While I was going through the Billion Dollar Whxxx (story about how JL siphoned off billions from 1MXX to his own accounts), I came across something very interesting.
The following is a summary :
Deloxxxx was the auditor of 1MXX. To sign off the accounts, they demanded that 1MXX proved that they still own the USD2 billion cash by bringing them back to Malaysia.
Of course, if JL still has the USD2 billion cash, he could easily just transfered them back. Unfortunately, he has already spent most of the money and has only about USD300 mil left. So, JL came up with a simple trick.
He transferred his USD300 mil to 1MXX, then got 1MXX to transfer the money back to him. Then he transferred to 1MXX, and 1MXX transfered back to him again. They repeated the process a few times. The several rounds of transfers from JL's accounts to 1MXX was then presented to Deloxxxx as proof of money coming home.
Guess what ? Deloxxxx accepted them as evidence. They were satisfied and signed off the accounts.
This made me wonder whether that was the way Red Chips created their cash. For those uninitiated, Malaysian investors had long been perplexed by Red Chips listed on Bursa. Almost all of them are penny stocks, but they hold huge amount of cash. The cash is usually several times their market capitalisation. This leads many investors to feel that they are undervalued (backed by so much cash !!!) and are hence safe to invest in. But almost all these companies eventually got into troubles and some were delisted. Many investors suffered permanent losses.
Malaysian investors clearly smell something fishy, but nobody can explain what is happening. The cash seemed to be real !!! In one occasion, some investors visited a particular Red Chip in its home country and was shown the documentary evidence of their cash holding in the bank.
After reading the Billion Dollar Whxxx, I think we might have found the answer. The Red Chips' accounts are audited once in a year. During that few days when the auditors are around, they will borrow money and transferred them into their bank accounts (the lender can place restrictive covenants on the accounts such that money cannot be moved out without their consent).
When the auditors look at the bank accounts, the money is there !!! So, they happily sign off.
Easy, isn't it ?
For more information, please get hold a copy of the Billion Dollar Whxxx. There are many fascinating details inside.