By Joseph Moss – International Banker
“The Malaysian people were defrauded on an enormous scale”, was the recent assertion by Deputy FBI Director Andrew McCabe in reference to an international banking scandal that has now rumbled on for over two years, and looks set to continue for some time. With investigations being conducted by several countries into the dealings of 1Malaysia Development Bhd (or “1MDB”), Malaysia’s state development fund, it is widely believed that over $3 billion was misappropriated from the Malaysian government. During this time, many Malaysian authorities have remained entrenched in a battle to save their positions, none with a higher profile than Najib Razak, Malaysia’s Prime Minister and Chairperson of 1MDB’s advisory board.
1MDB was initially set up by the oil-state Terengganu as a sovereign wealth fund, before being turned into a state-owned development fund by Najib back in 2009. The stated intention in doing so was so that the potential benefits of the bank’s projects could reach the general Malaysian population, rather than just the citizens of Terengganu. The bank could provide a conduit for foreign investment into Malaysia, principally through the formation of strategic global partnerships designed to promote long-term economic development. The money that would purportedly be raised from such projects in energy, real estate and tourism could then produce more employment and prosperity for Malaysians.
The reality that has transpired since then, however, appears to be in sharp contrast with such a vision. Fast forward to 2016 and the US Department of Justice (DoJ) moved in July to seize over US$1 billion in assets connected with money laundered from 1MDB, as part of the $3.5 billion it claims was misappropriated between 2009 and 2015. To date, it has been the largest ever case brought by the DoJ’s Kleptocracy Asset Recovery Initiative (KARI), which was launched 6 years ago in a bid to forfeit the proceeds of foreign official corruption which made their way through the US financial system, and to restore the funds to those people affected. The 136-page complaint filed by the US outlines an intricate international network of players and institutions that worked to hide bilions of dollars worth of stolen assets.
The first half of the decade would see 1MDB rack up substantial levels of debt, which ballooned to 42 billion ringgit (US$10 billion) for the year ended March 2014. The 2012 acquisitions of Tanjung Energy Holdings and Genting Group’s Malaysian power generation assets for 8.5 billion ringgit and 2.3 billion ringgit respectively, as well as the 1.2 billion ringgit purchase of a 75% stake in Jimah Energy’s coal-fired power plants one year later, were seen to be key contributors to this mounting debt. However, it was not until mid-2014 that the bank began to raise eyebrows after allegations about the misappropriation of state funds were published by investigative journalism blog “The Sarawak Report”. Suspicions were further raised after 1MDB began to miss payments on what was owed to its creditors, such as bondholders and banks. A 2 billion ringgit loan initially due in November 2014, for example, was eventually settled by 1MDB several months later, but only after it missed two repayment deadlines.
Although the scandal has far-reaching implications for a number of parties, it is the partnership between 1MDB and Saudi Arabian oil company PetroSaudi International that initially drew the most attention from officials, especially after a former PetroSaudi executive leaked extensive email correspondence which was published by the Sarawak Report. The joint venture with the Saudi firm was the first major deal signed by the bank back in 2009, and one in which it agreed to pledge $1 billion in return for proceeds from mineral extraction activity which PetroSaudi would conduct in Turkmenistan and Argentina, and valued at $2.7bn. According to the DoJ, however, only $300 million made it into the joint venture. The DoJ also alleges that $24.5 million was sent to the Riyadh bank account of an unnamed PetroSaudi prince who co-founded PetroSaudi. It is likely that the co-founders of PetroSaudi referred to in the DoJ complaint are Prince Turki bin Abdullah bin Abdel Aziz, son of the late Saudi King Abdullah, and former banker Tarek Obaid, although neither have been officially accused of malpractice. $20 million of the $24.5 million was then moved on again to an unnamed Malaysian official, dubbed “Malaysian Official 1”, whose description was that of “a high-ranking official in the Malaysian government who also held a position of authority with 1MDB”. The description corresponds to that of Prime Minister Najib Razak, although he has not been specifically named in the suit.
One of the central figures in the scandal is Jho Low, the Malaysian owner of private equity investment and advisory firm Jynwel Capital. According to the Justice Department’s lawsuit filed in July, Low and his associates helped to embezzle at least $3.5 billion in total from 1MDB, despite the financier having no official position at the bank. Low has been involved with 1MDB since its nascent days, initially playing an advisory role in the establishment of the Terengganu Investment Authority fund. He is also a family friend of Najib; indeed, both Low and the prime minister were present at the initial meeting in August 2009 to discuss the joint venture with PetroSaudi International, a meeting which also included the co-owners of the oil company. Once this deal was signed, moreover, the DoJ believes that the $700 million which did not reach the joint venture was sent into a shell company based in the Seychelles, called Good Star Ltd, which was owned by Low and which received an additional $330 million at a later date.
