International Financial Community Grows Leery of Malaysia

Although Malaysian politicians and government officials remain in full denial of reality over a US Justice Department investigation of massive fraud involving Prime Minister Najib Razak and his family, local and international bankers are not.

The bankers are trying to digest the implications of a downgrade by Fitch Ratings in late July of long-term foreign and local currency issuer default ratings for Petronas, Malaysia’s state-owned energy conglomerate, from A to A minus. That followed a downgrade of the government’s IDRs themselves on July 12 from A to A minus.

In a statement, Fitch said that while Petronas continues to maintain a strong credit profile, the Petronas IDRs are constrained by the Malaysian government’s own IDRs. An issuer default rating is a measure of credit risk, defined by the threat of an entity’s becoming defunct or entering into a variety of legal proceedings from bankruptcy to administration, receivership, liquidation or other formal winding-up procedures.

“The downgrade will certainly worry bankers especially, all for the right reasons because how much more blue-chip can you get than Petronas?” asked a Malaysian businessman who asked not to be named. Another source pointed out that Petronas is usually higher ranked than sovereign IDRs “so what does it all mean for the broader economy?”

Both described a global financial system that is tightening informally on Malaysian international depositors as bankers apparently grow increasingly distrustful. However, other than a bland report of the Fitch action, there has been no reporting in the local press of the implications of the report.

“It’s next to impossible for a Malaysian – especially non businessmen – to open an account in the UK or Europe for children staying there,” said one. “Now, over the past several weeks, even Singapore, where you could walk in and open an account, has tightened screws and a Malaysian would have to jump through fifty hoops to open one.”

In addition to uncertainty generated by the US Justice Department probe, other investigations are going on in Singapore, Switzerland, the UK, France, Luxembourg and other countries into the scandal, involving the state-backed 1Malaysia Development Bhd., which was founded in 2009 and which has fallen into a river of red ink even without the scandal.

On Aug. 15, for instance, the Swiss Federal Prosecutor’s Department sent letters to several banks, including BSI, whose Singapore office was ordered closed over money-laundering connected to 1MDB, naming Tarek Obaid, a shareholder and former director of PetroSaudi International a middle eastern oil exploration firm which received hundreds of millions of dollars from 1MDB. The letter named Tarek as an individual presently under investigation over the scandal.

Earlier the Swiss Attorney General issued a statement saying as much as US$4 billion had been laundered out of 1MDB into Swiss banks by unnamed individuals.

The Swiss officials are said to be seeking information about Obaid’s involvement in dealings between PetroSaudi and 1MDB. The investigation reportedly is focused on four other officials, two from 1MDB and two from an entity called Aabar Investments, which is believed to have diverted hundreds of millions of US dollars from 1MDB into a British Virgin Islands entity with a nearly identical name.

In April, because of that controversy 1MDB defaulted on US$1.75 billion bond it issued in 2012 after missing a US$50 million interest payment in a dispute with an Abu Dhabi guarantor. However, the government has since settled the dispute. It has also sold off millions of dollars of 1MDB assets to Chinese interests and reportedly is trying to settle a vastly overpriced rail contract with the Chinese to use the funds to pay off 1MDB debt.

On July 20, the US filed lawsuits in federal court that, while they did not name Najib, instead referred to “Malaysian Official 1,” alleging among a wide range of money laundering and other criminal and fraudulent activities that US$681 million from a 2013 bond sale by 1MDB had been transferred into the premier’s personal bank account.

Civil lawsuits alleged that a total of US$2.5 billion had been stolen from 1MDB and poured into a wide range of questionable activities including funding the blockbuster movie The Wolf of Wall Street, produced by Najib’s stepson Riza Aziz, the founder of Red Granite Pictures, as well as into luxury real estate in Los Angeles and New York and multimillion dollar paintings by Vincent van Gogh and Claude Monet. Jho Taek Low, a young Penang-born financier and close friend of Najib and Riza Aziz were named in the suit.

Najib, however, has gone on television to say that “what was done by the DOJ recently does not involve me, or the Malaysian government, or 1MDB directly….This is not a criminal suit, but a civil suit… but it has been politicized by certain enemies.”

Although he has continued to insist that he is blameless, last year he acknowledged that US$681 million – the amount specified by the Justice Department – had been deposited in his personal accounts at Ambank in Kuala Lumpur in 2013.

Almost immediately after the US Justice Department in Washington, DC, the Prime Minister’s Office in Putrajaya issued an astonishing statement saying that “Malaysian authorities have led the way in investigations into 1MDB. The company has been the subject of multiple investigations within Malaysia, including by the Malaysian Anti-Corruption Commission, Auditor General and bi-partisan Public Accounts Committee.”

In fact, as has been universally reported everywhere but in Malaysia’s kept press, officials have sought to thwart every single domestic attempt to bring an investigation into activities surrounding 1MDB.

A long list of surrogates has taken to the media to insist on the prime minister’s innocence and to accuse the US government of not seeking to get Malaysia’s side of the story. Others have flatly accused the United States, which considers Malaysia one of its most important allies in Southeast Asia, of attempting to bring down the government for unknown reasons.

Shortly after the announcement of the civil charges in Washington, DC, a United Malays National Organization youth chief filed a police report accusing the former central bank governor Dr. Zeti Akhtar Aziz; former Attorney-General Abdul Gani Patail and outgoing Malaysian Anti-Corruption Commission (MACC) chief Abu Kassim Mohamed of giving the US government falsified documents in the attempt to bring down Najib.

With the attorney general on the verge of filing an arrest warrant last July against Najib, the prime minister fired him, replacing him with an UMNO lackey named Mohamed Apandi Ali, who promptly cleared Najib.