1MDB: the saga so far – International Banker

1MDB: the saga so far

“The Malaysian people were defrauded on an enormous scale”, was the recent assertion by Deputy FBI Director Andrew McCabe in reference to an international banking scandal that has now rumbled on for over two years, and looks set to continue for some time. With investigations being conducted by several countries into the dealings of 1Malaysia Development Bhd (or “1MDB”), Malaysia’s state development fund, it is widely believed that over $3 billion was misappropriated from the Malaysian government. During this time, many Malaysian authorities have remained entrenched in a battle to save their positions, none with a higher profile than Najib Razak, Malaysia’s Prime Minister and Chairperson of 1MDB’s advisory board.

1MDB was initially set up by the oil-state Terengganu as a sovereign wealth fund, before being turned into a state-owned development fund by Najib back in 2009. The stated intention in doing so was so that the potential benefits of the bank’s projects could reach the general Malaysian population, rather than just the citizens of Terengganu. The bank could provide a conduit for foreign investment into Malaysia, principally through the formation of strategic global partnerships designed to promote long-term economic development. The money that would purportedly be raised from such projects in energy, real estate and tourism could then produce more employment and prosperity for Malaysians.

The reality that has transpired since then, however, appears to be in sharp contrast with such a vision. Fast forward to 2016 and the US Department of Justice (DoJ) moved in July to seize over US$1 billion in assets connected with money laundered from 1MDB, as part of the $3.5 billion it claims was misappropriated between 2009 and 2015. To date, it has been the largest ever case brought by the DoJ’s Kleptocracy Asset Recovery Initiative (KARI), which was launched 6 years ago in a bid to forfeit the proceeds of foreign official corruption which made their way through the US financial system, and to restore the funds to those people affected. The 136-page complaint filed by the US outlines an intricate international network of players and institutions that worked to hide bilions of dollars worth of stolen assets.

The first half of the decade would see 1MDB rack up substantial levels of debt, which ballooned to 42 billion ringgit (US$10 billion) for the year ended March 2014. The 2012 acquisitions of Tanjung Energy Holdings and Genting Group’s Malaysian power generation assets for 8.5 billion ringgit and 2.3 billion ringgit respectively, as well as the 1.2 billion ringgit purchase of a 75% stake in Jimah Energy’s coal-fired power plants one year later, were seen to be key contributors to this mounting debt. However, it was not until mid-2014 that the bank began to raise eyebrows after allegations about the misappropriation of state funds were published by investigative journalism blog “The Sarawak Report”. Suspicions were further raised after 1MDB began to miss payments on what was owed to its creditors, such as bondholders and banks. A 2 billion ringgit loan initially due in November 2014, for example, was eventually settled by 1MDB several months later, but only after it missed two repayment deadlines.

Although the scandal has far-reaching implications for a number of parties, it is the partnership between 1MDB and Saudi Arabian oil company PetroSaudi International that initially drew the most attention from officials, especially after a former PetroSaudi executive leaked extensive email correspondence which was published by the Sarawak Report. The joint venture with the Saudi firm was the first major deal signed by the bank back in 2009, and one in which it agreed to pledge $1 billion in return for proceeds from mineral extraction activity which PetroSaudi would conduct in Turkmenistan and Argentina, and valued at $2.7bn. According to the DoJ, however, only $300 million made it into the joint venture. The DoJ also alleges that $24.5 million was sent to the Riyadh bank account of an unnamed PetroSaudi prince who co-founded PetroSaudi. It is likely that the co-founders of PetroSaudi referred to in the DoJ complaint are Prince Turki bin Abdullah bin Abdel Aziz, son of the late Saudi King Abdullah, and former banker Tarek Obaid, although neither have been officially accused of malpractice. $20 million of the $24.5 million was then moved on again to an unnamed Malaysian official, dubbed “Malaysian Official 1”, whose description was that of “a high-ranking official in the Malaysian government who also held a position of authority with 1MDB”. The description corresponds to that of Prime Minister Najib Razak, although he has not been specifically named in the suit.

One of the central figures in the scandal is Jho Low, the Malaysian owner of private equity investment and advisory firm Jynwel Capital. According to the Justice Department’s lawsuit filed in July, Low and his associates helped to embezzle at least $3.5 billion in total from 1MDB, despite the financier having no official position at the bank. Low has been involved with 1MDB since its nascent days, initially playing an advisory role in the establishment of the Terengganu Investment Authority fund. He is also a family friend of Najib; indeed, both Low and the prime minister were present at the initial meeting in August 2009 to discuss the joint venture with PetroSaudi International, a meeting which also included the co-owners of the oil company. Once this deal was signed, moreover, the DoJ believes that the $700 million which did not reach the joint venture was sent into a shell company based in the Seychelles, called Good Star Ltd, which was owned by Low and which received an additional $330 million at a later date.

A large proportion of the embezzlement, it is believed, has been spent on extravagant purchases in the US including luxury New York apartments, expensive artworks by Van Gogh and Monet, opulent residencies in Beverley Hills and even a private jet. Prosecutors allege that some funds also went towards financing the Hollywood film The Wolf of Wall Street, with the Red Granite studio company which produced the film being run by Riza Aziz, the stepson of Najib and friend of Low. As such, investigators now believe that much of the financing behind Jynwel Capital has come from 1MDB’s illegally diverted funds, with the financial source of major Jynwel investments having their origins in money illegally diverted from the development bank. Such investments include a hotel in London’s Park Lane, one in Beverley Hills, and an investment in music giant EMI Publishing. Indeed, the DoJ court filing states that Low laundered over $400 million into the US, $106.7 million of which was used to acquire the EMI stake.

1MDB: the saga so far
By Joseph Moss
October 11, 2016 – International Banker


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