By BRADLEY HOPE and TOM WRIGHT
Wall Street Journal
Sept. 8, 2015
At issue is a $1.4 billion payment from 1MDB that officials at an Abu Dhabi investment fund said is missing
The corruption scandal around an economic-development fund in Malaysia is spilling beyond the country’s borders, as officials at a United Arab Emirates state investment vehicle raise questions about more than a billion dollars in money that they said is missing.
Abu Dhabi has long been a source of support for the fund, 1Malaysia Development Bhd., which was set up six years ago by Malaysian Prime Minister Najib Razak to develop new industries in the Southeast Asian country. Now, as 1MDB tries to fend off a cash crunch, its backers in Abu Dhabi are asking what happened to a $1.4 billion payment the fund said it made but which they never received, two people familiar with the matter said.
The dispute comes as Mr. Najib is battling a separate scandal linked to 1MDB. Malaysian investigators are examining the transfer of hundreds of millions of dollars into the prime minister’s alleged private bank accounts through entities linked to 1MDB. The disclosures have sparked a political crisis and set off a handful of investigations around the world, destabilizing the government and damaging confidence in Malaysia’s economy.
Mr. Najib has denied wrongdoing and said he didn’t take money for personal gain.
The U.A.E. is trying to sever its ties to the fund and restructure the entity that provided it with financial support, the people said.
The disputed payments are related to the purchase of power plants around the world by the Malaysian fund in 2012. A state investment fund in Abu Dhabi, the International Petroleum Investment Co., or IPIC, guaranteed the $3.5 billion in bonds that 1MDB issued to finance the purchase, according to the bond offering documents. In return, IPIC was to receive options to buy a 49% stake in the power plants as well as collateral for the bond.
According to 1MDB’s financial statements, the Malaysian fund made a collateral payment of $1.4 billion. A draft report into 1MDB’s activities by Malaysia’s auditor general, reviewed by The Wall Street Journal, said the payment went to a subsidiary of IPIC called Aabar Investments PJS.
IPIC’s consolidated financial statements, however, contain no reference to the receipt of the payment. Two people familiar with the matter said IPIC and Aabar never received the money. It isn’t clear what happened to the funds. 1MDB didn’t respond to requests for comment.
The dealings between the two countries shines a rare light on the workings of sovereign-wealth funds, which have increased significantly in size and are backed by wealthy governments but often lack transparency. The interactions between the two funds also are attracting scrutiny in Malaysia.
“This relationship is beyond a normal business relationship,” said Tony Pua, a member of the Malaysian opposition Democratic Action Party who sits on a parliamentary committee that also is investigating 1MDB.
Ibrahim Al Abed, a spokesman for the U.A.E., declined to comment, as did the country’s ambassador to the U.S. The office of Mr. Najib, who also is chairman of 1MDB’s board of advisers, didn’t respond to questions. IPIC and Aabar didn’t respond to requests for comment on the transfers.
The U.A.E.’s focus on its dealings with 1MDB is the latest in a series of inquiries into the Malaysian fund.
A Malaysian government probe found that nearly $700 million moved through banks, agencies and companies linked to 1MDB before being deposited into Mr. Najib’s alleged private bank accounts ahead of a close election in 2013, the Journal reported in July.
The source of the money is unclear, and the government investigation hasn’t detailed what happened to the funds that allegedly went into Mr. Najib’s personal accounts. Malaysia’s anticorruption body in August said the funds were a donation from the Middle East. The donor wasn’t specified.
The allegations drew tens of thousands of yellow-clad protesters into the streets of the capital last month. Malaysia’s currency, the ringgit has fallen to a 17-year low in part due to concerns over the fund.
The 1MDB fund was created to spur economic development by investing in lucrative industries and attracting foreign partners to help finance projects. The fund has rolled up over $11 billion in debt to fund purchases of assets, largely made up of power plants and real estate in Malaysia, Bangladesh, Pakistan, Egypt, Sri Lanka and the U.A.E.
The 1MDB fund’s assets have failed to generate enough cash, and at times it has rescheduled debt payments.
1MDB said it hopes to repay the debt by selling assets, which the fund’s management has said are valued at more than its borrowings.
The U.A.E.’s rulers in April dismissed IPIC’s managing director for a number of reasons, including issues related to 1MDB, according to the people familiar with the matter, and replaced him with the emirate’s energy minister.
The new management team is investigating the previous managers’ actions and relationship with 1MDB, according to the people. They also are in the early stages of crafting a restructuring plan for IPIC, which itself has become heavily indebted, they added.
To help shore up the Malaysian fund, IPIC’s new managers this year cut a deal with Malaysia’s finance ministry to inject $1 billion into 1MDB to cover a maturing bank loan and agreed to take over the $3.5 billion in power-plant bonds it had guaranteed. In return, the Malaysian government will transfer an equal value of assets to IPIC.
In the beginning, Malaysia touted ambitious goals for the fund. Mr. Najib sought to use 1MDB to raise Malaysia’s economic development and standing in the world by going beyond its dependence on exports of raw materials such as natural gas, palm oil and rubber.
Mr. Najib early on turned to the Middle East, a region with which Malaysia has strong ties based on trade and a shared religion in Islam. Over the next few years, the U.A.E. pledged to invest billions of dollars in projects through 1MDB, including a plan to turn Kuala Lumpur into a global financial center named after Mr. Najib’s father, Malaysia’s second prime minister.
Little of that money ever flowed. Instead, IPIC agreed to back the Malaysian fund’s power-plant bonds, leading to the payments that are the focus of IPIC’s inquiries.
Aabar, the IPIC subsidiary, also helped 1MDB during a disputed audit. According to the Malaysia auditor general’s draft report, 1MDB fired KPMG LLP as its auditor in late 2013 after the firm declined to sign off on 1MDB’s accounts unless it received more details about $2.32 billion the fund said was invested in a Cayman Islands account.
Aabar stepped in and guaranteed the Cayman Islands funds, an official for Deloitte Touche Tohmatsu Ltd., which took over as 1MDB’s auditor, told a closed-door meeting of the parliamentary committee probing 1MDB, according to a transcript of the proceedings reviewed by the Journal. This guarantee was never made public. Deloitte later signed off on the fund’s accounts. KPMG and Deloitte declined to comment.
Malaysia’s auditor general plans to issue a full report on 1MDB later this year. The central bank last month said it had completed another report into 1MDB, but details haven’t been made public. The Malaysian Anti-Corruption Commission also is probing allegations that cash flowed into Mr. Najib’s alleged accounts.
Two of the transfers into Mr. Najib’s alleged bank accounts totaling $681 million came from unknown sources via an account held by a British Virgin Islands-based company at Falcon Private Bank, a Swiss bank owned by Aabar, the U.A.E. fund, according to Malaysian investigation documents reviewed by the Journal. Falcon Bank declined to comment.
Swiss authorities said in August that they have opened a criminal probe into what they called suspicious transactions between Switzerland’s banking system and 1MDB. On Sept. 2, they said they had frozen funds valued at tens of millions of dollars in Swiss bank accounts linked to the fund on suspicions of corruption and money laundering.
contributed to this article.