Sarawak Report has now examined the Auditor General’s analysis of the so-called power purchase agreements in 2012, for which 1MDB raised US$3.5 billion through Goldman Sachs. His broad conclusions [see base of article] are contained in Section 5 of his Executive Summary and once again they represent a shocking indictment of the company and its advisors.

If someone had planned from the start to set up an instrument to siphon borrowed public money into a private off-shore fund, they could not have done it more methodically than 1MDB management through their power purchase deals.

Since it has been revealed that the private fund in question, the bogus Aabar Investments PJS Limited, later channelled money directly into Red Granite Productions, owned by Najib Razak’s stepson, the reasons for making the AG’s findings secret are ever more apparent.

In keeping with 1MDB’s earlier PetroSaudi deals, the AG highlights a pattern of management acting without the permission of the Board; then belatedly and only partially informing the Board of the actions taken or acting in total contravention of decisions by a Board, that seemed willing in the end to let matters pass.

He complains once more that his audit team was presented with limited and incomplete documentation by the company, on deals involving billions.

Nevertheless it can again be seen that contracts were signed by management that were highly disadvantageous to the company, usually involving commitments to pay huge and unnecessary sums of money.

And, as with the earlier PetroSaudi ventures, those sums of money were diverted to a destination other than the ones officially stated. In the case of PetroSaudi it was Jho Low’s Good Star, which had siphoned off the payments: in the power purchase deals it was the bogus Aabar Investments PJS Limited BVI that got the money.

Goldman Sachs

The Auditor General also refers to the pervasive presence of the bankers Goldman Sachs throughout all stages of these power purchase deals. It was Goldman which provided the original consultancy that validated 1MDB’s decision to invest in the power plants, as well as Goldman which raised the bonds to finance the deal.

Also, from the very start it was Goldman which had presented a proposal (back in February 2012) suggesting that the whole enterprise could subsequently be paid off by an eventual public offering of the companies.  The bank’s representatives gave presentations to the Board to recommend their strategy, the Auditor records.

This means that Goldman Sachs was therefore integral to the series of decisions that were soon to tie the company up in knots, as vastly expensive commitments kicked into play on the basis of plainly flawed and unnecessary agreements, supported by the bank.

Included in the “weaknesses” of these agreements, identified by the AG, was the commitment to pay for IPIC to lend its credit rating to issue bonds, because the power purchase subsidiaries of 1MDB did not hold their own credit rating.

Given that the Ministry of Finance was placed as the ultimate guarantor anyway, a less disadvantageous way of raising money could surely have been identified by Goldman on behalf of its 1MDB clients?

Moreover, the reader is left wondering why the handsomely paid experts at the international bank had seemingly failed to notice during the drafting of these agreements that the recipient company for the planned payments (the bogus BVI Aabar Limited) was not actually listed within the IPIC Group of companies?

Decisions that led to disaster

What the Auditor describes in his summary report is a series of agreements that resulted in 1MDB paying more than the entire sum of money that it had raised through its power purchase bond issues over to a bogus off-shore subsidiary of Aabar/IPIC in the BVI.

The two bond issues totalled US$3.5 billion, which had produced only a net receipt of USD3.197 billion, explained the Auditor, after deducting the extremely high transaction costs of USD302.5 million (8.6%) [5.9.h.]

Yet by the end of 2014 a whopping US$3.335 billion had been paid over to the fake Aabar Investments PJS Limited BVI, thanks to self-inflicted terms and conditions agreed by 1MDB.

So, 1MDB paid out ruinously more than it had borrowed, before even investing one ringgit in the intended power projects. No surprise, therefore, that far more borrowing was entailed in 1MDB’s power purchase history than was raised by these initial bond issues.

In point 5.8 of the Executive Summary, the AG explains that the RM18.79 billion initially borrowed to purchase RM12.07 worth of assets had by mid-2015 ballooned to a RM31.79 billion debt.

“Weaknesses”

The Auditor lists 1MDB’s key failings over these disastrous deals under the heading of  “weaknesses.. regarding the issuance of the USD Notes by Goldman Sachs” in a table of 15 major points (a-o).  The unfolding list presents an evolving horror story of mismanagement by any standards.

From the partial documentation available (all he was able to acquire from the company), the AG managed to deduce that these notes were primarily supported through an “Interguarantor Agreement” signed by IMDB and Abu Dhabi’s sovereign wealth fund IPIC for each of the US$1.75 billion bonds raised on May 18th and October 17th 2012.

But, he complains that this joint guarantee was of little real worth to the Malaysian side, because the terms specified that the ultimate responsible party was still the Malaysian Ministry of Finance, the owner of 1MDB.

