by Shamim Adam & Pooi Koon Chong Bloomberg April 7, 2016
Malaysian lawmakers sought to draw a line under the corruption allegations surrounding state investment company 1MDB, pinning the blame for financial lapses on its former chief executive and absolving his political bosses of responsibility for a scandal that’s roiled markets and sparked worldwide graft probes.
A bipartisan parliament committee identified at least $4.2 billion of unauthorized or unverified transactions at 1Malaysia Development Bhd., in a report published on Thursday. It recommended that former CEO Shahrol Halmi and other managers should be investigated, and a group of advisers headed by Prime Minister Najib Razak — who wasn’t otherwise mentioned in the 106-page document — be disbanded. The board of directors offered to resign.
Malaysia wants to shut down a scandal that has rocked the Southeast Asian country for more than a year, weakening its bonds and currency and threatening Najib’s grasp on power. Political instability came hand-in-hand with an economic squeeze, as the oil-price slump eroded revenue for the region’s only net crude exporter.
Silencing the speculation around 1MDB may no longer be entirely in Malaysia’s hands. Authorities from the U.S. to Switzerland are trying to piece together evidence to determine if some of the billions of dollars that the state company raised were siphoned out of its coffers and into the personal accounts of politically-connected individuals.
Bonds Recover
Still, there are signs that the crisis is easing. 1MDB, set up in 2009 to build infrastructure with borrowed funds, says it’s sold enough assets to repay all its short-term debt — about $1.5 billion — in the coming weeks, and still have cash to spare. The company’s bonds, which yielded almost 10 percent in October as graft allegations intensified, are now trading at about 5.6 percent.
1MDB amassed more than 50 billion ringgit ($12.8 billion) of debt over six years, using some of it to purchase energy assets, including joint ventures with companies in Saudi Arabia and Abu Dhabi.
Those transactions were among the irregularities identified in the parliament report. It said that as part of 1MDB’s joint venture with PetroSaudi International Ltd., $700 million was transferred to an account at RBS Coutts Bank Ltd. held by a company that had nothing to do with the project. A $2.1 billion payment to Aabar Investments PJS in Abu Dhabi hasn’t yet been verified, while another $1.37 billion was sent to the Gulf company without the approval of 1MDB’s board, the lawmakers’ report said.
Shahrol, who was CEO for most of 1MDB’s lifetime and remained a director after leaving the post in 2013, said he’s “done no wrong” and has “nothing to hide.” Najib and 1MDB have repeatedly denied wrongdoing. Royal Bank of Scotland Group Plc, which owns Coutts, declined to comment. Aabar didn’t immediately respond to a query.
‘The Scapegoating’
The committee had a broader criticism of 1MDB’s business model too, saying it “depended on debt which placed a heavy burden on the company and wasn’t sustainable as it didn’t have enough income to pay for its borrowings and cost of operations.” It said management sometimes disregarded instructions from the board or acted without getting approval, and Shahrol “must take responsibility for the weaknesses and constraints.”
The singling-out of Shahrol by lawmakers was a surprise, according to Oh Ei Sun, an analyst at the S. Rajaratnam School of International Studies in Singapore, and Najib’s political secretary from 2009 to 2011.
Oh said he had “guessed that a scapegoat would be rolled out” at some point, but hadn’t expected that the parliament committee, “which has opposition members, would do the scapegoating.”
‘Lessons Are Learned’
Najib said the report had “identified weaknesses in 1MDB’s capital structure and management.”
“We will study and act on the report’s recommendations,” the premier said. “We must ensure that lessons are learned, and action will be taken if any evidence of wrongdoing is found.”
The hunt for such evidence is under way outside Malaysia, too.
JPMorgan Chase & Co., Deutsche Bank AG and Wells Fargo & Co. have been asked by U.S. authorities to retain and turn over records that may be related to improper transfers from 1MDB, according to people familiar with the matter. Goldman Sachs Group Inc., which underwrote $6.5 billion in bond deals for 1MDB, is cooperating with Justice Department efforts to gather information, people familiar with the matter have said. There has been no indication that the banks are accused by authorities of wrongdoing.
Swiss prosecutors investigating 1MDB said in January that about $4 billion may have been misappropriated, with some funds transferred to Swiss accounts of former Malaysian officials. Najib isn’t among the officials in question.
Najib’s government has called the accusations about 1MDB politically motivated. They’re not the only set of financial allegations dogging the premier.
One of his predecessors and political rivals, Mahathir Mohamad, has called on Najib to quit over $681 million that appeared in his accounts before the last election in 2013, which the prime minister said was a political donation from the Saudi royal family.