Graft denials come under strain in Malaysia fund scandal

Kuala Lumpur (AFP) - Malaysia's prime minister and the company he founded, 1MDB, have weathered a year-long barrage of corruption allegations with nothing-to-see-here assurances, but a string of recent revelations is placing those denials under growing strain.

On Monday an Abu Dhabi sovereign-wealth fund which was helping 1MDB recover from massive debts abruptly withdrew its safety net, declaring the Malaysian state-owned company in default on a $1.1 billion loan.

The move centres on suspicions that 1MDB -- rather than repay the loan to the Abu Dhabi fund, International Petroleum Investment Co (IPIC) -- instead diverted the money, according to a Wall Street Journal report.

The dispute caps a string of recent revelations that have severely undermined claims by 1MDB -- short for 1Malaysia Development Berhad -- that its finances are in order and no graft occurred.

The scandal engulfing 1MDB and Prime Minister Najib Razak, who founded the company in 2009 to fund development projects, is staggering in its scale and complexity.

1MDB ran up debts of more than $12 billion to fund a series of questionable acquisitions.

But accusations began emerging last year that billions were looted from 1MDB in a vast campaign of international embezzlement and money-laundering that has triggered investigations by several countries stretching from Singapore to the United States.

Najib, who chairs 1MDB's advisory board, and the company have repeatedly denied wrongdoing.

- Confirming suspicions -

But the IPIC row and other recent revelations have suggested otherwise and could offer foreign investigators fresh ammunition, said James Chin, a Malaysia analyst at the University of Tasmania.

"This all shows quite clearly that not only was 1MDB diverting money but that this was done clearly in the name of the prime minister. It's very damaging," he said.

1MDB's denials began to unravel two weeks ago when a Malaysian parliamentary panel said the fund made more than $3 billion in unapproved payments to a now-dissolved British Virgin Islands company.

The report also indicated Najib's close involvement in key 1MDB decisions.

IPIC had agreed in 2012 to guarantee $3.5 billion in 1MDB bonds, lend the company more than a billion dollars, and make interest payments on the bonds.

1MDB was supposed to repay the loan through an IPIC subsidiary, Aabar Investments PJS, but IPIC last week revealed for the first time that it never received the money.

"IPIC and Aabar... are considering their options in relation to this dispute, including referring the matter to the appropriate dispute resolution forum," the Abu Dhabi fund said in a statement announcing the default.

1MDB insists that it paid the money to a British Virgin Islands entity with a nearly identical name to Aabar's.

But a Wall Street Journal investigative report has alleged it was a fake shell company through which money was funnelled to Najib and others.

A series of Journal reports starting last year have said Najib received more than $1 billion in mysterious overseas payments from 2011-2013.

After initially denying the claims, Najib admitted receiving $681 million in 2013 but denies it came from 1MDB. He says it was a gift from the Saudi royal family, most of which he returned.

Saudi Arabia's foreign minister confirmed last week the money came from his country, but only after weeks of silence as doubts over Najib's claim grew.

- 'Spectacular failure' -

The scandals have triggered demands -- including in massive Kuala Lumpur protests last August -- for Najib's resignation and transparent investigations.

Najib has stood firm, using his control of Malaysia's powerful ruling party to purge critics in the government and scuttle domestic investigations.

Najib's position is not seen as under imminent threat, but he could face renewed public pressure if the government is forced to step in and settle 1MDB's massive debts.

The finance ministry, which owns 1MDB, said late Monday it would "continue to honour all of its outstanding commitments", fuelling speculation of a 1MDB bailout that Najib had vowed would never happen.

"We now know clearly that with the spectacular failure of the (IPIC) deal, the Malaysian taxpayers will be called upon to foot 1MDB?s bills," opposition lawmaker Tony Pua said.

Any bailout could further pressure Malaysian finances amid plummeting oil revenues, slowing growth and concerns over the country's fiscal position which last year caused the ringgit currency to plunge.

"This definitely puts another dent in Malaysia's reputation. It's a bigger problem for Najib now because this is clearly in his hands now," said political analyst Wan Saiful Wan Jan.