Deutsche Bank denies lack of due diligence in fraudulent 1MDB fund transfers

Monday 10 Mar 2025

04 Nov 2021, 05:00 pm

This article first appeared in The Edge Malaysia Weekly on October 25, 2021 - October 31, 2021

DEUTSCHE Bank (Malaysia) Bhd has contended that it conducted a number of inquiries and exercised due diligence to ascertain the identity and purpose of over US$1 billion that state-owned 1Malaysia Development Bhd (1MDB) had requested the bank to pay into accounts held by Low Taek Jho-owned Good Star Ltd and PetroSaudi Holdings (Cayman) Ltd before executing the transfers from 2009 to 2011.

Its exercise of due diligence included obtaining the consent of Bank Negara Malaysia before transferring the funds, the German bank said in its statement of defence in reply to a suit filed by 1MDB, which claims that the bank’s lack of due diligence had resulted in fraudulent transfers between 2009 and end-2011 that had led to 1MDB incurring losses.

Beginning in May, 1MDB filed six suits, including one for US$1.83 billion against several foreign banks including Deutsche Bank, Saudi national Tarek Obaid, his companies PetroSaudi International Ltd and PetroSaudi Holdings, and its British chief investment officer, Patrick Mahony.

1MDB’s claim against Deutsche Bank and two Swiss banks — Coutts & Co Ltd in Zurich and JP Morgan Ltd in Geneva — alleges that the financial institutions did not practise due diligence, resulting in fraudulent transfers between 2009 and end-2011 that led to losses for 1MDB.

Last week, 1MDB obtained a court order from High Court judicial commissioner Quay Chew Soon to serve the court documents out of jurisdiction on Coutts, JP Morgan, Tarek, Mahony, PetroSaudi International and PetroSaudi Holdings, as they are based overseas.

Having been served earlier, on Sept 8, the Malaysian office of Deutsche Bank filed its defence, denying 1MDB’s assertions.

It would be interesting to see what the other defendants have to say, but in February 2020, Tarek and Mahony were charged in absentia with having criminally conspired with former prime minister Datuk Seri Najib Razak to embezzle 1MDB funds.

The Saudi national, along with his companies PetroSaudi International and PetroSaudi Oil Services (Venezuela) Ltd (PSOSL), is also subject to a forfeiture action in relation to US$340 million, funds that are also related to the present suit.

Through their lawyers, PSOSL and Tarek have proposed a settlement in relation to the forfeiture matter, and a hearing date has been fixed before High Court judge Datuk Ahmad Shahrir Mohd Salleh from Nov 11.

In the latest development, Tarek and the two PetroSaudi companies had entered an appearance to the suit, and they will be represented by the firm of Messrs Wong Kian Kheong Advocates and Solicitors.

The suit against Tarek, and the three financial institutions

1MDB’s suit against Tarek, Deutsche Bank and the others is in relation to the siphoning of funds in its early inception. Although 1MDB filed the writ of summons in May, it filed the statement of claim (SOC) against all seven defendants only on Aug 11, through Messrs Rosli Dahlan Saravana Partnership.

The suit follows the fraudulent transfer of at least US$1.83 billion from 1MDB to PetroSaudi and Tarek on the pretext that 1MDB was purchasing equity stakes in energy projects that PetroSaudi International had allegedly secured in its venture overseas. However, these projects did not exist.

Even worse, the state-owned entity ended up transferring the funds to a firm not related to PetroSaudi but one that was owned by fugitive financier Low, better known as Jho Low.

Allegedly a trusted confidante of Najib, Low pocketed the funds using an elaborate sham agreement with the PetroSaudi joint venture, to form 1MDB PetroSaudi Ltd.

The transfers, 1MDB said in its SOC sighted by The Edge, were made on the instructions of its former managing director and CEO Datuk Shahrol Azral Ibrahim Halmi and its director of business development, Casey Tang Keng Chee, who had directed that the fund pay US$1 billion for a 40% stake in the joint-venture company (JVCo) 1MDB PetroSaudi.

But the US$700 million that was supposed to be transferred to PetroSaudi International in September 2009 was instead diverted to a bank account of Good Star at Coutts, and the remaining US$300 million to PetroSaudi Holdings’ account in JP Morgan Switzerland.

In both instances, Deutsche Bank had executed the transfers for 1MDB.

The 1MDB SOC said that Tang had obtained the necessary approvals from Bank Negara, even though he had furnished only a Coutts bank account number but not details of the account holder.

Deutsche Bank also said its officer had checked with Tang and Bank Negara on the transfer and had received the all-clear. Moreover, Shahrol sent an email to confirm the recipient was indeed Good Star.

In its suit, 1MDB also alleged that Coutts (as the recipient bank) had failed to conduct a background check on Good Star as well as the purpose of the transfer.

As for the balance US$300 million, it was transferred to the account of 1MDB PetroSaudi in JP Morgan (as the recipient bank), on which — as with the earlier transfer — 1MDB claimed that Deutsche Bank and JP Morgan had not performed due diligence and background checks.

