US DOJ says "YES" but 1MDB says "NO". Why?

The USA's Department of Justice (DOJ) had alleged that billions were stolen from 1MDB and initiated asset seizures to recover this but 1MDB insist that it had not lost any money and that all its assets are accounted for. 

Essentially, the DOJ says someone stole your money and I will get some of it back for you while 1MDB is saying "No. That one is not my money".

Why is this peculiar situation happening?

Let's follow the money trail - particular the 3 sources of funds that the DOJ explicitly said the alleged stolen money came from.

Alleged source of funds 1: Good Star, as part of the PetroSaudi-1MDB Joint Venture.

What did 1MDB pay:

USD1.83 billion of which USD1.03 billion was transferred to Good Star and USD800 million to PetroSaudi. The ownership and the responsibility of the funds in question had changed when 1MDB paid the money as per the agreements

What happened to the money:

JV was converted to a loan. Loan was repaid by PetroSaudi to 1MDB via USD2.32 billion worth of investment units (Principle + interest/dividends).

What happened to the investment units?

USD1.4 billion was redeemed and used for 1MDB working capital purposes with remaining USD940 million in investment units.

When the Govt Auditor General special Audit report on 1MDB was leaked and published by Sarawak Report, this document also surfaced. It is a 3rd party document between Abu Dhabi and Bridge Capital - meaning it is not under Official Secrets Act (OSA). You can view the full 4 pages here.

This is the Deed of Capital Guarantee where Aabar Investments PJS of the Abu Dhabi explicitly guarantees all the value of the fund units of the Cayman funds run by Bridge Capital.

This guarantee is not by the disputed Aabar in the British Virgin Island but the actual sovereign fund itself owned by IPIC and the Abu Dhabi Govt.

This proves that the USD2.33 billion of payment returned to 1MDB based on 1MDB's total investment of USD1.8 billion in PetroSaudi by Good Star and PetroSaudi is real and has real value.

This also means that it is simply not legally possible for any of 1MDB money to be "stolen" by Good Star/PetroSaudi as 1MDB got back all their money plus a decent profit from the PetroSaudi JV.

This is a significant document and I am surprised that the US DOJ did not highlight this document or perhaps they are not aware of this document during their investigation since they did not bother to meet up with the Abu Dhabi or Malaysian Govt when they did their investigations.

If this document is genuine that means that 1MDB's chances in the arbritration with IPIC is much stronger.

What happened to the remaining USD940 million in investment units?

The entire USD2.33 billion units including the remaining USD940 million units is guaranteed by the disputed Aabar Investments PJS ofin Abu Dhabi (not the disputed one in British Virgin Island (BVI)) and was earmarked for the asset-debt swap arrangement between 1MDB and IPIC which is now in arbitration.

The bottom line:

1MDB cannot say or claim that Good Star or PetroSaudi funds is their money.

What happens next? :

Nothing. 

As far as 1MDB is concerned, PetroSaudi has paid back all of 1MDB's investment  plus USD481 million of profits and dividends. There is no money to recover from either Good Star or PetroSaudi.

An interesting nugget here is that if Jho Low and Riza have been named and accused of wrong-doing here for receiving funds from Good Star then it is surprising why both the then Riyadh Governor Prince Turki, who is the 7th son of the then King Abdullah and fellow PetroSaudi founder Tarek Obaid are not similarly reprimanded even though the FBI also stated they received money from Good Star.

Alleged source of funds 2: The disputed Aabar-BVI as part of the Abu Dhabi-1MDB joint-venture

What did 1MDB pay?

USD3.51 billion to Aabar-BVI for collateral, joint investment ventures and options termination agreements. Additionally, there is a USD940 million guarantee of the Cayman investment units and guarantee for the USD1.5 billion GIL fund units recommended by the Swiss-based BSI bank.

What happened to the guaranteed assets and money given by 1MDB.

