Najib was buffeted last year by allegations of graft and mismanagement at the debt-laden state fund, 1Malaysia Development Berhad (1MDB), and by a revelation that $681m was deposited into his personal bank account.
But the attorney-general, Mohamed Apandi Ali, said the transfer was a gift from Saudi Arabia’s royal family, and that no further action needed to be taken.
Opposition party leaders denounced the finding, saying the appointment of the attorney-general by the prime minister, in the midst of the crisis, suggested a conflict of interest.
But analysts said it was a victory for Najib that would allow him to focus on winning the next election, in 2018.
“The AG’s statement, today, pretty much allows the government to move on ... As far as things are legally concerned, the prime minister is in the clear,” said Ibrahim Suffian, director of independent opinion polling firm, Merdeka CentrE.
Apandi told a news conference no criminal offence had been committed by Najib in relation to three investigations submitted by Malaysia’s anti-graft agency.
“I am satisfied with the findings that the funds were not a form of graft or bribery,” he said.
“There was no reason given as to why the donation was made to PM Najib. That is between him and the Saudi family,” he said.
The involvement of the Saudi royal family is an unexpected twist in the saga over the funds transfer and the troubles of 1MDB, whose advisory board Najib chairs.
Najib denied any wrongdoing and said he did not take money for personal gain. His office declined to comment on the attorney-general’s findings.
The Malaysian Anti-Corruption Commission (MACC) had earlier said only that the funds were a political donation from an unidentified, Middle Eastern benefactor.
Apandi said $620m was returned to the donor in August 2013, five months after the transfer, because it had not been utilised.
He did not clarify what happened to the remaining $61m, nor why it had taken so long for news of the return of the funds to be released.
Najib, the son of a former prime minister, enjoys the backing of most of the powerful division chiefs in the ruling United Malays National Organization (UMNO) party.
Even his fiercest internal critics, such as influential former prime minister, Mahathir Mohamad, accept that he cannot be unseated.
Najib now needs to put aside the scandal and build support ahead of the 2018 election, after scraping to a narrow victory in the last polls.