Wednesday, September 23, 2015

Was 1MDB's failure to disclose Deutsche Bank's US$975 million loan in March 2014 to cover up payment of nearly US$1 billion to terminate options granted to IPIC?

Last week, the Wall Street Journal (WSJ) shed light on US$993 million which was allegedly paid to International Petroleum Investment Corporation (IPIC) by 1MDB to buy back the latter’s options have not been properly accounted for.  The above payment was not reflected in the audited accounts of IPIC.  Instead, IPIC’s books showed that 1MDB still owes an additional US$481 million to the former for the termination of the options as at December 2014.

These options were granted to IPIC’s subsidiary, Aabar Investment PJS in 2012 to acquire up to 49% of its two energy subsidiaries, Powertek Investment Holdings and 1MDB Energy (Langat) Sdn Bhd as part of the condition for the provision of a guarantee by IPIC for US$3.5 billion of 1MDB bonds.

Now, even as 1MDB is failing to explain where the “missing” US$993 million dollars went to if not to IPIC, the question also needs to be asked where the US$993 million dollars came from.

1MDB claimed in its March 2014 Financial Statements that in November 2014, it redeemed US$1.22 billion from its US$2.318 billion of funds mysteriously “invested” in the Cayman Islands.  However, the proceeds was instantly and “substantially utilised to pay debt interest, Aabar options, working capital”.  

It is been presumed that the US$993 million would have come from the US$1.22 billion redeemed from Cayman Islands.  1MDB’s US$2.318 investment in Caymans was in turn derived from its exit from its controversial investment with Petrosaudi International Limited in September 2012.

However, the Singapore Business Times and other media outfits had previously reported that 1Malaysia Development Bhd (1MDB) secured a US$975 million loan from a Deutsche Bank-led consortium of 6 banks in October 2014  also for the purposes of buying back the above options granted to IPIC.

Based on a cursory understanding of the above, it would mean that 1MDB would have paid nearly a whopping US$2 billion to IPIC to terminate the options which were granted to secure a guarantee for the former’s US$3.5 billion bonds!

However, a closer look at the March 2014 audited accounts of 1MDB would reveal that the US$975 million loan from the Deutsche Bank consortium was never disclosed as a “subsequent event”.  This is despite the auditors, Deloitte Malaysia signing off the financial statements only on 5 November 2014.

The failure of 1MDB to disclose the US$975 million loan to Deloitte Malaysia, and the disclosure instead that the US$1.22 billion redeem from Cayman Islands was immediately and “substantially utilised”, to pay for Aabar options rings new and deafening alarm bells.

The question must now be asked if 1MDB executives have carried out a fraudulent round-tripping exercise to use the undisclosed US$975 million to pay off the terminated options, pretending that the funds were sourced from the redeemed investment in Cayman Islands.

Was this an audacious cover up exercise as nothing tangible was ever redeemed from Cayman Islands because the money previously “invested” with Petrosaudi has been lost? However in an attempt to hoodwink both the auditors and the public that the Caymans investment was real, it was claimed that US$1.22 billion was redeem but was “substantially utilised” immediately with the excuse to buy back the Aabar options.

As the multi-billion ringgit Aabar options controversy gets bigger, 1MDB needs to explain not only where the US$993 million allegedly paid to IPIC went to, since IPIC did not receive the funds as alleged by the WSJ.  Now, 1MDB also must provide a clear and direct explanation as to why the Deutsche Bank consortium loan was never disclosed to their auditor, how much was actually paid out in total for terminating the options and the actual source of fund for the payment – whether from the Deutsche Bank loan or from the Cayman Islands redemption.

The failure to be transparent will only lead to justifiable speculation that nearly US$2 billion is now “missing” – US$1 billion allegedly paid to IPIC but not acknowledged in the latter’s accounts, and US$1 billion apparently redeemed from Cayman Islands which immediately vanished.

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