Wednesday, 3 August 2016

1MDB Scandal: "The UAE Connection"

This post deals with the second “phase” of the alleged misappropriation of funds from 1MDB and is based primarily on the US Department of Justice (DOJ) complaint against Red Granite, producers of The Wolf of Wall Street.    (the “Red Granite Complaint” or “Complaint”).   Paragraph not page numbers are used to cite the Complaint.  Where other sources are used, I’ve included links to websites, when possible.
Before I begin one very important note.
The US DoJ has filed complaints.  Certain parties mentioned in the complaints have been accused but have not been convicted of any crime, nor have they had a chance to neither respond to the charges made against them, nor have their responses and the original complaints tested by the judicial process.  At this stage all that can be said is that allegations have been made.  Please bear that in mind as you read this post. 
As before the focus is on connections to the GCC, though AA will be unable to resist excursions off his natural turf should the information be compelling.
In this post, I’ll look at the involvement of IPIC and Aabar, specifically that of two individuals who were officials of those companies at the time of the alleged misappropriation: 
· H.E. Khadem Abdulla Al-QUBAISI, Managing Director of IPIC (until 2015) and Chairman of Aabar (until 2013)  
· Mr. Mohamed Ahmed Badawy Al-HUSSEINY, CEO of Aabar until 2015.
I’d note that both these individuals’ names appear in the Complaint unlike the officers of PetroSaudi International (discussed in an earlier post) who were not explicitly named.
The Aabar Phase – Overview (Paras #9-10 and Paras #112-120)
During 2012, 1MDB raised US$3.5 billion in notes (laymanspeak “bonds”) arranged and underwritten by Goldman Sachs to fund the purchase of energy assets in Malaysia.  There were two issues each for US$1.75 billion.  IPIC guaranteed the issues either “directly or indirectly” as per the Complaint.  (Para 114).  1MDB also provided guarantees because the issuers of the Notes were newly created subsidiaries of 1MDB with no track records of their own.
The Complaint alleges that US$1.367 billion of the proceeds (39 percent of face value and 43 percent of estimated net proceeds) were diverted to a Swiss bank for the account of Aabar Investments PSJ in the British Virgin Islands (Aabar – BVI or BVI).  Despite the similarity to IPIC subsidiaries Aabar Investments and Aabar Investments PSJ, the BVI company was not owned by IPIC or Aabar. 
Funds were later allegedly transferred from the BVI account to an account controlled by TAN Kim Loong, described by the Complaint as an associate of Mr. LOW and further transferred presumably to disguise their origin and then used to acquire assets and transfers were made for the personal benefit of officials at 1MDB, IPIC, and Aabar.
The Aabar Phase Selected Details (Paras #121-227)
May 2012 US$1.75 Billion 5.99% Notes Issue Maturing 2022 (CUSIP XS0784926270)
Paras #122-127:  In order to fund its purchase of power generation assets from Tanjong Power, 1MDB decided to raise70 percent in Malaysian Ringgit (MR) from local banks and engaged Goldman Sachs (GS) to arrange and underwrite the Notes to fund the remainder.  After GS’s fees and transaction expenses, the net proceeds of the US$1.75 billion issue were estimated to be US$1,553,800,000.  Approximately, US$810 million of the proceeds were to be used for the purchase.   The remainder (US$744 million) was to be used for “general corporate purposes, which may include future acquisitions” as per the offering circular.  
AA side comment:  That is, almost half the proceeds were for unspecified “general corporate purposes”.  That pattern continued with the subsequent deals.  A natural question is why 1MDB continued to issue more Notes while accumulating an apparently ever increasing cash hoard.  There is a natural dilemma bankers face in structuring transactions.  The bigger the deal, the bigger the fees and, thus, the larger the personal bonuses.  On the other hand the banker has a duty to both the issuer and investors to ensure that amounts raised are appropriate.
Para #130 – Goldman earned US$192.5 million--11 percent of the Notes face amount--in fees (US$17.5 million) and commissions (US$175million). 
AA Side Comment:  Much has been made of the fees GS made on the three bonds it arranged for 1MDB.  The percentage appears “rich” but Goldman was underwriting the issues.  If it could not place the bonds, then it would wind up owning them itself.  It is also a fact that “debutante” (first time) issuers pay more in interest and fees than more “seasoned” issuers. Besides being a debutante, 1MDB presented a set of issues that increased the riskiness of the deal.  While it is owned by the Malaysian state, 1MDB is not full faith and credit.  As well, 1MDB had a very aggressive (risky) capital structure –one that would delight the heart of the stereotypical Kuwaiti “investor”:  maximum use of OPM --heavy on debt and low on equity.  1MDB’s fiscal year is 31 March so let’s use 2012 financials as a starting point. Then, before the Note issue, equity was already a scant twelve percent of total assets.  Not much structural balance sheet protection for lenders or bond investors.  By 31 March 2013, it was five percent.  Any banker or investor with a modicum of intelligence could have factored in this issue and seen that 1MDB’s already weak credit profile would be weaker after the issue. The riskier the issue, the higher the bankers’ fees. 
