SHOCK EXPOSE – ‘NAJIB WOULD FREQUENTLY FLY TO CHINA TO MEET JHO LOW’: RUMORS OF JHO’S ARREST IN CHINA GET A BOOST AS NAJIB’S CHINA DEALS UNRAVEL, WITH JHO PINPOINTED AS THE MASTERMIND BEHIND SSER, PENANG LAND, OTHER INFRASTRUCTURE DEALS STRUCK TO GET NAJIB OFF THE 1MDB HOOK

KUALA LUMPUR, Malaysia—Officials here are investigating whether the government of former Prime Minister Najib Razak used funds from a China-backed infrastructure program to help pay debts owed by the state investment fund at the center of one of the world’s biggest graft probes.

Prime Minister Mahathir Mohamad in July froze over $20 billion in Malaysian infrastructure projects that are part of China’s One Belt One Road initiative, saying the contract values appeared to be inflated, in what he called a sign of possible corruption.

Now, Mr. Mahathir’s government suspects cash intended for the projects was diverted through offshore shell companies and used to pay nearly $700 million of debt owed by 1Malaysia Development Bhd., or 1MDB, according to two government officials involved in reviewing the projects.

Malaysians associated with the Najib government, working with representatives of Chinese companies, appear to have arranged the diversion of funds, the officials said.

“Chinese companies may be involved in round tripping of major infrastructure projects in Malaysia that siphons off funds from these projects to help 1MDB,” Malaysia’s new Finance Minister Lim Guan Eng told The Wall Street Journal. China’s foreign ministry didn’t respond to a request for comment.

China’s Foreign Minister Wang Yi, left, talked with his Malaysian counterpart Saifuddin Abdullah on Tuesday in Putrajaya, among discussions that a Malaysian official said were aimed at restructuring the terms of Chinese loans. PHOTO: MALAYSIA FOREIGN AFFAIRS MINISTRY/EPA/SHUTTERSTOCK

Mr. Mahathir took office in May after pledging to voters to clean up the government, and has since moved quickly to restart investigations into what went on at 1MDB under his predecessor. Mr. Najib has denied any wrongdoing by himself or 1MDB, and an investigation by his attorney general cleared him. His representative didn’t respond to requests for additional comment for this article.

Malaysia, which is on the hook to repay billions of dollars to Chinese banks that financed the projects, is demanding that Beijing agree to restructure the terms, the two officials said. On Tuesday, Chinese Foreign Minister Wang Yi visited Kuala Lumpur, Malaysia’s capital, the latest in a diplomatic flurry aimed at working out a compromise, according to one of the officials.

In mid-July, Daim Zainuddin, an ally of Mr. Mahathir who is leading investigations into the matter, laid out Malaysia’s concerns about the loans in a meeting with China’s Premier Li Keqiang in Beijing, according to a Malaysian official who was present. Scores of Chinese officials descended on Kuala Lumpur last week, and Mr. Mahathir is scheduled to meet President Xi Jinping in Beijing in August.

On Tuesday, China Foreign Ministry spokesman Geng Shuang, in a regular press conference, called Malaysia an important partner, and didn’t elaborate.

China has used the Belt and Road initiative to compete with U.S. influence in Asia, helping build roads, bridges and ports at a time when the U.S. has scaled back development aid. But China’s infrastructure push also has been dogged by corruption allegations in some countries. China has denied a role in any such corruption.

Malaysian officials are focusing on a $2.5 billion agreement signed in November 2016 in which state-owned China Petroleum Pipeline Bureau, a subsidiary of China National Petroleum Corp., would build a series of petrochemical and gas pipelines on Malaysia’s main peninsula and in the state of Sabah on Borneo island.

Malaysia’s Finance Ministry said it had paid China Petroleum over $2 billion, drawing largely on loans from Export-Import Bank of China.

The Malaysian government suspects money from the project was used to pay debts for 1MDB, which is being investigated for graft in several countries including the U.S., the two Malaysian officials said.

Malaysia has issued an arrest warrant for Jho Low, a financier who investigators say was involved in 1MDB schemes. Mr. Low is shown here in New York in 2014. PHOTO: DEBBY WONG/CORBIS

The officials said their suspicions are based largely on the timing of the transactions ahead of a loan due date and the involvement of key suspects in the 1MDB scandal. Some money likely was taken by Chinese and Malaysian individuals involved in the deal, they said.

