Malaysia-Abu Dhabi link emerges as key challenge in revived 1MDB probe

By Leslie Lopez, The Straits Times Singapore

A settlement between troubled Malaysian state fund 1MDB and a clutch of state-owned Abu Dhabi entities involved major financial concessions from both governments, a review of documents and interviews with officials and executives with knowledge of the transactions reveals.

More startlingly, it called for the special dispensation that no legal action could be taken against individuals involved in the transactions, exclusive information obtained by The Straits Times has found.

Malaysian investigators are trying to piece together these and other irregular financial transactions in their quest to get to the bottom of the financial debacle at 1MDB, and former premier Najib Razak’s relationship with Abu Dhabi has become a key focus.

FORCED INTO THE DEAL?

Malaysian investigators are working on a theory that both parties were forced to come together to reach a confidential settlement in late April last year to head off the widening global criminal probe that would have severely undermined the embattled Najib administration and the Abu Dhabi royal household.

The Malaysian authorities have now turned up the heat on 1MDB.

In a major development last week, Malaysia’s anti-corruption agency (on June 24) arrested Mr Najib’s former special officer Amhari Efendi Nazaruddin, who investigators believe played a central role in the Abu Dhabi settlement agreement.

The key economic officer at Mr Najib’s office was remanded for seven days for questioning, and was on Wednesday taken to businessman Low Taek Jho’s luxury apartment during a raid by the Malaysian Anti-Corruption Commission.

1MDB chief executive officer Arul Kanda was also sacked on Thursday on grounds of dereliction of duties.

Separately, investigators have also summoned former and current 1MDB directors and company officials for questioning and slapped travel bans on several of them, government officials said, without identifying the personalities.

Officials close to the investigation insist that a full understanding of the highly irregular transactions could shed light to the 1MDB debacle and help in the framing of criminal and civil charges against Mr Najib and his agents who were involved in the financial scandal.

But major challenges lie ahead.

Lawyers and financial executives tracking developments at 1MDB note that unravelling a settlement agreement reached by two sovereign governments could prove difficult, if not messy.

Separately, there is scepticism over the level of cooperation Malaysian investigators would get from their Abu Dhabi counterparts.

The following account offers an insight into the highly irregular relationship between the two governments. It also makes for a cautionary tale about how aggressive state-owned entities can be easily be manipulated by corrupt financial executives and government officials when there is little oversight.

A CURIOUS RELATIONSHIP

The seeds of 1MDB were sown in early 2009, when Mr Low , who enjoyed close relations with Mr Najib, mooted a plan to create a sovereign wealth fund to invest in strategic offshore businesses.

Mr Najib liked the idea, and, shortly after assuming the premiership in April of that year, signed off on a government guarantee for a bond issue that raised five billion ringgit (S$1.69 billion) as seed capital.

1MDB initially entered into several questionable investments with politically well-connected business personalities in Saudi Arabia.

The venture with little-known PetroSaudi International did not amount to much apart from leaving 1MDB with highly questionable “investment units” in return for over US$1 billion that the Malaysian fund put into the business arrangement.

Sometime in 2012, Mr Low enticed Mr Najib and 1MDB into a partnership with Abu Dhabi’s Aabar Investment PJS and its subsidiary International Petroleum Investment Company (IPIC) with the prospect of acquiring power assets in Malaysia. The two Abu Dhabi entities jointly provided guarantees on the principal and interest payments on two separate US$1.75 billion bonds issued by units of 1MDB.

In return for the guarantees, financial executives familiar with the transaction told The Straits Times, 1MDB paid US$1.37 billion to an Aabar entity domiciled in the British Virgin Islands (BVI) and also granted the entity the option to purchase up to 49% of 1MDB’s new energy businesses.

Why 1MDB agreed to such generous terms is unclear. But that arrangement would be altered two years later under a separate refinancing package.

In 2014, 1MDB terminated the option it granted to the Aabar entity in the British Virgin Islands to acquire the stake in its energy businesses by paying the company a US$993 million settlement.

1MDB also entered into a separate deal, referred to as a “top-up” agreement, and paid an additional collateral of US$1.15 billion to Aabar.

This second arrangement was executed to avoid the forfeit of the original US$1.37 billion collateral payment to Aabar which financial executives close to the situation said was triggered due to non-compliance of certain terms under the original guarantee.