Paras #129 and #146 – Within one day of closing of the issue (21 May 2012), 1MDB transferred approximately US$577 million to the Swiss account of Aabar Investments PJS – BVI. Note that Tanjong was paid US$650 million (Para #144).
Para #134 – 1MDB granted Aabar Investments PJS – BVI a ten year option to acquire up to 49 percent of these assets for a maximum of MR1,225,000,000.  Note that the compensation for the IPIC guarantee is going to an alleged unrelated party not to an IPIC or Aabar entity.
October 2012 US$1.75 Billion 5.75% Notes Issue Maturing 2022 (CUSIP XS0829573913)
Paras #137-139  This issue also for US$1.75 billion was arranged and underwritten by Goldman, guaranteed by 1MDB with “indirect” guarantee provided by IPIC.  The Notes were to fund the purchase of energy assets from Genting.  Net proceeds after expenses and Goldman’s fees were estimated at US$1,636,260,000 of which US$692,357,340 was for purchase of the Genting assets. As before the rest was for “general working capital purposes”.   Roughly fifty-eight percent of the issue.   This just reinforces the issue above about 1MDB’s real need for such large issues. 
AA Side Comment:  Assuming a rough US$4 million for expenses, as was the case with the first issue, Goldman’s fee was roughly US$110 million, six percent of the face amount of the Notes, and 57 percent of the fee on the first issue.  This validates the comments about debutante issues above. The lower fee may also be due to the support IPIC provided for the issue.  For more on that see below.
Para #141 – 1MDB guaranteed the Notes but IPIC did not.  IPIC “nevertheless agreed to privately secure the bonds on a bilateral basis with Goldman. No reference to IPIC’s indirect guarantee was included in the offering circular.”
AA Side Comment:   If IPIC originally provided credit support to the issue, it would seem that Goldman would have to disclose this to potential investors as a material fact.  However, if the support were in connection with the underwriting, then GS would not have had to disclose this information.  In an offering circular for the 1MDB guaranteed US$3 billion note 2013 issue by 1MDB Global Investments, the second US$1.75 billion is described as guaranteed only by 1MDB.  . 
This is all very strange “privately” securing the bonds “on a bilateral basis with Goldman” sounds as though IPIC is providing support for the underwriting.  This might have been structured as a “put” option.   If GS couldn’t place the Notes, it could exercise the option and “force” IPIC to buy the bonds immediately.  Perhaps, it was structured as a credit default swap, with GS being able to claim after default.  In any case, it doesn’t sound like IPIC’s undertaking extends to holders other than GS.
Para #141 – As compensation for procuring IPIC “indirect guarantee”, Aabar BVI was granted an option to acquire up to 49 percent of the Genting assets for up to ten years.  As the Complaint alleges, BVI is not an IPIC/Aabar entity and thus the compensation owed them was misappropriated.
Para #152 – One day after the second issue closed, 1MDB transferred US$790 million to Aabar BVI’s Swiss account, bringing the total transferred to US$1.367 billion.   Per Para #116, 1MDB recorded these transfers as “deposits” at Aabar Investments PJS in its financial statements. 
Disposition of Funds at Aabar – BVI
As outlined above, the Complaint alleges that US$1.367 billion was transferred to Aabar BVI’s Swiss account.  What happened to the funds?  I’m not going to recite details of the intermediary transfers, though I will make a general comment on the mechanics.
AA Side Comment: Not completely relevant to this post, but interesting.  The names of all the intermediaries allegedly used for the subsequent funds transfers make them sound like investment firms or funds.  (Paras 173-176) Two of them were actual investment funds according to the Complaint.  The Complaint notes that Aabar moved money into these two funds through CITCO.  That’s a tantalizing comment.  It suggests the possibility that these transfers did not pass through normal commercial banking payment channels, that is, Aabar moved funds to its account at CITCO and then instructed CITCO to credit accounts on its books. This would make detection harder.  In any case the use of “investment firms/funds” to move money provides an apparent justification for the transfers: investment firms (not individuals) making investments.  If true, a neat way to disguise the transactions and deflect any AML (anti-money laundering) queries.     
