By Anil Netto From ALIRAN

In the light of the shutting down of Swiss private bank BSI in Singapore, Anil Netto examines what happened to over RM7bn of Malaysian public funds parked in a mysterious high-risk investment fund.

In early May, the Financial Times of London carried an in-depth feature on the City of London as a global money laundering hub, which included an expose of the Swiss private bank BSI in the UK.

The paper revealed that a former employee of BSI in the UK had warned regulatory watchdogs that BSI bankers were providing services that could facilitate money laundering and tax evasion. The story described the tricks of the trade used to provide a cover for such activities, including the use of shell companies registered in a tax haven “such as the British Virgin Islands, where its ownership can be kept secret”.

From around the time Swiss financial services regulator Finma raised the alarm, BSI in Singapore has been in the crosshairs of investigations. And inevitability the link to 1MDB, BSI Singapore’s largest client, was on the minds of many.

How was 1MDB involved? Let’s look specifically at the case of what happened after 1MDB wound up its controversial US$1.8bn investment in Petrosaudi International Ltd. 1MDB claimed it had somehow made a profit of US$0.4bn. This meant it had about US$2.2bn (RM7-8bn) – though a few doubters harboured scepticism about whether the amount existed in full, given all the controversial transfers that had taken place at Petrosaudi.

What bewildered many observers was that instead of bringing this ‘funds’ back to Malaysia, 1MDB then brazenly(!) used a subsidiary, Brazen Sky Ltd (registered in the British Virgin Islands, of course), to park the ‘US$2.2bn’ in an outfit called Bridge Global Absolute Return Fund Segregated Poftfolio Company. (What a mouthful; let’s just call it Bridge Global).

Why put public money in a high-risk fund?

What was the nature of this fund? Bridge Global was incorporated in the Cayman Islands – but of course. According to Parliament’s public accounts committee report on 1MDB, this was a new entity – just a month old; it didn’t have a licence for investment management, and it did not have experience in handling large funds.

The Edge reported that 1MDB’s Brazen Sky actually owned all the shares in Bridge Global, as stated in a charge sheet by the Commercial Affairs Department of the Singapore police. Of the over US$2.5bn in the Bridge Global fund, about US$2.2bn was reportedly from 1MDB.

So does that mean there were few or no other investors in that fund? What kind of fund was that? If Brazen Sky was the sole or main investor in Bridge Global, doesn’t that mean 1MDB was just shifting money or units or whatever between two connected entities – or perhaps tossing them down a bottomless pit?

It turns out the fund was managed by Bridge Partners Investment Management (Cayman) Ltd, part of Bridge Partners Investment Management Ltd in Hong Kong, a little known outfit whose track record in asset management and connections with certain individuals have been called into question.

Now, this Bridge Global fund was “speculative and involves a high degree of risk” and investors faced “the possible loss of all or a substantial part of their investment”…”with no certainty of return” [quotes from documents sighted by The Edge, 17 November 2014]. In fact, there was “no guarantee, assurance of representation… that a shareholder will not lose some of, or all, its investments in the Fund”!

This is what doesn’t make sense. Why would 1MDB want to “invest” such a large amount – money it badly needed back home – in such a high-risk fund? It is not as if the fund offered sure-fire returns. Whose decision was that?

1MDB CEO Arul Kanda recently said the firm extracted from Aabar Investments PJS a guarantee covering the full sum of Brazen Sky ‘investments’ of some US$2.3bn (The Edge, 25 April 2016). But why the need to request Aabar Investments PJS to guarantee the “investment” in the fund if it was a wise and rationale decision?

