The scandal that is threatening to eat up M’sia — and its leader

KUALA LUMPUR — In the spring of 2013, Mr Song Dal-sun, head of securities investment at Seoul-based Hanwha Life Insurance, sat down to a presentation by a Goldman Sachs banker. The young Goldman salesman, who had flown in from Hong Kong, made a pitch for bonds to be issued by 1Malaysia Development Bhd (1MDB), a state-owned company closely tied to Malaysian Prime Minister Najib Razak.

It was enticing. The 10-year, dollar-denominated bonds offered an interest rate of 4.4 per cent, about 100 basis points higher than other A-minus-rated bonds were yielding at the time, he recalled. But Mr Song, a veteran of 25 years in finance, sensed something was amiss. With such an attractive yield, 1MDB could easily sell the notes directly to institutional investors through a global offering. Instead, Goldman Sachs was privately selling 1MDB notes worth US$3 billion (S$4.1 billion) backed by the Malaysian government. “Does it mean ‘explicit guarantee’?” he recalled asking the Goldman salesman, whom he declined to name. “I didn’t get a straight answer,” Mr Song said. “I decided not to buy them.”

The bond sale that Mr Song passed up is part of a scandal that has all but sunk 1MDB, rattled investors and set back Malaysia’s quest to become a developed nation. Mr Najib, who also serves as Malaysia’s Finance Minister, sits on 1MDB’s advisory board as chairman. The scandal’s aftershocks have rocked his office, his government and the political party he leads, United Malays National Organisation (UMNO). A state investment company trumpeted as a cornerstone of Mr Najib’s economic policy after he became Prime Minister in April 2009, 1MDB is now mired in debts of at least US$11 billion. Former Prime Minister Mahathir Mohamad, a one-time political mentor who has turned on Mr Najib, said “vast amounts of money” have “disappeared” from 1MDB funds. 1MDB has denied the claim and said all of its debts are accounted for. The Prime Minister’s office declined to comment for this article.

From the moment in 2009 when Mr Najib took over a sovereign wealth fund set up by the Malaysian state of oil-rich Terengganu and turned it into a development fund owned by the federal government, 1MDB has been controversial. Since the beginning of this year — with coverage driven by the Sarawak Report, a blog, and The Edge, a local business weekly — the scandal has moved closer and closer to the heart of government, sparking calls for Mr Najib’s ouster and recalling Malaysia’s long struggle with corruption and economic disappointment.

Beginning in March, as public pressure grew, the country’s Auditor-General, Parliament’s Public Accounts Committee, the central bank and the police have all homed in on 1MDB. The force of the scandal helped topple the ringgit, the worst-performing currency in Asia as of July 16, down 8.1 per cent against the dollar since the start of the year. Foreign reserves plunged 20 per cent in June from a year earlier.

On July 3, the Wall Street Journal, citing documents from government probes, reported that investigators believe almost US$700 million in cash moved through state agencies, banks and companies linked to 1MDB before eventually finding its way into Mr Najib’s personal accounts. The money reportedly included two transactions—one worth US$620 million; another, US$61 million—made in March 2013, two months before a general election returned Mr Najib to power as part of the Barisan Nasional, or National Front, coalition.

In a country with no public campaign financing and few strictures on political donations, the alleged cash flows caused alarm.

On March 12, before the 2013 election, 1MDB chairman Lodin Wok Kamaruddin and Mr Khadem Qubaisi, then-chairman of Abu Dhabi’s Aabar Investments, signed an agreement to form a joint venture. The following month, 1MDB announced it had raised US$3 billion for its share of the partnership. “1MDB opted for a private placement to ensure the timely completion of this economic initiative,” the company said in a statement on April 15 of that year.

The timing was controversial. “1MDB may have been created with one of the key objectives being to raise a slush fund to finance Barisan Nasional’s election campaigns,” said Member of Parliament Tony Pua, of the opposition Democratic Action Party. A statement from the Prime Minister’s office dismissed the allegations in the Wall Street Journal, saying they amounted to “political sabotage” at the hands of “certain individuals to undermine confidence in our economy, tarnish the government and remove a democratically elected Prime Minister”. In a statement, 1MDB said it “has never provided any funds to the Prime Minister”.

THE PLAYERS

Malaysia’s biggest financial scandal has spotlighted a colourful cast of characters — some connected to 1MDB, some not. A politician since the age of 23, the moustachioed Najib is the eldest son of the country’s second Prime Minister following its independence from Britain in 1957, Abdul Razak Hussein, and a nephew of the third, Hussein Onn.

Mr Najib’s wife, Ms Rosmah Mansor, is an influential figure in her own right. Mr Riza Aziz, Ms Rosmah’s son from her first marriage, is close to a Kuala Lumpur man-about-town who has been linked to 1MDB named Mr Low Taek Jho. Mr Jho Low, as he is known, is a whiz-kid dealmaker who helped set up 1MDB’s first joint venture, with PetroSaudi International, according to reports in The Edge and the Sarawak Report.