These highly suspicious financial manoeuvres, which essentially saw 1MDB pay out more than it received from the bond issues in just over two years, would then be followed by another financial restructuring between 1MDB and its Abu Dhabi partners.

In late May 2015, they entered into yet another restructuring agreement that was referred to as a “debt for asset swap arrangement.”

Under that deal, the Malaysian entity received an advance of US$1 billion from IPIC under a fresh restructuring of its debt arising from the bond issues. It also called for 1MDB to make good with cash amounting to US$1.15 billion within six months. (According to financial executives close to the situation, this figure was made up of the principal amount of US$1 billion that was advanced, approximately US$100 million in interest charges and another US$50 million in funding costs.)

When 1MDB failed to make the end-2015 settlement for the advance from IPIC, Abu Dhabi decided to play hardball. It declared that Malaysia was in default of the bond-guarantee agreement. IPIC and Aabar also insisted that the amounts paid by 1MDB into the BVI entities were not owned by the Abu Dhabi state companies.

THE FALLOUT

The stunning claims threw one of the biggest international bond issues at the time into a tailspin and rocked financial markets.

Calm was restored after both 1MDB and Abu Dhabi said they would enter into arbitration talks to resolve the issue.

While the Malaysians and Abu Dhabi state-owned entities haggled over the missing monies, investigations by regulatory agencies from several countries over 1MDB’s global financial transactions had reached a crucial stage. And financial executives close to the affair said that the dispute between Kuala Lumpur and Abu Dhabi presented the US Department of Justice with an opening to file indictments.

Lawsuits by the DOJ in July 2016 alleged that 1MDB funds intended for IPIC and Aabar had been illegally siphoned into entities in BVI that were controlled by senior officials from the Abu Dhabi entities before finding their way into Mr Najib’s personal bank account in Malaysia.

While much of the monies that reached Mr Najib flowed back to the shell companies from which they had arrived, the DOJ filed claims on more than US$1billion of mostly US assets that it said were acquired by stolen 1MDB funds.

Two senior executives who played central roles in the 1MDB-related energy acquisitions – IPIC’s Khadem al-Qubaisi and Aabar’s Mohamed Badawy al-Husseiny –  were subsequently arrested by Abu Dhabi authorities. Both the executives were long regarded to be in the inner circle of Sheikh Mansour bin Zayed al-Nahyan, who is also the brother of Sheikh Khalifa, ruler of Abu Dhabi and president of the United Arab Emirates.

Financial executives said the growing intensity of the international probes were causing deep embarrassment to the Malaysian and Abu Dhabi governments, which at the time were insisting that the dispute was a bilateral problem that would be resolved between the two parties.

But both governments were advised by their lawyers that the illegal siphoning of 1MDB funds, which were transacted in US dollars, gave the DOJ oversight to pursue civil and criminal charges against Malaysian and Abu Dhabi officials and entities involved in the money laundering scheme.

That prospect forced both parties to the negotiating table to hammer out a solution, noted the financial executives familiar with the matter.

THE CONFIDENTIAL SETTLEMENT

Mr Amhari, who was arrested last week, played a key role in the talks with senior Abu Dhabi negotiators.

In late April 2017, both governments reached a settlement over the missing monies. It remains confidential to this day.

Senior government sources told The Straits Times that the private settlement called for 1MDB to make good on the US$1.15 billion that was due to IPIC in two separate instalments, and these were fully settled at the end of 2017.

The Malaysian government also waived the collateral guarantees provided by Abu Dhabi and agreed to settle the interest and principal payments from the US$3.5 billion bond issue.

In return, Abu Dhabi agreed that it would make good on the missing monies that had flowed to entities in the BVI , amounts that it had earlier claimed were not received from 1MDB.

Malaysian government officials familiar with the ongoing investigation believe that Kuala Lumpur is unlikely to get much cooperation from Abu Dhabi in its bid to unravel the settlement agreement.

But they said that the next best option is to build a case that the Abu Dhabi dealings and eventual settlement agreement were carried out in bad faith by Mr Najib and his agents.

As for the special dispensation in the settlement agreement not to pursue action against individuals involved in the affair, the investigators said the Malaysian government would not recognise any immunity claims.