1MDB Auditor General's Report: This is a copy of the Auditor General’s exact report, which we are uploading in stages over the coming week. We have re-typed the entire report in order to frustrate attempts to persecute whistleblowers. Please excuse any typing errors, the text is an exact replica.

Auditor general report executive summary

Executive Summary

1. Introduction

1.1 Background

Cabinet had decided on March 4, 2015 that the National Audit Department (JAN) were to verify the accounts of 1Malaysia Development Bhd (1MDB) and its relevant report ought to be handed to the Public Accounts Committee (PAC). Prior to this, on Feb 27, 2015 PAC had also made a request to the JAN to perform an audit on 1MDB.

With regard to this, JAN initiated an audit on March 10, 2015. The audit that took place between March 10 and June 15, 2015 was an interim audit and the relevant report was submitted to the PAC on July 9 and July 10, 2015. This interim report discussed the analysis of the financial statements and investments in a joint-venture with PetroSaudi; the issuance of Murabahah Notes and the Segregated Portfolio Company (SPC).

Following this, the audit was continued until Jan 31, 2016 and a final report was prepared, containing the analysis of the financial statements and financial position of the 1MDB Group based on financial statements ending March 31, 2014 and financial information received up until Oct 31, 2015.

Apart from this, an analysis was also performed on the performance of the equity investments, Murabahah notes, financial portfolio / Portfolio of Funds / Fund Portfolio, SRC Group, real estate sector and energy sector. This final report includes issues covered in the interim report and discussions at the PAC level.

1.2 Audit Objectives

This audit was performed based on the mandate from the Cabinet and PAC to verify the financial statements of the 1MDB Group, which have been audited, and to evaluate the financial performance and activities of the 1MDB Group in order to determine if the objectives of establishing the company had been achieved.

1.3 Scope and Methodology

JAN’s had performed checks on the 1MDB Group’s audited financial statements for the financial period ending March 31, 2010 until March 31, 2014. The financial statements for the year ending March 31, 2015 was not prepared by 1MDB for this audit. However, JAN was able to perform an audit based on documents obtained from 1MDB including discussions with (1MDB’s) management. JAN faced limitations while performing this audit in view of the fact that some original or important documents were either submitted late or were not provided by 1MDB for the purpose of verifying transactions or as evidence for the audit.

1.4 Limitations

The limitations resulted in a significant impact on the audit process in terms of verification of the actual financial position, operations and related transactions. Among important documents that were not submitted were the 1MDB Group’s Management Account for the year ending March 31, 2015 and bank statements from foreign lenders. [The audit team] was unable to access computers, notebooks and servers at 1MDB in order retrieve data and information for cross reference and analysis.

1.5 Formation of 1MDB

Finance Ministry Incorporated (MKD) has taken over Terengganu Investment Authority Berhad (TIA) which was established by Menteri Besar Terengganu Incorporated (MBI Terengganu) on Feb 27, 2009. The original objective of establishing TIA was to create a sovereign wealth fund with a capital of RM11 billion. The funds were to be obtained from oil royalty owed (to Terengganu) amounting to RM6 billion and bond issuance from the local and foreign financial markets with a proposal for the Federal Government to provide a guarantee of RM5 billion based on Terengganu’s future oil revenue. The Federal Government decided to take over TIA and this process was completed on July 31, 2009 and the company was renamed 1MDB on Sept 25, 2009. After the takeover, 1MDB was no longer a sovereign wealth fund but a strategic development company wholly- owned by MKD with an approved capital of RM1 billion and paid-up capital of RM1,000,002. Subsequently, 1MDB was involved in the following investments:

  1. JV with PetroSaudi Holdings (Caymans) Ltd;
  2. Investment in Segregated Portfolio Company (SPC);
  3. Investment in SRC Group;
  4. Investment in real estate sector; and,
  5. Investment in energy sector.

1.6 Management Structure and Organisation in 1MDB

1.6.1. The management structure was divided into three levels – Advisory Board, Board of Directors and Senior Management. The Advisory Board was tasked with providing guidance and advice on investments and business.

1.6.2. In 2009 and 2010, 1MDB had only one subsidiary and was involved in equity and real estate investments. 1MDB Group’s structure expanded following its involvement in the energy sector through the acquisition of three independent power producers with local and foreign networks, following which the amount of companies in the 1MDB Group had increased to 96 in 2014.