The entire USD6 billion of payments and guarantees was identified as assets for the 1MDB-IPIC asset swap agreement in exchange with IPIC based on the following:

Assets from 1MDB:

• USD 3.5 billion cash deposits paid to Aabar BVI.
• USD 1.5 billion GIL funds (Fund Manager introduced by BSI and guaranteed by Aabar BVI)
• USD 940 million Brazen Sky fund units (Guaranteed by Aabar Investments ABU DHABI - not the disputed Aabar BVI - this is in the AG report and the PAC report)

Assets from IPIC:

• Assume 1MDB's USD 3.5 billion bond principal
• Assume 1MDB's USD 1.5 billion future bond interest
• USD 1 billion in cash (paid to 1MDB in June 2015)

IPIC is now disputing that Aabar-BVI is their company and has cancelled the Asset swap agreement but 1MDB insist that the Aabar-BVI is an IPIC company. Therefore, it is now in dispute.

The case is now in the London Court of International Arbitration where initial proceedings had started last month.

Why did 1MDB even transfer or deal with Aabar-BVI in the first place when according to IPIC and Aabar Abu Dhabi, it is not owned by them?

When 1MDB signed the Joint-Venture agreement with Aabar Investments PJS in Abu Dhabi. The discussions was with Aabar's duly-authorized Chairman, Khadem Abdullah al-Qubaisi and their Managing Director Mohamed Badawy Al-Husseiny - both of whom are also indicted by the FBI together with Jho Low.

During the agreement signing, 1MDB also engaged their internal and external lawyers to certify that Aabar Investments PJS Ltd in the BVI is owned by the Aabar Investments PJS in Abu Dhabi.

The attached document which came from here, is the Certificate of Incumbency issued by the incorporation of the disputed Aabar in BVI. This certificate is issued by Hong Kong based Offshore Incorporations Limited (OIL)- he leader in international incorporations and corporate services.

The Certificate of Incumbency states the two directors of Aabar Investments PJS Ltd in the BVI to be the Chairman and Managing Director of Aabar Investments PJS and the sole shareholder to be the Abu Dhabi based Aabar Investments PJS.

Headquartered in Hong Kong, OIL has offices in the BVI, Singapore, Taiwan, Shanghai, Beijing, Shenzhen, Guangzhou, UK, Cyprus and Dubai and has around 220 employees.

OIL is a group company of Vistra Group, which has 2,300 employees in 40 jurisdictions; its global headquarters are in Hong Kong.

If the official incorporation documents, the Chairman of the parent company, the Managing Director of the parent company and both the internal and external lawyers engaged in the joint-venture due diligence tells 1MDB that Aabar Investments PJS Ltd in the BVI is legitimately owned by Aabar Investments PJS in Abu Dhabi, then what else could 1MDB have done differently to certify that this is not a fake company?

The ownership of Aabar-BVI and the associated transfers were also verified through successive audits by external auditors KPMG and Deloitte's over the next few years and no alarms were raised then. Both auditors would have certainly met or contacted Aabar in Abu Dhabi to verify the transactions too.

However, for reasons still unknown, IPIC agreed to the swap deal, paid USD1 billion, paid the interests on the USD3.5 billion bonds,and then only said in April 2016 - an amazing 10 months after the swap deal was signed and years after 1MDB had stated they had paid all those money to Aabar in publicly available financial statements.

But whatever the case, when 1MDB paid those money to Aabar-BVI or Aabar PJS in Abu Dhabi, the ownership and responsibility of the money has transferred to Aabar.

The bottom line:

1MDB cannot say or claim that the money that was transferred from Aabar BVI to Jho Low, Red Granite, Khadem et al as alleged by the US DOJ is theirs. As far as 1MDB is concerned, Aabar BVI is legitimate and owned by IPIC. If money from here was stolen then it was stolen from IPIC and not 1MDB.

