(May 24): Troubles at Malaysia’s state investment company 1MDB deepened as its officials told the government the fund is insolvent and unable to repay debts that could amount to almost US$7 billion ($9.40 billion) over the next five years.

1MDB’s directors said they had questioned US$2.5 billion worth of purported investments held overseas and the company’s management failed to supply proof of such holdings over the past two years, according to a finance ministry statement on Wednesday. Its former chief financial officer told the government in March the company wouldn’t be able to service interest payments due in April and May, Finance Minister Lim Guan Eng said.

Malaysia, under newly-elected Prime Minister Mahathir Mohamad, is trying to uncover the extent of alleged embezzlement or money laundering at 1MDB, set up by former premier Najib Razak in 2009 to attract foreign investment. There are global criminal and regulatory probes as investigators attempt to trace if money flowed out through a complex web of opaque transactions and fraudulent shell companies to finance what the US said were spending sprees by corrupt officials and their associates.

"I have instructed that the Ministry of Finance take steps to appoint PwC to conduct a special position audit and review of 1MDB so that Malaysians would know the true financial state of affairs in 1MDB," Lim said. "We would then be able to determine the cost of the shenanigans to the taxpayers."

Irregular Transactions

In April 2016, a Malaysian parliamentary committee identified at least US$4.2 billion in irregular transactions in 1MDB. The US alleges a small coterie of Malaysians may have diverted more than US$4.5 billion from the fund into personal accounts disguised to look like legitimate businesses, and kicked back some of those funds to officials. Singapore has punished banks over lapses related to 1MDB, seized hundreds of millions of assets and jailed bankers over the scandal.

The company has consistently denied any wrongdoing and repeatedly said all its funds are fully accounted for.

1MDB President Arul Kanda had previously said there is 31 billion ringgit ($10.5 billion) of mostly long-term debt outstanding, down from a peak of 50 billion ringgit, while data compiled by Bloomberg shows 26.8 billion ringgit of bonds and interest payments are due by 2023.

1MDB’s dollar bonds due 2023 dropped about 2 cents to around 90 cents on the dollar on Thursday, traders said.

Dollar Debt

Abu Dhabi’s International Petroleum Investment Co. guaranteed two separate dollar-denominated bonds for 1MDB in 2012 in deals arranged by Goldman Sachs Group Inc. that raised US$3.5 billion. The bonds due in 2022 were the subject of a dispute in recent years on who’s liable to make interest payments on the debt. The ownership on one of the issues isn’t known because it was a private placement, while data compiled by Bloomberg shows there is no single investor that holds more than 5.1% of the bonds on the other set.

In a settlement agreement with IPIC last year, 1MDB assumed the coupon and principal obligations for the bonds, and the company said it would meet the payments by cashing out on investment fund units that it owned.

Those are the same investments that 1MDB director Kamal Mohd Ali called "a scam," according to the finance ministry statement.

The revelations come after the finance minister said on Tuesday that Malaysia’s government debt has been inflated by 1MDB’s borrowing and exceeds 1 trillion ringgit. That was higher than previously disclosed by Najib’s administration as it was masked by the way the accounts were reported, he said.