2. 1MDB Group’s Investments

2.1. Islamic Medium Term Notes

2.1.1. TIA had proposed to issue Islamic Medium Term Notes (IMTN) amounting to RM5 billion as initial funding. On April 1, 2009, the Federal Government agreed to act as guarantor for TIA to raise the RM5 billion from the domestic and foreign financial markets through IMTN for investment purposes in accordance to the Loans Guarantee (Bodies

Corporate) Act 1965. This guarantee encompasses the repayment of the principle and interest for a period of 30 years. This was followed by an approval from the TIA’s Board of Directors on April 15, 2009. The agreement was signed on May 15, 2009 between TIA (issuer) and AmInvestment Bank Bhd (AmBank) as the lead arranger, lead manager and facility agent. On the same day, the Federal Government provided a guarantee for the issuance of the IMTN.

2.1.2. However, the signing of the agreement and facilitation of the government guarantee was not in accordance to the terms and plans by MBI Terengganu and this had dissatisfied MBI Terengganu as the TIA shareholder. The TIA Board of Directors through a resolution dated May 22, 2009 ordered the suspension of the issuance of the IMTN until a corporate management structure and best practices were realised. The TIA chief executive officer was instructed to take immediate action to terminate and suspend all actions involving the issuance of the IMTN. However, he had already signed the Subscriber Agreement with AmBank on May 25, 2009 and the Aqad Agreement, Murabahah Purchase Agreement and Murabahah Sales Agreement on May 26, 2009. [Hal

2.1.3. The TIA CEO’s act of pursuing the issuance of the IMTN resulted in him being removed as a company director through a shareholders resolution dated May 27, 2009. On the same date, a TIA Board of Directors resolution signed by Datuk Ismee and Shahrol Azral [Halmi] to proceed with the issuance of the IMTN and reappoint Shahrol Azral as a TIA director. The issuance of the IMTN […] had resulted in MBI Terengganu issuing a written warning to AmBank on May 29, 2009. The bank was accused of malpractice and non-compliance by issuing the IMTN. Moreover, Cabinet was informed on June 3, 2009 that the DYMM Sultan of Terengganu had sought a report on the “Unauthorised Issuance of IMTN by TIA”.

2.1.4. On May 29, 2009, TIA received the net amount from the IMTN totalling RM4.385 billion from the full value of RM5 billion, which is at a price of RM87.92 for every RM100 in nominal value with a discount rate of 12.08% in view of AmBank as the lead arranger to ensure the issuance of the IMTN was fully subscribed. The coupon rate is 5.75% per annum with effective rate of returns to be 6.68% annually.

2.1.5. During the 1MDB Board meeting on Oct 10, 2009, the chief executive officer informed that the IMTN was issued based on the urgings of the TIA special advisor for the purpose of developing Pulau Bidong in cooperation with Mubadala (a company). Apart from this, in June 2015, the former 1MDB CEO said the issuance of the IMTN had proceeded because the agreement signed on May 15, 2009 was a “bought deal” in which AmBank as the lead arranger and primary subscriber had obtained secondary market subscribers for the issuance of the bond.

2.2 Equity Investments, Murabahah Note and Fund Portfolio

2.2.1. 1MDB Group’s joint-venture with foreign companies began in 2009 with the goal of pioneering investment opportunities abroad. The first JV project was finalised between 1MDB, PetroSaudi Holdings (Cayman) Ltd. and 1MDB PetroSaudi Ltd. (joint-venture compay) on Sept 28, 2009. 1MDB held 40% equity with a contribution of USD1 billion while PetroSaudi Holdings (Cayman) Ltd. held 60% equity in form of assets worth approximately USD1.5 billion. The decision to invest in this JV company was made in a period of eight days, without a detailed evaluation process and before issues/conditions raised by the 1MDB Board of Directors were resolved. There were four different companies registered with the name PetroSaudi but the investment proposal paper tabled to the 1MDB Board of Directors did not state this fact.

2.2.2. The assets valuation report prepared by Edward L Morse was presented on Sept 29, 2009, which is the same date that he was confirmed in his appointment to perform the job by the 1MDB CEO, and the report was received one day after the JV was signed. The valuation report took into consideration the exploration rights and oil production in Turkmenistan and Argentina. The valuation was conducted on assets owned by PetroSaudi International Ltd although the JV agreement clearly states that the company which owned all rights and interests on the agreed assets for the JV project was PetroSaudi International Cayman.

