KUALA LUMPUR, Malaysia—Investigations into the 1Malaysia Development Bhd.scandal have thus far focused on the alleged involvement of former Prime Minister Najib Razak . But Malaysia’s new government faces an awkward problem: How far should it pursue the companies that played a supporting role in one of the world’s largest-ever financial swindles?
Since Mr. Najib was forced out of office in an election upset, succeeded by veteran premier Mahathir Mohamad, the extent of the alleged theft from 1MDB has faced renewed scrutiny. If Mr. Mahathir follows through on election promises to fully investigate the scandal, he will need to step into some of Malaysia’s most important boardrooms.
Among the companies exemplifying the links to 1MDB are two large conglomerates, Tanjong PLC and Genting Group . According to a person familiar with the fund’s interactions and an examination of public documents, they enjoyed a quid-pro-quo relationship with 1MDB and Mr. Najib’s political dynasty. Representatives of the companies didn’t reply to requests for comment.
The two conglomerates aren’t alone in their ties to Mr. Najib’s government or 1MDB. Other companies allegedly played a role in the 1MDB scandal, including listed banking group AMMB Holdings Bhd. According to the U.S. Department of Justice, $681 million that originated from 1MDB was received by Mr. Najib’s personal account at the bank and used for personal and political spending.
Mr. Najib has denied taking money for personal gain. Both he and 1MDB have denied wrongdoing. Malaysian investigations conducted during his premiership cleared him. The fund has said it would cooperate with any lawful investigation. AMMB declined to comment.
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Senior government figures in Malaysia say the new 1MDB investigation will leave no stone unturned, even if that means ruffling the feathers of the business elite.
“Everything will come out. No one will be spared,” said Rais Hussin, chief strategist in Mr. Mahathir’s political party.
Others doubt Mr. Mahathir will want to scrutinize business leaders too much because Malaysia needs investment to sustain its economy, which has been shaken by volatile commodity prices. Some “will keep thinking whether it’s safe or not,’’ said one person involved in the investigation.
In the matter of Genting and Tanjong, the conglomerates in 2012 sold power assets to 1MDB. Genting later recorded extraordinary accounting gains that implied the value of those assets were much less than what 1MDB paid for them, according to a financial statement from the company. In fiscal 2013, 1MDB recorded an impairment of 1.2 billion ringgit ($301 million) on part of the premium it had paid to buy the assets, according to the fund’s financial statements.
A few months after the sale, a Genting subsidiary donated $10 million to a charity linked to Mr. Najib, according to the company’s spokesman. Companies owned by Ananda Krishnan, the Malaysian businessman who also controls Tanjong, donated a combined $135 million to the charity, according to documents produced by a person involved in the transaction. Neither Tanjong nor Mr. Krishnan’s holding company responded to requests for comment.
Goldman Sachs Group Inc., which advised 1MDB on the deals, made hundreds of millions of dollars from a related bond sale. Goldman has defended the power-asset valuations as commensurate with other contemporary transactions in Southeast Asia. A Goldman spokesman declined to comment further. At the time, Tanjong, Genting and 1MDB said the transactions made sound business sense.
The new impetus for investigating 1MDB could end years of stalling in Malaysia. The Najib government’s denials of wrongdoing contradict investigators’ accounts in several countries—including the U.S.—which alleges at least $4.5 billion was stolen from 1MDB over several years and spent on luxury items including a superyacht and mansions in America.
A thorough sweep of Malaysia’s economy would also involve a look at state-linked companies, which dominate industries from agriculture to real estate and make up more than a third of the local stock market by value.
Some companies are embroiled in their own political scandals, such as the Federal Land Development Authority, or Felda. Felda, using a subsidiary, bought a stake in an Indonesian palm oil firm at an inflated price from Jakarta-based billionaire Peter Sondakh. At the time, opposition politicians complained the deal wasn’t transparent and the Felda unit paid above the market price.
A private plane owned by one of Mr. Sondakh’s companies was chartered days after Mr. Najib’s election loss for what Malaysia’s current government says was a thwarted attempt by the former prime minister to flee the country.
Felda didn’t reply to a request for comment. Earlier this week, a spokesman for Mr. Sondakh didn’t respond for comment but previously said he wasn’t aware of a plan to fly Mr. Najib and his wife to Jakarta. Mr. Najib has been barred from leaving the country.
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For his part, 92-year-old Mr. Mahathir has been accused by opponents of helping to stitch together a union between big business and political elites during his 22 years in office from 1981 to 2003, a collaboration that he may now have to unravel.
During his previous tenure, Mr. Mahathir was regularly accused of giving favorable government contracts to allies, a practice Mr. Najib continued. Mr. Mahathir now says he made mistakes and has the country’s interests at heart, though he wasn’t more specific.
Mr. Mahathir used state companies to strengthen the influence of the majority Malay Muslm population, which traditionally lagged behind the more affluent ethnic Chinese minority. In doing so, he created a class of industrialists who benefited from the privatization of government companies, which financed his ruling party.
Political analysts say Mr. Mahathir has a narrow window of opportunity to remake Malaysia. He has promised sweeping changes to campaign financing rules and says he will introduce requirements that politicians declare their assets, along with term limits for the prime minister. Currently, political-financing laws don’t limit donations to political parties. Disclosure of the origins of donations is limited.
Others say a cleanup, especially of the government-linked companies that dominate business, could open markets up to more competition and bring money back from Malaysians who went overseas to escape corruption and affirmative-action policies.
“I think there are early signs that the new government is serious about cleaning things up,” said Jayant Menon, an economist at the Asian Development Bank.