AG’s report highlights governance lapses in 1MDB

This article first appeared in The Edge Financial Daily, on May 16, 2018.
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KUALA LUMPUR: 1Malaysia Development Bhd’s (1MDB) investments in the sovereign fund’s joint venture with PetroSaudi Holdings (Cayman) Ltd were made swiftly, without proper feasibility studies and often without proper approvals, according to the National Audit Department’s (NAD) executive summary on 1MDB declassified yesterday.

The report shows that the fund’s first joint-venture (JV) project was with PetroSaudi Holdings (Cayman) Ltd. The JV company, 1MDB PetroSaudi Ltd, was formed on Sept 28, 2009, in which 1MDB invested US$1 billion for a 40% stake.

“Investment decisions in the JV company were made within eight days, without a detailed assessment process and before the issues/conditions raised by the 1MDB board are resolved. There were four different companies registered under the name of PetroSaudi but [in] the proposed investment paper submitted to the board of directors, 1MDB did not state this fact,” the report noted.

Additionally, a clause in the deal stated that 1MDB-PetroSaudi received a cash advance of US$700 million a week after the JV was formed from PetroSaudi (Cayman) on Sept 25. The US$700 million was to have been repaid in full barely five days later on Sept 30, when 1MDB transferred US$1 billion into two separate accounts — US$300 million to the JV company’s account and US$700 million to another company’s account to settle the cash advance.

“Approval of the 1MDB board was not obtained for the payment of the US$700 million to another company’s account,” the report said.

Six months later, 1MDB sold its 40% stake in the JV company for US$1.20 billion in Murabahah Notes. The notes had a profit rate of 8.67% per annum and matures on March 31, 2021. They are supported by a corporate guarantee from PetroSaudi International Ltd.

On Sept 14, 2010, 1MDB made another Murabahah Notes subscription for US$500 million, and a total of US$330 million was paid between May 20 and Oct 25, 2011. The subscription was partly funded via loans from financial institutions.

After holding onto the notes for 27 months, 1MDB redeemed them and the profits it would have received for them which amounted to US$2.22 billion on June 1, 2012, via an asset swap arrangement. Under the deal, 1MDB’s unit, 1MDB International Holdings Ltd (1MDB-IHL), got a 49% stake in PetroSaudi Oil Services Ltd (PSOSL), a PetroSaudi subsidiary.

“The conversion of the Murabahah Notes to equity investments in PSOSL was made without any detailed study to identify liabilities, the ability to generate funds and past financial performance. Despite knowing that PSOSL operates in Venezuelan waters where sanctions have been imposed by the United States and ending drilling contracts, the decision to invest in the PSOSL proceeded,” read the report.

Approval from the board and 1MDB shareholders for the note to equity conversion was only obtained on June 20, 2012, but 1MDB’s chief executive officer (CEO) signed five documents to effect the equity acquisition on June 1 that year, the report added.

Subsequently, 45 days after 1MDB converted the notes into equity in PSOSL, 1MDB’s CEO suggested disposing of the stake due to sanctions against Venezuela.

“1MDB’s board approved the disposal of 1MDB-IHL’s 49% equity in PSOSL to Bridge Partners International Investment Ltd (Bridge Partners) for not less than US$2.22 billion, to be managed by a licensed fund manager,” the report noted.

The sale and purchase agreement was signed on Sept 12, 2012, and Bridge Partners issued six non-interest bearing promissory notes worth US$2.318 billion, payable in one month, as purchase consideration.

On the same day, 1MDB, via its subsidiary Brazen Sky Ltd, inked an investment management agreement with Bridge Global Absolute Return Fund SPC (Bridge Global SPC) and Bridge Partners Investment Management (Cayman) Ltd to invest US$2.32 billion.

This investment was funded by promissory notes which were subsequently invested in various portfolio investments of the SPC in the Cayman Islands. “This investment was made through Bridge Global SPC, a newly established one-month company with no fund management licence nor experience managing large funds,” it noted.

Interestingly, 1MDB’s board of directors on May 20, 2013, agreed that the investment would be gradually redeemed to improve public perception of the fund’s credibility.

On Dec 20, 2014, 1MDB’s board was informed that the current amount of the redeemed SPC fund amounted to US$1.39 billion and the balance of US$939.87 million would be redeemed at the end of December 2014. The redeemed US$1.39 billion proceeds was deposited into Brazen Sky’s bank account, and then transferred to 1MDB Global Investments Ltd.

“The action does not comply with the 1MDB board’s directive requesting redemption of SPC portfolio funds brought back to Malaysia,” the report highlighted.