1MDB, the elephant in the room

By Khairie Hisyam

As multiple probes into 1MDB evolved into controversies surrounding the prime minister himself, attention seems to have shifted to the political uncertainty that followed. However 1MDB, the heart of the scandal, seems all but forgotten.

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It is a scandal that has rocked Malaysia – for the first time in history, a sitting prime minister was accused of receiving a huge sum of money in his personal bank accounts with all the implications that arise.

When the July 2, 2015 report by the Wall Street Journal (WSJ) – which alleged a series of money transfers in March 2013 that ultimately saw some US$700 million (RM2.6 billion) land in Prime Minister Mohd Najib Abdul Razak’s personal bank accounts – emerged, multiple probes were already underway on controversial 1Malaysia Development Bhd (1MDB).

The self-styled strategic development company, which for years has seen mismanagement and a growing borrowing pile amounting to RM42 billion as of end-March 2014, had been the subject of intense coverage in the preceding months, largely driven by Sarawak Report and The Edge.

This in turn caught an increasing amount of attention from the public, who had largely been unaware or apathetic towards 1MDB in previous years despite critical coverage by a number of media, KINIBIZ included.

However, the emergence of the WSJ allegations and the fiasco that followed had all but relegated 1MDB to the sidelines. In a strange twist, focus seemed to have shifted from the main issues to alleged information leaks.

This raises questions of whether pressing issues at the company will ever be fully addressed and investigated after all.

A renegade GLC

Set up in 2009, 1MDB apparently set out with noble intentions yet had seen many a questionable decision in its moves while racking up borrowings.

After raising an initial RM5 billion through bond issuances as Terengganu Investment Authority (TIA) in early 2009, the entity was then taken over by the federal government and renamed.

“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 July 2009.

Once taken over 1MDB moved with some haste to invest its billions, though its choices of investments raised questions, given its stated objectives. In some aspects it raised questions whether 1MDB was one government-linked company (GLC) that had gone rogue.

Its first investment was a US$1 billion injection into a joint venture with international oil and gas exploration company PetroSaudi International, which translates into RM3.47 billion based on exchange rates at the time.

The apparently rushed affair raised questions as the joint-venture vehicle was set up such that it immediately owed PetroSaudi International US$700 million soon after creation. This debt was paid off as soon as 1MDB’s money came in. In turn two board members resigned soon after the joint venture was inked, according to 1MDB annual reports.

Sarawak Report later alleged that this amount was transferred to an account controlled by businessman Low Taek Jho or Jho Low, who had previously denied any official role at 1MDB.

According to 1MDB’s annual report, this joint venture was terminated six months later with the funds injection converted into a lending arrangement on Mar 31, 2010, the last day of its 2010 financial year. 1MDB went on to forward more funds to PetroSaudi and in September 2012 sold off the loan for US$2.318 billion, claiming a profit of US$418 million.

However the money was not brought back to Malaysia immediately. Instead 1MDB chose to invest the money in a Segregated Portfolio Co in the Cayman Islands before it was repatriated in two tranches, the second time being early this year.

The first deal and subsequent developments from it, far off-track from its stated objectives of spurring strategic development domestically, were symptomatic of 1MDB’s doings over the years.

Among others, 1MDB also grossly overpaid for the power assets it later purchased, while KINIBIZ calculations in early 2013 found it also grossly mispriced several of its bonds.

The bonds mispricing alone caused it to lose out on potentially RM4 billion or more by way of offering the bonds too cheaply and allowing the first biters to flip these bonds for quick, clean and obscene profit into the open market. Worse, the mispricing losses are invisible as they represent lost opportunity rather than outright losses.

Meanwhile a cost-return mismatch gnawed at its balance sheet, with high interest rates weighing against lower investment returns. The result was an unsustainable entity that claimed paper profit year after year by revaluing land it gained cheaply from the government while bleeding cash in reality.

