The sultan, his household and a $15bn dispute over oil in Malaysia


It’s an unlikely setting for a authorized battle over a British colonial holdover. However at lunchtime final Monday, a bailiff walked right into a serviced workplace constructing within the Avenue John F Kennedy in central Luxembourg to serve an asset seizure discover on two subsidiaries of one of many largest power corporations on the earth, Petronas.

It was a shocking salvo in a $15bn authorized battle that centres on a Malaysian state about 11,000km away, and includes descendants of a former sultan, a land take care of British colonialists, a publicity-shy London-based litigation fund and a dispute 144 years within the making.

That very same afternoon, the bailiff, appointed by claimants within the Philippines, visited the headquarters of 9 banks dotted round Luxembourg, handing financiers throughout the European tax haven the identical demand to freeze the accounts of the 2 Luxembourg-based subsidiaries — Petronas Azerbaijan (Shah Deniz) and Petronas South Caucasus.

Except Malaysia acknowledges the legitimacy of their claims, say the claimant’s legal professionals, there will probably be extra seizures of state-owned property like Petronas within the coming weeks. Different models from the corporate’s huge world enterprise community and even bancrupt state funding fund 1MDB might be a goal.

When phrase of what was occurring in Europe reached the Petronas headquarters in Malaysia — the dual 452m-high glass towers that dominate the Kuala Lumpur skyline — a terse assertion from the corporate confirmed the supply of the saisie-arret and vowed to battle for its property.

Sultan Jamalul Kiram II, who got here to the throne on the age of 10 in 1894, was the final formally recognised sultan of Sulu © KITLV/Artistic Commons

The case, which till now has attracted little worldwide consideration, centres on competing claims over the oil-rich Malaysian state of Sabah. The eight claimants say they’re the heirs of Jamalul Kiram II, the final formally recognised sultan of Sulu, a small archipelago within the close by Philippines. For a number of years they’ve been looking for compensation for the land that their ancestor leased to a British buying and selling firm earlier than the invention of huge pure sources in Sabah. The heirs, backed by a London regulation agency, have been bankrolled by a UK funding fund, Therium, in a litigation course of that has now price in extra of $10mn.

Petronas, whose enterprise generates 11 per cent of Malaysian authorities revenues, was solely dragged into the case with the seizures on Monday. The proceedings have been described by authorized specialists as one of the crucial uncommon worldwide arbitration disputes in historical past.

It doesn’t appear to have a precedent, says Colin Ong QC, a outstanding arbitration lawyer not concerned within the case. “Nobody might have predicted 144 years in the past that an settlement signed in Borneo throughout British colonial instances would give rise to such a dispute right now.”

In March, an arbitrator in France, Gonzalo Stampa, dominated in favour of the sultan’s heirs and located that Malaysia, which inherited the obligations of the 1878 lease settlement upon securing independence from the UK in 1963, should pay them $14.9bn in compensation. An earlier listening to in Spain had stalled after Malaysia complained that communications weren’t correctly dealt with.

Malaysia is interesting in opposition to Stampa’s ruling and has condemned the case as an assault on its sovereignty. Some Malaysians have even questioned whether or not the claimants are the real heirs of the Sulu sultan.

A day after the seizures, a Paris decide suspended the enforcement of the $14.9bn award till the attraction is concluded. This prompted Kuala Lumpur to declare that the award might not be enforced anyplace on the earth. However unbiased authorized specialists and a Spanish PR firm, Estudio de Comunicación, which is representing Malaysia in Europe, confirmed that the suspension solely applies in France.

Though the arbitrator made his determination in February, the Malaysian authorities was caught off guard by the asset seizures in Luxembourg and by the prospect that they may now proceed elsewhere. The transfer sparked panic in Kuala Lumpur, with two Malaysian MPs looking for an emergency debate in parliament and the federal government saying plans to launch a Sulu “process pressure”.

The Sulu heirs’ representatives argue they have been pushed to take these measures after Malaysia refused to have interaction. Paul Cohen, lead counsel for the claimants and a lawyer at London-based 4-5 Grey’s Inn Sq., says litigation was the “remaining resort”.

“A couple of Malaysian authorities refused to answer our purchasers’ direct approaches prior to now few years,” Cohen says. “On condition that the Malaysian authorities knew who they have been, and knew each side of a 140-year-old contract, this was clearly a tactic to freeze off confrontation and determination.”