“Although the guarantee was given by IPIC, 1MDB still bears all the risks in the event of a default.” [5.9.c]

Not much use then.  So, what was the point of all this dealing one might ask?

The most obvious purpose appears to have been to tie 1MDB into a series of very expensive commitments, in order to justify the ludicrous later payments to the bogus subsidiary company Aabar Investments PJS Limited.

Options

The Auditor General writes that Goldman Sachs explained to him [5.9.d] that in return for this ultimately valueless IPIC guarantee, 1MDB committed to prepare ‘options’, which gave the bogus Aabar Limited the right to acquire a 49% equity in the power subsidiaries they were about to purchase (although the AG complains the documents were never produced for audit).

Note how the AG significantly points out at this juncture that those options were signed over specifically to the fake Aabar Limited, which was of course a bogus company unrelated to the IPIC/Aabar Group in whose name the options were being issued:

“According to Goldman Sachs, in return for IPIC’s guarantee on the two USD Notes, 1MEL and 1MELL [1MDB’s Power Purchase subsidiaries] would prepare options for Aabar Ltd to acquire a 49% equity in 1MESB and 1MELSB at a fixed price. However, the Options Agreement for the issuance of the two USD Notes was not presented for audit.”

Credit Enhancement

Quite separate from this options promise to the bogus entity and also from the original Guarantor Agreement was another form of document, which shortly after floated into the mix, according to the Auditor.

This was a so-called “Collaboration Agreement for Credit Enhancement” attached to each of the bonds, dated May 21, 2012 and Oct 19, 2012, which the Auditor says was agreed to by 1MDB management, but was significantly not signed by the main Abu Dhabi party to the Guarantor Agreement, IPIC [5.9.e].

This Collaboration Agreements provided for a cash payment/’Security Deposit’ to be made once again to the fake Aabar Limited, explains the Auditor (although he complains he never received proper copies). The justification offered was that this was a consideration in return for allowing 1MDB to piggy back IPIC’s credit rating:

“Apart from the option to Aabar Ltd., 1MDB also agreed to provide a “credit enhancement” in the form of a cash payment (security deposit) to Aabar Ltd. The payment would have to be made within three days of the receipt of the USD Note, as stipulated in the Collaboration Agreement for Credit Enhancement dated May 21, 2012 and Oct 19, 2012.
This quid pro quo was necessary because 1MEL and 1MELL did not have the requisite credit rating to issue the USD Note and had used IPIC’s rating.However, the Board was never informed of this “credit enhancement” which was agreed to by the management, who were tasked with finalising all matters concerning the issuance of the USD Notes. Approval from the Board to allow 1MEHL, the parent company of 1MEL and 1MELL, to give a “credit enhancement” in the form of cash payment (security deposit) was not sought. [5.9.d]

So, not only was IPIC kept in the dark about this extra commitment, which had been tagged on after the main agreement, but so was the Board of 1MDB!

Within days of signing the main agreements, the Auditor has thus explained, 1MDB management had encumbered themselves with two lots of secret related commitments, which were shortly to evolve into vast financial demands on the company by a bogus third party, namely Aabar Investments PJS Limited.

Could this have been other than a calculated and deliberate self-entrapment on the part of management? You only have to judge what happened next, as the AG goes on to list the huge sums paid out for these ‘mistakes’ totalling more than the money raised in the first place.

Remember, the Auditor confirms that IPIC itself had not signed these extra agreements, which corroborates the letters sent by IPIC managers to complain they had no idea whatsoever that there were any “options” or “deposits” added to their ‘Inter-guarantor Agreement’:

“IPIC’s guarantee resulted in 1MDB having to provide two things in return or as collateral – options and the security deposit. However, the only document signed by IPIC was the Interguarantor Agreement dated May 21, 2012, which does not contain any clause, terms or conditions stipulating such options and security deposits on the part of 1MDB or its subsidiaries issuing the USD Note.. “[5.9.g.]

The AG explains exactly how much was paid by 1MDB management to the bogus Aabar Limited for the covertly added “Security Deposit” – no less than US$1.367 billion, which was 39% of the entire capital raised:

“The net receipt of the two USD Notes amounted to USD3.197 billion after deducting the transaction cost of USD302.5 million (8.6%). From this amount, only USD1.83 billion (52.3%) could be used for investments (acquisition of TEHSB and MLSB), operations and working capital. This is because USD1.367 billion (39.1%) was paid to Aabar Ltd as security deposit. [5.9.h.]

How to make a ‘deposit’ into a permanent payment!

It would appear that the last thing 1MDB management were wanting was a situation where that ‘deposit’ might have to be returned by the bogus Aabar Limited.  Otherwise, they would surely not have signed up to such disadvantageous terms as those next identified by the AG.

