This article first appeared in The Edge Malaysia Weekly on July 6, 2020 - July 12, 2020
The charges:
4 counts of abuse of power for using his position as PM, finance minister & 1MDB board of advisers chairman to receive gratification worth:
• RM60.63 million on Feb 24 & June 14, 2011
• RM90.9 million on Oct 31-Nov 12, 2012
• RM2.08 billion on March 22 & April 10, 2013
• RM49.93 million on June 23 & Dec 19, 2014
21 counts of money laundering involving over RM4.3 billion
• 1st-9th count (March 22-April 10, 2013) RM2.08 billion from Tanore Finance Corp to his bank account
• 10th count (Aug 2, 2013) RM652.6 million from his bank account to Tanore Finance Corp
• 11th & 12th count (Aug 2 & 7, 2013) RM20 million to Umno via cheque; RM100,000 to Umno Batu Kawan via cheque
• 13th count (Aug 7, 2013) RM246,000 to Tan Sri Lim Soon Peng via cheque
• 14th count (Aug 12, 2013) RM2 million to ORB Solutions Sdn Bhd via cheque
• 15th count (Aug 14, 2013) RM303,000 to Semarak Konsortium Satu Sdn Bhd via cheque
• 16th-19th count (Aug 15-23, 2013) RM1.38 million from his bank account to Tanore Finance Corp
• 20th and 21st count (Aug 27 & 30, 2013) RM162.44 million from one of his AmIslamic Bank accounts to another
A directors’ circular resolution (DCR) on the conversion of an equity to debt paper was deliberately written in a manner to confuse the directors of 1Malaysia Development Bhd, so they would not be able to comprehend that the value of the proposed investment was far lower than what it was made out to be, the company’s former CEO told the High Court in the trial of Datuk Seri Najib Razak last week.
Other than the DCR, 1MDB’s senior management also managed to persuade the board — and even its auditors — that a number of other schemes were sound even though they were ill conceived. On one occasion, for instance, billions of dollars were invested with a fund manager that did not even hold an investment licence.
Going by the testimony of ex-CEO Datuk Shahrol Azral Ibrahim Halmi, the senior management were given considerable latitude by the board and even Shahrol himself, to the extent that they did not nail down the specifics of the investment or question why deals were structured in a certain manner.
Previously, Shahrol had maintained that he had gone along with proposals by businessman Low Taek Jho and his cohorts in the company as he believed that Low was acting under the instructions of Najib, or at least with the former prime minister’s knowledge. The prosecution maintains that Najib was in cahoots with Low in the egregious theft of billions of dollars belonging to 1MDB.
Under cross-examination by senior defence counsel Tan Sri Muhammad Shafee Abdullah, Shahrol conceded that over several occasions, the board may have been kept out of the loop when it came to “repatriating” the controversial fund’s investment of over US$2 billion in a joint venture with PetroSaudi International Ltd (PSI).
Shafee pointed particularly to the questionable use of DCRs to seek the board’s approval — as opposed to physical meetings for discussions — and the board’s blind faith in Low’s instructions.
Of murabaha notes and equity stakes
In 2009, 1MDB invested US$1 billion in the 1MDB-PSI JV for a 40% stake, which was later converted into murabaha notes worth US$1.2 billion in early 2010, in a bid to get its auditors to sign off on the fund’s financial statements for the year ended March 31, 2010.
In June 2012, the notes were deemed to be worth about US$2.22 billion and were then converted back into equity in the form of a 49% stake in a different entity — PetroSaudi Oil Services Ltd (PSOSL) — as part of a repatriation exercise that the board undertook to get its investment back. This equity was held via 1MDB International Holdings Ltd.
Despite only owning a 49% stake (the remaining 51% was held by PSI) in the Venezuela-based PSOSL, 1MDB was entitled to 100% of the company’s economic benefits or profits, which was unusual, as pointed out by the defence in previous proceedings.
“Was there a board paper for the presentation of the entire investment plan in relation to the conversion of the murabaha notes into a 49% shareholding in PSOSL?” asked Shafee.
“No, there was no meeting on it,” said Shahrol, who then added that the directors were notified and had approved the move via two DCRs.
During proceedings last month, Shafee pointed to the irregularity of how the DCRs were framed, with one outlining the redemption of the murabaha notes from the 1MDB-PSI JV for US$2.222 billion, and the other outlining the purchase of the 49% stake for the same amount.
The lawyer suggested that this was done to deceive the directors into thinking that there were two separate exercises when there was only one exercise, which was to directly convert the murabaha notes into the 49% stake in PSOSL.
