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Do the integrity pledges matter?
Published on: Tuesday, July 14, 2015
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Kuching: The massive crackdown on Sarawak's illegal loggers shows that the Integrity Pledge signed by the State's six main players meant nothing but shadow play.Sarawak Chief Minister Tan Sri Adenan Satem, who succeeded Tun Abdul Taib Mahmud last year, called for the state's six largest players – Samling Group, Rimbunan Hijau (including Jaya Tiasa Bhd), Ta Ann Holdings Bhd, KTS Timber Industries Bhd (GT Plywood Industries Sdn Bhd), Shin Yang Group and WTK Holdings Bhd – to sign the pledge.

However, Transparency International Malaysia President Datuk Akhbar Satar says a pledge is not legally binding. "A pledge has no legal binding (effect). It should be an integrity pact which is legally binding," he said.

Adenan has made public his efforts to distance himself from Taib's legacy by urging his ministers to sign a corporate integrity pledge and vowing to rid the state of corruption. Adenan is Taib's former brother-in-law.

"The corporate integrity pledge bears no weight and serves as a smokescreen to clear the names of the companies signing the pledge and those connected to them. If they sign the pledge, then public attention is immediately diverted from them. It is a matter of catching the little fish to save the big fish in the end," says a source.

"This move was initiated by the timber players themselves, and those connected to them. In a few months all the excitement will die down and it will be business as usual for those companies," the source claims.

Activity in Sarawak's timber industry has come close to a standstill following the MACC's crackdown.

'Logging activity in Sarawak is now very low with many sawmills and logging companies going out of business," said an observer.

Sarawak's timber industry is the single largest contributor to the country's timber exports, making up roughly 38pc last year. Based on Malaysian Timber Council figures, that's close to RM7 bil of total exports of RM20.52 bil.

For January to March, total exports amounted to RM3.15 bil, of which RM1.04 bil, or 33pc, came from Sarawak (see table). Strong timber exports helped lift overall Q1 exports which were negatively impacted by the sharp drop in oil and crude palm oil prices.

In May, MACC began a massive crackdown on timber mills and logging firms in the state, and has since summoned 14 directors and managers of timber companies to help in its investigations. It has also frozen RM719 mil in 519 bank accounts belonging to companies and individuals in the timber industry, including a Sarawak Assemblyman.

Further investigations will be carried out under the MACC Act 2009's Sections 17(a) and 17(b), as well as Section 4 of the Anti-Money Laundering and Anti-Terrorism Financing Act 2011.

While some might argue not all timber logging and downstream companies will be affected, the impact goes deeper than anticipated as more industry players will feel the squeeze of a sharp drop in supply.

Downstream players are beginning to feel the heat. A Senior Manager of a Sarawak-based plywood manufacturer says pretty soon, his company will have to close shop as the consequent rise in prices takes effect. The ongoing investigations could see a reduction in existing quotas held by logging concessionaires by next month.

"Of course it is always good to take precaution and freeze all these accounts, but to a certain extent, companies not involved in illegal logging and do not support these activities will also feel the impact," he says.

"The shortage in supply will lead to a hike in prices of round logs and other raw materials, and for downstream players like us, we will soon have to bear the cost. I'm not saying we should support illegal logging, but there should be some other way around this.

"We did not buy from illegal loggers but when they kept supply up, prices stayed cheap. There is also a shortage of tree farms or legal logging zones for the rest of the logging contractors to meet demand. There are not even enough contractors with sufficient size and funding now to carry out the work on such short notice. We cannot cope.

"The main issue here is proper zoning and farming, which was not corrected before the MACC's actions," he adds.

His company exports mainly to Japan, which accounts for 20pc of Malaysia's timber exports and 55pc of plywood exports. He is concerned his Japanese clients will look elsewhere for plywood.

"Japan is a big importer of Malaysia timber, and if we cannot supply what Japanese importers need, they will look elsewhere, including in other countries. This is an extreme situation, but it is not impossible," he says.

A General Manager of a wood pellet manufacturer says he and others in the industry are well aware of the presence of illegal logging and have take precautions when working with suppliers.

