KULIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES

FUTURES, OPTION & RISK MANAGEMENT

(FIN 4870)

SEMESTER 1 2020/2021

MAMINCO SCANDAL CASE STUDY

DUE DATE: 19TH DECEMBER 2020

PREPARED BY:

ATHOILLAH BIN HOSNI (DL1732647)

MUHAMMAD HAKIMI ZAFAREN BIN MOHAMED ZAKIR

(DL1736091)

EVALUATED BY:

DR. AZHAR MOHAMAD

 MAMINCO SCANDAL STUDY CASE
Malaysia's tin industry was once second leading in the world as it paid a great
contribution to the national economy. It produced a numerous thousands of tones, or 31% of
world output and there were forty thousand over people were employed in this industry.
During the tenure of Dr. Mahathir Mohamad, tin industry was pushed to the corner and the
market price has dropped. In 1981, Maminco Sdn Bhd which only cost RM2 was set up and
was used to raise tin prices in London Metal Exchange with loans from Bank Bumiputera
Bank and to buy tin future contracts secretly.

Following years, Maminco Sdn Bhd was unable to retain tin price after they pushed
the price up successfully and so it collapsed (The WTF Report, n.d.). Eventually, the company
owned the bank approximately 1.6 billion. After the incident of RM 2 Company, instead of
admitting that it was their mistakes, the government developed another company called
Makuwasa Sdn Bhd (The WTF Report, n.d.). This company was set up to create new shares,
and sell it at market prices to cover the losses of Maminco (Jeubelie, 2015). Lastly, Dr.
Mahathir admitted that these companies were set up to cover the government’s losses from
Maminco scandal and to repay the loan to the bank in 1986 (Jeubelie, 2015).

The loan was entrusted to a corrupt politician without the paperwork needed by the
Executive Committee and the Board of Directors. This business has bailed out about 1.6
billion from BBMB and is considered as a big financial scam and includes money laundering
activities. The Maminco Sdn Bhd would also like to receive the restructuring scheme for the
liquidity problems faced. This was a corruption case and was under investigation in Malaysia
and Hong Kong by the police.

BBMB filed a petition to the High Court of Hong Kong to liquidate PIL for non-
payment of loans. At the time when the financial community in Hong Kong realized that the
Carrian Group had liquidity issues. Thus the Chairman of BBMB and Bank Negara had been
extremely incompetent in their duties and were seeking to deny blame for the scandal. It is
highly doubtful that the BBMB management in Kuala Lumpur and the political leaders have
been unaware of the BMF controversy from the very beginning as part of the BMF funds used
to fund Maminco Sdn Bhd.
 Dr. Mahathir also announced that a mysterious state-sponsored firm named
Makuwasa Securities Sdn. Bhd. It was created to try to recover the tin-trading losses.
Makuwasa was supposed to make substantial profits from selling blocks of shares allocated to
it at preferential rates in 1984 and 1985 through the Malaysian Workers Provident Fund or the
Government's National Pension Scheme. It was a significant violation of propriety when the
Mahathir administration raided the EPF in the 1980s to finance dubious transactions resulting
in the EPF-Makuwasa scandal, causing massive losses to the EPF. The EPF-Makuwasa
scandal emerged because in the early 1980s, the government tried to recover the RM600
million losses incurred in a failed effort to corner the London tin market through shadowy
Maminco activities, which instead flopped.

From what we have learn through this case, an option on a futures contract gives
the holder the right, but not the duty, to purchase or sell a particular futures contract at an
exercise price on or before the expiry date of the option. These function similarly to stock
options, but vary in that a futures contract is the underlying security. Maminco Sdn Bhd
attempted to control the selling price of tin to build demand. During the tenure of Dr.
Mahathir Mohamad, the tin industry faced a bullish market. As a result of this incident, it is
not difficult to see that the operation and management of the organization and the government
have been bad decision-making. When they set up an RM 2 business to purchase their future
contracts, but most importantly, to cover the losses and repay the bank, it is to artificially
increase tin prices. Unfortunately, the US released its tin reserve, the government of Malaysia
was unable to hold the market and then it crashed. On the other hand, this event also showed
that the government was not adequately prepared to fight external pressures.

Actually, Maminco Sdn Bhd should come up with option strategies which is
combination strategies where the company combines an option with the underlying asset in
such a way that overall position either reduces or eliminate risks. Maminco already make long
call in future contract, they are expecting the price will rise but the price falls because of the
US released their stockpile of tin in the market to stabilize it. In the meantime, Maminco
should long put also since their strategies failed in order to recover the loss of long call. This
will help the company to minimize the losses in the tin stock price.
 Maminco scandal was implicated between tin industry, Malaysia’s government and
US’s government. Malaysia was second-leading tin industry in the world but since Dr.
Mahathir Mohamad became PM, Maminco affair occurred and brought huge impact to the
society and the people. The poor decision, low credibility and accountability will affect
company reputation. Inaction and delay of the Government in dealing with fraud and
corruption crimes, particularly in high places, as in the case of the BMF, it also refers to a
government that refuses to be accountable. It should be emphasized again that there is a
strong need to establish interaction and coordination between law enforcement agencies in
different countries.

The need is to tackle the activities of foreign fraudulent activities and criminals and
not to conceal evidence as was not permitted to be presented in court in the case of BMF
whereby 150 telexes sent 397 between the British, Hong Kong and the Malaysian
Government, which could shed light on the case. However, it is equally essential, if not more,
and it should not be ignored. History has shown that corruption was essentially caused by
dishonest individuals who gave in to temptations when they were given the opportunity to do
so. Both the opportunities and the motivation to commit the crime must be present.