Tuesday, July 14, 2015

The Power of Sly Wordplay - Small Change, Big Difference

Did 1Malaysia Development Bhd doctor its March 2014 Financial Statements to its bankers?

1Malaysia Development Bhd (1MDB) has been making unsubstantiated accusations that the leaked incriminating information exposed by the Sarawak Report was “tampered”. Despite the many attempts to discredit the leaked information by 1MDB, the Prime Minister and other Cabinet Members, they were not able to point to a single expose made by the Sarawak Report which was allegedly “tampered”.

The irony is hence not lost when 1MDB itself has committed the same offence at a grander scale.

I call upon all Banks which lent money to 1MDB to refer the latest audited financial statements for March 2014 in their possession, provided by the company.

Based on the copy of the Audited Accounts obtained from the Companies Commission (SSM), the second paragraph of section 18 (ii) on page 93, should read

As of the date of this report, the amounts received from the redemption of investments of US$1.22 billion (RM4.03 billion) in the SPC above have been substantially utilised for the purposes of debt interest payment, working capital and payments to Aabar as refundable deposits pursuant to a Settlement Agreement to extinguish the Options Agreements…

However, the paragraph above has in all likelihood, been materially tampered. The copies of the Audited Accounts in the Banks’ possession would instead probably read

"…the amounts received from the redemption of investments of US$1.22 billion (RM4.03 billion) in the SPC above have been substantially set-aside for the purposes of debt interest payment, working capital and payments to Aabar as refundable deposits…"

By changing just one word, from “utilised” to “set-aside”, 1MDB has transformed entirely the meaning of the paragraph. Based on the certified true copy lodged with the SSM, the auditors confirmed that the US$1.22 billion redeemed has been more or less used up.

However, by amending to “set-aside”, the Audited Accounts would provide a false assurance to the lenders that 1MDB has already “set-aside” nearly US$1.22 billion of cash to pay them when the interest and loans become due.

In fact, I have valid reasons to believe that the above isn’t the only alteration on the 2014 Financial Statements by 1MDB. I call upon all lenders to 1MDB to peruse through the financial statements with a fine toothcomb to discover all the discrepancies between the original copy lodged with SSM, and the doctored copy in their hands.

This is a very serious issue because it would become a clear breach of warranty and representation made by the Company to the Banks. Such a breach would be automatically tantamount to an “Event of Default” typical in nearly all loan agreements between lenders and borrowers.

Based on publicly available information, 1MDB still owes RM3.5 billion to a consortium of 4 local banks – Maybank, RHB, Alliance and HwangDBS Bank. Other banks with hundreds of millions of ringgit in exposure to 1MDB include Ambank and Affin Bank. By triggering the “Event of Default”, all of 1MDB’s outstanding loans to these institutions will become immediately due and payable.

What is even worse is that the doctoring of 1MDB’s financial statements is a very serious criminal offence under the Penal Code. For example, Section 477A on “Falsification of Accounts” states that

Whoever… wilfully and with intent to defraud, destroys, alters, mutilates or falsifies any book, paper, writing, valuable security or account… or wilfully and with intent to defraud, makes or abets the making of any false entry in, or omits or alters, or abets the omission or alteration of any material particular from or in any such book, paper, writing, valuable security or account, shall be punished with imprisonment for a term which may extend to seven years, or with fine, or with both.

If discrepancies are found with the Financial Statements as I have alleged, I call upon the Bank to immediately file Police reports to protect its interest and that of its shareholders.

In fact, if 1MDB is now so audacious as to doctor its financial statements, I am now seriously concerned about the integrity of the various documents which it has submitted to the Auditor-General – including the minutes of the Board of Directors, Directors’ resolutions and other relevant documents. I would be very worried if they have been similarly tampered to hide the wrongdoings of the company and its directors and officers.

Tony Pua

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