For 1MDB to claim that the money is theirs would mean that the entire London arbitration case between IPIC and 1MDB will collapse and 1MDB will end up losing billions while Abu Dhabi's IPIC will get away blameless - despite both of IPIC's most senior executives, their former Managing Director Khadem from 2007 to 2015 and Aabar PJS's Managing Director Mohamed Badawy Al-Husseiny being named as part of the DOJ case and asset seizures.

What happens next? :

1MDB will need to focus on winning their arbitration case by proving that the two senior executives of Aabar and IPIC had acted with full authority of the board and that all checks had shown that Aabar-BVI had legally belonged to Aaabar Investments PJS Abu Dhabi and IPIC.

1MDB believes it has enough evidence and a strong case in winning this case since it deliberately refused to pay for the scheduled interest payments on the bonds despite having RM3 billion in the bank then and allowed the two 1MDB bonds guaranteed by IPIC to default thus triggering the guarantee by IPIC, which forced IPIC to pay up.

If 1MDB wins this case then USD4.5 billion in assets can be recovered from IPIC. If this is the case, it is likely that IPIC will take-over the USD3.5b bonds and allow 1MDB to keep the USD1 billion which they had paid earlier. IPIC will then be the party responsible for reclaiming the USD4.5 assets in Aabar-BVI.

Alleged source of funds 3: The USD1.5 billion invested by 1MDB in BSI Bank investment funds.

What did 1MDB pay?

USD1.5 billion invested in registered investment funds recommended by the Swiss-based BSI Bank. This USD1.5 billion was part of the proceeds of the 2013 USD3 billion bond (also known as the 1MDB GIL money) that was raised as part of the proposed joint-venture with Aabar to develop Bandar Malaysia in the year 2013. The remaining USD1.5 billion was used by 1MDB as part of their working capital towards development of TRX, Bandar Malaysia and the power plants business.

Crown Prince of Abu Dhabi, General Sheikh Mohammed Zayed Al Nahyan, witnessed the signing ceremony in 2013.

The proposed Bandar Malaysia JV signed in March 2013 was planned to be an arrangement where 1MDB would raise USD3 billion and Aabar would raise USD3 billion and both parties would contribute to the 1MDB-GIL company to develop Bandar Malaysia.

As Aabar failed to raise their USD3 billion in time and the JV eventually did not take off, 1MDB then decided to use half of their money as working capital while investing the unused portion in an investment fund to avoid negative carry (or paying interest on unused funds raised from a loan).

What happened to the money in the investment funds?

The money is still invested in the funds and was originally also planned to be used as part of the asset swap with IPIC since it is guaranteed by Aabar-BVI.

What happens next? :

Since the asset swap is now in termination, this fund is already in the redemption phase. However, redeeming a unit of USD1.5 billion is not like withdrawing money from a bank. The fund itself would have to sell their investments before paying 1MDB. It is believed that this process is close to completion.

How much of actual "Wang Rakyat" was used by 1MDB so far?

The paid-up capital is RM1 million paid for by the Malaysian Govt. The rest of the funding that went up to RM42 billion at one time was raised from bonds and bank borrowings.

How much in loans does 1MDB still have?

Other than 3 bonds, all the remaining borrowings, lines of credit and other bonds have been paid off by 1MDB during the debt rationalization exercise started in the year 2015.

Since the beginning of 2015, 1MDB has cleared and removed all the following loans from its book:

• fully paid RM3.5 billion Powertek loan from a consortium of banks
• fully paid RM1 billion standby credit from the govt
• fully paid USD150m EXIM bank loan
• RM2.4 billion Bandar Malaysia sukuk taken over by 60% buyer of 1MDB.
• transferred RM800 million Socso loan into project financing for TRX. This loan is self-amortizing and is already significantly repaid.
• removed RM6 billion of legacy power debts previously assumed, as part of the Edra sale
• fully paid RM2 billion Marstan loan arranged by Ananda Krishnan which was used to repay the RM2 billion Maybank bridging loan
• fully paid USD975m Deutsche Bank loan

After all these other loans had been paid of, 1MDB is still left with RM2.3 billion in cash but has the following renaming bonds.

