On the trail of 1MDB’s billions, again

By Khairie Hisyam

With recent revelations by Sarawak Report more pieces have emerged as to how 1MDB’s billions travelled the globe. In this issue piece, we revisit the trail that began in 2009.

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In May 2008, news surfaced that Terengganu state is starting its very own sovereign wealth fund to manage the state’s oil revenue, a move agreed to by the Malaysian Cabinet in December the same year.

The fund was named Terengganu Investment Authority (TIA) and aimed to “generate long-term sustainable and recurring returns” and to promote economic development in the state, said TIA’s then-chief executive officer Shahrol Halmi in a statement to Bloomberg.

To kick-start things, TIA raised RM5 billion by issuing a bond guaranteed by Putrajaya. Another RM6 billion was supposed to have come from oil royalties.

But things never took off further for TIA. The federal government took over the entity in July 2009 and officially renamed it 1Malaysia Development Bhd (1MDB) on Sept 25, 2009.

“1MDB is to drive sustainable, long-term economic development for Malaysia by forging strategic global partnerships and promoting foreign direct investment for Malaysia to further enhance the multiplier effects for the Malaysian economy,” said Prime Minister Najib Abdul Razak in a July, 2009 statement.

And a big chunk of the initial RM5 billion raised by the fund then went on a merry ride across the world.

An urgent joint venture

Once taken over by the federal government, the former TIA entity moved with incredible urgency to invest, although its first major deal raises many questions.

By the time it was officially renamed 1MDB, the outfit was close to sealing a joint venture with Petrosaudi International Limited, in which 1MDB would eventually invest some US$1 billion or RM3.47 bilion according to Sept 29, 2009 exchange rates.

An oil and gas exploration company, Petrosaudi International was founded in 2005 by Tarek Essam Ahmad Obaid and other investors, according to its website.

In turn Tarek, said to have close links to certain Saudi Arabia royals, is chief executive officer of Petrosaudi and runs the outfit. With offices in London, Riyadh and Geneva, Petrosaudi has projects in Ghana, Indonesia, Saudi Arabia, Venezuela and Tunisia, according to its website.

Coming back to the joint venture, the partnership between Petrosaudi and 1MDB was in the form of a company called 1MDB Petrosaudi Ltd.

Strangely however, the joint venture company was already established with a name that reflected the partnership prior to the formal signing of the joint venture deal and was also almost immediately saddled with debt.

To recap, 1MDB Petrosaudi Ltd was incorporated on Sept 18, 2009 as a wholly owned subsidiary of Petrosaudi International.

One week later, 1MDB Petrosaudi Ltd executed an agreement with its parent Petrosaudi International on Sept 25, 2009, which stipulated that the former owes the latter some US$700 million.

Days later, on Sept 29, 2009, Petrosaudi International and 1MDB executed the joint venture agreement which saw 1MDB inject some US$1 billion into 1MDB Petrosaudi Ltd in exchange for 40% equity.

On Sept 30, 2009 – just one day after 1MDB’s entry — 1MDB Petrosaudi Ltd paid its US$700 million debt obligation to its now-60% shareholder Petrosaudi International, concluding a chain of events that spanned less than two weeks from the joint venture company’s incorporation.

Jho Low’s hand

Two intriguing revelations from email correspondence published by portal Sarawak Report in relation to the joint venture are the close involvement of businessman Jho Low as well as an implied urgency on 1MDB’s part to inject the money into 1MDB Petrosaudi Limited.

According to the email correspondence, Jho Low was closely involved in bringing 1MDB and Petrosaudi together, starting with his meeting with UK businessman Patrick Mahony on Sept 8, 2009.

At that point Mahony worked for Ashmore, an investment group funding Petrosaudi’s Argentina operations and subsequently joined Petrosaudi after the joint venture was inked. Both Jho Low and Mahony were introduced to each other by Petrosaudi chief executive officer Tarek.

It was only by Sept 15, 2009 that then-1MDB chief executive officer Shahrol Helmi was put in touch with his Petrosaudi counterpart Tarek by Jho Low, who continued to appear intimately involved in leading the negotiations from that point onward.

This runs in stark contrast to his oft-repeated statement that he only offers advice on occasion to 1MDB and is not actively involved, as KiniBiz examined in the previous part of this issue series.

In response to KiniBiz queries, a spokesperson for Jho Low said that the businessman is sought for his views on various matters given his extensive international business investments and relationships worldwide.

