How Malaysia’s 1MDB probe was flawed

Documents and interviews reveal an investigation severely restricted by political pressure and lack of transparency.

Investigations ordered by Malaysia’s leader into graft allegations at a state-development fund have been undermined by political pressure and a lack of transparency, according to documents and interviews with people involved.

Evidence possibly central to the probes was placed off limits or ignored, The Wall Street Journal found. Potentially crucial clues weren’t scrutinised. And at least one key figure, Malaysian Prime Minister Najib Razak himself, wasn’t interviewed by investigators.

The promise of a thorough and transparent accounting of what happened at the fund, 1Malaysia Development Bhd, or 1MDB, has helped Mr Najib fend off domestic criticism. Now, though, with six foreign countries investigating allegations of corruption at 1MDB, pressure is rising at home for greater transparency.

Mr Najib in March 2015 pledged an independent probe into 1MDB, which he founded to spur economic development. He ordered the auditor general, an investigative agency whose findings are typically public, to compile a report on the fund’s activities. And he ordered the contents to be reviewed and debated by the Public Accounts Committee, a parliamentary body.

But the auditor general’s report into 1MDB, completed in March, was classified under Malaysia’s Officials Secrets Act, shielding it from public view.

The auditor general separately provided some information in a presentation to the Public Accounts Committee, said people who were present. Tony Pua, an opposition lawmaker who sits on the committee, said in a statement this month that the auditor general “has specifically confirmed that $US7 billion of 1MDB assets and transactions overseas cannot be verified or traced.”

The committee, however, made no mention of the $US7 billion estimate when it published its report on 1MDB in April and said only that an unspecified amount of money was unaccounted for.

“The issues are of such public importance that there cannot be any excuse for making the auditor general’s report an official secret,” said Razaleigh Hamzah, a senior politician with the United Malays National Organization, Mr Najib’s ruling party.

Hasan Arifin, a ruling-party politician who heads the committee, didn’t call Mr Najib to testify even though Mr Najib was chairman of 1MDB’s board of advisers and also is Malaysia’s finance minister, giving him ultimate oversight over the fund. Other participants in the inquiry repeatedly asked him to seek Mr Najib’s testimony, said Mr Pua and two current and former ruling-party politicians on the committee.

The auditor general didn’t respond to requests for comment.

When asked by Malaysian journalists why Mr Najib had not been called as a witness, Mr Hasan said, “I have to earn a living.” He later said the remark was a joke. Mr Hasan didn’t respond to requests for comment for this article.

Mr Hasan also didn’t inform the Parliamentary committee of evidence from a senior central bank official -- transmitted in an April 6 letter to Mr Hasan -- that $US1 billion in 1MDB funds had been transferred to an offshore company owned by a close associate of Mr Najib, said Mr Pua and the current ruling-party member. They said Mr Hasan never shared with the committee any of the contents of the letter, a copy of which was reviewed by the Journal.

Investigators and other people familiar with the matter say that Mr Najib and his family used hundreds of millions of dollars originating with the 1MDB fund to bolster an election campaign, buy real estate, indulge in foreign clothing- and jewellery shopping sprees and to help finance a Hollywood film.

Mr Najib didn’t respond to requests for comment but has denied those allegations and said he has done nothing wrong in regard to 1MDB. He has said he cooperated with probes into the fund.

“There is no proof in the [Public Accounts Committee] report that shows wrongdoing by the prime minister in the administration of 1MDB,” Mr Najib told Parliament this week. 1MDB denies wrongdoing and says it is cooperating with probes at home and abroad.

The investigation Mr Najib ordered began after opposition politicians began to question the fund’s management. “If any wrongdoing is proven, the law will be enforced without exception,” Mr Najib said last year.

But from the outset, important elements of the 1MDB scandal were off-limits during the inquiries.

The 1MDB fund’s managers failed to provide bank-account information to investigators, including financial statements for its overseas accounts in the British Virgin Islands, that might have helped show where the fund’s money flowed. 1MDB management told the committee the only copies were taken in a police raid, according to transcripts of the parliamentary proceedings.

The Public Accounts Committee report named members of 1MDB’s senior management that it said should face a criminal investigation. It didn’t name Mr Najib. A police spokesman declined to comment because 1MDB is under investigation. No one has been charged in Malaysia in connection with 1MDB.

Mr Najib had set the Malaysian probe in motion before The Wall Street Journal reported last summer that $US681 million linked to the fund had landed in his personal bank accounts in 2013.

Soon after those articles were published, political pressure mounted on the probe, said committee members. Mr Najib “wanted to shut all discussions down,” said Mr Pua, the opposition politician. The prime minister removed the committee’s head without explanation and promoted him into his cabinet, stalling the work for months.

Malaysia’s attorney general, Mohamed Apandi Ali, cleared Mr Najib of wrongdoing in January, saying that the funds in his account were a legal political donation from Saudi Arabia and that most had been returned. He gave no details.

The Journal, citing people familiar with investigations in two countries and bank-transfer documents, has reported that the money entered Mr Najib’s accounts via a complex web of transactions involving offshore companies that trace back to the fund.

The Public Accounts Committee’s report doesn’t mention any of those transactions.

After the Parliamentary committee’s report was released, Mr Najib said in a statement that it showed large amounts of money were “not missing” and that 1MDB’s management said its funds “have been fully accounted for.”

Last summer, Malaysia’s then-attorney general, Abdul Gani Patail, was about to file criminal charges against Mr Najib related to 1MDB, according to a person familiar with the matter.

But the government suddenly announced he would be replaced before his term was up due to health reasons. Mr Abdul Gani couldn’t be reached for comment and hasn’t spoken publicly about the situation.

The new attorney general, Mr Apandi, found no charges were warranted, and shut down a separate investigation into 1MDB headed by Malaysia’s anti-corruption agency, which had earlier called for Mr Najib’s arrest. Neither Mr Apandi nor the anti-corruption agency returned calls seeking comment.

A separate probe by Bank Negara Malaysia, the country’s central bank, ended after it asked Mr Apandi to file criminal charges against 1MDB’s management on allegations of illegally moving money out of the country. He refused, saying there was insufficient evidence of a criminal act.

The central bank also had provided the parliamentary committee with details about the $US1 billion of 1MDB funds that was sent offshore. The money was meant for a joint venture with a Saudi company, PetroSaudi International Ltd., the bank said in the April 6 letter.

But instead, the letter said, the money went into an account named Good Star controlled by Jho Low, a 34-year-old Malaysian financier whose formal name is Low Taek Jho. He helped run 1MDB from behind the scenes and managed Mr Najib’s bank accounts, the Journal reported in April.

A deputy governor of Bank Negara, Nor Shamsiah Yunus, last month wrote Mr Hasan, the head of the parliamentary committee, with this information about Mr Low. Ms. Nor wrote the details of Good Star’s ownership had come from two foreign authorities, which she didn’t name.

Mr Low wasn’t named in the parliamentary report into the fund. Attempts to reach Ms. Nor weren’t successful.

The information appears to contradict a letter sent by PetroSaudi to 1MDB -- a copy of which was made available to the parliamentary committee -- that named PetroSaudi as the owner of Good Star. The former chief executive of 1MDB, Shahrol Halmi, also told the committee during proceedings that Good Star was a unit of PetroSaudi.

A lawyer for PetroSaudi said the company sticks by the contents of its letter to 1MDB about the ownership of Good Star.

Wall Street Journal