Investment valuation gives auditors migraine

The valuation of this “investment” caused major headaches for 1MDB’s then external auditors KPMG. According to the PAC report, KPMG wanted:

confirmation from BSI of Brazen Sky’s ownership of investment in the fund,
due diligence documentation to make sure Bridge Global was properly and legally set up.
a legal opinion on the structure of the Bridge Global fund
a report on the net asset value of the investment at 31 March 2013 and supporting documents. (Although a firm, Vistra Fund Services Asia Ltd, had worked on the net asset value of the investment, KPMG felt it was still not in a position to establish if it complied with local and international accounting standards.)
Bridge Global’s financial report for 31 March 2013. (Brazen Sky as a stakeholder of the fund should have received an unaudited financial report of Bridge Global but this was not provided to KPMG.)
Long story short, KPMG was not in a position to confirm the valuation of the investment in Bridge Global. So KPMG not surprisingly required documentary evidence to support the valuation, especially given the circumstances. The list above is what any external auditors worth their salt would have asked for.

1MDB then tried to convince KPMG about the valuation of the fund at a meeting on 29 November 2013. But nothing doing: KPMG stood its ground and insisted it wanted documentary evidence not oral evidence or arguments. Failing which, it would have to issue a “lapuran teguran” (a critical report).

On 30 December 2013, 1MDB wrote a letter informing KPMG that it could obtain further information from the fund managers themselves. But the following day, the 1MDB shareholder abruptly terminated KPMG’s contract!

1MDB’s new auditors Deloitte would only accept the valuation of the “investment” because it was then guaranteed by Aabar and an ‘independent valuation’ was carried out. That says a lot about the quality of those investments.

The ‘independent valuation’ for FY2013 and FY2014 was carried out by a firm in Singapore called NRA Capital Pte Ltd, a company which “values listed and unlisted companies and assets”. This firm was reportedly hired by Bridge Partners, the investment manager of the fund.

Now, if NRA Capital was hired by Bridge to carry out the valuation, how independent was the valuation going to be?

Incidentally, the Singapore Commercial Affairs Department reportedly charged a person on 20 April 2016 with corruptly giving a “gratification of a sum of S$3,000 to a Lee Chee Waiy as an “inducement” to “expedite the preparation of a favourable valuation report to be released by Lee’s company”. Lee was an associate director of NRA Capital from 2009 to 2015 (The Edge, 2 May 2016).

From US$2.2bn down to US$1.0bn

So what happened to that $2.2bn in Cayman Islands in the end?

Despite the 1MDB board’s orders for the funds to be brought back to Malaysia from May 2013 to May 2015, no serious action was undertaken by the 1MDB management until October 2014. And when they did take action, they did not comply with the board’s direction for the funds to be brought back to Malaysia (per PAC report) – and the transfer was not tabled to the board for prior approval.

Of the US$2.2bn, US$1.2bn was purportedly used for interest payments, working capital and payments to Aabar as “refundable deposits pursuant to a settlement agreement to extinguish the option agreements” (notes to 1MDB’s 2014 accounts). But the PAC report, however, disclosed that the 1MDB board was only informed of the actual “payment” made out of Bridge Global fund for the Aabar option after it had been made.)

That is about the same figure (60 per cent of the total sum) Deputy Finance Minister Ahmad Maslan claimed had been brought back to Malaysia by November 2014. He explained the money had been invested in projects domestically. “They are projects like TRX (financial centre Tun Razak Exchange) and several other projects that is helping us reduce debt” and it excludes money used to finance the sovereign wealth fund’s power plant projects and loan servicing.

If that’s the case, 1MDB should provide an itemised breakdown of the US$1.2bn, how it was used, the dates the various payments were made, and through which banks.

Ahmad Maslan added back then that the remaining 40 per cent would be brought back by the end of 2014. But that didn’t happen.

Why not? Instead Bank Negara has fined 1MDB an undisclosed amount for failure to comply with its order to repatriate the funds. So easy to selesai? Was the US$1.2bn (60 per cent) actually brought back at all?

Not only did Aabar provide a guarantee for the whole US$2.2bn, it appears that the US$2.2bn investment in the fund was also charged to Deutsche Bank against a US$975m loan to 1MDB, a decision only conveyed to the 1MDB board on 20 December 2014 – after the fact.