1. RM5 billion 2009 long-term bonds that matures in the year 2039- these bonds are tied to the continued development of TRX and is matched to the cashflows of this development.
2. USD3.5 billion 2012 bonds guaranteed by IPIC that matures in the year 2022. (if 1MDB wins the arbitration then these bonds will likely be taken up by IPIC)
3.  USD3 billion 2013 bonds that matures in the year 2023. - these bonds are tied to the continued development of Bandar Malaysia, which 1MDB still owns 40% of, and is matched to the cashflows of this development.

How much of actual "Wang Rakyat" has actually been lost so far due to the DOJ civil suit?

None so far. Since the amounts alleged "stolen" are from the loans that 1MDB took above and the loans are not due, no actual Malaysian money has been lost as yet. This is assuming that the IPIC dispute can be settled in 1MDB's favour and the USD1.5 billion GIL bonds is redeemed.

It is also important to note that other than the USD3.5 billion bonds which are in dispute with IPIC, 1MDB have not defaulted on any loans or bonds. In fact as pointed out above, many loans have been completely repaid or settled. 

The final bottom line. 

It must be noted that all 3 sources of funds which the DOJ report listed were all direct dealings with the governments and royal families of two different Arab countries and 1MDB paid directly to accounts instructed by them. If 1MDB was to be scammed, then these countries would have helped to scam 1MDB.

Or if 1MDB itself was a scam then those countries pakat with 1MDB to help scam.

But the real bottom line is this:

If 1MDB manages to win the IPIC arbitration and also redeem the USD1.5 billion GIL funds then 1MDB can truly say that none of their money was missing or stolen.

This means that it is impossible for  Jho Low, Riza, Khadem, Malaysia Official 1 (ie PM) or anyone else for that matter to have stolen any money from 1MDB to buy or invest all those assets that the FBI now wants to seize.

But it could mean that someone else would have been cheated instead. It could be Abu Dhabi's IPIC or it could be legitimate profits made from fund investment ventures.

But whose money would that be then that was used to buy art, gamble, buy properties?. It could be Abu Dhabi's IPIC money, Saudi Arabia money or it could be legitimate profits made from fund investment ventures.

*22nd April 2017 UPDATE* 

The Straits 

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Much have been talked about Jho Low and Riza being named in the DOJ civil suit to seize assets. Also named as their so-called co-conspirators to seize assets are IPIC and Aabar's Khadem Al-Qubaisi and Mohamed Ahmed Badawy.

Given the recent revelations that 1MDB holds documentation showing that Aabar (which among many other investments, was the largest single shareholder of Daimler-Benz) guaranteed the Cayman investment units held by 1MDB from the PetroSaudi profits and also that the two directors of the Aabar-BVI which IPIC now disputes, let's learn a bit more about these two persons:

H.E Khadem Abdulla Kadem Butti Al-Qubaisi served as Managing Director, Chief Executive, and Director at International Petroleum Investment Company PJSC, since May 2007.

He is a close confidante of IPIC Chairman Sheikh Mansour, who is the deputy prime minister of the United Arab Emirates, minister of presidential affairs and member of the ruling family of Abu Dhabi. He is the half brother of the current President of UAE, Khalifa bin Zayed Al Nahyan.

Khadem was named at number 14th spot in Gulf Magazine’s 2014 list of the Top 100 World’s Most Influential Arabs, and included in the Oil & Gas Power Middle East top 50 in 2011.

He received the Arabian Businessman of the Year for 2009 in the UAE, and also received the coveted #1 Award as the ICIS Power Player of the Year 2009.

He served as the Managing Director of IPIC from 2007 to 2015 and served as the Chairman of Aabar Investments PJSC from 2012 to 2015..

H.E. Al-Qubaisi served as Managing Director at National Central Cooling Company PJSC since May 2011.

