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

KUALA LUMPUR: The telltale signs of it being a billion dollar scheme to defraud Malaysia were there — the rushed deadlines for a US$1 billion cash deal, hurriedly prepared valuers’ report to esoteric assets located halfway across the globe and dealings with companies incepted in the world’s tax havens: Cayman Islands, British Virgin Islands, Jersey and Panama.

It is therefore no surprise that the Public Accounts Committee (PAC) report released yesterday concluded that 1Malaysia Development Bhd’s (1MDB) US$1 billion investment in 1MDB-PetroSaudi Ltd (PetroSaudi) was a “non-strategic decision” that was made in eight days, without proper and detailed evaluation, one that was made before issues raised by the 1MDB board was resolved. There should have been no reason to hurry, given that there was no specific project that needed quick cash infusion.

But not only did the joint venture (JV) agreement contained clauses that were against 1MDB’s interests, there was proof that the 1MDB chief executive officer (CEO) and management had repeatedly ignored strict and specific instructions of the 1MDB board and disregard corporate governance guidelines. The disregarded instructions include the appointment of a consultant to evaluate the PetroSaudi JV.

In the Oct 3, 2009 meeting, the 1MDB board voiced their dissatisfaction that their order had been neglected, and funds had been channelled to third parties without their knowledge.

Yet no action (apart from a reprimand and strict warning given during a board meeting on Oct 3, 2009, five days after the PetroSaudi deal had been sealed) was taken against him, the report noted.

Avid followers of 1MDB developments would have already read about PetroSaudi International Ltd — the company that Low Taek Jho and several individuals have been reportedly accused of using to siphon at least US$700 million out of 1MDB.

Citing documents submitted by Datuk Shahrol Azral Ibrahim Halmi on June 5, 2015 and his statements during the meeting with the PAC on Nov 25, 2015, the PAC report affirmed that 1MDB had on Sept 30, 2009 transferred US$700 million to Good Star Ltd.

Dubious Good Star transfer

There was no board approval for the US$700 million transfer, according to the Auditor-General. According to its investigations, only US$300 million was transferred to account 7619400 at JP Morgan (Suisse) SA, being the bank account of PetroSaudi, the JV company between 1MDB and PetroSaudi International Ltd.

The board was also not notified on the change in bank accounts for the JV company from BSI SA Geneva to JP Morgan (Suisse) Geneva. “This raises questions because checks by the Attorney-General (AG) found that the decision to change bank accounts was made through a resolution dated Sept 30, 2009, (the same date the cash transfer was made) but interviews with several former directors found that they did not know about this resolution although their signatures were on them,” the report read.

In fact, a closer look at the PetroSaudi JV agreement found that 1MDB was only given an “extremely short period of two days” to pay US$1 billion to 1MDB-PetroSaudi Ltd, with the JV agreement signed on Sept 28, 2009 and the deadline for cash payment on Sept 30, 2009.

Checks by the AG on the document given by Shahrol on June 5, 2015 found that Brian Chia (Messrs Wong & Partners Advocates and Solicitors) via an email dated Sept 30, 2009 questioned a letter demanding the repayment of the US$700 million cash advancement, given that PetroSaudi International Ltd’s letterhead was used when the one giving the loan was PetroSaudi Holdings (Cayman) Ltd. The email was dated Sept 30, 2009 when the cash transfer for the payment of the loan was also made on the same day.

To recap, the JV began with a letter from Prince Turki dated Aug 28, 2009 to the prime minister of Malaysia which appended a letter from Tarek Essam Ahmad Obaid, CEO of PetroSaudi International Ltd, which was also dated Aug 28, 2009 to introduce PetroSaudi International Ltd to the prime minister. The letter was subsequently forwarded to the 1MDB management for further action.

The letter from Tarek spoke of a proposed 40% equity ownership by 1MDB worth US$1 billion in a JV between 1MDB and PetroSaudi International Ltd. PetroSaudi International Ltd was to contribute energy assets worth US$2 billion into the JV company but only accept a goodwill discount which results in its asset injection to be worth US$1.5 billion.