Para #181 and 182– US$473 million in four transfers between 29 May and 30 October 2012 to Bank Privee Edmond de Rothschild Luxembourg for the account of VASCO Investment Services SA, described as “affiliated with AL-QUBAISI” who is the “beneficial owner”.
Para #186  to 189 -US$55 million in four transfers between 29 May and 3 December 2012 to BHF Bank Frankfurt for Rayan Inc.  AL-HUSSEINY is identified as the “beneficial owner”. 
Paras #190-192 - US$11.6 million in two transfers 18 December 2012 and 22 January 2013 to Bank of America Texas for MB Consulting for “Services Rendered” of which AL-HUSSEINY is identified as “beneficial owner and sole signatory.”
Paras #194-196 - US$30 million to AMBank Malaysia for the account of Malaysian Official 1.  As per my post about PetroSaudi International, MO1 would appear to be the current Prime Minister of Malaysia.
Paras #197-198 – US$5 million to Falcon Bank Zurich for account of 1MBD Officer 3 identified as 1MDB’s General Counsel and Strategic Director in Para #27. 
Paras #202 – US$238 million to Red Granite Capital.  A portion of these funds are alleged to have been used to produce The Wolf of Wall Street, acquire assets, and fund a gambling vacation in Las Vegas.
AA Side Comment:  I can’t resist.  According to the Complaint, Paras #222-225 Red Granite transferred US$41 million to Alson Chance (AC) in June 2012.  On 10 July 2012 AC transferred US$11 million to the Venetian Casino in Las Vegas for deposit to LOW’s account.   On 15 July 2012, five days later, an apparently very unlucky LOW withdrew US$1.1 million from the Casino (US$0.5 million for the remainder of the deposit and US$0.65 million for chips.  Of course, gambling is not the only thing that one can spend money on in Las Vegas.  And Mr. LOW was hosting several people, including a former 1MDB officer and a famous movie star. On the other hand, chips are “bearer instruments”.   If I want to pay you, I can give you some chips.  When you cash them in, they are “winnings” and there is no obvious connection to the provider.  
The UAE Connection
Let’s look at some of the allegations made against AL-QUBAISI and AL-HUSSEINY as well as some other UAE connections.   Please note that AA’s comments are not assertions of wrong doing by the individuals named, but rather comments on what the allegations would mean, if they are indeed true. 
Para #115 - H.E. Khadem Abdulla ALQUBAISI and Mohamed Ahmed Badawy AL HUSSEINY were directors of Aabar Investments PSJ-British Virgin Islands, the company allegedly used as the first link the misappropriation of the US$1.367 billion.  They were at the same time officials of IPIC and/or Aabar, entities that were also defrauded in the scheme.  If the allegations are true, then they also participated in weakening 1MDB which could lead to calls under the guarantee.   See Para #162 for 1MDB’s claim that the BVI is indeed owned by Aabar/IPIC. 
Para #125 – When a Goldman MD met with Shaykh Mansour Bin Zayed, the Chairman of IPIC, to discuss the first bond issue, LOW was present, though “not involved in the deal” as “far as” the Goldman MD “was aware”. 
It’s interesting to speculate on how LOW became involved in the meeting.  Introduced by ALQUBAISI?  Direct relationship? 
What are the chances the LOW just popped by when Goldman’s MD came for a no doubt pre-arranged meeting to talk about the transaction?  Another “remarkable coincidence”?  That being said, Sh. Mansour is no doubt a very busy individual with many demands on his time.  Perhaps, he is double booking appointments as way of meeting all those who need to talk with him. 
Paras #131 and 141- 1MDB issued options as compensation for IPIC’s guarantees, but these were granted to the BVI which is not related to either IPIC or Aabar, according to the complaint.   The options granted the BVI the right to buy up to 49% of the two power projects financed with the bonds over a ten-year period.  For the Tanjong option, AL HUSSEINY allegedly signed on behalf of the BVI.  Thus, IPIC/Aabar was also a victim of “misappropriation”.   See also Para #162.
Paras #181-192- As outlined above, ALQUBAISI allegedly received US$473 million and ALHUSSEINY US$66.6 million.
AA Side Comment:  Geez we all want a bit when we retire, but US$473 million? Surely a lot more than 10,000 Swiss Francs a month.  Seems like a rather “princely” sum for a mere “excellency”.   As noted before on this blog, AL QUBAISI acted as an intermediary for Shaykh Mansour Bin Zayed on the Barclays capital raising.  If the 1MDB allegations are true, perhaps, he (QUBAISI, not Sh. Mansour) decided it was time to “wet only his beak”.  Rather a bold and highly risky move by an individual whose continued livelihood in the UAE depends on remaining in Sh. Mansour’s good graces. Sh. Mansour is personally committed to IPIC and the tarnishing of its name in a scandal is no doubt unwelcome as well as what would appear to be betrayal by a very trusted business partner.      