2.2.3. In addition, the JV agreement includes clauses which insufficiently provides for the interest of the company [1MDB]. Among others, the loan received by 1MDB PetroSaudi Ltd. amounting to USD700 million from its parent company, PetroSaudi Holdings ( Cayman) Ltd. on Sept 25, 2009 must be paid back in full on or before Sept 30, 2009. On Sept 30, 2009, a total of USD1 billion (RM3.487 billion) was transferred by 1MDB to two separate accounts – USD300 million to the account of the JV company and USD700 million to the account of another company for the purpose of repaying the loan received by the JV company. The payment of USD700 million to the other company was performed without the approval of the 1MDB Board of Directors.

2.2.4. Six months after the JV was signed, 1MDB disposed all of its 40% equity stake amounting to USD1 billion in the JV company in return received USD1.20 billion through the subscription of Murabahah Notes. The Murabahah Notes provide returns of 8.67% annually and mature on March 31, 2021 and were supported by a corporate guarantee by PetroSaudi International Ltd. On Sept 14, 2010, an additional subscription of Murabahah Notes amounting to USD500 million (RM1.57 billion) was made and a total of USD330 million (RM1.02 billion) was paid between May 20 and Oct 25, 2011. A portion of the funds to finance the additional subscription of Murabahah ntoes were made through loans from financial institutions.

2.2.5. After investing 27 months in the Murabahah Notes, on June 1, 2012, 1MDB redeemed the Murabahah Note, including profits yet to be received, amounting to USD2.22 billion (RM6.8 billion) through an asset swap arrangement in which 1MDB’s subsidiary, 1MDB International Holdings Ltd (1MDB-IHL), acquired a 49% equity stake in PetroSaudi Oil Services Ltd (PSOSL), a PetroSaudi International Ltd subsidiary. 1MDB-IHL also ratified a “call and put option” with PetroSaudi International Ltd to acquire the remaining 51% stake in PSOSL at an option price of USD10. The swapping of Murabahah Notes for equity in PSOSL was performed without detailed study to determine (PSOSL’s) liability, ability to generate funds and its past financial performance. Although knowledge of PSOSL’s operations in Venezuelan waters was subjected to restrictions/sanctions by the US and drilling contracts were expiring, the decision to invest in PSOSL was continued. Moreover, the approval by the Board of Directors and 1MDB shareholders to swap the Murabahah Notes for equity in PSOSL was signed on June 20, 2012, but the 1MDB CEO had signed five documents regarding the deal on June 1, 2012. This shows that the 1MDB CEO took action even before seeking the board’s approval.

2.2.6. 45 days after 1MDB swapped the Murabahah Note for an equity stake in PSOSL, the 1MDB CEO had sought to dispose of the equity stake in PSOSL because Venezuela was facing sanctions by the US. In relation to this, the 1MDB Board of Directors approved the disposal of 1MDB-IHL’s 49% equity stake in PSOSL to Bridge Partners International Investment Ltd (Bridge Partners) for a consideration of not less than USD2.22 billion which to be managed by a licensed fund manager. This decision was made through a resolution by the Board of Directors and 1MDB shareholders.

2.2.7. On Sept 12, 2012 the sale and purchase agreement to dispose of 1MDB-IHL’s entire stake (in PSOSL) was ratified between 1MDB and Bridge Partners. In return, Bridge Partners issued six promissory notes, without interest, valued at USD2.318 billion, which must be paid in one month. On the same date, 1MDB, through its fully-owned subsidiary Brazen Sky Ltd, ratified an “Investment Management Agreement” with Bridge Global Absolute Return Fund SPC (Bridge Global SPC) and Bridge Partners Investment Management (Cayman) Ltd. to invest the USD2.318 billion. This investment was funded through promissory notes in lieu of cash and was later invested in various investment portfolios through a Segregated Portfolio Company (SPC) in the Cayman Islands. This Investment was made through Bridge Global Absolute Return Fund SPC (Bridge Global SPC), which was a month-old company, without a fund managing license and without experience in managing large sum of funds.

2.2.8. The Board of Directors on May 20, 2013 agreed that the investment be redeemed in stages in order to improve public perception on the credibility of 1MDB’s investments. The Board of Directors had issued nine instructions between May 2013 and August 2014 to the management to prepare a plan, schedule and redemption of portfolio funds from the SPC either through stages or as a whole. However, no immediate action was taken by the 1MDB management.

