I assumed that stolen passports might be tracked in some database that airlines would routinely access. Why is this not the case!
Having traveled in that part of the world I'd point out two things to you:
1) Malaysia,and nearby Indonesia,have large moslem majorities.The Bali were,IIRC,Indonesian. 2) Possible explanations for a passport SNAFU...a computer malfunction,not surprising in one of the most primitive regions in the world...or collusion by one or more moslem sympathizers working the passport/check in desk.