Last week, Shafee put it to the witness again that all the exercises surrounding the restructuring of the investment was to make it difficult for the board members to understand the true value of the investment, to which Shahrol agreed, although he clarified that he played no role in coming up with the plan.
Given the significant size of the investment, Shafee also questioned the reason behind there being no physical board meeting to explain the exercise to the directors.
Shahrol said the relationship and investment with PSI, including the conversion of the stake, was the subject of previous board meetings, so the directors already had an idea of the processes involved.
“We had discussed the relationship of PSI and how we were going to bring the money back. At that point, it was taken that it had been agreed to at the higher levels. We were only executing what was outlined to us,” Shahrol explained.
Board could have questioned investment but did not
Due to purported concerns over US sanctions on Venezuela, Shahrol previously testified that Low — now a fugitive — and 1MDB legal counsel Jasmine Loo Ai Swan had suggested for the investment to be disposed of via the sale of 1MDB’s stake in PSOSL, to avoid any “negative perception by the US towards Malaysia”. This was sometime at end-July 2012.
Loo and Terence Geh Choh Heng, then 1MDB deputy chief financial officer, had proposed for the shares to be sold to Bridge Partners International Investment Ltd, which the Shahrol said was in line with the action plans set out by Low.
The money was subsequently invested in a hedge fund managed by Bridge Global Absolute Return Fund SPC, a Cayman Islands-registered segregated portfolio company (SPC) linked to Bridge Partners. Note that this SPC was only incorporated in August 2012.
Although Shahrol said he was initially hesitant about putting the money with Bridge, as the original plan was to repatriate the money back in 2009, he was convinced by Low’s action plans, which stated that the funds would be brought back on a scheduled basis to avoid any forex losses.
Shafee highlighted that this was a huge investment into a questionable “absolute return fund” and that the board must have been briefed about the matter by Bridge Partners itself.
Shahrol said he took Loo and Low’s word that it was a necessary step to bring back 1MDB’s money and that it was a safe investment.
Shafee: But by then, the money was still not coming in. The liquidation of the asset was not happening. You cannot possibly keep trusting these people to make it happen.
Shahrol: Expectations were already set that this was going to happen. It was progressing according to [Low’s] plan and I continued to trust that he had things under control.
Shafee: Now, Datuk Shahrol. You were in the top management and also the board. If you have not heard of this Bridge Global Absolute Return Fund, you would have taken action on your own or made a collective decision after discussing with the board members.
Shahrol: But that wasn’t what happened. I explained why. I had no reason to be suspicious at the time.
He reiterated that the matter of repatriation was discussed at every board meeting since 2010 and that there was nothing preventing individual board members from picking up the phone to question the exercise.
In August 2012, the board approved the sale of the stake to Bridge Partners in exchange for six promissory notes worth US$2.318 billion, which the witness previously claimed was a plan hatched by Low, with the now-fugitive financier telling him that Najib had given his approval.
Auditor signed off on management’s representations
During a board meeting in December 2012, KPMG, 1MDB’s auditor at the time, explained to the board that it required more information on 1MDB’s overseas investments before it could sign off on the accounts.
The lead partner of the audit team at the time, Ahmad Nasri Abdul Wahab (now the head of financial management in the advisory arm of KPMG) told the board that the audit had been completed, although discussions were ongoing with the management on the disclosure of the sale of the 49% equity in PSOSL to Bridge Partners, which was subsequently invested into the Bridge Global Absolute Return Fund.
Shafee: Why did KPMG question this? Did KPMG come to the realisation that there was something seriously wrong?
Shahrol: I didn’t think so at the time. They signed off on the accounts on the representations made by the management of 1MDB.
According to Shahrol, Geh mentioned that the fund manager was in the midst of getting Bridge Global Absolute Return Fund listed on Bloomberg, which would allow KPMG to get an accurate valuation of the value of the fund.
Shafee said Geh’s comment was “total nonsense” as the fund was never listed. He pointed out that the fund was not even legitimate in the first place as it lacked the requisite licences.
Shafee: We know that the fund was never listed. Why did Geh mention this in the middle of the board meeting?
Shahrol: If I recall correctly, it was kind of a discussion and he defended the position that the investment was a real one.
Shafee: Was he trying to impress on Nasri that the fund would be listed on Bloomberg?
Shahrol: Nasri and the board as well.
Hearing continues before judge Collin Lawrence Sequerah on July 15.
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