The AG said it did not find any information with regards to the PetroSaudi International Ltd and Prince Turki’s letter on the proposed JV being tabled to the 1MDB board of directors during the special meeting to discuss the investment.

The chairman of the 1MDB board of directors — who at the time was Tan Sri Azlan Mohd Zainol (appointed Aug 11, 2009 and resigned on Jan 11, 2010) who replaced Tan Sri Mohd Bakke Salleh (appointed Feb 27, 2009 and resigned on April 7, 2009) — said the cash asset ratio for the JV had not been determined during the Sept 18, 2009 board meeting.

This was just 10 days before the JV agreement was signed on Sept 28, 2009 where PetroSaudi Holdings (Cayman) Ltd and 1MDB-PetroSaudi Ltd was represented by Tarek while 1MDB was represented by Shahrol.

The signing ceremony was witnessed by the Prime Minster of Malaysia and Prince Turki.

According to the JV agreement, 1MDB was to invest US$1 billion cash (40% equity participation) while PetroSaudi Holdings (Cayman) Ltd will contribute assets worth no less than US$1.5 billion (60% equity participation) in the JV company.

But checks by the Auditor-General on the JV agreement found several issues and conflicting information.

The JV company, 1MDB-PetroSaudi Ltd, was registered on Sept 18, 2009 in the British Virgin Islands (BVI) by PetroSaudi Holdings (Cayman) Ltd, which is also formed on the same day. The JV agreement also contained a clause that says 1MDB-PetroSaudi Ltd (which was formed Sept 18, 2009) had received a cash advance totalling US$700 million on Sept 25, 2009 from its parent company, PetroSaudi Holdings (Cayman) Ltd. The advanced sum needed to be repaid in full on or by Sept 30, 2009.

The very existence of this five-day loan of US$700 million in itself raises questions, the report says.

Checks by the Auditor-General did not find any minutes or document to show that the 1MDB board of directors had been notified of the US$700 million cash advancement before the JV was signed.

Interviews with current and former 1MDB board members in June 2015 found that the cash advancement was never tabled or discussed by the 1MDB management before the JV was sealed.

The 1MDB board was only told of the proposed JV with PetroSaudi International Ltd for the first time in the Sept 18, 2009 meeting. The early registration of 1MDB PetroSaudi Ltd (BVI) show that the 1MDB management had decided beforehand to form the JV with PetroSaudi International Ltd, and the 1MDB board of directors were only notified afterwards. There was no record to show that the 1MDB board of directors had been notified on whether a special purpose vehicle, being 1MDB PetroSaudi Ltd (BVI), had been registered or established, the report read.

The 1MDB board of directors had directed management to make sure PetroSaudi International Ltd contribute its share of the JV with 50% cash, or at least US$1 billion and 50% in the form of assets to the JV company. However, the 1MDB management did not execute the board directive, but had executed the proposal by Tarek in the letter dated August 28, 2009.

Investigations also show that a profile on PetroSaudi International Ltd was never tabled to the board of directors until the agreement had been signed. This is highly unusual for a JV that involves huge cash investment fast, the report said.

A copy of the US$700 million loan agreement between 1MDB-PetroSaudi Ltd and PetroSaudi Holdings (Cayman) Ltd signed by Tarek, as representative of both companies, was submitted by the 1MDB management but the National Audit Department could not verify it with the actual document.

Not only was the US$700 million loan questionable, the valuation report — that was ready in eight days despite the board being told earlier would take months to complete and would only be ready in March 2010 — which the 1MDB board found wanting, indicated that the assets were of high risk.

In addition, checks by the Auditor-General found that 1MDB director for business development Casey Tang Keng Chee was appointed in place of Mohd Bakke alongside Shahrol as corporate representative in the JV company. The JV agreement also said 1MDB was entitled to appoint two directors on the JV company board, and not three as required by the 1MDB board when approving the investment in PetroSaudi International Ltd, not other companies.

A letter from valuer Edward L Morse dated Sept 20, 2009 told the 1MDB management that it would be appointed by 1MDB and 1MDB-PetroSaudi Ltd to conduct the independent valuation on PetroSaudi International Ltd and its subsidiaries’ hydrocarbon assets. The letter of appointment was signed by Shahrol on Sept 29, 2009 — which was the same date as the valuation report by it dated Sept 29, 2009, a day after the JV agreement was signed on Sept 28, 2009.

