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This article first appeared in The Edge Financial Daily, on April 8, 2016.

 

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KUALA LUMPUR: The Public Accounts Committee’s (PAC) report on 1Malaysia Development Bhd (1MDB) states that the fund’s corporate governance and internal control are unsatisfactory, noting that some of its management’s decisions were not in line with best practices.

Among the reasons for such findings include important investment decisions were only undertaken via written resolutions, and no thorough studies had been undertaken before an investment was made, according to the report.

1MDB is a company wholly-owned by the Minister of Finance (Inc) [MoF Inc]. However, the PAC report states that the operational management and investments of 1MDB were in effect not overseen by MoF Inc. This is because there is no representative from the Ministry of Finance on 1MDB’s board, and there have been special treatments and exemptions extended to the fund by the government.

Among others, 1MDB and several of its subsidiaries have been exempted from corporate income tax for 10 years starting Nov 23, 2010, while a number of the government’s regulations in terms of the management of earnings, remuneration and bonus payment to its board members were waived.

1MDB also received several government guarantees and support letters as well as standby credit to fund its operations. For example, the fund received guarantees for a period of 30 years on the issuance of its Islamic medium term notes (IMTN) with a nominal value of RM5 billion.

There are two findings by the PAC on 1MDB’s lack of corporate governance. Both can be simplified as important decisions taken by the board were made without proper consultations and thorough studies.

A review done by the auditor general (AG) shows that the majority of important decisions regarding an investment were approved by the board via written resolutions. These include decisions to undertake or terminate an investment or to extend the tenure of an investment.

These decisions, which were only undertaken via the board’s written resolutions involve investments which have capital outlay of between US$1 billion (RM3.91 billion) and US$2.2 billion each, notes the PAC report.

“This shows that a constructive discussion among the board of directors and thorough evaluation on an investment was not made before an important decision was undertaken,” the committee states in the report.

The PAC states that the non-existence of an investment committee has led to investment decisions being made without thorough evaluation or proper due diligence.

“Within four years since the establishment of 1MDB between 2009 and 2012, its investments using origination funds through the issuance of RM5 billion worth of IMTN had changed in forms four times from an equity investment in a joint venture with PetroSaudi Holdings (Cayman) Ltd to a portfolio fund on the Cayman Islands.

“The changes in investment decisions within a short period involving a large fund show that the decisions were not made according to good corporate governance practice,” the report states. PetroSaudi Holdings (Cayman) is a subsidiary of PetroSaudi International Ltd.

Many important decisions were made without proper due diligence or thorough discussions among the board of directors, according to the AG.

These include the issuance of the RM5 billion IMTN by Terengganu Investment Authority (TIA), a joint venture (JV) with PetroSaudi, the conversion of the equity investment in 1MDB PetroSaudi Ltd into a Murabahah note, and the US$2.32 billion investment into a segregated portfolio company (SPC).

The PAC notes in the report that the IMTN was issued within a short period due to recommendation by TIA’s special adviser. The IMTN was issued for the development of Pulau Bidong in partnership with Mubadala Development Co in 2009. The report notes that the IMTN was issued without any action taken over issues raised by TIA’s board of directors.

The decision to invest in a JV with PetroSaudi was made within eight days, according to the PAC report. 1MDB’s board was only informed about the decision to enter into the JV, which was ratified on Sept 28, 2009, on Sept 18, 2009. The US$1 billion investment was made without due diligence process.

As for the investment into the SPC, 1MDB took a huge risk, as the US$2.32 billion investment was made through Bridge Global Absolute Return Fund SPC, which was a one-month-old company, without licence as a fund manager and no experience in managing such a huge amount. Besides that, acquisitions of shares in Tanjong Energy Holding Sdn Bhd, Mastika Legenda Sdn Bhd, a solar project with DuSable Capital Management and various funding programmes were also made without thorough deliberation and proper planning.

The acquisition of Tanjong Energy’s shares costing RM10.6 billion on Feb 8, 2012 was made without thorough deliberation in regards to funding method, financing cost and commitment, which had to be born by 1MDB.

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