committee for Electoral Matters • The ranking Opposition member of the PSC. • The Chief Justice • The Chairman of the Malaysian Human Rights Commission (Suhakam) • The President of the Malaysian Bar Council • An additional civil society representative who has knowledge of or practical experience in electoral

matters. This Select Committee is not a permanent committee in the Parliament. The inclusion of this representation will require some changes to be made in the Parliament.

Nomination Process

Formation of an Election Commission Nomination Committee (ECNC):

• The ECNC will make a public call for applications when a vacancy arises • Applicants will be screened for their eligibility • Public hearings will be held with shortlisted candidates, of which there must be at least

three for each available vacancy. • The ECNC will submit its chosen candidates to Parliament for approval by the House, after

which it goes to the Agong for approval

Legal Restrictions

Citizenship

1

Impartiality

2

A person may not be appointed as an Electoral Commissioner if the person:

Is an officer or employee of a registered party or of any accounting

unit of such a party

Is a member of a registered party

holds a relevant elective office

has at any time within the last ten years

a

Been such an officer or employee as is

mentioned in paragraph (b)

Held such an office as is mentioned in paragraph (c)

Has been named a party donor in the

register of donations

b c

d ii iii i

1.3 Term of Office of EC Members

• Election Commissioners should be appointed for a six-year term with the option for extension of a

second term. This will allow Commissioners to see through a minimum of one full election cycle.

• The age of retirement shall be 70 years of age. Appointments to the Commission should be staggered to allow for some continuation of institutional memory.

1.4 Accountability of EC

2. How do you do Legislative Reform and introduce a new law: The Political Parties Act? The Political Parties Act (PPA) is going to be a new legislation that is expected to affect the Federal Constitution and other laws to create a comprehensive and standardized framework that regulates political funding. This new law is expected to merge and repeal selected sections of the Election Offences Act 1954, Election Commission Act 1958 and Societies Act 1966.

Establishment of a Parliamentary Select Committee (PSC)

• To reflect the composition of the House • To receive reports submitted by the EC on an annual basis and after any state or federal level elections • To receive expenditure reports • Carry out inquiries into improvements to be made to the electoral system and processes, with input from the EC • Of whom hearings and all findings should be made open to and made public

This new law will address eight major weaknesses in the current system.

Please tell me more about the PPA and how will it impact on political financing?

2.1 Governance of political parties What’s new?

Governance of political

parties

Limits on political

contributions

Limits on political

expenditure

Access to funding

Reporting requirements

Public disclosure

requirement

Regulating financing of

party elections

Guideline for caretaker

government

6

7 8

1 2

4 5

3

The EC will be the custodian of the

PPA.

The creation of a Political Parties

Division.

Registration of political parties

EC will take over the role of registering and regulating political parties, a function currently under the ROS.

Functions:

Oversee and facilitate party affairs

Receive, scrutinise and archive official documents submitted by political parties.

Publicly disclose sensitised information of political parties

Enforce and ensure compliance of PPA

A new Political Parties Regulation Framework will be established:

2.2 Limits on political contributions

The PPA will introduce regulations to instil accountability and transparency of political contributions. This covers contributions made in cash or in kind.

Yang di-PertuanAgongProtector

Parliament

Oversight Body

EC Commissioners

Decision making

Secretariat

Executive

Political Parties DivisionExecutive

Proposed Political Parties Regulation Framework

EC Chairman

Custodian

Set up a list of permissible annd non-permissible donors

Parties and candidates must disclose the identity of donors who donated > RM50 in a single or multiple donations

Place a limit of RM10,000 per donor a year

Place a limit of RM100,000 per corporation a year or RM500,000 from a group of companies owned by same majority shareholders

Place a cap of annual RM50,000 donation for third party actors (TPA)

Donations made to political parties must go directly into the party's account

Parties and individual candidates must issue receipts for all contributions

2.3 Limits on political expenditure There will be limits imposed on how much candidates, political parties and TPAs can spend during election periods and outside of the election season.

