(Writes through with comments from central bank, details on Khazanah transaction)
By A. Ananthalakshmi and Joseph Sipalan
KUALA LUMPUR, May 24 (Reuters) - The government of former Malaysian Prime Minister Najib Razak used funds from deals with the central bank and the sovereign wealth fund to pay for some of the liabilities of beleaguered state fund 1Malaysia Development Berhad (1MDB), sources with knowledge of the matter told Reuters.
The payments, which were kept secret by Najib's administration, show the extent to which federal agencies and government money were used to bail out debt-ridden 1MDB, a fund founded by Najib and subject to money laundering investigations in at least six countries.
About $500 million raised from a land sale agreement with the central bank and about $300 million from the sell-back of shares of sovereign fund Khazanah Nasional Berhad were used to fund the $1.2 billion settlement amount owed to Abu Dhabi state fund IPIC, the sources said.
The sources did not want to be identified as they were not authorized to talk to media.
At the time of payments to IPIC last year, 1MDB had said it had funded the settlement through ongoing rationalisation programmes. But Malaysia's new finance minister dismissed those claims this week as "deception" and said the finance ministry had been bailing out 1MDB for over a year.
Najib held the finance ministry portfolio since 2008, including when he was prime minister, until his shock defeat in a general election earlier this month. Neither he nor a spokesman were available for comment on the allegations on 1MDB.
1MDB officials did not immediately reply to questions on the matter.
1MDB's financial position has unravelled in recent days under the new Malaysian administration of Mahathir Mohamad, who has opened investigations into allegations of money laundering and corruption at the state fund.
Najib has been barred from leaving the country and is being questioned by the anti-graft agency.
In civil lawsuits, the U.S. Justice Department has alleged that about $4.5 billion was misappropriated from 1MDB.
The Malaysian fund has denied any wrongdoing and Najib has denied all allegations of corruption against him.
Khazanah told Reuters in an e-mail that the ministry of finance exercised its right in August 2017 to redeem outstanding Redeemable Convertible Cumulative Preference Shares amounting to 1.2 billion ringgit, which were issued to the ministry in 2011.
In a statement issued later, Khazanah said it had no control over the utilisation of the funds once the shares were redeemed. The finance ministry had the right to redeem the shares at any point, it said.
The central bank said in a statement it initiated the purchase of the land, and it was conducted as an arms-length transaction. It said it has extended information on the deal to the country's anti-graft agency for a complete review.
The finance ministry did not respond to requests for comment on the central bank deal. On the Khazanah transaction, it directed Reuters to the Khazanah response.
New Finance Minister Lim Guan Eng is scheduled to hold a news conference at 0830 GMT.
Funds from the Khazanah share repurchase deal were used to pay for the first tranche of settlement payment owed to IPIC, while money from the land sale to central bank was used to fund the second and final tranche, the sources said.
As part of the initial settlement agreement with IPIC, 1MDB was supposed to pay the $1.2 billion in two tranches - one by July 31 and the other by Dec. 31.
1MDB missed the first deadline to pay $600 million. The Abu Dhabi fund then allowed 1MDB to pay the amount in two equal instalments by end August.
It was not clear when exactly in August Khazanah made the 1.2 billion ringgit payment to the finance ministry that was eventually used to fund the IPIC settlement.
On Dec. 27, 1MDB said it had paid the final tranche and that the entire settlement amount was paid through funds raised by an "ongoing rationalisation" programme.
Bank Negara Malaysia said on Jan. 4 that it had agreed to purchase a plot of land from the Malaysian government for about 2 billion ringgit after several months of discussions.
Najib's government deceived the public and parliament over the country's financial situation and 1MDB, Lim, the finance minister, said this week. The ministry has paid for nearly 7 billion ringgit of 1MDB's dues since April 2017 and the government is due to pay billions more from 2022, he said.
$1 = 3.9800 ringgit Reporting by A. Ananthalakshmi, Joseph Sipalan and Liz Lee; Editing by Raju Gopalakrishnan