What they agreed was that if 1MDB failed to launch its projected IPO before a period of 42 months had expired (i.e. by November 2015) then the fakeAabar Limited would be permitted to keep the lot!

“The Security Deposit paid to Aabar Ltd would only be returnable to 1MEHL if the projected IPO had been completed within 42 months from the day of the first USD Note (i.e. End of Nov 2015). The repayment (by Aabar Ltd) was to be made within 60 days of the IPO.” [5.9.i]

As everyone knows the date for the IPO kept slipping back and eventually was dropped.  According to the above agreement the bogus Aabar Limited BVI is therefore no longer obliged to repay that US$1.367 billion that it was given as security, in return for a guarantee from somewhere else!

Cashing in the Options

Meanwhile, the ‘reckless’ 1MDB management was also turning those separate options into cash for very same fake Aabar Limited.

Apparently, Malaysia’s Companies Commission had informed these executives that in order for the prized IPO to successfully go ahead it would be wise to terminate the third party interest in the company.

1MDB executives agreed with alacrity, says the AG and proceeded to come to a “Settlement  Agreement”, whereby they would pay an “Assignment Price” of US$300 million up front to the bogus Aabar Limited, in order to release the options – with a commitment to pay a balance of a further amount only after the floatation had taken place. That further amount would be calculated according to the worth of the offering, according to this agreement:

“The management had signed a document titled Relating to Option Agreement (Settlement Agreement) for the purpose of Aabar Ltd’s termination of the option on May 22, 2014. The amount which it required that 1MEHL pay to Aabar Ltd (known as the Assignment Price) for this termination of the option would be valued based on the enterprise value on the day of the listing and the expected growth of the 1MDB Energy Group over eight years. The Assignment Price was to be paid in two stages – USD300 million by Sept 30, 2014 and the balance [to be determined] within 45 days of the IPO.” [5.9.k.]

But, of course, this is not what the management actually did.  Once again, in defiance of an outraged Board, they actually paid the bogus Aabar Limited a staggering US$1.968 billion UP FRONT to terminate those options, IN ADVANCE of any IPO:

“The termination of option payment was not in line with the conditions in the Settlement Agreement. What the management actually paid Aabar Ltd was USD1.968 billion in three payments – May 2014 (USD250 mil), Sept 2014 (USD725 mil) and Dec 2014 (993 mil) – although the only payment which had been agreed before the IPO was USD300 mil.”  [5.9.l]

Perhaps, “If the management had told the Board about the impact of the IPO not taking place, the financial risks could have been minimised”, the AG notes wryly. But, of course, they did not!

Added to the payments for the ‘Security Deposit’ these terminations of ‘Options’ resulted in a total of US$3.335 billion being paid out to the fake Aabar subsidiary.

Aabar Investments PJS Limited BVI

So, finally to the key nub of this whole problem, which is the bogus off-shore Aabar Limited which was the recipient of all this cash.  For months 1MDB has attempted to argue the toss about this fake third party, which was used to siphon off the cash.

However, if there is one over-riding reason why this report has been made a secret, then surely it would be the Auditor General’s own official confirmation that this was a third party company outside the of the power purchase deals.  From his detailed account it can be seen that this outsider was acting exactly in the same way that Good Star Limited had operated in siphoning the cash from the 1MDB PetroSaudi Joint Venture:

“There are three parties involved in the issuance of the two USD Note – IPIC, Aabar Investment PJS (Aabar) and Aabar Investments PJS Limited (Aabar Ltd). Aabar is a subsidiary of IPIC, which was incorporated in Abu Dhabi. Aabar Ltd is incorporated in the British Virgin Islands with a BVI corporate address. However, IPIC Group’s financial statements for the year ending Dec 31, 2013 and Dec 31, 2014 only lists Aabar as its subsidiary. 1MDB had presented the Incumbency Certificate for Aabar Ltd but JAN was unable to verify it with the relevant authorities.” [5.9.o]

Failed IPO

There had been a plan for burying this enormous heist, as the Auditor General goes on to consider.  Goldman Sachs had proposed a glorious IPO (Initial Public Offering on the Malaysian Stock Market) for all these purchased power plants right from the very start.  The government company would buy them with this inflated loan and would then launch the whole offering onto an unsuspecting public, whose eager investment would pour in the necessary cash to ….. well, cover any shortfalls.

It didn’t work, because by the time that IPO was planning to be launched (early 2014) public trust had evaporated in 1MDB and the credibility of this debt-ridden company was at rock bottom.  The man in charge, Najib Razak, is blaming ‘critics’ and ‘journalists’ for this failure of crucial confidence….. we leave our readers to judge the factual evidence provided by Malaysia’s top auditor.

TRANSLATED EXCERPT OF SECTION 5 BELOW