“When Petrosaudi and 1MDB independently formed a joint venture, Mr Low was invited by Petrosaudi to provide his views in the dialogues, given his insight into the Middle East and Asia,” said the spokesperson via email. “Consistent with Mr Low’s prior public statements on 1MDB, Mr Low has no decision-making authority or the ability to compel 1MDB or PetroSaudi to do anything.”

“It is unfortunate that Mr Low has been unnecessarily drawn into the political crossfire in Malaysia which is exacerbated by misinformation stemming from articles based on biased sources, irresponsible innuendo and unsubstantiated details,” added the spokesperson.

“The stakeholders of the joint venture, PetroSaudi, 1MDB and the Government of Malaysia have issued comprehensive statements providing the facts, including the confirmation that the accounts and transactions have been audited and verified by Deloitte, Companies Commission of Malaysia (CCM), and the Malaysian Cabinet has concluded that there is no wrongdoing,” said the spokesperson further.

Money in a hurry?

In any case, one part of the email exchanges that stood out was a seeming urgency to move the funds 1MDB had set aside for the joint venture by the end of September 2009.

“We need to move fast n we need as much detailed info u have as fast as possible. We want to sign and pay by sept 09. Wil be emailing out a timeline [sic].” wrote Jho Low on Sept 10, 2009.

1MDB’s US$1 billion investment into the joint venture was presumably made immediately after the signing of the joint venture agreement on Sept 29, 2009 considering the joint venture vehicle, 1MDB Petrosaudi Ltd, immediately paid of its debt obligation of US$700 million to Petrosaudi the next day.

This left some US$300 million with the joint venture vehicle, which was not yet spent according to an email dated Dec 19, 2009 sent by Mahony to 1MDB’s then-chief financial officer Radhi Mohamed.

The email was part of a series of exchanges published by the Sarawak Report yesterday.

As for the US$700 million, Sarawak Report alleged that the funds went to the account belonging to a company controlled by Jho Low, called Good Star Ltd.

This allegation was based on two documents the portal published on its website: a letter by Petrosaudi CEO Tarek dated Sept 29, 2009 and an email from Mahony to Tarek dated Sept 22, 2010.

In Tarek’s letter, he wrote to the board of directors of the joint venture company 1MDB Petrosaudi Ltd to demand repayment of the debt owing by the company to its 60% shareholder Petrosaudi International.

“Pursuant to Clause 4 of the Loan Agreement, we write to demand for the repayment of the Loan and we direct that the Loan (repayment) be made to the bank account of our affiliate, Petrosaudi International Limited,” wrote Tarek.

However, the account number stated in Tarek’s letter actually belonged to Good Star Ltd, alleged Sarawak Report, relying on an email sent by Mahony to Tarek which showed the Swiss account number of the company.

In any case, the allegation was denied by Petrosaudi International earlier this month, stating that the US$700 million went to Petrosaudi entities and no one else.

“PetroSaudi stated categorically that funds from 1MDB went to PetroSaudi-owned entities and any other inference is false,” Bernama reported Petrosaudi as saying in response to “malicious and harmful allegations” made against it. “Upon 1MDB’s exit, PetroSaudi had paid 1MDB in full and both parties no longer have any financial or legal relationship.”

From JV to Cayman’s

The joint venture eventually proved to be short-lived. Six months later the partnership was terminated, said 1MDB previously, and the 40% equity in the joint venture company was sold back to Petrosaudi International for US$1.2 billion.

However, 1MDB did not get cash for the equity sale. Instead, Petrosaudi issued an 11-year bullet repayment Murabaha facility, a form of credit sale under Islamic financial law, at an interest rate of 8.67%.

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, prompting Petaling Jaya Utara member of parliament (MP) Tony Pua to question whether the last-minute conversion was a cover-up to avoid reporting details on the joint venture in its 2010 financial report.

Two more loan extensions followed in 2010 and 2011 from 1MDB to Petrosaudi International, to the tune of US$500 million and US$200 million respectively. The first of these, a US$500 million loan, was via a five-year bullet repayment loan.

This brought 1MDB’s Murabaha notes to a total of US$1.9 billion by 2011.

One year later, the Murabaha notes were sold to an undisclosed party for US$2.318 billion in September 2012, according to 1MDB’s annual audited accounts, yielding a profit of US$418 billion.

The timing of the sale coincides with when 1MDB’s auditors would be signing off its annual accounts for the 2012 financial year ended March 31, 2012 (FY12), considering the six-month regulatory deadline for companies to file their annual audited accounts with the Companies Commission of Malaysia (CCM).

To recap, Section 169 of the Companies Act 1965 requires company directors to file audited financial statements on an annual basis not more than six months after the close of each financial year, meaning 1MDB’s deadline to file FY12 annual accounts would be on Sept 30, 2012.

