Malaysia's 1MDB Scandal Takes Down Its Central Bank Governor

(Bloomberg) -- Prime Minister Mahathir Mohamad announced the resignation of Malaysia’s central bank governor as questions swilled over the role the monetary authority played in a deal linked to scandal-plagued state fund 1MDB.

The government accepted Muhammad Ibrahim’s offer to resign, Mahathir told reporters in Putrajaya on Wednesday, adding he gave no specific reason for leaving. In a note to Bank Negara Malaysia employees, Muhammad said he was "prepared to relinquish" his position to protect the central bank’s image and reputation after negative perception over a land purchase from the government and the subsequent use of proceeds from the acquisition.

"The perception is that the purchase of the land was made to intentionally aid and abet the misappropriation of public funds pertaining to the corruption and scandal surrounding 1MDB," Muhammad said. "This is totally untrue. Bank Negara Malaysia will never be party to any such activities that would betray the public trust in us."

The governor’s unexpected resignation comes less than a month after Mahathir took power in a surprise election victory. The premier has wasted no time in reopening probes into alleged embezzlement and money laundering at 1MDB and has reinstalled former investigators of the debt-ridden fund to map wrongdoing and execute a plan to retrieve lost money.

Possible Successor

Local media speculated former central bank deputy governor Nor Shamsiah Mohd Yunus will be appointed to the helm after Bloomberg News reported on Tuesday that Muhammad this week offered to resign. The government will name his successor once it’s been approved by the country’s king, Mahathir said on Wednesday.

Shamsiah was involved in the investigation of 1MDB while at Bank Negara, and when Muhammad’s predecessor Zeti Akhtar Aziz was in power. The central bank in 2015 requested criminal proceedings at least twice against 1MDB for allegedly breaching the nation’s currency control law, and the requests were dismissed by the attorney general’s office. Shamsiah left when her term ended in late 2016 after almost three decades at the bank.

The U.S. said more than $4.5 billion flowed from 1MDB, through a complex web of opaque transactions and fraudulent shell companies, to finance spending sprees by corrupt officials and their associates.

Finance Minister Lim Guan Eng said in May that the previous administration of premier Najib Razak had used money raised from the land sale to the central bank -- valued at about 2 billion ringgit ($503 million) -- to pay off some of the debts of 1MDB. Bank Negara has said the purchase, announced in January, was transacted at fair value and complied with all governance requirements and relevant laws.

"Skeptical as many may be, the bank did not know nor did we have any control over the proceeds of the land purchase that would be used to settle 1MDB’s obligations," Muhammad said in the note to employees, which was verified by a central bank spokeswoman. "It is simply unthinkable for us to be associated with such a controversial entity mired with accusations of fraud and mismanagement. It is not in our nature to do such things."

Muhammad joined the central bank in 1984 and rose through the ranks before eventually becoming governor in May 2016. His appointment was met with relief from markets as investors and analysts were concerned Najib would name a governor who was more politically aligned to the government, compromising the independence of the monetary authority.

He cut interest rates in a surprise move shortly after taking office and implemented curbs on some foreign-exchange trading that drew criticism from currency traders. The central bank raised rates in January, and left borrowing costs unchanged twice since then. Policy makers are due to meet again in July.

©2018 Bloomberg L.P.