How Malaysia's 1MDB Scandal Shook the Financial World

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(Sept 26): Malaysia’s state-owned investment fund, 1MDB, was supposed to attract foreign investment. Instead, it has spurred criminal and regulatory investigations around the world that have cast an unflattering spotlight on financial deal-making, election spending and political patronage under former Prime Minister Najib Razak. The figures are mind-boggling: A Malaysian parliamentary committee identified at least $4.2 billion in irregular transactions related to 1MDB. Najib was ousted from power in a general election in May as the scandal fueled a voter backlash that ended his party’s 61 years of rule. Malaysian authorities have charged Najib with dozens of counts of corruption, criminal breach of trust and money laundering involving 1MDB-related monies.

1. What is 1MDB?

It’s a government investment company -- full name, 1Malaysia Development Bhd. -- that took shape in 2009 under Najib, who went on to lead its advisory board. Its early initiatives included buying privately owned power plants and planning a new financial district in Kuala Lumpur. The fund proved better at borrowing -- it accumulated $12 billion in debt -- than at luring large-scale investment.

2. What’s the issue?

Investigators have been trying to trace how money flowed through and around 1MDB and illegally into personal accounts. The U.S. Justice Department says more than $4.5 billion flowed from the fund, through a complex web of opaque transactions and fraudulent shell companies, to finance spending sprees by corrupt officials and their associates. Swiss investigators say up to $7 billion passed through 1MDB and one of its units. The U.S. alleges that a small coterie of Malaysians, led by a businessman known as Low Taek Jho, diverted money from 1MDB into personal accounts disguised to look like legitimate businesses, and kicked back some of those funds to officials. Some of the money is alleged to have ended up with Najib and his family. That includes $681 million that landed in Najib’s personal bank account, according to U.S. prosecutors. Malaysia’s then attorney general, backed by Saudi authorities, said in 2016 the $681 million was a donation from the Saudi Arabian royal family, much of which was returned. U.S. investigators say the money instead came from, and was returned to, an offshore entity allegedly controlled by Low.

3. Who is investigating?

There are probes related to 1MDB in at least 10 countries, focused on possible embezzlement or money laundering. The U.S. Justice Department identified about $1.7 billion in assets that it says were illegally acquired through money diverted from 1MDB, including real estate, art, a luxury yacht and proceeds from the film “The Wolf of Wall Street." (It reached a $60 million settlement with the producer of that movie.) Singapore and Switzerland have imposed financial penalties on several banks for lapses in anti-money laundering controls related to funds allegedly from 1MDB. According to the Federal Bureau of Investigation, possible witnesses were too scared to talk because they feared retaliation. Malaysia’s new government has revived the country’s own probes, after the previous administration joined 1MDB in insisting all funds were accounted for.

4. What’s happened since Malaysia’s election?

A lot. On the campaign trail, then opposition leader Mahathir Mohamad lambasted Najib as a “thief.” Within days of becoming prime minister, he barred Najib from leaving Malaysia and said he’d reopen a graft probe targeting 1MDB with a view to recovering billions of dollars of lost funds. Mahathir, 93, also replaced the attorney-general who in 2016 had cleared Najib, and instructed the auditor-general to declassify a 1MDB report that had been protected under the Official Secrets Act. Luxury items and cash seized by police from various premises linked to Najib were valued at about 1.1 billion ringgit ($266 million). Najib’s wife, daughter, stepson and lawyer were questioned by police and anti-graft officials, as were former top administration officials. Authorities are seeking a quick sale of a $250 million yacht owned by Jho Low and trying to secure the return of his private jet parked in neighboring Singapore, which separately has returned more than $10 million to Malaysia from its investigations. Low has been charged in absentia with eight counts of money laundering, though his whereabouts aren’t publicly known.

5. What does Najib say?

The ex-prime minister has consistently denied wrongdoing and has pleaded not guilty to all charges. He could be jailed for decades and fined. Speaking weeks before the election, Najib had acknowledged “some reputational damage’’ to Malaysia. “I would have probably not had that kind of business model, probably I would make sure tighter supervision,” he said of 1MDB. “But we all learn from our mistakes.’’ When Swiss prosecutors said in July they were investigating six people and two banks in their 1MDB probe, they added that there were no “factual grounds” to name Najib as a suspect.