The Jho Low connection

While the questionable ongoings at 1MDB had seen media coverage since early 2013, it was only this year that the public at large paid closer attention to the brewing issue.

In part this was due to former prime minister Dr Mahathir Mohamad wielding the issues around 1MDB as a point of criticism against his second successor Najib, who is credited with conceiving the idea for 1MDB and chairs the company’s advisory board.

On the media front, Sarawak Report began taking up coverage of the controversial company with a trove of leaked documents, shedding some light into strange ongoings over the years. Similarly The Edge Media Group stepped up its reportage, also citing leaked documents.

Among others the leaked documents and emails available to Sarawak Report and The Edge shed further light on the role played by Jho Low in 1MDB’s early transactions.

While Jho Low had no official position and repeatedly denied involvement beyond offering advice when requested, email communications published by Sarawak Report suggest a disproportionate amount of authority and a leading role played in negotiations and decision-making.

For instance the leaked emails indicate that Jho Low and his associates had discussed a potential joint venture between 1MDB and PetroSaudi International even before officials from both companies had officially met.

In particular, chief executive officers from both companies were only introduced to each other by Jho Low on Sept 15, 2009, some two weeks prior to the joint venture being signed. He remained in the loop of negotiations and was indicated as an active participant, going by the emails published by Sarawak Report.

An eye-catching aspect of the email trail that has emerged is how officials from both 1MDB and PetroSaudi would at times seemingly be playing catch-up to Jho Low and his associates in terms of the joint venture talks.

This indicated an involvement far beyond an occasional advisory role, despite Jho Low’s repeated assertions to the latter. Pressing questions follow on why the businessman wielded so much influence in the affairs of a company wholly owned by the Malaysian government.

Catching fire

The growing public pressure led to the prime minister stating, on March 4, that the auditor-general Ambrin Buang is tasked to probe 1MDB’s accounts, promising that any wrongdoing will see the law “enforced without exception”.

Critics in turn question the apparently narrow scope of the probe, given a wider context of governance issues at 1MDB.

On April 30 the Public Accounts Committee (PAC) decided to probe 1MDB and began mid-May by summoning Ministry of Finance secretary-general Mohd Irwan Serigar, among others. In June, Bank Negara Malaysia also launched a formal enquiry into 1MDB investments abroad and its foreign debts.

In any case, the leaked documents cited by Sarawak Report and The Edge were later revealed in end-June to originate from Xavier Justo, a former PetroSaudi director who allegedly attempted to extort the company in exchange for sensitive information. The Edge later admitted to promising Justo payment for the leaked information but never paid him the promised amount.

The entry of Justo’s role into the picture was followed by allegations of “tampering” with the data, with 1MDB defenders accusing Sarawak Report and The Edge as being part of a conspiracy to attack the prime minister.

On the other hand the “tampering” allegation came from a cybersecurity firm on PetroSaudi International’s payroll and was latched onto by members of the government to discredit both Sarawak Report and The Edge.

One week after the emergence of Justo and his role in the leak, WSJ shook the nation with its July 2 article which alleged RM2.6 billion was transferred into personal bank accounts belonging to the prime minister, though qualifying that it does not know the purpose of the transfers nor what became of the money.

An important point was that the transaction chain reportedly involved companies linked to 1MDB, according to WSJ citing leaked government investigation papers.

In an immediate response, the prime minister denied taking government money for personal gain and accused the report as being part of a political attack by Dr Mahathir Mohamad.

Several days later, a special multi-agency task force to investigate the money trail of 1MDB was formed, comprising the Attorney-General’s Chambers, Bank Negara Malaysia, the police and the Malaysian Anti-Corruption Commission (MACC).

Najib’s manoeuvres

While the early days of the special multi-agency task force’s investigations showed promising signs of progress, subsequent events proved this a false hope.