2.4 Access to funding: private and public financing The PPA aims to encourage sustainable financing of politics by promoting a balanced mix of private and public financing. Political parties should not have to heavily rely on either form of funding.

Limit political party expenditure based on annual revenue received for any given year.

Impose a "no campaign" expenditure window between the day parliament or state assemby is disolved and nomination day

TPAs are not allowed to spend more than 20% of revenue received by its affiliated party per annum

Limit political party expenditure based on the number of candidates contesting in an election.

Introduce new spending regulation for candidates by taking into account the number of voters and geographical size of a constituency.

TPAs not allowed to spend more than 20% of expenditure incurred by its affiliated party per annum

The term “third-party actors” (TPAs) is used to describe non-political party or non-candidate electoral actors who solicit contributions and make expenditures directly related to an electoral campaign. Some examples are political action committees, certain non-profits, or certain union campaign funds, foundations, think tanks, etc.

Non

-ele

ctio

n P

erio

d E

lect

ion

Per

iod

Rationale for regulation of private financing

However, regulations on private considerations must be reasonable and considerate. Otherwise, it may encourage parties to resort to “creative” accounting and practices designed to stretch these limits. OK. So what are the regulations on private financing?

Ensure transparency of donations

Avoid prejudice to the motives or activities of political parties

Reduce unfair advantages gained by wealthy individuals

Regulations on Private Financing

Prohibit political parties from owning for-profit businesses

Elected representatives are required to publicly declare their assets before taking public office and must update regularly thereafter

Elected representatives are not allowed to be involved in profit-making businesses while in public office

A for-profit business is an organisation which aims to earn profit through its operations and is concerned with its own interests. Not-for-profit organisations, which focus on serving the public, are concerned with money only as much as it is necessary to fund their activities.

What else can we do to help further level the playing field? Private financing regulations are likely to restrict the ability of parties and candidates to obtain independent funding. So, we must provide parties with alternative sources of income to finance their political activities. The solution is to introduce fair and reasonable public funding for running of the party machinery and during election campaigns. The proposed financing scheme will be:

What are the potential benefits and risks of Public Funding?

Entitlement •  Annual public funding to be based on the total popular votes gained in the most recent election. A party will receive RM4 annually for each vote obtained.

Distribution •  Public funding to be distributed on a half-yearly basis and the funds are to be paid to political parties or directly to independent candidates.

Reporting •  Recipients of public funding must submit an annual audited account to EC. The report must include a balance sheet detailing receipt and expenditure. Failure to report in a timely manner will result in a loss of entitlement.

Disclosure •  EC will make its financial report on public financing readily available to the public.

1. It is a natural and necessary cost of democracy

2. It can limit the influence of interested money and thereby help curb corruption

3. The government can encourage or demand changes in for example how many women candidates a party fields

4. It can increase transparency in the financing of a party and candidate, thereby helping to curb corruption

5. If parties and candidates are financed with only private funds, economic inequalities in society might translate into political inequalities in government

6. Political parties and candidates need support to meet the growing costs of campaigning

7. In societies with low levels of income, ordinary citizens cannot be expected to contribute much to political parties

Arguments for Public Funding:

1. It increases the distance between political elites (party leadership, candidates) and ordinary citizens (party members, supporters, voters)

2. It preserves a status quo that keeps the established parties and candidates in power

3. Taxpayers are forced to support political parties and candidates whose views they do not share

4. Funding of political parties and candidates takes money away from schools and hospitals

5. Political parties and candidates both take the decision and collect the money

6. Political parties risk becoming organs of the government rather than parts of civil society

Arguments against Public Funding:

2.5 Reporting Requirements The PPA will strengthen existing reporting requirements for parties and candidates, a key step in reforming political financing. The new regulations will be:

2.6 Public Disclosure Requirements Public disclosure requirements work alongside mandatory reporting of funding and expenditure to ensure transparency in political financing