Then there is Goldman Sachs executive Tim Leissner, a lanky, blue-eyed German who is now Goldman’s South-east Asia chairman. He was a fixture in Malaysian dealmaking in the late 2000s. Goldman helped manage billionaire T Ananda Krishnan’s 2009 initial public offering of Maxis, Malaysia’s biggest mobile phone service provider.

Goldman established a close and profitable relationship with 1MDB. From 2012 to 2013, the bank arranged three bond sales for the company, totalling US$6.5 billion. Fees, commissions and expenses for Goldman totalled US$593 million — about 9.1 per cent of the money raised—according to a person familiar with the sales. “These transactions were individually tailored financing solutions, the fee and commissions for which reflected the underwriting risks assumed by Goldman Sachs on each series of bonds, as well as other prevailing conditions at the time, including spreads of credit benchmarks, hedging costs and general market conditions,” said Hong Kong–based Goldman spokesman Edward Naylor.

In 2013, Goldman arranged 1MDB’s US$3 billion bond sale, the one passed up by Hanwha Life’s Mr Song. The note is included in JPMorgan’s benchmark Asian and Emerging-Market Bond indexes. Goldman’s commissions, fees and expenses from the sale were US$283 million, or 9.4 per cent of the amount raised, according to the prospectus. The person familiar with the transaction said Goldman’s take was high because the bank bought bonds from 1MDB, assuming the risk, and then resold them to customers.

In many ways, 1MDB’s star-crossed existence mirrors the misfortunes of this country of 30 million people. Mr Najib set up 1MDB at a time when the Malaysian economy was on the mend; it expanded by 7.4 per cent in 2010, becoming one of the fastest-growing in South-east Asia. The company — supported by the advisory board chaired by Mr Najib and including high-ranking government officials from China, Saudi Arabia and the United Arab Emirates — set out to be a state-owned strategic development company that would forge global partnerships, draw foreign investment to Malaysia and build up the country’s industrial base.

Early on, 1MDB formed joint ventures with Saudi and Abu Dhabi companies. On a visit to Malaysia in July 2013, Japanese Prime Minister Shinzo Abe attended a signing ceremony that was meant to initiate discussions on 1MDB’s plan to issue Samurai bonds guaranteed by the Japan Bank for International Cooperation. None of these plans panned out as they were supposed to. Over time, to its growing number of detractors, 1MDB looked more and more like a giant black box, its inner workings echoing the mysteries suggested by the wayang kulit, traditional shadow puppets, that frolic on the office walls of the Kuala Lumpur-based company.

1MDB, which has announced plans to wind itself down, is reducing its debt, according to president Arul Kanda.

“1MDB has undertaken various initiatives to reduce the company’s debt levels and ensure that maximum value is generated for its 100 per cent shareholder, the Ministry of Finance,” Mr Kanda said in a statement to Bloomberg Markets on July 16.

As part of the plan, 1MDB has repaid a US$975 million loan, while more than 40 potential investors have shown interest in one of its property developments, Bandar Malaysia. He said the company also intends to sell its power plants.

“We are focused and are making good progress,” he said.

TOUGH TIMES FOR NAJIB

The 1MDB story begins in 2008. In December of that year, Terengganu, a sultanate located across the Malay Peninsula from Kuala Lumpur, got federal government approval to set up its sovereign wealth fund, the TIA. Goldman Sachs and Boston Consulting Group advised the TIA in its early days. Mr Jho Low advised the TIA from January to mid-May, according to a statement released on his behalf to local media in May last year.

In May 2009, the TIA raised RM5 billion (S$1.79 billion) through the sale of 30-year Islamic bonds. Guaranteed by the federal government, they were offered at an interest rate of 5.75 per cent. In fact, according to Dr Mahathir, the bonds were sold at a discounted price that effectively yielded bondholders 7 per cent. “Who approved such terrible terms for a loan to a government-owned company?” the former Prime Minister asked on his blog. 1MDB said in response that the effective yield was actually 6.15 per cent and was reasonable considering that these were Malaysia’s first 30-year notes.

Two months later, the Najib government quietly took over the TIA and renamed it 1MDB. As the new company was getting up and running, the well-connected Mr Low laid the groundwork for 1MDB’s dealings with the Saudis, according to reports in The Edge and the Sarawak Report. The son of a wealthy Malaysian businessman, Mr Larry Low, Mr Jho studied at Harrow, an elite London boarding school. While there, he met Mr Najib’s stepson, Mr Riza Aziz, who was studying at the London School of Economics and Political Science (LSE), and came to know Mr Riza’s mother, Ms Rosmah, when she visited London, according to a New York Times report in February. Later, at the Wharton School of the University of Pennsylvania, he took a semester off to start a company called Wynton Group, managing US$25 million pooled mostly from his friends’ families, according to an interview he gave to Malaysia’s Star newspaper in 2010.

