Explosive WSJ Report Exposes China's Role In 1MDB Scandal

In the waning months of his administration, Malaysian Prime Minister Najib Razak was desperate to stave off the bankruptcy of1MDB, the sovereign wealth fund that Razak and members of his inner circle looted (allegedly with the help of Goldman Sachs). So, he turned to an unlikely source of funding to bail out the fund - signing away rights to some of his country's most valuable resources in the process.


The source? China. Employing financier Jho Low as an intermediary, Razak worked out an arrangement with the Chinese government whereby Razak's government would grant state-owned Chinese enterprises lucrative stakes in Malaysian railway and pipelines projects in exchange for $34 billion - more than enough to clear the shortfall in 1MDB, and then some.

By 2016, Mr. Najib was in a bind because the fund had borrowed $13 billion it couldn’t repay. He turned to Jho Low—a Malaysian financier the U.S. Justice Department has alleged was the mastermind of a multibillion-dollar theft of 1MDB funds—to negotiate with China to resolve the crisis, according to current and former Malaysian officials.

According to a report in the Wall Street Journal, Razak offered the Chinese an invaluable cherry on top of the sweetheart deal. Permission to dock Chinese Navy ships in two Malaysian ports - a "significant concession" that would push Malaysia undeniably into the orbit of Beijing.

Mr. Najib also embarked on secret talks with China’s leadership to let Chinese navy ships dock at two Malaysian ports, say two people familiar with the discussions. Such permission would have been a significant concession to Beijing, which seeks greater influence across contested waters of the South China Sea, but it didn’t come to pass.

The projects - and the port permissions - were swiftly incorporated into China's ambitious "One Belt, One Road" initiative - a series of infrastructure projects across Europe, Asia and Africa to fill in gaps in railway and pipeline infrastructure (and help cement China's influence across the developing world).

The WSJ, which cited documents and minutes from meetings between Malaysian and Chinese officials in its report, described the projects as one of the most egregious examples of what China's critics have derided as "debt trap diplomacy" - extending credit to desperate countries in exchange for rights to key strategic resources that can be applied to BRI.


US national security officials who spoke with WSJ on the condition of anonymity described the Malaysia deal as one of China's most ambitious attempts to leverage state-backed financing to cement its geostrategic advantage.

A Journal examination of the China-Malaysia projects, based on documents and interviews with current and former Malaysian officials, offers one of the most detailed accounts to date of the political forces at work behind China’s Belt and Road program, a signature initiative of building ports, railways, roads and pipelines in some 70 countries to generate trade and business for Chinese companies.

U.S. officials say China is using the program to increase its sway over developing nations and trap them in debt while advancing its military aims. Several countries, including Pakistan and the Maldives, have been reviewing One Belt, One Road projects amid allegations some deals unfairly advanced Beijing’s interests.

What's more, minutes from the meetings revealed that China and Razak tried to cover up the prime minister's intentions, saying the deals must be portrayed as "market-driven" instead of "political" in nature.

The minutes also revealed that the projects were a fount of corruption, with valuations of the deals priced at above-market rates so that some of the money could be diverted for "other needs."

By 2017, the money had already started flowing through China's Export-Import Bank and into the coffers of 1MDB.

Documents reviewed by the Journal show Malaysian officials suggested that some of the infrastructure projects be financed at above-market values, generating excess cash for other needs. Investigators from the current Malaysian government, which replaced Mr. Najib’s last year, believe some of the money helped Mr. Najib finance his political activities and cover maturing debts of 1MDB, a fund he set up in 2009 to finance local development.

Mr. Najib was aware of the 2016 Malaysian-Chinese meetings, according to people familiar with them. Asked about them, the former prime minister issued a statement saying the rail project would have brought tens of thousands of jobs to Malaysia and stating that under his leadership, the country experienced nine years of continuous economic growth.


A month later, the Malaysians proposed that Chinese state companies instead make payments that would “indirectly be used to repay 1MDB debt,” according to meeting minutes.

Notes of a discussion on Sept. 22, 2016, say the sides agreed to move ahead with the infrastructure deals even though “they may not have strong project financials.”

Participants needn’t “waste time studying the actual project financials to see if they can sustain the debt etc.,” because Malaysia’s government backed the deals for strategic reasons, the documents say.

Notes from that meeting said Malaysia was working to enhance bilateral ties, citing support Mr. Najib voiced for China’s position in the South China Sea during a regional summit in Laos.

Two months later, Mr. Najib went to Beijing and signed the deals. Together with other projects, they made Malaysia the second-biggest recipient of One Belt, One Road funding after Pakistan.

Money was flowing by the middle of 2017 as the Export-Import Bank of China issued the first loans. By fall the bank had paid out 80% of the $2.5 billion pledged to state-owned China Petroleum Pipeline Bureau to build the pipeline, although little work had been done, according to Malaysian officials.

The story shed some light on one of the enduring mysteries of the 1DB scandal: how Low has managed to evade US and Malaysian prosecutors. Per WSJ, he has been hiding out in China under Beijing's protection.

In another interesting detail, WSJ reportedly confirmed that the Chinese government had ordered increased surveillance of WSJ's reporters in Hong Kong who were working on the story.

At a meeting the next day, Sun Lijun, then head of China’s domestic-security force, confirmed that China’s government was surveilling the Journal in Hong Kong at Malaysia’s request, including “full scale residence/office/device tapping, computer/phone/web data retrieval, and full operational surveillance,” according to a Malaysian summary of that meeting.

China worked hard on behalf of Razak during his reelection campaign. But it wasn't enough, and instead former Prime Minister Mahathir Mohamed, who is in his 90s, prevailed. He is now struggling to renegotiate Razak's deals with the Chinese. Meanwhile, Razak is facing corruption charges and will likely head to trial later this year. And Mahathir is struggling to renegotiate some of his predecessors deals.

In summary, one of the biggest financial frauds in Asian history was facilitated with the cooperation of the Chinese Communist Party and Goldman Sachs.