In March 2015, Arul Kanda told the 1MDB board he wanted to use the repatriated investment funds to pay off the bank loan. But apparently, BSI wanted an indemnity from Deutsche Bank to absolve it from any liability from the use of the funds in that way. Oh, what a tangled web they wove!

The balance US$1.0bn

So that still leaves $1.0bn to be accounted for (about 40 per cent of the US$2.2bn). Arul Kanda said, “what is left is $0.94bn” (Edge interview, 25 April 2016). And it doesn’t look like it was brought back. Instead, he said the amount is a “Cayman fund held through BSI Bank based in Singapore”.

But there was an asset agreement sale on 2 January 2015 for Aabar Investments PJS Limited (the real one) to buy back $0.94bn – though this agreement was not presented to the 1MDB board, according to the PAC report. Now that 1MDB has sent money to the imitation Aabar, the recovery of this $0.94bn must be questionable.

The auditor general’s department, for its part, was unable to verify the balance of US$0.94bn because surprise, surprise, 1MDB didn’t provide complete documentation (PAC report). The redemption that was supposed to be in cash had now turned out to be in “units”! The auditor general’s department also noted that by 25 May 2015, it was the third time that the repatriation/redemption of funds from Bridge Global was changing shape!

The Edge reported that the charge sheet by the Singapore authorities reveals that the investment manager for the fund, Bridge Partners, was also paying US$12m in “custodian fees” to BSI in Singapore. Neat arrangement, that. (BSI employee Yeo Jiawei has also been charged with concealing from his then employer that he would be receiving US$1.6m from Bridge Partners, ie a percentage of the fee that 1MDB’s Brazen Sky was paying Bridge Partners for managing the fund.)

Dolled-up IOUs?

So, what are the underlying assets behind those remaining famous Cayman Island fund “units” supposedly worth US$0.94bn?

“It’s multiple assets but largely debt, promissory notes,” said Arul Kanda, vaguely in April 2016. This was contrary to his representation to the 1MDB board on 12 January 2015 that the US$0.94bn had been redeemed and brought back in cash by the end of 2014 (PAC report).

Fancy term – promissory note. A promissory note, by definition, is “a signed document containing a written promise to pay a stated sum to a specified person or the bearer at a specified date or on demand”.

According to Investopedia, “The difference between a promissory note and a simple IOU is that an IOU only states an amount that is owed to another party; a promissory note states the amount as well as the steps necessary to pay back the debt and the consequences if the lender should fail to do so.” In other words, an IOU dressed up in legalese?

Swiss financial services regulator Finma has just delivered a scathing indictment of BSI and the lack of supervision of its Singapore outfit. “The sovereign wealth funds’ [1MDB] assets were typically invested through specially created intermediate structures. BSI supported the development of these structures with the aim of achieving a higher level of confidentiality for the investment activities. Ultimately, however, BSI was therefore unable to determine how these assets were invested.”

This was recognised by some within the bank and flagged up as an issue, noted Finma. In 2012, a BSI employee contacted the management: “My team is implementing these transactions without really knowing what we are doing and why and I am uncomfortable with this. […] there should be a stronger governance process around all this.” But the bank took no action.

Finma concluded that the problems identified in BSI “constitute serious breaches of the statutory due diligence requirements in relation to money laundering and serious violations of the principles of adequate risk management and appropriate organisation. “

Now that BSI in Singapore has been ordered to be shut down and fined to boot, what happens to those Cayman Islands “units”, “debt” or “promissory notes” parked in the bank – the money that rightly belongs to the Malaysian people?

1MDB should show us these “largely debt, promissory notes” as many Malaysians are curious to see whether these dolled-up IOUs can really be converted to badly needed hot cash. And let’s see who actually issued these “promissory notes”.

For more on this story go to: http://aliran.com/aliran-csi/aliran-csi-2016/whatever-happened-1mdbs-cayman-islands-funds/

See related iNews Cayman stories with links to others published May 19 2016 “BSI said to probe bank employees on 1MDB-related dealings” at: http://www.ieyenews.com/wordpress/bsi-said-to-probe-bank-employees-on-1mdb-related-dealings/