1MDB-Tanore Trial: 1MDB’s casual dismissal of glaring issues

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

BECAUSE a joint venture that 1Malaysia Development Bhd had with PetroSaudi International Ltd (PSI) was purportedly a government-to-government (G2G) deal, and one that Datuk Seri Najib Razak had taken a personal interest in, a number of bizarre business decisions which should have set off alarm bells were casually brushed aside by 1MDB’s management and board of directors, the cross-examination of its former chief executive Shahrol Azral Ibrahim Halmi revealed.

As cross-examination by Najib’s lead counsel Tan Sri Muhammad Shafee Abdullah resumed last week, Shahrol — the ninth prosecution witness — again alluded to the board and management’s believe that Low Taek Jho’s instructions were akin to direct orders from the former prime minister himself since both men had a close relationship.

Having taken that position, the management and board took no notice of hints of impropriety or even due diligence — a standard in any potential investment, especially if it involves billions of dollars.

1MDB’s first auditors, EY, raised a red flag when it refused to sign off on the company’s financial statements for the year ended March 31, 2010, pointing out that it did not have enough information to properly assess the value of the assets under the 1MDB-PSI JV company.

Shahrol claimed that despite requesting for the relevant documents from then PSI directors, Patrick Mahony and Tarek Obaid, they were not forthcoming and therefore 1MDB could not provide EY with the information required.

However, Shahrol, being a director of the JV — as well as 1MDB, which is an investor in the JV — should have been entitled to the documents, suggested Shafee. He asked, why did this not raise any suspicions against PSI?

“The impression that I had was that this deal was between Tarek, Prince Turki and Datuk Seri Najib. I was just a cog in the machinery. I wasn’t involved in the decision-making. When Patrick and Tarek were not forthcoming with the documents I requested, I escalated this to Jho [Low] to see whether there was anything that could be done from the G2G side,” said Shahrol.

The inability of 1MDB to provide the relevant information led to “strong disagreement” between the management and EY, prompting a proposal to replace EY with KPMG.

Shahrol said Low — now a fugitive from the law — had told him that EY was being “too rigid” in its assessment.

Consequently, the management converted the recognition of 1MDB’s investment in the JV from equity to Murabaha notes, and KPMG subsequently signed off on the audited accounts.

More crucially for 1MDB, the change in the way the investment was recognised resulted in different documents being required for the audit, which meant that the information previously requested by EY was no longer needed.

About two years later, in 2012, the management decided to convert the Murabaha notes back into equity, in the form of a 49% stake in PetroSaudi Oil Services Ltd (PSOSL), a PSI subsidiary.

The exercise was part of a move to repatriate US$1.83 billion that was locked up in the 1MDB-PSI JV, as Shahrol said that 1MDB needed to direct some cash to domestic projects, including the Tun Razak Exchange and Bandar Malaysia developments.

Although PSOSL was purportedly making profits in its operations in Venezuela, Shahrol revealed that the board never saw the audited financial statements of the company prior to 1MDB’s acquisition of the 49% stake.

Neither was he sure whether the management received the accounts, or if 1MDB strategy executive director Jasmine Loo Ai Swan — the person who dealt with PSI on behalf of 1MDB — had reviewed the financial position of PSOSL. Loo has also gone into hiding.

The agreement for the 49% stake in PSOSL was rather odd as it provided for 1MDB to be entitled to full or 100% of PSOSL’s economic benefits. Another peculiar aspect of the exercise was the way it was presented to the directors.

Shafee pointed out that there were two directors’ circular resolutions (DCRs), with one outlining the redemption of the Murabaha notes from the 1MDB-PSI JV for US$2.22 billion, and the other outlining the purchase of the 49% stake for the same amount.

The lawyer suggested that the two exercises could have been put into one document, given that 1MDB was essentially acquiring the stake in exchange for the Murabaha notes. He added that the separation of the two documents was unnecessary and may have been done with the intention to mislead the directors.

Shahrol said Loo was the one who prepared the documents and as she was a lawyer, he did not ask her why the documents were prepared that way. The two documents were, however, circulated together, he added.

Shafee then asked: “Wouldn’t the separation of the documents create an illusion that there are two separate transactions for two separate entities? When in fact these two companies are related?”

Shahrol disagreed with the suggestion but agreed it was possible.

The management’s attitude towards the appointment of Tan Sri Ong Gim Huat (then Datuk) as an independent director on the board of 1MDB was just as relaxed. Ong is linked to Low’s father, Larry Low Hock Peng, by virtue of their being business partners.

“Did you do a background check on Ong Gim Huat?” asked Shafee.

“The context was that his name had first come up via Jho. The appointment of members of the board had to be approved by Datuk Seri Najib, so I thought Datuk Seri Najib had wanted him on the board,” said Shahrol. “Tan Sri Ong never showed me any cause to believe that he was anything but independent and was looking after the interests of the company.”

Shafee then put it to the witness that it is the management’s duty to carry out a background check to ensure that Ong was truly independent.

Shahrol demurred, saying appointments to the board were made by the prime minister.

“But the prime minister should be informed that the person is truly independent,” Shafee pressed. “Datuk Shahrol, it seems that whenever you are put into a corner, you either blame my client or the others — Jho Low, Jasmine Loo and so on. You never take fault and blame everybody else.”

“I disagree,” said Shahrol.