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Malaysia in transition

Malaysia and Goldman Sachs seek elusive 1MDB settlement

Source says Muhyiddin government more 'flexible' than Mahathir's

The 1MDB scandal in Malaysia has become a cloud over U.S. investment bank Goldman Sachs.    © Reuters

KUALA LUMPUR -- Malaysia and global investment bank Goldman Sachs are working toward a multibillion-dollar settlement related to the scandal that engulfed defunct state fund 1Malaysia Development Berhad, with a source describing the talks as a shift in the government's approach following Prime Minister Muhyiddin Yassin's rise to power.

Confirming media reports earlier this week, people close to the discussions told the Nikkei Asian Review that a team representing Goldman Sachs Chairman and CEO David Solomon was in Malaysia to restart negotiations with the Finance Ministry, after a four-month hiatus due to the country's coronavirus lockdown.

One source said the talks specifically pertained to the amount Goldman Sachs would agree to return to the Malaysian government, in exchange for dropping criminal charges against the bank. Three Goldman subsidiaries have pleaded not guilty to misleading investors about three 1MDB bond issuances worth a total of $6.5 billion.

Anger over billions of dollars allegedly siphoned out of 1MDB contributed to former Prime Minister Najib Razak's 2018 election defeat to a coalition led by Mahathir Mohamad, who vowed to root out corruption. But Mahathir was forced to resign earlier this year after an internal coup, making way for a Muhyiddin government that depends on support from the party Najib once led, the United Malays National Organization.

Najib himself faces more than 40 charges, verdicts on the first seven of which are expected next Tuesday.

When it comes to Goldman Sachs, "The previous government under Mahathir was very fixed on the compensation quantum and did not want to budge," a source said, speaking on condition of anonymity due to the sensitivity of the matter. "But the current government is more flexible and wants to see what the bank can offer, to negotiate better."

Malaysia's Attorney General Idrus Harun is leading the negotiations with Goldman Sachs. The settlement is expected to be close to $3 billion, plus future collaborations the bank would undertake for a "discounted service fee." The government was seeking to recover $2.7 billion allegedly misappropriated from the issuances, while demanding the return of $600 million the investment bank pocketed as fees.

"No decisions were made in the last meeting," the source said. "But both parties are expected to meet again early next month with a definite decision."

Malaysia's former Prime Minister Najib Razak, right, speaks with his lawyer during a break in court proceedings in February.   © Reuters

Goldman's future services could include offering expertise on sovereign bond issuances and the disposal of state companies. The government is currently mulling an issuance of an Islamic bond, known as sukuk, worth $588 million to finance the restructuring of the Federal Land Development Authority -- a state agency governing plantation smallholders. A sukuk worth $118 million is also planned for the third quarter of 2020, intended to fund smaller businesses, enhance school internet access in rural areas and support research on infectious diseases.

Malaysia has also charged 17 current and former Goldman Sachs executives, accusing them of duping investors by making untrue statements and omitting key facts about the bond issuances. Under Mahathir's government, then-Attorney General Tommy Thomas led two rounds of settlement negotiations to no avail.

In June 2019, Mahathir claimed that Goldman Sachs had offered $239 million in compensation, which he described as "little" compared to the "huge killing" made by the investment bank.

Last month, new Finance Minister Tengku Zafrul Abdul Aziz had signaled that Muhyiddin's government would not accept a settlement of even $3 billion, vowing to press ahead with the legal cases.

But Tommy, in an interview with Nikkei last October, said it was natural for the cases to proceed while the two sides seek an agreement.

"Both the criminal charges and settlement negotiations are happening in parallel, they are not mutually exclusive," he said at the time. "We can always reach a settlement on the first day of trial. A lot of cases are even settled even after the trial begins. So the doors for discussion are still open while the prosecution readies the criminal case."

All told, $4.5 billion is believed to have been stolen from 1MDB, according to U.S. and Malaysian authorities. Najib, who denies all wrongdoing, took a separate hit on Wednesday, when a Malaysian high court ordered him to pay nearly $400 million in unpaid taxes from his years in office.

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