2.2.9. On Dec 20, 2014 the Board of Directors was informed that the latest funds to have been redeemed from the SPC portfolio stood at USD1.392 billion and the balance of USD939.87 million would be redeemed at the end of December 2014. From this amount, USD993 million was paid to Aabar to terminate options. In reality, all of those remaining funds from the SPC portfolio were used as collateral for Beutsche Bank for a loan amounting to USD975 million, for which an approval from the Board of Directors was not obtained. Apart from this, the USD1.392 billion which had been transferred to the account of Brazen Sky Ltd was forwarded to 1MDB Global Investment Limited (1MDB GIL). This act contravened the instructions of the Board of Directors who demanded that the SPC portfolio funds be brought back to Malaysia.

2.2.10. An Asset Sale Agreement was signed on Jan 2, 2015 between Brazen Sky Ltd and Aabar Investments PJS Limited (Aabar Ltd) to ensure the balance of the SPC portfolio funds amounting to USD939.87 could be redeemed before March 31, 2015, as sought by the Board of Directors. However, the agreement was signed without the knowledge of the Board of Directors and 1MDB shareholders. In relations to this, the Board of Directors agreed on March 25, 2015 to terminate the Asset Sale Agreement and replaced it with a Share Sale Agreement in which the all equity in Brazen Sky Ltd was to be sold to Aabar Ltd at a consideration price of USD1.20 billion. However, the Share Sale Agreement was never finalised.

2.2.11. On May 28, 2015, a Term Sheet for Settlement Arrangements (Binding Term Sheet) was signed between 1MDB Group, Finance Ministry Incorporated (MKD), International Petroleum Investment Company (IPIC) and Aabar Investments PJS Groups (Aabar). Among the important terms in the Binding Term Sheet is that IPIC will pay 1MDB USD1 billion before or on June 4, 2015 and takeover the payment obligations for the interest and principle for two USD Notes which respectively amounts to USD1.75 billion. As for 1MDB, during a meeting on June 14, 2015, the Board of Directors was informed that among assets which would be transferred to IPIC/Aabar was the balance from the SPC portfolio amounting to USD939.87.

2.2.12. In conclusion, for the period of four years since 1MDB was established, the initial investment by 1MDB through funds from the issuance of IMTN amounted to RM5 billion and this investment instrument was changed four times. This started with the investment of USD1 billion (RM3.49 billion) in 2009 in a JV with a subsidiary of PetroSaudi International Ltd, followed by the investment of Murabahah Note amounting to USD830 million (RM2.59 billion) in 2011 and 2012 until it was transformed into investment in the SPC Portfolio amounting to USD2.318 billion (RM7.18 billion) in Cayman Islands in September 2012. The repatriation of a portion of the investment in the SPC Portfolio in 2014 was used to fund various company commitments and investments. In the end,

the investment was left with a balance of USD939.87 in the form of investment units in the SPC Portfolio on March 31, 2015.

3. Investments in SRC Group

3.1. An early proposal for the establishment of a Strategic Resource Company was presented by 1MDB to the prime minister on Aug 24, 2010. The Economic Planning Unit (EPU) had studied the proposal and approved the establishment of the company after several conditions were fulfilled. Based on the Memorandum and Articles of Association (M&A), SRC’s objective was to identify and invest in projects involving drilling, extraction, processing and trade in conventional energy, renewable natural resources and minerals, including the acquisition of company shares, stocks and securities. According to SRC’s business plan for 2011 to 2015, SRC will supply coal for the long term needs of the country by the fourth year of operation (2014).

3.2. As a subsidiary of 1MDB, SRC received funds from a government development grant amounting to RM15 million from the RM20 million approved by the EPU and a loan of RM2 billion from Retirement Fund Incorporated (KWAP). The RM2 billion was received on Aug 29, 2011 which was meant to be repaid over 10 years. The loan was guaranteed by the Government which includes principle and interest, amounting to RM2.902 billion.