6. What’s next and why does it matter?

Charges against Najib are just part of the Malaysian government’s battle to recover lost 1MDB funds and bring to justice those guilty of siphoning public funds. Local investigators have pledged to cooperate with global counterparts as they try to piece together how billions of dollars may have been embezzled and laundered through major financial centers in the U.S., Europe and Asia. The findings could potentially identify, and help close, loopholes in the global financial system that open the way for corruption.

7. Who else is involved?

Though not all have been accused of doing anything wrong, financiers and financial companies have found themselves part of the 1MDB saga:

Jho Low, a bon vivant who said he did consulting work for 1MDB, is portrayed by U.S. prosecutors as the central figure who set up shell companies to collect proceeds from the fund and arranged the withdrawal of tens of millions of dollars to pay Malaysian government officials and for his own lavish spending. As well as being wanted in Malaysia, he’s been labeled a "key person of interest" in Singapore. Low has asserted his innocence on his website and hired former New Jersey Governor Chris Christie and law firm Kasowitz Benson Torres, among others, for his legal defense. Riza Aziz, Najib’s stepson and a friend of Low, co-founded the movie production company that paid $60 million to settle U.S. Justice Department claims it financed the “Wolf of Wall Street” with money siphoned from 1MDB. Goldman Sachs made $593 million working on three bond sales that raised $6.5 billion for 1MDB in 2012 and 2013, dwarfing what banks typically make from government deals. It said in 2015 that fees and commissions “reflected the underwriting risks" it had assumed. Mahathir says Malaysia is seeking to recoup some of those fees. Tim Leissner, Goldman’s former chairman of Southeast Asia and lead banker for 1MDB bond issues, is now barred from the world of finance in the U.S. and Singapore. Leissner was in talks with U.S. prosecutors to potentially plead guilty to criminal charges, the Wall Street Journal reported in July, citing people familiar with the matter. Prosecutors in Malaysia and Singapore are turning their attention to Roger Ng, Leissner’s junior, who introduced several parties central to the scandal, people familiar with the matter say. Singapore authorities have interviewed Tan Boon-Kee, Deutsche Bank AG’s former Asia Pacific head of financial institutions group, and quizzed the lender about the extent of her involvement with the 1MDB account. She hasn’t been accused of wrongdoing. Switzerland’s Office of the Attorney-General said July 10 that six people and two Swiss banks are suspected of involvement in using financing intended for 1MDB for other purposes, "most particularly for the personal enrichment of the persons involved." Malaysia central bank governor Muhammad Ibrahim resigned as questions swirled over the role the monetary authority played in its land purchase deal from Najib’s government, who in turn used the proceeds to pay 1MDB’s debt. Muhammad denied the acquisition was made to “intentionally aid and abet the misappropriation of public funds.” UBS Group AG, DBS Group Holdings Ltd., Credit Suisse Group AG, United Overseas Bank Ltd. and Standard Chartered Plc are among those who have also drawn penalties from the Singapore central bank for anti-money laundering lapses. They said they will strengthen controls in their businesses. Falcon Private Bank Ltd., a Zurich-based bank linked to $3.8 billion of 1MDB fund flows, was ordered to cease operations in Singapore while Switzerland threatened to withdraw its license if there were any further breaches of money-laundering regulations.  BSI SA, a 143-year-old Swiss bank that worked with 1MDB, lost its license to do business in Singapore for breaches of money laundering rules. Switzerland’s financial regulator will conduct a detailed review of JPMorgan Chase & Co.’s anti-money laundering controls after finding the bank seriously breached regulations in its dealings with 1MDB. Singapore has banned at least eight financial professionals in connection with 1MDB. Malaysia’s finance ministry and 1MDB reached a $1.2 billion settlement with Abu Dhabi’s sovereign wealth fund over a debt dispute and made the payments in 2017. - Bloomberg