In a similar vein, Mr Low’s role at 1MDB involved “OPM” — other people’s money, said a former business associate in Kuala Lumpur. By now, Mr Low had assembled an impressive array of connections. On Sept 7, 2009, Low met Mr Patrick Mahony, an executive of PetroSaudi International, in New York, according to a report in The Edge. Mr Tarek Obaid, a co-founder of PetroSaudi, had introduced them to each other via email on Aug 28, the report said. It did not take long for 1MDB and PetroSaudi to cobble together a US$2.5 billion joint venture. Mr Mahony did not respond to emailed questions. Mr Obaid could not be reached for comment.

As it got off the ground, 1MDB worked with more than a dozen financial institutions, but it forged especially close ties with Goldman. A helping hand came from Mr Roger Ng, Goldman’s head of South-east Asia sales and fixed-income trading, a Malaysian national well-known for his connections to politicians and tycoons, according to two people who know him. Mr Leissner, then based in Singapore as Goldman’s co-president for South-east Asia, played a key role in expanding the bank’s business in Malaysia. He declined to comment for this article. Mr Ng, who left Goldman last year, did not respond to phone calls or a text message.

In December 2009, Goldman won a licence from Malaysia’s Securities Commission to set up fund management and corporate finance advisory operations in the country. “The future outlook for Malaysia’s capital markets and its asset management industry is very positive,” Mr Leissner said in a statement released by the commission at the time. “Through our local presence, we look forward to playing a larger role in their development.”

For 1MDB, Goldman played multiple roles. In 2012, it advised the firm on its acquisition of Tanjong Energy Holdings from Malaysian billionaire Krishnan and domestic power plants from Genting, a conglomerate. The following year, the bank helped 1MDB purchase the Jimah Energy Ventures power plant in Selangor, Malaysia, in a deal that was completed last year.

The true extent of the trouble at 1MDB did not become apparent until late last year. Scandal aside, 2014 was a difficult year for Mr Najib and his government. First came the disappearance of Malaysia Airlines Flight MH370 and all 239 people on board in March. Then, in July, Flight MH17, also operated by the state-owned airline, crashed near Donetsk in strife-torn eastern Ukraine, possibly after being hit by a surface-to-air missile; all 298 passengers and crew died. It was around that time that the Sarawak Report and The Edge, under long-time editor Ho Kay Tat, began their exposes of 1MDB, adding to Mr Najib’s woes.

The Sarawak Report was founded by Ms Clare Rewcastle Brown, who was born in Sarawak, a state on the island of Borneo, of British parents and now runs the site out of London. Earlier this year, the website claimed to have obtained emails and other documentation showing how Mr Jho Low and several business associates siphoned US$700 million from 1MDB’s venture with PetroSaudi Holdings, which was registered in the Cayman Islands in the Caribbean. Mr Low, who has denied playing any role in 1MDB after the work he did for the TIA, did not respond to requests for an interview or to emailed questions. The government, without giving any details, has tried to discredit the emails as reported by the Sarawak Report, saying the communications may have been tampered with. Then on July 19, the Malaysian Communications and Multimedia Commission said it had blocked the Sarawak Report’s website in Malaysia for publishing content that could “destabilise the country”. Ms Rewcastle Brown said she will not be impeded by the government’s action, describing it as the “latest blow to media freedom”.

Adding to a climate of fear and tension, the Malaysian police launched an investigation into whether government officials, including central bank personnel, were behind the leaking of documents that allegedly showed 1MDB money turning up in Mr Najib’s accounts. The central bank on July 12 denied any impropriety.

As allegations swirl around him, the stakes for Mr Najib are high. Not only is he Prime Minister and Finance Minister; he is also president of a political machine, UMNO, that has been in power since Malaysia’s independence. What is more, he is chairman of the Khazanah Nasional sovereign wealth fund, which had US$29 billion under management at the end of last year. “Power is too concentrated to one person,” said Mr Zaid Ibrahim, a former Law Minister, who built the country’s largest law firm. He said the total lack of checks and balances in Malaysia has led to abuse of power.

In the early days of Mr Najib’s rule, Malaysians had more cause for optimism than now, said Professor Danny Quah, an economics professor at the LSE. Like many successful Malaysians overseas, Prof Quah has maintained ties with his native country. He served on Malaysia’s National Economic Advisory Council from 2009 to 2011, and he still vividly recalls a day — March 30, 2010 — when Mr Najib stood in front of global investors and promised a “1Malaysia” where all Malaysians of different races would work together toward one goal — turning Malaysia into a developed nation by 2020. At the time, Mr Najib had enough popular support to aim high. “Right then, it was a golden opportunity,” Prof Quah said. “It’s a moment that passed.” BLOOMBERG