Golfing buddies Obama and Najib in a tight spot over 1MDB

[KUALA LUMPUR] It's been less than two years since US President Barack Obama and Malaysian Prime Minister Najib Razak laughed and chatted during a round of golf as they both holidayed in Hawaii.

Since then the leaders have forged a relationship based on close trade ties, a shared interest in combating terrorism and a level of wariness about China's military expansion in South-east Asia. Malaysia as a secular Islamic state plays a key role in pushing back against extremism in the region.

Mr Obama spoke warmly of Mr Najib during a visit to Malaysia in April 2014, thanking him for his "partnership, for your vision for what our nations can accomplish together, not only for our two peoples, but for the peace and prosperity of this entire region." The situation just got more complicated.

The US Justice Department's bid to seize US$1 billion linked to alleged money laundering involving a Malaysian state fund known as 1MDB is the largest single action brought by its six-year-old Kleptocracy Asset Recovery Initiative.

The civil filings allege a broader US$3.5 billion misappropriation from 1Malaysia Development Bhd, whose advisory board was chaired by Mr Najib until recently.

"This investigation puts the Obama administration in a very difficult position," said Bridget Welsh, a professor of political science who specialises in Malaysia at Ipek University in Turkey.

"Mr Najib will have to distance himself from the US and to do that I'd expect him to accuse the US of conspiracy," she said.

"He needs to do something for the grassroots in Malaysia." Malaysian Foreign Minister Anifah Aman met US ambassador Joseph Yun on Thursday and noted the country is yet to receive any request from the US for information or evidence for the filings.

"Malaysia highly values its bilateral relations with the United States and calls on the US to recognise the various steps taken by the government of Malaysia to address the 1MDB issue," the ministry said in a statement.

The filings name a coterie of influential Malaysians, including Mr Najib's stepson Riza Aziz. They refer to others by a number only, including an unnamed Malaysian official who controlled accounts that received hundreds of millions of dollars. That description fits Mr Najib, who acknowledged almost US$700 million went into his bank accounts before the 2013 general election.

The Malaysian government has pledged to cooperate with any lawful investigations, and Mr Najib was cleared of wrongdoing domestically over the money which he said was a personal donation from the Saudi royal family.

But the US probe risks overshadowing ties that have evolved across a series of meetings in the US and Malaysia - the most recent was in California in February. The two leaders have also posed for a "wefie" on social media.

Under Mr Obama, the US has pushed for closer partnerships with predominantly Muslim countries, including Malaysia. He made the first visit by a sitting US president to Malaysia in nearly 50 years in 2014. The US has relied on Malaysia as a bridge to other Muslim countries in the Middle East, and with more than US$46 billion in annual trade, Malaysia is now the US's 19th-largest trading partner.

Malaysia is also one of the 12 member nations in the US-led Trans-Pacific Partnership, a trade pact that would cover around 40 per cent of the global economy and which currently does not include China.

It has been a quiet ally on issues of maritime security, including piracy, and pushing back against Chinese claims of sovereignty in the South China Sea. In June, after a meeting in China of foreign ministers from the Association of Southeast Asian Nations, Malaysia released and then retracted a joint Asean statement expressing "serious concerns" over developments in the disputed waterway.

Mr Najib has weathered a year of political turmoil at home over the revelations of the funds that reached his accounts. He's purged opponents in his ruling party to maintain his grip on power, and had recent victories in a state poll and two by- elections.

The biggest immediate concern for Mr Najib with the US move would be to limit the domestic impact and to prevent disquiet among his coalition's key voter base - ethnic Malays.

The US State Department said it is in contact with the Justice Department about the matter but added it is in the hands of the latter department.

Mr Obama's most recent visit to Malaysia in November came as the scandals over political donations and 1MDB's finances were running high. At the time, he told a meeting of young people he would raise issues of transparency with Mr Najib. Afterward, Mr Najib and Mr Obama posed for photos and had a 45-minute meeting where Mr Najib said Mr Obama raised "certain" views.

"The problem with the US relationship is that it became personalised," said Ms Welsh. "Once Mr Obama is out of the White House it will change." Either way, US-Malaysia ties will endure, she said. The US needs Malaysia to remain within its orbit, for one thing, and China has been expanding its economic influence in Malaysia.

1MDB agreed late last year to sell a 60 per cent stake in a property project in Kuala Lumpur to China Railway Construction Corp and a local partner as part of plans to reduce debt. The development known as Bandar Malaysia will host terminals for the planned high speed rail connecting Kuala Lumpur to Singapore, which China is also keen to build.

"Malaysia needs the US as a counterbalance to China," said Oh Ei Sun, an analyst at the S Rajaratnam School of International Studies in Singapore and Mr Najib's political secretary from 2009 to 2011.

Mr Najib told reporters on Thursday the US Justice Department's civil suit won't affect ties with the US and is a "separate issue."

"It is relating to individuals," Mr Najib said. "It doesn't relate to the overall position with respect to policies between our two countries."

While Malaysia values Chinese investment, Mr Oh said it was concerned about China's assertiveness in terms of it sending semi-official vessels into disputed waters near Malaysia's coast.

"I don't see this latest in the 1MDB saga having too much of an effect on the overall strategic partnership with the US."

BLOOMBERG