Following the sale of the Murabaha notes, the US$2.318 bilion received were then invested in a Segregated Portfolio Company in the Cayman Islands.

Unverifiable funds

The investment in Cayman Islands raised many questions, among others over the fund’s management, transparency as well as the sensibility of the investment move.

For one, not even 1MDB’s auditors were able to verify the actual existence of the funds allegedly invested in the Cayman Islands, said Petaling Jaya Utara MP Tony Pua previously, citing auditor declarations in 1MDB’s annual audited accounts.

“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)’,” said Pua.

Previously, 1MDB’s directors had admitted in its FY13 annual audited accounts that the self-styled strategic development company is “unable to exercise control or significant influence” over its investment there, which came to some RM7.18 billion at the prevailing exchange rate then.

According to the Malaysian Financial Reporting Standards (MFRS), control is defined as power over the investee, exposure or rights to variable returns from involvement with the investee or ability to use power over the investee to affect the amount of returns.

Furthermore, the identity of the fund manager in charge of 1MDB’s billions in the Cayman Islands remained a mystery for some time, only stated to be “a licensed financial institution with good credit ratings”.

In May 2014, however, The Business Times of Singapore reported that the mysterious fund manager is in fact little-known Hong Kong-based Bridge Partners, which runs the Bridge Global Absolute Return Fund in which 1MDB’s funds in the Cayman Islands are vested.

According to the news report, the investment was made through Brazen Sky Limited, a little-known company incorporated in the British Virgin Islands – a known tax haven similar to the Cayman Islands. The Business Times of Singapore attributed the discovery to documents it sighted.

Notably, Bloomberg data listed the one-year return of the Bridge Global Absolute Return Fund at 5.76%, which matches the figure stated by 1MDB in its FY13 annual audited accounts.

In any case, the return rate of 5.76% raised another question on whether the move to invest in the Cayman Islands was prudent, considering that 1MDB terminated an 11-year loan facility yielding a return of 8.67% in order to shift its funds there.

In addition the cost of 1MDB’s funds that eventually went to the Cayman Islands investment stood at 6.71%, according to Petaling Jaya Utara MP Tony Pua. This effectively means 1MDB was not earning enough to repay its cost of borrowing the invested funds in the first place.

Adding to the controversy over the investment in Cayman Islands is a link between Bridge Partners and Singapore ponzi king James Phang Wah, according to documents sighted by KiniBiz.

From Cayman’s to Singapore

The monies in the Cayman Islands were eventually redeemed by 1MDB, although contrary to a promise made by Deputy Finance Minister Ahmad Maslan the funds were not repatriated to Malaysia.

In a statement last January, newly minted 1MDB chief Arul Kanda said the fund had fully redeemed its investments in the Cayman Islands but no amount will be brought back into Malaysia in order to meet its interest payment obligations.

“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.

In a separate interview with The Business Times of Singapore, Arul said the redeemed amount is being kept 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.”

However, the redemption was actually done in two stages. The first stage saw US$1.22 billion or 60% of the monies redeemed to pay debt interest and for the company’s working capital requirements among other purposes, according to 1MDB’s previous annual audited accounts.

This left some US$1.1 billion of the original US$2.318 billion, which was eventually redeemed as stated in Arul’s January 2015 statement. The redemption in full followed heavy questions on the whereabouts of 1MDB’s monies in the Cayman Islands – leading the criticism was former Prime Minister Dr Mahathir Mohamad.

The criticism in turn came after news reports of 1MDB missing a loan payment obligation of some RM2 billion due for end-2014. 1MDB would eventually pay off this loan commitment in February this year after several time extensions.

“I want to know which bank it’s kept in now. A billion dollars; you must keep it somewhere, you see. I don’t know where the money is – that is part of transparency,” said the former prime minister in an interview with Sarawak Report published after Arul Kanda’s statement.

Last week it was revealed in Parliament that the US$1.1 billion is kept in Singaporean bank BSI Bank Limited Singapore.

“The decision to use a bank in Singapore was done in order to smoothen the transaction as there are regulations from Bank Negara that transactions above RM50 million needs its approval,” said the Finance Ministry in a written reply to Petaling Jaya Utara MP Pua.

This latest revelation caps an amazing journey of 1MDB’s billions, from a strangely rushed joint venture in the Middle East to a mysterious investment in a known tax haven all the way back to an island nation just across the Causeway from Malaysian shores.

Yesterday: How involved is Jho Low with 1MDB?

Tomorrow: Why 1MDB issues warrant deeper investigation