• Political parties, candidates and TPAs to report to the EC Governance

• Political Parties, individual candidates and TPAs will be required to report on financing Affected parties

• Non-election season: Parties to report annually (not applicable to candidates) • Election period: Parties and candidates to make daily summary reporting and comprehensive reporting

within 14 days of polling day Frequency of reporting

• Disclose identity of donors who contributed RM500 or more in a single or multiple donations Reporting of infromation

• All reports must be audited by an independent auditor before submission to the EC Veracity of reports

• Slush funds are not allowed Slush funds

Public disclosure

Affected parties

Governance

Disclosure information

Frequency of disclosure

Method of disclosure

Victimisation of donors to opposition

Public disclosure will include financial reports of political parties, candidates and TPAs.

EC will be made responsible for publicly disclosing the financial reports.

EC to publicly disclose without tampering financial reports received.

Non-election period: Annual disclosure to be done within 31 days of the first month of the calendar year.

Election period: EC to disclose summary reports on a daily basis and comprehensive disclosure within 31 days of polling day.

Establish an online registry or depository of announcements by political parties.

It is against the law for government agencies and officials to unfairly victimise donors of opposition parties.

2.7 Financing internal party elections Aside from regulating the funding of parties and candidates, the PPA will exercise oversight of internal party elections and funding. Wait, why do we need to regulate internal party elections? This is crucial as party elections are driven by money-based factionalism, rent-seeking and patronage. This further exacerbates vote-buying and undermines the integrity of political parties. Existing laws and regulations are currently silent on this. Political parties are governed largely by its own constitution and party structure. As a matter of principle, national level political financing regulations should apply to internal party elections.

2.8 Guidelines For Caretaker Government

There is currently no framework or legislation dealing with a caretaker government. The PPA will prohibit the caretaker government (the incumbent government in the lead up to the elections) from using state resources and announcing election goodies and development programmes.

Parties to submit audited financial

reports of contestants to the Election Commission

Contribution limits for party election as per

national elections

Expenditure limits for party elections as per

national elections

Reporting requirements (during

and after party elections) as per national elections

Disclosure requirements (during

and after party elections) as per national elections

Governance EC will be made responsible as the oversight body of the caretaker government.

Role of caretaker

government

Prohibit caretaker government from launchng development programmes

as soon as parliament / assembly is dissolved.

List of Non-Governmental Organisations Endorsing these Reforms: ABIM NSCAH Aliran OHMSI Anak0Muda0Sarawak0 PACOS AWAM Pahang0Raub0Ban0Cyanide0in0Gold0Mining0Action0Committee Association0of0Women0Lawyers People's0Service0Organisation Baramkini Perak0Women0for0Women0Society BERSIH02.0 PERMAS BERSIH0Sabah Persatuan0Sahabat0Wanita0Selangor BERSIH0Sydney Persatuan0Siswazah0Lihua0KL0and0Selangor BRIMAS PRIHATIN C4 PRIMA DEMA PROHAM Empower Projek0Beres ENGAGE Projek0Dialog Friends0of0Kota0Damansara Pusat0KOMAS G25 Rapat G40 REFSA Global0Bersih Sabah0Women's0Resource0Action0Resource0Group HAKAM SABM I0am0#26 Sahabat0Rakyat IKRAM Sarawak0Access IRF SAVE0Rivers JAG SIS Japan0Graduates0Association0(JAGAM) Suaram Jihad0for0Justice TAHABAS JOAS Tamil0Foundation KAMI Tenaganita KLSCAH Tindak0Malaysia KTI United0Chinese0School0Alumni0Associations0of0Malaysia LiuHua WAMI LLG WAO Malaysian0Indians0Transformation0Action0Team0(MITRA) WargaAMAN MIPAS We0Are0Malaysians Muslim0Professionals0Forum Women0Development0Organisation0of0Malaysia0PJ0Branch National0Indian0Rights0Action0Team Women's0Centre0for0Change