Bankrolling the sultan’s heirs

The award might additionally ship a windfall for London-based investor Therium, which in keeping with a number of folks near the case is backing the Sulu heirs financially. The price of pursuing arbitration instances over plenty of years represents a considerable monetary gamble on the end result of every case, and would usually run into tens of thousands and thousands of {dollars}. The eight descendants, who dwell within the Philippines, should not rich and embrace a number of retirees in keeping with their representatives.

The litigation fund, which says it has raised $1.1bn to finance varied instances because it was based in 2009, declined to remark. Previously, it has publicly backed much less geopolitically delicate instances, comparable to final yr’s high-profile attraction in opposition to the wrongful conviction of UK Publish Workplace employees.

A cyclist cycles past the twin tower headquarters of Petronas in Kuala Lumpur
Petronas, whose twin-tower headquarters dominate the Kuala Lumpur skyline, generates 11 per cent of Malaysian authorities revenues © Samsul Mentioned/Bloomberg

The case has come at a essential time for Malaysia, which has had three prime ministers in as a few years. The south-east Asian nation has been embroiled in a political disaster since 2015, amid subsequent revelations that billions of {dollars} had been embezzled from 1MDB. Petronas, one senior Malaysian minister lately recommended, will probably be central to the federal government’s efforts to rebuild the post-pandemic financial system.

The state-owned enterprise has this yr cashed in on hovering oil costs sparked by the conflict in Ukraine. Within the first quarter, its pre-tax earnings surged 114 per cent to $7.1bn in comparison with the identical interval in 2021. Zafrul Aziz, Malaysia’s finance minister, informed the Monetary Occasions in April that the increase in commodity costs might assist Malaysia cut back its debt.

However further seizures by the Sulu heirs might set again Malaysia’s restoration.

The current worth of the Luxembourg holding corporations seized by the Sulu heirs is unclear. In February, they liquidated a 15.5 per cent stake in Azerbaijan’s Shah Deniz offshore gasfield, beforehand valued at virtually $2.3bn. Petronas mentioned the proceeds from this sale have been “repatriated”, however declined to touch upon how a lot the subsidiaries are price now.

So long as Malaysia refuses to just accept the award, its debt to the claimants is more likely to improve. For yearly it goes unpaid, the cash owed will improve by 10 per cent, it was determined in Paris.

Morning landscape of a village with river and green paddy fields in Sabah, Malaysia
Caught in the course of the authorized wranglings are the folks of Sabah, Malaysia’s poorest state © Lano Lan/Alamy

Zafrul dismissed the importance of the French ruling in April. “The Malaysian financial system measurement is RM1.5tn. The $15bn is about RM40bn . . . Our nation, [will] we crash after [losing] that 3 per cent?” he requested sarcastically. He dismissed the declare as “a frivolous, no-basis case”.

The case has touched a nerve in Malaysia, which has fended off claims to Sabah, a area measuring roughly 74,000 sq km with a inhabitants of virtually 4mn, for many years. The Philippines, which lies to the north east, has a historic declare to the state that some politicians have continued to revive.

Jamalul Kiram II died in 1936 with out leaving a direct inheritor, however since then a procession of Filipino residents have made claims to the throne that for hundreds of years dominated a area spanning modern-day Malaysia and the Philippines. One man, Muedzul Lail Tan Kiram, reportedly nonetheless claims to be the dwelling sultan of Sulu.

In 2013, the followers of 1 self-proclaimed inheritor arrived in Sabah to steer an invasion that plunged the usually peaceable nook of Malaysia into violent chaos. Through the ensuing battle with safety forces, not less than 60 folks have been reported killed earlier than the invaders — who numbered not more than 180 — retreated.

As much as that point, the claimants mentioned Malaysia had paid them an annual stipend of $5,300, in recognition that they have been kin of the late sultan and successors of the 1878 settlement. After the assault, Kuala Lumpur halted the funds, regardless of a former Malaysian attorney-general later acknowledging there gave the impression to be no proof linking the armed invaders with the heirs who had been receiving the yearly charges.

In 2017, the descendants declared their intention to take authorized motion, a transfer that has reignited anxiousness over Sabah in Malaysia and uncovered Britain’s messy colonial legacy within the nation.

“This case is the historical past of colonialism, with a twist,” says Elisabeth Mason, a lawyer at 4-5 Grey’s Inn Sq..