AS. said...

I wonder if the energy assets in question that the bond issues were supposed to finance even existed/were for sale?

Using fund administrators/custodians isn't a surefire way of avoiding AML processes (as these entities are also required to perform AML) however certain gets around traditional banking channels.

Lastly, I think there may be some confusion between Sheikhs Mansour (IPIC/Barclays) and Mohammed (Crown Prince, and present at the 1MDB/Aabar signing ceremony). Both MBZ's however Sheikh Mohammed is usually the one referred to as MBZ in political/econ circles.

Abu 'Arqala said...

Sorry for the delay in responding. I thought I posted this last week, but clearly didn’t.

Many thanks for taking the time to comment.

(1) Energy Assets -- Yes, the Tanjong and the Genting energy assets existed and were purchased.

(2) Fund Administrators/Custodians and AML - A while back for no particular reason, I looked at public data from various national FCIUs or similar agencies on reporting by financial intermediary types. USA, UK, Canada and Singapore. Rates for fund administrators custodians brokers were abysmally low in terms of absolute numbers of reports and as a percentage of transaction volume. And much lower than for traditional banks. In one case, one national regulator noted that some brokerage firms had not submitted even a single SAR. Generally, there is a bit of CYA in this reporting because building a track record of attempting to comply serves one very well when the inevitable bad fish slips through the net. So not submitting a single report is remarkable.

That could be the result of (a) no significant suspicious transactions running through these channels or (b) other.

(3) MBZ You are correct that MBZ is usually reserved for the CP. A rookie mistake on my part to use the accepted abbreviation for him to refer to Sh. Mansour. I amended my post to correct to avoid any confusion.

Arkad said...

Seems some fresh facts have come to light...

Abu 'Arqala said...


Thanks for commenting. Appreciated because I get so few real comments. Mostly, it's a cadre of apparent scammers and con artists peddling loans.

I'm betting it's not money burning since dirty money would most likely be laundered to make it fresh, clean, and presentable.

More likely it's records - emails, journal, general ledger and accounting records. Since most of these are probably electronic component based, the resulting haze is no doubt filled with PCBs and other harmful chemicals.