He serves as Chairman of Compania Espanola de Petroleos S.A. and Aabar Properties LLC. H.E. Al-Qubaisi serves as Co-Chairman of First Energy Bank. He serves as the Chairman of First Gulf Bank PJSC.

He has been the Chairman of Supervisory Board of NOVA Chemicals Corporation since January 1, 2011. He served as the Chairman of Supervisory Board of Arabtec Holding P.J.S.C., since May 2012.

He served as the Chairman of First Energy Bank B.S.C.(c) until March 2016. He served as the Chairman of Arabtec Holding P.J.S.C. from May 08, 2012 to May 2015. He served as the Chairman of the Board at NOVA Chemicals Inc.

He served as the Chairman of the Board at NOVA Chemicals Corporation since January 01, 2011 and served as its Director from January 01, 2011 to April 22, 2015.

He served as the Chairman of Hakkasan Limited until April 14, 2016. He served as the Chairman of Supervisory Board at Borealis AG from March 5, 2010 to April 2015.

He served as the Chairman of National Central Cooling Company PJSC and Falcon Private Bank Ltd. He served as Chairman of Abu Dhabi National Takaful Company P.S.C. until August 5, 2014.

He served as the Chairman of Gulf Energy Maritime PJSC until June 2008. He has been a Deputy Chairman of Supervisory Board at OMV Bulgaria OOD since May 2010. He has been a Vice Chairman of Duqm Refinery and Petrochemical Industries LLC since July 2012.

He served as Deputy Chairman of the Board of Supervisory Board of OMV Aktiengesellschaft from May 26, 2010 to May 10, 2012 and served as its Member of Supervisory Board. He served as Vice Chairman of Supervisory Board at Borealis AG.

He served as Vice Chairman of UniCredit S.p.A. from May 2012 to October 2012 and served as its Director until October 2012. He served as a Member of Supervisory Board at Borealis AG from March 5, 2010 to April 2015.

He served as a Member of Supervisory Board of AMI Agrolinz Melamine International GmbH and Borealis Agrolinz Melamine GmbH. H.E. Al-Qubaisi serves as a Director of ChemaWEyaat and Board Member of Emirates Investment Authority.

He serves as a Director of Abu Dhabi National Chemicals Company. He served as a Director of Arabtec Holding P.J.S.C., from April 28, 2012 to May 2015. H.E. Al-Qubaisi served as a Director of First Gulf Bank PJSC, National Central Cooling Company PJSC and Hyundai Oilbank Co., Ltd.

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Mr. Mohamed Ahmed Badawy Al-Husseiny, CPA, served as the Director of Falcon Private Bank Ltd. Previously, Mr. Al-Husseiny served as the Chairman of Falcon Private Bank Ltd.

He served as the Chief Executive Officer and Director of Aabar Investments PJS from March 2010 to April 2015. Mr. Al-Husseiny served as its Chief Financial Officer since April 2007 and previously served at the firm since its inception in April 2005.

Mr. Al-Husseiny serves as the Member of the Board of Directors at Powertek Energy Sdn Bhd, EDRA Global Energy Berhad and Equity Group Foundation International (EGFI). He served as Chief Financial Officer at Dalma Energy.

Mr. Al-Husseiny served as a Director of Dalma Energy LLC. Mr. Al-Husseiny served as Chief Financial Officer at MB Petroleum Group for six years since 1997.

Mr. Al-Husseiny served as a Board Member of First Energy Bank B.S.C.(c) until March 2016.

He served as Deputy Chairman of alizz islamic bank SAOG from November 20, 2011 to April 4, 2013. Mr. Al-Husseiny served as a Director of NOVA Chemicals Corporation since September 7, 2012.

He served as an Independent Director of Arabtec Holding P.J.S.C. since April 28, 2012. He served as a Director of UniCredit S.p.A. until October 15, 2015. He served as Director of Compañía Española de Petróleos, S.A.U. since August 2011.

The two persons above are certainly no light-weight and came with impeccable reputation at the time when 1MDB met them in the year 2011.