By Khairie Hisyam
A 2009 joint venture that controversial fund 1Malaysia Development Berhad (1MDB) entered into reeks of a con job, says a member of parliament (MP) today, who urges the company to come clean on the matter.
In a statement today, Petaling Jaya Utara MP Tony Pua said 1MDB chief executive officer Arul Kanda had not explained the matter adequately and instead was “obviously evasive”.
“Arul Kanda completely avoided dealing with the brazen attempt to siphon US$700 million out of 1MDB to Petrosaudi or its nominees,” said Pua, adding that this is “a blatant failure of the directors’ fiduciary duty and corporate governance.”
Pua was referring to a joint venture agreement dated Sept 29, 2009 between 1MDB and Petrosaudi International Limited, which stipulated that 1MDB would inject about US$1 billion into Petrosaudi International’s wholly owned unit 1MDB Petrosaudi Limited in exchange for 40% equity.
In turn 1MDB Petrosaudi was incorporated on Sept 18, 2009, just 11 days before the joint venture agreement. A week later on Sept 25, Petrosaudi International and 1MDB Petrosaudi executed an agreement that stipulated the new unit owes its parent US$700 million.
Following the execution of the joint venture agreement on Sept 29, 1MDB Petrosaudi paid the US$700 million debt obligation to Petrosaudi International in full on Sept 30, concluding a chain of events that spanned less than two weeks from the moment 1MDB Petrosaudi was incorporated.
“On the surface it looks like a con job,” said Pua at the Democratic Action Party (DAP) party’s headquarters in Kuala Lumpur today.
Short-lived investment
Tony Pua
However the joint venture was terminated six months later, said 1MDB previously, with the US$1 billion investment converted into Murabaha notes valued at US$1.2 billion.
According to Pua, 1MDB sold its 40% equity in 1MDB Petrosaudi back to Petrosaudi International for US$1.2 billion. The self-styled strategic development company then lent US$1.2 billion to Petrosaudi International in terms of 11-year Murabaha notes, which is backed by a corporate guarantee from Petrosaudi International.
Notably this conversion of 40% equity to Islamic loan took place on the last day of 1MDB’s 2010 financial year ended March 31, 2010.
“Was this (last-minute conversion) a cover-up?” asked Pua, who is also DAP national publicity secretary. “By converting it into a loan to Petrosaudi International, 1MDB was then able to avoid reporting details of the joint venture agreement in the 2010 financial report.”
Following two more loan extensions of US$500 million and US$200 million respectively in 2010 and 2011 to Petrosaudi International, 1MDB’s total Murabaha notes stood at US$1.9 billion, said Pua.
This is strange as 1MDB was not set-up as a money-lending company, said Pua, even more so given that much of 1MDB’s funds were themselves raised through short-term loans.
Money unseen
The Murabaha notes were later sold to an undisclosed party in September 2012, just before 1MDB’s financial report for the financial year ended March 31, 2012 were signed off by auditors, said Pua.
Based on 1MDB’s annual audited accounts, the transacted amount for the Murabaha notes were US$2.318 billion, which gives rise to a profit of US$418 million, added Pua.
However the funds were then invested in a Segregated Portfolio Company in the Cayman Islands and this raises the question of whether the restructuring from Murabaha notes to a Cayman Islands investment is another cover-up, said Pua.
“No one, not even the auditors were able to verify first-hand that the monies were actually in Cayman Islands,” said Pua today. “The investment was classified as a ‘Level 3’ asset where the valuation was ‘derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs)’.”
While 1MDB previously announced a profit of US$488 million from the Petrosaudi transaction, it is unclear whether the figure was revalued to US$418 million noted in its accounts, acknowledged Pua.
Redeemed, not repatriated
In a statement last month, 1MDB chief Arul Kanda said the US$2.318 billion invested in the Cayman Islands had been fully redeemed, though the monies were not repatriated back into the country.
“Following a commitment made by the chairman of the board of directors … 1MDB can confirm that it has now redeemed in full the US$2.32 billion invested by the company in a Cayman Islands registered fund,” said Arul Kanda, who is also 1MDB president and group executive director.
The redemption was however done in two stages. Some 60% of the monies or US$1.22 billion were redeemed earlier according to 1MDB’s accounts to pay debt interest and as working capital, among other purposes.
The remaining US$1.1 billion, which was redeemed following heavy criticism, were kept in US Dollar and will not be repatriated, said Arul in an interview with Business Times Singapore published earlier this month.
“There’s a very sensible and simple reason for that,” said Arul to Business Times Singapore. “We are keeping the money in US dollars as we have US$6.5 billion in bonds out there, in which interest payments come up to nearly US$400 million a year.”
In any case, despite the declaration of profit amounting to US$488 billion by 1MDB, the whereabouts of the remaining US$1.1 billion remains a mystery, said Pua. “The next question to ask is hence, where exactly is this US$488 million of ‘paper’ profit Arul was talking about?” asks Pua.
‘Mind-boggling’
In addition the decision not to repatriate the funds was mind-boggling, said Pua, given that 1MDB had some RM2 billion in short-term financing repayment due by end-November 2014.
Following several extensions, the loan reportedly would be classified as default had 1MDB failed to meet the final deadline for payment of Feb 18.
News reports citing sources claimed that 1MDB was engaged in talks with billionaire Ananda Krishnan for a loan to meet the loan commitment. However 1MDB dismissed the reports as “speculation”, though no outright denial was issued.
“The action not to repatriate was mind-boggling because 1MDB was frantically seeking funds to repay a RM2 billion loan which was outstanding since November 2014,” said Pua today.
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