This article first appeared in The Edge Malaysia Weekly on July 31, 2023 - August 6, 2023

EVEN as far back as 2013, former prime minister Datuk Seri Najib Razak was warned about the mounting debt that 1Malaysia Development Bhd (1MDB) was accruing, which if left unresolved, would threaten the stability of the local banking system and put Malaysia at risk of a ratings downgrade.

The gravity of the matter, and Najib’s inaction despite also holding the finance minister portfolio and heading 1MDB’s board of advisers, prompted Bank Negara Malaysia to document the critical issue.

Former central bank governor Tan Sri Zeti Akhtar Aziz testified in court last week that she had sent him two letters in 2014 and 2015 seeking an explanation and highlighting Bank Negara’s concerns over 1MDB’s mountain of debt, but he did not respond.

Zeti testified that in 2013, a central bank committee known as the Financial Stability Committee (FSC), whose role is to discuss (and help resolve) any corporation that has debt in excess of RM2 billion, had held a meeting that Najib attended.

The first company up for discussion at that meeting was 1MDB. Zeti explained that 1MDB was of the utmost importance — she described it as a “systemically important organisation”. “This is because if something happened to 1MDB, it would have a rampant impact on the financial institutions and overall economy of the country.”

Zeti said she had sent two letters on behalf of Bank Negara to Najib, who was also the finance minister then, on July 23, 2014, and Jan 16, 2015, to raise concerns over 1MDB’s high debt levels and the possible implications for government finances.

However, she said Najib never responded to either her or Bank Negara. She described the lack of response on his part as “not normal”.

The first letter, she said, had detailed the 1MDB Group’s high and increasing debt levels and the repayment challenges, which had in fact subsequently led to the restructuring of a loan from the domestic banks.

The letter also highlighted the group’s significant exposure to foreign exchange rate fluctuations. Zeti outlined that a default by 1MDB could have potential implications on the country’s sovereign ratings and the government’s overall fiscal position.

She urged Najib to “increase transparency around 1MDB’s debt and operations” and to contain any further increase in its debt levels.

The second letter highlighted that in the event that the loan due by 1MDB was not repaid within the extended deadline granted by the lenders, the lenders could then proceed to declare an event of default. Bank Negara pointed out that such an event could result in the immediate crystallisation of the equivalent of RM16.6 billion in contingent obligations of the government arising from the explicit guarantees that had been provided for 1MDB’s debt.

“These are government guarantee debt, which are obligations of the government that must be met. In addition, there could be a possible consequent downgrading of Malaysia’s sovereign rating,” she wrote.

Going by her testimony, the central bank appeared to be in the dark about 1MDB’s activities until it was alerted by a “foreign authority” in March 2015 that 1MDB funds meant for investments were being remitted into accounts unrelated to the company.

Prior to the tip-off and the investigations, Zeti’s letters to Najib were written without knowledge of the goings-on at 1MDB, and based on the state-owned company’s high debt levels, which were already public knowledge at the time.

The foreign authority informed Bank Negara that a foreign entity had transferred “a major sum of funds” to “an entity in their jurisdiction” that was beneficially owned by fugitive financier Low Taek Jho (Jho Low). The “major sum of funds” was the US$700 million that 1MDB had transferred to Good Star Ltd (GSL) out of US$1 billion meant for the acquisition of a 40% stake in a joint venture company, 1MDB PetroSaudi Ltd in the British Virgin Islands.

1MDB had secured the central bank’s approval for the remittance. Bank Negara’s own onsite investigation revealed that the US$700 million had indeed gone into GSL.

It was after this tip-off that the task force — comprising Zeti, attorney-general (AG) Tan Sri Abdul Gani Patail, Malaysian Anti-Corruption Commission chief Tan Sri Abu Kassim Mohamed and IGP Tan Sri Khalid Abu Bakar — started investigations into 1MDB.

In haste, Najib replaced Abdul Gani as AG with Tan Sri Apandi Ali, who then effectively disbanded the task force which, according to Zeti, was ready to press charges against Najib and the others behind the 1MDB scandal.

In this trial, Najib is charged with four counts of abuse of power and 21 counts of money laundering of RM2.28 billion of 1MDB funds.

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