Despite the complexity of the assets that needed to be evaluated, it was able to come up with a report in eight days. The assessment by Edward L Morse Energy Advisory Services was conducted on the assets (exploration and production rights) of PetroSaudi International Ltd.

However, the JV agreement clearly states that the company that owns the rights to the agreed JV assets was PetroSaudi International Cayman, which is different from PetroSaudi International Ltd.

The JV agreement also states that on the date of the agreement PetroSaudi Holdings (Cayman) Ltd had transferred all the issued shares of PetroSaudi International Cayman (which holds the rights to the assets estimated to be worth US$2.7 billion) to 1MDB-PetroSaudi Ltd. The same report could not verify the assets owned by Petro Saudi Turkmenistan 1 Ltd (Jersey incepted) and Petro Saudi Ltd Inc (Panama incepted).

In its report, the PAC said the actual ownership of the JV assets could not be verified because no documents were submitted to the 1MDB auditors or the Auditor-General to prove the actual date assets of PetroSaudi International Cayman had been transferred to 1MDB-PetroSaudi Ltd.

The Edward L Morse valuation report, in commenting on the oil exploration and production rights in various locations in Argentina and Turkmenistan, had stated that it only checked the project economics without valuing the geological source, property rights or even the contractual rights to the field.

The PAC said this shows that the rights to produce oil for Block 3 in Turkmenistan and Argentina had not been verified, which means that the agreement to accept those assets as equity in the JV can be considered unrealistic and high risk.

The report also states many other restrictions, including the fact that PetroSaudi International Ltd could not prepare a cash flow model that can be used to compare the assets in Turkmenistan as it did not have the ability to evaluate evolving royalty and fiscal regimes as well as check the value comparison procedure. This, the PAC said, “shows that PetroSaudi International Ltd did not have the expertise to deal with complex assets”.

“This [also] shows that 1MDB failed to evaluate the assumptions made by the valuer with regards to the production, petroleum price, discount rate as well as capital and operational expenditure requirements. The valuers’ report only evaluated the rights to the assets, and not the value of the company that holds those assets. As such, the company’s net worth was also not stated. All these constraints are a risk on the accuracy of the valuation report,” the PAC report read.

In the Oct 10, 2009 board meeting, the 1MDB board raised the need for an independent asset valuation, where the management was asked to get 10 names of reliable valuers to be shortlisted and approved by the chairman of the advisory board. With that, the management can discuss with PetroSaudi Holdings (Cayman) Ltd on the appointment of a second independent valuer.

The 1MDB board also directed the 1MDB CEO to prepare a comprehensive summary report to the chairman of the 1MDB advisory board that contain the chronology of the JV, payment status and the 1MDB board’s dissatisfaction on the asset evaluation report of PetroSaudi Holdings (Cayman) Ltd.

However, during the 1MDB board meeting dated Nov 7, 2009, Shahrol said a second evaluation on the assets was not required because the chairman of the advisory board was opposed to it and had instead directed the 1MDB board to appoint a consultancy firm to evaluate the JV ownership. The Auditor-General did not find any document to prove that a consultant was ever appointed.

Checks by the Auditor-General found that the JV agreement contain a clause that requires quarterly financial and operational reports to be submitted to shareholders. But these reports could not be produced by 1MDB.

During the JV period, the 1MDB board was not notified on where the funds in the JV company had gone to although Shahrol and Tang were appointed as 1MDB’s representatives in the JV. The Auditor-General was also not given any document that proves any investment have been made by this JV company.

Not only was the US$700 million loan questionable, the valuation report — that was ready in eight days despite the board being told earlier would take months to complete and would only be ready in March 2010 — which the 1MDB board found wanting, indicated that the assets were of high risk.

