Monday, February 23, 2015

1MDB CEO's Response To 1MDB Petrosaudi JV Scam Raises Further Questions

CEO Arul Kanda must explain where is the purported US$488 million of “profit” arising from the 1MDB joint venture with Petrosaudi International.

The Sarawak Report exposed the secret 1Malaysia Development Bhd (1MDB) and Petrosaudi International Limited (PSI) joint venture (JV) agreement dated 29 September 2009, revealing details which points towards a highly elaborate scam to siphon money from 1MDB.

Despite knowing that “1MDB Petrosaudi Limited” had a dubious existing debt of US$700 million, 1MDB agreed to invest US$1 billion (RM3.5 billion) into the newly set up company to subscribe for 40% of new shares.

Immediately after the signing of the agreement, “1MDB Petrosaudi Limited” repaid in full, the US$700 million (RM2.5 billion) of advances to PSI using the newly received funds from 1MDB.

I had earlier asked the Prime Minister Dato’ Seri Najib Razak and 1MDB to explain why on earth did 1MDB invest US$1 billion in a JV where the JV partner immediately gets to siphon 70% of the funds out of the joint venture for practically nothing in return?

The response from the newly appointed CEO of 1MDB, Arul Kanda Kandasamy was both disappointing and obviously evasive.

Arul Kanda said that the JV was terminated 6 months later in 31 March 2010.  The US$1 billion investment was revalued to US$1.2 billion and “converted into Murabaha notes” or an Islamic loan to the Petrosaudi subsidiary.

The 1MDB CEO further argued that “these Murabaha notes were paid back in full, with 1MDB earning a profit of US$488 million, in 2013”.

Arul Kanda completely avoided dealing with the brazen attempt to siphon the US$700 million out of 1MDB to Petrosaudi or its nominees, which in itself is a blatant failure of the directors’ fiduciary duty and corporate governance.

In fact, the exposed JV agreement and Arul Kanda’s reply now give stronger reasons to ask if the US$1 billion investment which was suddenly converted to a loan on the very last day of the March 2010 financial year, was in actual fact a cover up of the JV scam.

By converting it into a loan to the Petrosaudi, 1MDB was then able to avoid reporting the details of the JV agreement in the 2010 Financial Report.

How else could one reasonably explain why if 1MDB had decided that the JV with Petrosaudi did not work out, 1MDB didn’t just withdraw its US$1.2 billion investment in full?  Instead the funds which were raised via a debt guaranteed by the Malaysian Federal Government, was inexplicably extended as a loan to the Petrosaudi subsidiary.  If 1MDB did not believe in the business model any more, then why did it still lend money to the venture?

In fact, 1MDB twice further extended loans via the Murabaha Notes to the Petrosaudi subsidiary, US$500 million later in 2010 and another US$200 million in 2011.  Hence the total loan extended under the opaque scheme was US$1.9 billion.

It should be highlighted here that 1MDB was never set up with any objective to become a money-lending company.

Then in September 2012, before its March 2012 accounts was signed off, the Murabaha Notes were sold to an undisclosed party for US$2.318 million, giving 1MDB a “profit” of US$418 million.  The whole dubious episode would have ended there if the proceeds of the sale were returned to the company.

Unfortunately, the mystery deepened when the proceeds were controversially invested in a Segregated Portfolio Company (SPC) in the Cayman Islands, which was “managed by licensed investment manager” and “regulated by the relevant monetary authorities”.

Again, no one, not even the Auditors – KPMG in 2012, and Deloitte Malaysia in 2013 and 2014 were able to verify first hand that the monies were actually in Cayman Islands.  The investment was classified as a “Level 3” asset where the valuation was “derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).”

Hence, once again, the restructuring of the Murabaha Notes into Cayman Islands investment raises the question if this was a last minute transaction to cover up the original cover up to avoid further scrutiny in the Financial Report for March 2012.

Finally, the controversial funds in the Cayman investment were fully “redeemed” after much public criticism on 13 January 2015.  However, since then Arul Kanda has refused to disclose the whereabouts of the US$1.103 billion balance proceeds from the redemption, only announcing that the funds will not be repatriated into Malaysia.

The action not to repatriate was mind-boggling because 1MDB was frantically seeking funds to repay a RM2 billion loan which was outstanding since November 2014.  The 1MDB CEO also refused to confirm or deny the widely-reported speculation that the RM2 billion loan was finally repaid on 13 February 2015 only with a last minute desperate loan deal with local billionaire Tan Sri Ananda Krishnan.

The whole complex and mind-boggling financial manouvres all point towards the perpetuation and massive cover up of a multi-billion ringgit fraud.

Arul Kanda proudly announced that 1MDB made US$488 million of profit from the Petrosaudi transaction but what we have at hand is at least US$1.1 billion “missing” in unknown whereabouts.  The next question to ask is hence, where exactly is this US$488 million of “paper” profit Arul was talking about?
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