Malaysia central bank warned government in 2014 of 1MDB risks

[KUALA LUMPUR] Malaysia's central bank warned the government as early as 2014 of risks to the financial system from debt-ridden state investment company 1Malaysia Development Bhd, Governor Zeti Akhtar Aziz said.

Bank Negara Malaysia issued two memorandums to the finance ministry, the sole shareholder of 1MDB, flagging the dangers of the fund's mounting debt, Ms Zeti said in an interview in Washington on Saturday. She didn't say how the ministry responded.

"Of course this was on our radar screens," Ms Zeti said of 1MDB, whose debt ballooned to 50 billion ringgit (S$17.43 billion) as of January.

"We were monitoring in terms of the level of their indebtedness, and whether they had any systemic implications on the banking sector."

The comments indicate a level of concern at the central bank for years over the fund, whose advisory board is chaired by Prime Minister Najib Razak. Bank Negara Malaysia has tried and failed to have criminal charges brought against 1MDB for allegedly making inaccurate disclosures on overseas investments.

Ms Zeti, whose 16-year tenure as governor ends in two weeks, has been publicly critical of 1MDB's actions, risking bringing her into conflict with Mr Najib.

The country's 2nd finance minister and the secretary-general at the ministry couldn't be reached on their mobile phones on Sunday for comment.

1MDB has been the subject of investigations by local agencies like the central bank, as well as countries such as Switzerland and Singapore, amid allegations of financial irregularities.

It has consistently denied any wrongdoing. Financial troubles at the company, which included almost defaulting on a loan, led it last year to announce plans to sell assets and pare debt.

The probes come amid a separate political scandal over a US$681 million donation from the Saudi Arabian royal family that appeared in Mr Najib's bank accounts before the general election in 2013.

1MDB's woes plus questions over the money in Mr Najib's account have created the biggest threat to the premier since he came to power in 2009, though he has retained the support of the bulk of senior officials in the ruling coalition.

Mr Najib has denied any wrongdoing over the donation and the attorney-general has cleared him of any graft.

A parliamentary committee in its investigation report of 1MDB released this month identified at least US$4.2 billion of unauthorized or unverified transactions and recommended former Chief Executive Officer Shahrol Halmi and other managers be investigated.

Transcripts from the parliamentary hearing also highlighted Mr Najib's involvement in decisions on questionable transactions that bypassed the board of directors and finance ministry.

Officials from the finance ministry told the Public Accounts Committee they were never consulted on the fund's investment decisions or finances.

The company said this month it had repaid all short-term debt and bank debt, leaving it with 2.3 billion ringgit in the bank.

Bank Negara said in October its probe of 1MDB found inaccurate disclosures by the fund when it sought approvals for investments abroad. The attorney general concluded there was no wrongdoing and dismissed the central bank's recommendation for criminal proceedings against 1MDB.

Ms Zeti said last month the central bank is pursuing "appropriate administrative enforcement action" as the company didn't show proof why it couldn't meet an order to bring US$1.8 billion in funds related to multiple deals back to Malaysia.

"The administrative action has been submitted to the attorney general," she said in the interview on Saturday. "We are waiting for a decision."

The conclusion by the central bank about two years ago was Malaysia's banking system could have absorbed a default by 1MDB, Ms Zeti said. The fund's borrowings were with "many banks" and while lenders would have been affected, it wouldn't have been enough to cause severe stress, she said.

While Ms Zeti has previously said the 1MDB and Saudi donation scandals hurt confidence in the country, she adopted a more conciliatory tone on Saturday.

"Right now, I believe that Malaysia needs to be able to move on and put that behind us," she said. 1MDB's rationalization "and the intent for it to be eventually scaled back and even possibly unwound would give Malaysia the opportunity to move on."

BLOOMBERG