The about face comes three months after the British Government turned down a request from Malaysian activists to investigate the killings, which took place during an anti-communist operation in the Malayan Emergency.
The "Batang Kali massacre" occurred in a village in central Selangor state on Dec 12, 1948, when 14 members of the Scots Guards are alleged to have killed 24 unarmed ethnic Chinese and set fire to their village on a rubber plantation.
"The [British Government has] decided to reconsider the decision ... that no inquiry would be established or other investigation undertaken into the incident at Batang Kali in 1948," said a letter from London that was sent to activists in Malaysia who have been campaigning for an inquiry.
An official at the British High Commission in Kuala Lumpur confirmed the contents of the letter, but said there was no guarantee an inquiry would be ordered.
"We must not pre-empt the outcome of the reconsideration process which we expect will take several weeks," she told the AFP news agency, adding that she could not say why the decision was being reviewed.
A spokesman for the activists, who have been campaigning for an investigation since 1993, welcomed the decision and urged a speedy resolution to the issue.
"The British Government must act quickly instead of simply dragging their feet until the surviving witnesses, who are very old, are no more," said Quek Ngee Meng, adding that one of the witnesses died last week.
Mr Quek said that his group had traced nine former British soldiers and four Malaysians who were witnesses to the events but that this pool will dwindle if the legal process takes too long.
He said the shooting was explained away in 1948 with the then Malayan attorney general saying an inquiry had been held and the troops vindicated, although no trace of this investigation has been found.
The massacre remained largely forgotten until a British newspaper in 1970 ran an explosive account of the killings, publishing sworn affidavits by several soldiers involved who admitted the villagers were shot in cold blood.
The revelations provoked uproar in Britain but a promised investigation was later dropped after a change in government.
The guerrilla war left thousands dead and formally ended only in 1989 with the signing of a peace treaty with the Malayan Communist Party.
Malaya won independence in 1957, when it became Malaysia.
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