In addition, checks by the auditor-general (AG) found that 1MDB director for business development Casey Tang Keng Chee was appointed in place of Mohd Bakke alongside Shahrol as corporate representative in the JV company. The JV agreement also said 1MDB was entitled to appoint two directors on the JV company board, and not three as required by the 1MDB board when approving the investment in PetroSaudi International Ltd, not other companies.

A letter from valuer Edward L Morse dated Sept 20, 2009 told the 1MDB management that it would be appointed by 1MDB and 1MDB-PetroSaudi Ltd to conduct the independent valuation on PetroSaudi International Ltd and its subsidiaries’ hydrocarbon assets. The letter of appointment was signed by Shahrol on Sept 29, 2009 — which was the same date as the valuation report by it dated Sept 29, 2009, a day after the JV agreement was signed on Sept 28, 2009.

Despite the complexity of the assets that needed to be evaluated, it was able to come up with a report in eight days. The assessment by Edward L Morse Energy Advisory Services was conducted on the assets (exploration and production rights) of PetroSaudi International Ltd.

However, the JV agreement clearly states that the company that owns the rights to the agreed JV assets was PetroSaudi International Cayman, which is different from PetroSaudi International Ltd.

The JV agreement also states that on the date of the agreement PetroSaudi Holdings (Cayman) Ltd had transferred all the issued shares of PetroSaudi International Cayman (which holds the rights to the assets estimated to be worth US$2.7 billion) to 1MDB-PetroSaudi Ltd. The same report could not verify the assets owned by PetroSaudi Turkmenistan 1 Ltd (Jersey incepted) and PetroSaudi Ltd Inc (Panama incepted).

In its report, the PAC said the actual ownership of the JV assets could not be verified because no documents were submitted to the 1MDB auditors or the AG to prove the actual date assets of PetroSaudi International Cayman had been transferred to 1MDB-PetroSaudi Ltd.

The Edward L Morse valuation report, in commenting on the oil exploration and production rights in various locations in Argentina and Turkmenistan, had stated that it only checked the project economics without valuing the geological source, property rights or even the contractual rights to the field.

The PAC said this shows that the rights to produce oil for Block 3 in Turkmenistan and Argentina had not been verified, which means that the agreement to accept those assets as equity in the JV can be considered unrealistic and high risk.

The report also states many other restrictions, including the fact that PetroSaudi International Ltd could not prepare a cash flow model that can be used to compare the assets in Turkmenistan as it did not have the ability to evaluate evolving royalty and fiscal regimes as well as check the value comparison procedure. This, the PAC said, “shows that PetroSaudi International Ltd did not have the expertise to deal with complex assets”.

“This [also] shows that 1MDB failed to evaluate the assumptions made by the valuer with regards to the production, petroleum price, discount rate as well as capital and operational expenditure requirements. The valuers’ report only evaluated the rights to the assets, and not the value of the company that holds those assets. As such, the company’s net worth was also not stated. All these constraints are a risk on the accuracy of the valuation report,” the PAC report read.

In the Oct 10, 2009 board meeting, the 1MDB board raised the need for an independent asset valuation, where the management was asked to get 10 names of reliable valuers to be shortlisted and approved by the chairman of the advisory board. With that, the management can discuss with PetroSaudi Holdings (Cayman) Ltd on the appointment of a second independent valuer.

The 1MDB board also directed the 1MDB CEO to prepare a comprehensive summary report to the chairman of the 1MDB advisory board that contain the chronology of the JV, payment status and the 1MDB board’s dissatisfaction on the asset evaluation report of PetroSaudi Holdings (Cayman) Ltd.

However, during the 1MDB board meeting dated Nov 7, 2009, Shahrol said a second evaluation on the assets was not required because the chairman of the advisory board was opposed to it and had instead directed the 1MDB board to appoint a consultancy firm to evaluate the JV ownership. The AG did not find any document to prove that a consultant was ever appointed.

Checks by the AG found that the JV agreement contain a clause that requires quarterly financial and operational reports to be submitted to shareholders. But these reports could not be produced by 1MDB.

During the JV period, the 1MDB board was not notified on where the funds in the JV company had gone to although Shahrol and Tang were appointed as 1MDB’s representatives in the JV. The AG was also not given any document that proves any investment have been made by this JV company.