IPIC v 1MDB: A mind-boggling settlement

By Mohamed Hanipa Maidin

Despite a bit of a delay in giving this comment, I am still tempted to pen this article commenting on arbitration proceedings between the International Petroleum Investment Company (IPIC) and Aabar Investment PJS Ltd on one part, and our debt-laden 1MDB on the other. The proceedings took place at the London Court of International Arbitration.

The relationship between IPIC and IMDB commenced in 2012. It all started when IPIC guaranteed two bonds for 1MDB to raise funds for the purchase of power generation assets.

It is fascinating to note that despite not being named as a party to the arbitration proceedings, the agreement of settlement also involved the Minister of Finance (Inc) of Malaysia (MOF). Under the terms of the said settlement, apart from 1MDB, the MOF also undertook to IPIC to assume full responsibility for all future interests and principal payments under the two bonds issued by the 1MDB group companies that are guaranteed by 1MDB and IPIC.

Why do I need to comment? The answer is fairly simple. As far as I am concerned, the purported settlement plainly reflected a mind-boggling one, viewed from any perspective.

According to a New Straits Times report dated Aug 1, 2016, Second Finance Minister Johari Abdul Ghani was reported to have said that 1MDB would fight the case and would never settle.

He further said: “We want to see them in court. Let the arbitrator see our documents.”

He also reiterated that “all of our investments are guaranteed by IPIC. We want to fight this case and we want to win. Based on the documents 1MDB forwarded to us, I am very confident of a positive outcome. We are taking the position that we are not paying the interest. We should not pay and we must win this case.”

But that was in 2016. In 2017, the government seemed to make a huge and drastic U-turn. Although it was previously confident of winning the case, 1MDB suddenly agreed to settle the dispute. And, in fact, it paid the first payment in the sum of US$ 602.725 million to IPIC sometime in August this year as part of the terms of settlement.

Yesterday, it was reported that the second payment of US$ 602 million could be paid to IPIC by the end of this year.

What brought IPIC and 1MDB to the arbitration in London? To recap, according to the same minister, “the dispute is about IPIC not acknowledging the British Virgin Islands-registered (BVI) Aabar Investments PJS Ltd, as its entity within its group.”

It was also reported that 1MDB had sent a total of US$3.5 billion to Aabar BVI. All in, the 1MDB transfers to Aabar included about US$ 1.4 billion from a privately placed bond that Goldman Sachs raised in 2012. The 1MDB fund also made payment of US$855 million, US$933 million and US$295 million as security deposits and other guarantees for the bond to the BVI firm.

The minister confidently stated that as far as the ministry was concerned, and based on the records available in the ministry, BVI-registered Aabar Investment belonged to IPIC. According to him, the directors of the companies were both the senior officials of IPIC. Nevertheless, IPIC suddenly took a different position by denying that the said company was one of its own subsidiaries.

I am of the view that there was a strong likelihood the minister might have given an honest statement. Assuming that he was right, it was clearly neither wise nor proper for IMDB to amicably settle this matter, let alone settle it on such unfavourable terms. It raises a lot of questions as to why 1MDB as well as the finance ministry had no qualms whatsoever in settling the arbitral dispute on such glaringly unfavourable terms.

If what was said by the minister was completely true, the ministry and 1MDB respectively should have never agreed to reach any settlement. On the contrary, both should have fought or litigated the case to the hilt. Apparently, 1MDB had a good case and meritorious defence.

With such a questionable and mind-boggling settlement, I sincerely believe that both the prime minister and 1MDB owe the people reasonable and convincing explanations to the following legitimate questions:

a. Why did 1MDB as well as MOF agree to reach an amicable settlement with such dubious terms?

b. What really prompted the government to switch its legal position from robustly contesting the arbitral dispute with IPIC to conceding on such disadvantageous terms?

c. If it is true that 1MDB had duly paid Aabar Investment Ltd BVI prior to this, and the minister was so confident that such a payment was made in good faith to IPIC’s own subsidiary, what would have hindered 1MDB from bringing the real culprits into the suit by making them either third parties or co-defendants?

d. What happened to the purported payment of US$3.5 billion? What has the government done to recover the said sum of money?

We are awaiting your convincing replies, Mr Prime Minister.

Mohamed Hanipa Maidin is Sepang MP. -FMT