A spokesman for the China Petroleum Pipeline Bureau said that money it received for Malaysian pipelines was used for the project only. Export-Import Bank of China didn’t respond to requests for comment.

A former Malaysian official who worked in the prime minister’s office said Jho Low, a Malaysian financier who investigators say was involved in 1MDB schemes, played a central role in negotiating the pipeline deal and other Malaysia-China infrastructure projects. Mr. Low has denied wrongdoing; his representatives didn’t respond to requests for additional comment for this article.

U.S. and Malaysian officials believe Mr. Low organized a scheme to take at least $4.5 billion from the 1MDB fund between 2009 and 2015, which he and others allegedly used to buy mansions, jewelry, art, and to finance a Hollywood production company. Malaysia has issued an arrest warrant for Mr. Low, who is living in China and Thailand, according to people aware of his movements.

A day after he was arrested, former Malaysian Prime Minister Najib Razak was charged in connection with the 1MDB scandal at a Kuala Lumpur court and released on bail. Photo: Getty

Investigators have said Mr. Low ran 1MDB from behind the scenes, and appeared to be protected by Mr. Najib, then prime minister, who allegedly received hundreds of millions of dollars of the fund’s money into his personal bank accounts. Mr. Najib’s attorney general said the money was a political donation that was mostly returned.

Mr. Najib was arrested in July on money-laundering charges related to 1MDB. He pleaded not guilty; he views the charges as politically motivated, a spokesman said.

The transactions now under scrutiny occurred when the 1MDB fund was in dire straits last year. Despite building up over $10 billion in debt, it had few assets. It also had a looming repayment of $1.2 billion to an Abu Dhabi sovereign-wealth fund, which had provided an emergency short-term loan to 1MDB in 2015 when the Malaysian fund was facing default.

In May 2017, Mr. Low met Mr. Najib on the sidelines of a Belt and Road forum in Beijing to discuss infrastructure projects involving China, according to the former Malaysian official who worked in the prime minister’s office. The official said Mr. Najib would regularly travel to China at the time to meet Mr. Low, who held no official government position.

By that time, China’s export bank had begun to provide funds to China Petroleum Pipeline Bureau for the Malaysia project, though Malaysia’s finance minister had yet to secure all the land needed for the pipelines, according to the two current Malaysian officials. Soon after, an associate of Mr. Low who had worked for 1MDB attended a meeting in Malaysia to discuss the pipeline project, said one of the officials.

The two officials suspect some of the $2 billion meant for the China Petroleum Pipeline Bureau likely went instead into a series of shells before landing at a Cayman Islands-based company called Silk Road Southeast Asia Real Estate Ltd. The company’s sole beneficial owner is listed as a Middle Eastern investor, the officials said; they believe he is an associate of Mr. Low. Investigators haven’t been able to locate the investor.

In August last year, Silk Road paid the equivalent of almost $700 million to take over a Malaysian Finance Ministry company whose only holding was 234 acres of land that had belonged to 1MDB, Malaysia’s Finance Ministry under the current government has said. The price was around twice what 1MDB had spent on the acquisition four years earlier.

The ministry, which previously was controlled by Mr. Najib and had taken over 1MDB as it ran into trouble, used proceeds of the sale to pay 1MDB’s debt to the Abu Dhabi fund, International Petroleum Investment Co. Ltd., or IPIC, the ministry now says.

All the transactions were carried out in Chinese yuan, which would have avoided triggering compliance alarms at U.S. banks, one of the Malaysian officials added.

The nearly $700 million moved to a bank account at  Industrial & Commercial Bank of China Ltd.  in Malaysia held by the Finance Ministry, which then sent the money to IPIC’s account with the same bank in Abu Dhabi, the official said. IPIC has confirmed it received the money, but declined to comment further.

Silk Road never took formal ownership of the Finance Ministry company that owned the land, which was in the northern Malaysian state of Penang. The land is still owned by Malaysia’s Finance Ministry.

About 13% of the pipeline project, now on hold, has been built, Malaysia’s finance ministry said. The 1MDB fund still has debt of around $8 billion.

WALL STREET JOURNAL

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