"To the best of our knowledge, we do not deal with illegal loggers, but there is only so much that a subcontractor or supplier will tell us of their activities. We ensure there is adequate licensing and documentation, but we can only do so much. We can't tell if the certification was obtained legally, or if it is fake," he says.

With international NGOs, environmental groups and governments putting pressure on Malaysia to take action on illegal logging the past few years, the writing was on the wall. However, it seems the authorities and timber players were slow, or reluctant, to act.

"A couple of years back, I was informed by some sources of rampant money laundering and corruption in the Malaysian logging industry, specifically logging companies in Sibu, Sarawak," said the observer.

He notes that major banks, pressured by western countries and NGOs, set up compliance departments to look into illegal logging and forest clearance (in the case of palm oil plantation development) in respect to RSPO (Roundtable on Sustainable Palm Oil) certification and money-laundering prevention guidelines.

'Many Sarawak companies and business people suspected of such activities were asked to close their accounts with these banks. The latest incident (of the MACC's crackdown and raid on timber mills) is a continuation of these events," he says.

This, he adds, could be an indication that large timber companies had knowingly conducted business with illegal loggers, which is contradictory to the corporate integrity pledge. Last year, the pledge was signed by major timber companies including the state's six biggest logging firms – Samling Group, Rimbunan Hijau (including Jaya Tiasa Bhd), Ta Ann Holdings Bhd, KTS Timber Industries Bhd (GT Plywood Industries Sdn Bhd), Shin Yang Group and WTK Holdings Bhd.

The pledge, drawn up by the MACC and the Sarawak Forestry Department, was initiated by the Sarawak Government. At press time, MACC declined to comment on the matter.

According to the Sarawak Forestry Department, the state lost RM41 mil in revenue from illegal logging activities last year.

A pledge is not what the industry needs to wipe out corruption in the timber sector.

Transparency International Malaysia President Datuk Akhbar Satar said banning the exports of logs altogether is what the industry needs to effectively stop the exploitation of natural resources.

"Malaysia should sign the Voluntary Partnership Agreement (VPA) with the European Union which includes recognition of native customary rights. The problem is Sarawak, which owns the largest forested land in Malaysia, refuses to sign. Most of the timber and wood products from Sarawak are for exports to Japan".

Under the VPA, the definition of legal timber is timber harvested by licenced person from approved areas and timber and timber products exported in accordance with the laws, regulations and procedures pertaining to forestry, timber industry and trade of Malaysia.

Akhbar said the responsibility lies with the forestry department and Ministry of Natural Resources and Environmental, and not the MACC, to curb illegal logging.

"It is their (Ministry of Natural Resources) job to curb illegal logging in the country. The MACC has other work to do. Under the National Forest Act 1984, the penalty is more severe (than the MACC Act 2009) for illegal logging, where upon conviction, they (illegal loggers) are liable to a fined of RM1 mil and a jail term of between five and 20 years.

"Make sure to avoid (only) imposing a compound on illegal loggers, but charge them in court to get a more severe sentence, including imprisonment," Akhbar says.

The financial repercussions of the crackdown are already evident. For its quarter ended March 31, WTK's net profit dropped 65pc quarter-to-quarter to RM5.33 mil from RM15.33 mil previously, which its management attributed to "changes in administrative procedures" for the forest management process.

"During this transition period of implementation of new procedures, harvesting activities were affected which resulted in lower round logs production," the company said in its exchange filling.

The company also announced plans to step up replanting efforts, setting an expansion target of 12pc for its reforestation area by replanting 1,000ha with fast-growing commercial timber tress.

WTK has 8,000ha replanted, and WTK Chairman Datuk Wong Kie Yik, who is also chairman of the Sarawak Timber Association, says it is the company's long-term goal to replace natural timber from concessions with farmed wood in line with the state's sustainable forest management practice.

However, if it is possible for large timber companies like WTK increase their plantation areas, why was it not done sooner?

An analyst says political influence could have played a part in determining how much replanting needs to be done. Another factor could be how the wood is used.

"Wood from plantations is used mainly for plywood, and natural logs are mainly for export. India is the largest importers of raw logs," says the analyst. Wood from the reforestation effort could take up to 10 years before it can be harvested, and in the meantime supply will be tight for the plywood industry.

WTK declined to comment, and the Sarawak Timber Association could not be contacted.


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