3.3. A JV project between SRC’s subsidiary SRC International (Malaysia) Ltd (SRCI) and Aabar Investments PJS (Aabar) on Nov 3, 2011 resulted in the establishment of Aabar-SRC Strategic Resources Limited (ASRC). ASRC’s initial capital amounts to USD120 million, with each side providing USD60 million. The SRCI board had approved USD45.50 million for investment in the coal industry in Mongolia without providing a feasibility study on the matter which will be undertaken by ASRC through Gobi Coal & Energy Limited (GCE). SRC also invested in PT ABM Investama TBK, Indonesia amounting to USD120 million (RM366.68 million) through published share prices listed on the Indonesian Stock Exchange. During a meeting on Feb 14, 2012, the SRC CEO had reported that the estimated gains on the investment was USD4 million.

3.4. On Feb 15, 2012 1MDB’s ownership of SRC was relinquished to Finance MInistry Incorporated (MKD) by means of share transfer through dividend-in-specie interim payments. The transfer of SRC shares also reduced 1MDB Group’s operational loss from RM25 million to RM16.2 million, reduced the 1MDB’s gearing ratio from 12 times to 9.5 times and reduced the government’s guarantee by RM2.902 million to 1MDB Group.

4. Real Estate Investments

5. Energy Sector Investments

6. Financial Position of 1MDB Group

6.1 Based on the financial statements for the year ending March 31, 2014, 1MDB Group’s outstanding debt, both foreign and domestic, stood at RM33.71 billion. This does not include inherited loans. Eight of the loans involve domestic lenders and three from foreign lenders. Apart from this, 1MDB had 11 inherited loans, from two independent power producers in 2012 and 2014, involving RM8.15 billion which must be serviced. Thus 1MDB’s position in loan balance up until financial year ending March 31, 2014 stands at RM41.86 billion.

6.2 In terms of asset positions, a 363% rise (in value), from RM9.53 billion in 2012 to RM44.14 billion in 2013, was recorded. This increase resulted from the acquisition of two independent power producers, revaluation of real estate investments, an increase in cash on hand, deposits to Aabar Ltd, concession agreements and leases which have not been received. According to the 2014 financial statements, the value of assets increased by another 16% to RM51.41 billion following the acquisition of another IPP and investment in a portfolio fund manager.

6.3 An analysis of the cash flow on the financial statements from year 2010 to 2014 have shown that 1MDB’s paid-up capital was only RM1 million. This small amount showed that the company was not (financially) stable because it required to borrow for its activities. Throughout financial year 2010 until 2014, 1MDB obtained 17 loans (not inclusive of inherited loans) at a nominal value of RM42.88 billion but received cash amounting to RM39.17 billion. However, (the company’s) activities which were funded by loans did not generate the necessary cash flow to repay the loans.

6.4. Up until Oct 31, 2015, the total amount repayable by 1MDB Group stood at RM55 billion while its assets were valued at RM58.60 billion. Government guaranteed or assisted loans stood at RM20.31 billion.

6.5. Based on the assumption that the rationalisation plan is implemented and no new loans are taken after Oct 2015, it is estimated that RM42.26 billion is required to repay the loans which will mature between November 2015 and May 2039. 1MDB needs to prepare large sums to fulfil its obligations – RM4.88 billion in 2016, RM14.74 in 2023 and RM5.14 billion in 2039. 1MDB also requires to have at least RM1.52 billion annually from Nov 2015 to May 2024 to repay its loans.

6.6 For the period of 2016 until 2023, the borrowing cost which must be borne by 1MDB Group amounts to RM9.08 billion. The IMTN issued in 2009 will mature in 2039 with coupon payments amounting to RM287.50 per annum. 1MDB Group’s commitment for the IMTN from November 2015 until 2039 amounts to RM11.90 billion – RM5 billion principle and RM6.90 billion in interest.

7. Corporate management and Internal Controls

[…] Overall, the management and internal controls in 1MDB Group was “less than satisfactory”. Some management decisions and decisions by the Board of Directors were made without due process. Among others:

1.Between 2009 and 2015, several important investment decisions involving large sums were made through written resolutions by the Board of Directors without any discussion and proper detailed valuation. Several investments were decided on short notice and were high risk. However, the Board of Directors have told the PAC on Jan 19, 2016 that discussions were held before approvals were given through written resolutions.

2.In several situations, the 1MDB management had presented incomplete or inaccurate information to the Board of Directors before an important decision was to be made. In fact, the management sometimes took action without approval from the Board.

3.There were also situations in which the 1MDB management had presented information that was inaccurate or did not correlate with other interested parties.

4.The 1MDB management took actions which were against, or did not fully comply with, Board/shareholder decisions.

1MDB’s record keeping and filing methods were not systematic and less than satisfactory.


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