The Business Times, Singapore
Wednesday, May 18, 2016

WITHIN the span of six years, 1Malaysia Development Bhd’s (1MDB) debt had ballooned 10 times to RM50 billion (S$17 billion) and its business deals are now the subject of probes in seven jurisdictions, including Singapore. Could the mammoth scandal around the state-backed fund have been averted?

The answer is “Yes”, given the events at the strategic investment firm from the outset, which ought to have set off alarm bells at various government agencies, regulatory authorities and financial institutions.

In fact, had there been vigilance and proper checks and balances in the first place, the 1MDB controversy could well have been nipped in the bud.

Barely three months after the firm was formed in February 2009 (it was then called Terengganu Investment Authority under the oil-rich state before it was taken over by the federal government), there were already tell-tale signs from the firm’s RM5 billion government-guaranteed sukuk bond issue, the first in a series of big debts 1MDB would pile on over the years.

The manner in which the sukuk was issued should have raised a red flag. Despite a “no-go” from the board, management pushed through the issue anyway – at an unusual pricing not befitting the firm’s capital base.

No one took heed – not even after Terengganu state authorities raised serious concerns and signalled that the fundraising should be halted given certain improprieties; and not after the resignations of two prominent, high-profile individuals from the 1MDB board within a year of its inception.

What followed instead were several billion-dollar deals with joint-venture partners from the Middle East and big-scale buyouts in the energy and real estate space – all funded with more debt and risks which would in the firm’s short existence lead to crippling financial woes, shaken public trust in Malaysia’s leadership and highest institutions, marred the country’s international reputation, and, more recently, defaults on its bond payment.

All that could have been avoided if someone – be it from 1MDB’s board (past and present members, many of whom hold top posts in government-linked institutions) or the regulatory bodies – had spotted and acted on the irregularities in the original bond issue and, later, the hundreds of millions of dollars funnelled in and out of the country’s banking system.

Regulators abroad too should have been sharper to the warning signs. As it turned out, several financial institutions in Singapore, Switzerland and the United States are now mired in the 1MDB scandal.

Two weeks ago, the Malaysian finance ministry said it would take over the firm’s remaining assets and dissolve its advisory board, chaired by Prime Minister Najib Razak. The ministry (which is also headed by Mr Najib) has accepted the en bloc resignation of 1MDB’s board members. A new structure – albeit a skeletal one as the firm is set to be unwound – does little to mitigate the damage caused by the scandal. It will take a lot more (and a lot longer) for true closure. But at some point, regulators have to acknowledge that their indecision and tardiness in acting had unwittingly turned them into “enablers” of this controversy that has beset the country, its financial system, and its people.