This article first appeared in The Edge Financial Daily on August 1, 2017

KUALA LUMPUR: Today is the day that 1Malaysia Development Bhd (1MDB) is due to make good on its settlement agreement with Abu Dhabi’s International Petroleum Investment Company PJSC (IPIC).

The first payment of US$602.725 million (RM2.58 billion) is due to be paid by July 31 midnight, New York time (-12 hours). This gives 1MDB till noon in Malaysia, and many will be watching to see if the state-owned fund can meet its obligations.

After all, other than asset disposals, this transaction will be the first major cross-border transaction that 1MDB musters since it became a controversial topic back in 2015.

It will also be the fund’s first major foreign transaction since the US Department of Justice (DoJ) began civil forfeiture action on US$1.7 billion worth of assets, allegedly linked to an international conspiracy to launder funds misappropriated from 1MDB.

However, the scope of the DoJ’s civil asset forfeiture could be much wider. Based on complaints, the DoJ estimates a whopping US$4.5 billion worth of 1MDB funds had been misappropriated from 2009 to 2015.

With so much funds allegedly misappropriated, it is no wonder that the repayment to IPIC is being closely monitored.

Nonetheless, Attorney-General Tan Sri Mohd Apandi Ali reiterated recently that the Malaysian government had found no wrongdoing related to 1MDB as alleged in the forfeiture suits.

“We also note that there has been no evidence from any investigation conducted by any law enforcement agency in various jurisdictions that shows that money has been misappropriated from 1MDB, and that there have been no criminal charges against any individual for misappropriation of funds from 1MDB.

“1MDB is a Malaysian company and has been the subject of multiple investigations within Malaysia, including by the Malaysian Anti-Corruption Commission (MACC), auditor-general and the bipartisan public accounts committee (PAC). After review, we found that no crime was committed,” Apandi was quoted by the media as saying in June.

Back to the due payment, it is the first tranche of two due to IPIC.

The remaining portion of US$602.725 million is due by the year end. In total, 1MDB will be paying IPIC US$1.205 billion (RM5.16 billion) as part of the settlement agreement.

It is interesting to note that the main reason 1MDB even owes this much of money to IPIC in the first place is because IPIC has been helping 1MDB meet its debt obligations since May 2015.

To recap, IPIC lent 1MDB RM1 billion in 2015. The money was used to help 1MDB repay another loan owed to Deutsche Bank worth US$975 million. As part of the arrangement, IPIC also agreed to help 1MDB service interest payments on US$3.5 billion worth of bonds.

These were two tranches of Goldman Sach’s bonds — a US$1.75 billion bond with a fixed rate of 5.75% and a US$1.75 billion bond with a fixed rate of 5.99%. Both are due in 2022, and IPIC is the co-guarantor for both as well.

In total, IPIC paid approximately US$200 million to help cover 1MDB’s interest payments for a year to help prevent the bonds from defaulting.

As part of the arbitration settlement, 1MDB has agreed to repay the US$1.205 billion owed to IPIC.

As part of the agreement however, the ministry of finance (MoF) agreed to guarantee that 1MDB will assume all future interest and principal payments for the Goldman Sach bonds.

Both 1MDB and IPIC also agreed to enter into “good faith discussions”, regarding some US$3.5 billion in funds that have allegedly disappeared. This sum, not to be confused with the Goldman Sach’s bonds, pertains to several transactions from 1MDB to IPIC that never arrived.

It began with a US$1.367 billion “security deposit” in 2012 for co-guaranteeing the US$3.5 billion bonds. Then, another US$993 million was paid to IPIC for termination options. Finally, another US$855 million and US$295 million were supposedly paid to IPIC as “top-up security deposits”.

IPIC claims it did not receive any of this money.

In all the three cases, the money was sent to Aabar Investments PJS Ltd (British Virgin Islands). 1MDB claims that Aabar BVI was a subsidiary of IPIC. However, IPIC claims it never had such a subsidiary.

Going forward, however, these legal troubles will be only one of the many that 1MDB faces — the fund must also meet its financial obligations. Not only will 1MDB have to pay IPIC the US$1.2 billion, it will also have to service the US$3.5 billion bonds — costing over US$200 million a year.

Being the guarantor, MoF will have to step in to meet any of 1MDB’s obligations if the fund fails to do so.