Followers of Jamalul Kiram III display placards while holding a brief protest
Protesters south of Manila in 2013. The identical yr, followers of 1 self-proclaimed inheritor of the final sultan arrived in Sabah to steer an invasion that descended into violent chaos © Romeo Ranoco /Reuters

“Think about that, as a substitute of shopping for Manhattan for 60 guilders, Peter Minuit signed a perpetual lease,” says Mason, referring to the Dutch colonialist who acquired Manhattan Island from the Lenape Native Individuals. “Certainly by now, the Lenape tribe would have appeared from Wall Road up Broadway to Lincoln Heart and Central Park and concluded: ‘60 guilders isn’t anyplace close to sufficient. It’s excessive time to renegotiate this deal.’

“That’s precisely what’s occurred right here,” she provides.

Malaysia has on a number of events tried to shoot down the proceedings. It now says it has opened a legal investigation into Stampa, who started the proceedings in Spain however moved the case to France after it was suspended in Madrid. Stampa declined to remark. Based on Ong, worldwide regulation permits arbitration hearings to be relocated once they turn into “unduly troublesome”.

Following the arbitrator’s ruling in February, unbiased legal professionals have been bemused by Kuala Lumpur’s determination to ship “diplomatic notes” to each signatory of the New York Conference on implementing arbitration awards, of which Malaysia is a member. Such a transfer, they mentioned, recommended that Malaysia hoped it might affect overseas courts.

“How can that even be accomplished?” asks Roger Chin, accomplice at Chin Lau Wong & Foo and president of the Sabah Regulation Society. Malaysia is “in a means [undermining] judiciaries’ independence by saying: ‘don’t have a look at it’. That’s clearly fairly fallacious”.

A consultant for Malaysia mentioned the nation is taking “each motion it deems essential to make recognized its place concerning the battle”. They added that the arbitration was not legitimate after Stampa’s appointment was overturned in Spain, and the award’s suspension in Paris is grounds for different international locations to refuse its enforcement.

The precise inheritor?

Caught in the course of the authorized wranglings are the folks of Sabah, Malaysia’s poorest state, the place in keeping with authorities information virtually a fifth of the inhabitants lived beneath the poverty line in 2019. Whereas these the FT spoke to have been strongly against the Sulu descendants’ claims, additionally they felt let down by the nationwide authorities.

A revolving door that has delivered three governments in three years has impeded efforts to problem the case, in keeping with Chin. “With totally different attorneys-general and every one coming in with out having served for a really very long time, that basically has an impact.”

The nationwide authorities must convey the folks of Sabah into the dialogue, says Shari Jeffri, a banker who has been researching the area’s historical past for 20 years. He says he has historic information exhibiting the land was by no means the Sulu sultan’s to lease within the first place, because it belonged to the sultan of Brunei.

“Why are [the Sulu heirs] mentioning the historic declare? I might quite the Malaysian authorities give the cash to Sabah,” he provides. “We want the infrastructure.”

The claimants say they intend to dedicate a “sizeable share” of the proceeds to addressing points within the area spanning the previous sultanate of Sulu, together with training, healthcare and housing.

A market in Sabah. The oil-rich Malaysian state is on the centre of competing claims © Sanjit Das/Bloomberg

The case has additionally reignited fears concerning the Philippines reopening its declare to Sabah. Its new president, Ferdinand Marcos Jr, is the son of the late dictator who as soon as argued Sabah belonged to the Philippines.

“The arbitration ruling has given unusual Filipinos [the idea that] they’ve an opportunity of success,” says Yong Teck Lee, former chief minister of Sabah. “Amongst unusual Malaysians in Sabah, in the back of our thoughts is that this anxiousness.”

Essentially the most urgent subject for the federal government in Kuala Lumpur is forestall the Sulu heirs from hoovering up extra of the state property that type the spine of the nationwide financial system.

The claimants’ legal professionals warn that extra state property will probably be pursued until a decision is reached.

“Worldwide regulation doesn’t allow you to choose and select,” says Cohen. “Both Malaysia honours its worldwide obligations, or it goes ‘full Russia’.”

“The seizure course of is a rolling programme that’s designed to satisfy our purchasers’ monetary calls for,” he provides. “However we hope Malaysia will see the price of being a authorized pariah state and are available to phrases.”

Extra reporting by Eleanor Olcott in Taipei

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