Failed venture converted to Islamic financing arrangement

To hide the failure of the joint venture and misrepresent the value of 1MDB’s investment overseas, as well as to circumvent Ernst & Young’s audit concerns at that juncture relating to the fund and its investments, Deutsche Bank’s SOC said Najib issued a Special Rights Redeemable Preference Shareholders Resolution to restructure the equity investment in the joint venture to a convertible fixed income generating debt instrument in the form of murabaha notes.

A Murabaha Financing Agreement (MFA) was made between JVCo 1MDB PetroSaudi and 1MDB in June 2010 but backdated to March 22, 2010, to avoid audit concerns.

Under the MFA agreement, 1MDB was required to pump another US$1.5 billion into 1MDB PetroSaudi to finance the obligations of the MFA. 1MDB contended in its SOC that, on Sept 14, 2010, Shahrol caused the fraudulent transfer of US$500 million from 1MDB to the JVCo account.

In the first drawdown of US$500 million, US$300 million went to Tarek’s personal account and the balance of US$200 million to the two PetroSaudi firms.

Tarek then requested a second drawdown of US$330 million. Of the amount, 1MDB contends that from May 20 to 23, 2011, a sum of US$95 million made its way to Low’s Good Star account held in Coutts via an AmBank transfer, with another US$110 million via Deutsche Bank on May 27, 2011, and the balance of US$125 million on Oct 25, 2011, via AmBank. So, in total, another US$330 million of 1MDB funds were transferred to Good Star.

Between Sept 14, 2010, and Oct 25, 2011, a total of US$830 million (of the US$1.5 billion 1MDB was to inject into the 1MDB PetroSaudi joint venture under the MFA) was misappropriated from 1MDB.

1MDB is seeking US$1.11 billion from Deutsche Bank, US$1.03 billion from Coutts and US$800 million from JP Morgan as a result of the fraud.

It is also seeking an additional US$153 million from Tarek, who benefitted from the first chunk of the US$1 billion transfer. Constructively, 1MDB is claiming the return of US$1.83 billion that had fraudulently been held out as assets by PetroSaudi.

German bank claims careful measures taken

Deutsche Bank (Malaysia) Bhd, in its defence filed on Sept 8 through Messrs Rahmat Lim and Partners, denied the assertion of 1Malaysia Development Bhd (1MDB) that it had not practised due diligence in the transfer of the funds.

It also denied the assertion made in 1MDB’s statement of claim (SOC) that 1MDB held a current account at the bank. It claimed its involvement was having a transfer of foreign funds facility.

The bank further claimed that it had taken screening measures to prevent money laundering or anti-terrorism financing.

“The screening did not disclose any negative results with regard to the JVCo (1MDB PetroSaudi), PetroSaudi or any PetroSaudi entities. As such, Deutsche Bank is under no obligation to carry out a further review under the relevant regulatory guidelines applicable at the material time,” it said.

“Deutsche Bank has also conducted inquiries and due diligence to ascertain the identity and purpose of the US$700 million transfer.”

The bank noted that at all times, it followed Datuk Shahrol Azral Ibrahim Halmi and Casey Tang Keng Chee’s instructions regarding the purported transfer, and that it was accompanied by Bank Negara Malaysia letters dated Sept 29 and 30, 2009, to two different accounts: one in Coutts and the other in JP Morgan.

“Deutsche Bank also avers that as [Shahrol and Tang] are agents of 1MDB, their knowledge of the true nature of 1MDB’s remittance instructions of 2009 was attributed to or imputed on 1MDB as the principal.”

The bank further stated in its defence that its CEO had also highlighted to Bank Negara that the name of the beneficiary in the 1MDB transfer instructions had differed from the two Bank Negara approval letters.

“It was also highlighted expressly to Bank Negara that the US$700 million was to go to the PetroSaudi account instead of the JVCo account. Bank Negara then communicated to [the] Deutsche Bank CEO that the US$700 million to [the] PetroSaudi account instead of the JVCo account was a business decision by 1MDB,” it said, adding that the central bank had no objection to it.

Deutsche Bank further claimed it did not know that the Coutts account holder was not related to PetroSaudi, as the details were given by Tang. Shahrol verified the transfer a few days later.

“At that time, Shahrol represented to Deutsche Bank that Good Star [Ltd] is 100%-owned by PetroSaudi International. This point was further reinforced when former 1MDB CEO Arul Kanda Kandasamy forwarded a letter dated May 22, 2015, from PetroSaudi International confirming Good Star’s sole share was owned by the PetroSaudi Group since Sept 1, 2009, and remained unchanged during the period of receipt of all the funds from 1MDB Group to PetroSaudi Group.”

It further maintained that as Good Star is not a client of Deutsche Bank, there is no obligation for it to conduct know-your-customer checks.

The bank further denied any negligence or breach of contract or dishonest assistance in the said transactions during its three-year service to 1MDB, as alleged by the firm in the SOC.

For these reasons, it claimed that 1MDB was not entitled to claim the reliefs sought from the court and that the claim was also time-barred.

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