On July 8, the police raided 1MDB’s headquarters at Jalan Sultan Ismail, days after the special task force raided three companies – SRC International Sdn Bhd, Gandingan Mentari Sdn Bhd, and Ihsan Perdana Sdn Bhd – which had been named in the money trail alleged by the WSJ report dated July 2.

This development painted a picture that the investigations were on the right track. Further adding hope for the public was a series of arrests between July 21 and July 29 of several individuals with varying connection to the companies named in the WSJ money trail.

However, things took a sour turn on July 24 when The Edge issued a statement saying the Home Ministry is suspending its publishing licence for a business weekly and a daily financial newspaper beginning July 27 for three months.

Come July 28, the nation was shaken further. The prime minister announced a surprise cabinet reshuffle, dropping his deputy Muhyiddin Yassin and Shafie Apdal, both of whom had been increasingly vocal in demanding clarification on the 1MDB controversy.

More significantly, however, also announced that day was the appointment of Mohamed Apandi Ali as the new attorney-general replacing Abdul Gani Patail, whose services ended the day prior, according to the government.

In a double twist, Abdul Gani remains an officer in the Attorney-General’s Chambers until his slated retirement date of Oct 6 and seemed unaware of the termination despite the official reason being stated as health reasons.

Soon after, a purported draft charge sheet was published by Sarawak Report, claiming that Abdul Gani was on the verge of prosecuting the prime minister. Mohamed Apandi dismissed the claim.

Over at the PAC, the cabinet reshuffle also saw four Barisan Nasional members of parliament (MPs), including chairman Nur Jazlan Mohamad, being appointed to ministerial posts.

The decimation of the PAC meant its probe into 1MDB was also frozen as the Parliament speaker refused to convene a special assembly to appoint new members so as to keep the probe going.

From transfer to leaks

For the special task force and its investigation, things went downhill from there. From investigating the alleged money transfer, focus seemed to have shifted towards finding parties responsible for alleged leaks of information.

Notably the police took the leading role in this new shift of direction. On Aug 1 the police arrested two MACC officers and a member of the Attorney-General’s Chambers, followed by a statement by the MACC two days later that the RM2.6 billion transfer was in fact a “donation” without specifying the purpose and the identity of the donor.

By Aug 5, the newly minted attorney-general Mohamed Apandi declared the special task force as no longer needed as news emerged that the top two heads of MACC are on leave. The police raids, ostensibly investigating leaks of information, continued.

In perspective, it had been a spectacular turn of events. In one fell stroke, the cumulative actions of the prime minister in end-July had effectively stalled various investigations into 1MDB as well as the alleged RM2.6 billion money transfer into his personal bank accounts, which was by now all but confirmed as fact by the MACC.

In the meantime the MACC’s probe appeared hampered by other institutions while Bank Negara saw allegations of corruption and rumours of ill-health surface against its governor Zeti Akhtar Aziz. The shake-up continued with the replacement of the top brass at the Special Branch, the police intelligence arm.

And now the focus of public attention has shifted to the apparent power struggle in which the prime minister had been successful in maintaining his position of power by neutralising various parties of the investigations. Questions now emerge if his political opponents can find a way to unseat him and seize power democratically.

In turn the political uncertainty over how long the prime minister can remain in power this way had contributed towards a dragdown of the ringgit against the US dollar, which had been among the lightning rods of public outcry over the scandal.

Somewhat sidelined by the emerging political uncertainty was the original heart of the scandal: 1MDB. It seemed that public attention at large had all but moved on despite myriad pressing questions remaining unanswered.

With the special multi-agency task force apparently disbanded and then declared unneeded by the new attorney-general, Bank Negara was the only agency which concluded its probe, after which documents were handed to the Attorney-General’s Chambers for further action.

What sort of action might follow however remains to be seen, given the current attorney-general is not the same person who initiated the investigations.

Will the truth ever be uncovered on the 1MDB scandal? Hope remains but, given the current political outlook, is fading fast.

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Timeline of investigations into RM2.6 billion transfer

July 2: Wall Street Journal (WSJ) reported a total of US$700 million was transferred into the prime minister’s personal bank accounts in March 2013 via a chain of transactions.

July 3: Prime Minister’s Office issued a statement claiming WSJ expose was “political sabotage”. The prime minister accused former prime minister Dr Mahathir Mohamad as masterminding the allegation and stressed that he had never taken public money “for personal gain”. 1MDB denied transferring money to the prime minister.

July 5: Attorney-general Abdul Gani Patail announced a special multi-agency task force investigating 1MDB’s money trail, comprising Attorney-General’s Chambers, police force, Bank Negara Malaysia and MACC.

July 8: Police raided 1MDB headquarters at Jalan Sultan Ismail.

The prime minister’s lawyers sent a legal letter to WSJ requesting clarification on the July 2 article.

July 9: MCMC warned of stern action against those spreading false information on 1MDB online.

July 12: Bank Negara Malaysia denied allegations that its staff leaked 1MDB information to WSJ.

July 20: The Malaysian Communications and Multimedia Commission (MCMC) blocked access to Sarawak Report.

July 21: MACC denied any information leak from its offices to WSJ on 1MDB investigations.

July 21-29: A number of individuals were arrested to help investigations into the transaction chain that saw money being transferred into the prime minister’s accounts.

July 24: The Home Ministry issued a letter to The Edge Media Group, announcing the suspension of the publishing licences for its weekly and daily publications effective July 27 for three months.

July 28: Prime minister reshuffled cabinet, dropping deputy Muhyiddin Yassin one day after a public speech raising questions on 1MDB.

Meanwhile attorney-general Abdul Gani was replaced by Mohamed Apandi Ali and the former seemed in the dark over the matter.

Four members of the Public Accounts Committee (PAC), which had been probing 1MDB, were given cabinet positions, decimating PAC line-up and freezing the probe.

July 29: MACC oversight panels call for non-interference in the special task force investigating 1MDB.

July 30: Sarawak Report claimed possession of draft charge sheet against the prime minister, alleged Abdul Gani Patail was on the verge of arresting the prime minister prior to his replacement. The Attorney-General’s Chambers denied the purported draft charge sheet.

July 31: New attorney-general Mohamed Apandi Ali dismissed the purported draft charge sheet, said it points to a plot to topple the prime minister.

Aug 1: Two MACC officers and a member of the Attorney-General’s Chambers were arrested in police investigation over information leak on 1MDB investigations.

Aug 3: MACC declared US$700 million as donation but did not specify donor identity nor purpose of donation. Scheduled PAC hearing on 1MDB postponed indefinitely.

Aug 5: Newly minted attorney-general Mohamed Apandi Ali declared special task force investigating 1MDB as no longer needed.

MACC top two were revealed to be on leave. Meanwhile police raided MACC’s special operations division.

Aug 6: MACC deputy director Mustafar Ali lamented police arrests of MACC officials, claimed SRC International probe hampered as a result.

The prime minister instructed his lawyers to seek a second opinion before deciding on the next course of action against WSJ.

Aug 7: Two vocal MACC directors transferred to Prime Minister’s Department.

Aug 10: Transferred MACC directors returned to respective former posts at the Commission after meeting chief secretary to the government Ali Hamsa.

Aug 13: Bank Negara announced completion of probe into 1MDB, said documentation provided to relevant agencies.

Aug 15: New Deputy Prime Minister Zahid Hamidi claimed there was a plot to topple the government via formation of a new majority in Parliament.

Aug 16: In an interview with The Star Online, Housing Minister Abdul Rahman Dahlan suggested that the prime minister had to “take out” people in the scenario that a draft charge sheet was prepared against him.

Aug 17: New Communications Minister Salleh Said Keruak instructed MCMC to ask Google, Facebook and Twitter to curb spread of “false information”.

Aug 19: Attorney-General’s Chambers stated that it is examining Bank Negara’s probe findings on 1MDB.

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