A large proportion of the embezzlement, it is believed, has been spent on extravagant purchases in the US including luxury New York apartments, expensive artworks by Van Gogh and Monet, opulent residencies in Beverley Hills and even a private jet. Prosecutors allege that some funds also went towards financing the Hollywood film The Wolf of Wall Street, with the Red Granite studio company which produced the film being run by Riza Aziz, the stepson of Najib and friend of Low. As such, investigators now believe that much of the financing behind Jynwel Capital has come from 1MDB’s illegally diverted funds, with the financial source of major Jynwel investments having their origins in money illegally diverted from the development bank. Such investments include a hotel in London’s Park Lane, one in Beverley Hills, and an investment in music giant EMI Publishing. Indeed, the DoJ court filing states that Low laundered over $400 million into the US, $106.7 million of which was used to acquire the EMI stake.
Both Jho Low and Riza Aziz are specifically named in the US lawsuit, along with Abu Dhabi government officials Khadem Abdulla al-Qubaisi and Mohammed Ahmed Badawy al-Husseiny. At the time, al-Qubaisi was managing director of the government-owned International Petroleum Investment Co. (IPIC), an $80 billion sovereign wealth fund, while al-Husseiny was the chief executive of IPIC subsidiary Aabar Investments. Through Jho Low, 1MDB tapped up these Abu Dhabi contacts to help raise funds, which resulted in the announcement that IPIC would invest in power plant development in conjunction with 1MDB, and the development bank would send $1.4 billion to IPIC as a “refundable deposit”. The funds never arrived, however. Instead, the DoJ suspects that they went to a shell company in the Virgin Islands called Aabar Investments PJS Limited, named as such to give the impression it was associated with the real IPIC subsidiary Aabar Investments. Both al-Qubaisi and al-Husseiny are thought to be directors of the offshore company, which was then used to transfer $238m to Red Granite, and from where funds were used to finance The Wolf of Wall Street and buy property in Manhattan, Beverly Hills and London. According to the US court action, al-Qubaisi received $473 million of diverted funds directly into his bank account. He has since been arrested by Abu Dhabi police, sacked from his role at IPIC and had his assets frozen.
Goldman Sachs is also under the spotlight for its dealings with 1MDB. The US banking giant currently faces questions from the New York State Department of Financial Services in relation to the due diligence it carried out as part of three bond sales it helped 1MDB to issue in 2012 and 2013, with IPIC guaranteeing two of the sales in 2012. The three sales totalled $6.5 billion, while Goldman reportedly made about $500 million from the bond sales, or 7.7% of the securities’ face value. Although it does not face any specific citation for malpractice, Goldman has been questioned about whether it failed to sufficiently inform investors about the nature of the bonds, and whether it acted illegally in failing to notify regulators when proceeds of the bond sales disappeared. The DoJ has asserted that Goldman’s offering circulars for the two IPIC-guaranteed bonds contained “material misrepresentations and omissions” regarding the intended use of the bond sale proceeds, as well as the nature of the relationship between IPIC and 1MDB.
More recently, New York’s banking regulator has been seeking clarification from Goldman about its role in the third bond sale in 2013. The sale raised $2.7 billion, some of which was used to purchase power plants, but $1.2 billion of which was diverted into offshore shell companies overseen by Low and his associates, according to the DoJ. One associate of Low is named as Eric Tan, whom the DoJ alleges controlled the Tanore Finance account into which the funds were diverted, and from which Najib received $681 million. The prime minister continues to contend that the funds were a gift from the Saudi Arabian royal family, a position that has been supported by the Saudi foreign minister and Malaysian attorney-general. A further $100 million is believed to have been used by Tan to purchase art on Low’s behalf.
It should also be mentioned that the US is not the only country to be holding an official investigation into 1MDB’s dealings at present. Today, investigators in at least seven countries are still working on accounting for all the money that went missing. Singapore and Switzerland, in particular, are now carrying out extensive investigations of their own, and have begun criminal proceedings against Swiss private bank BSI SA for allegedly failing to prevent suspected money laundering and bribery related to its dealings with 1MDB. According to Swiss regulators, approximately 100 client accounts at BSI were involved with 1MDB, of which 18 were opened by Low in a single day. Documents reviewed by the Wall Street Journal show that hundreds of millions of dollars moved through the BSI accounts of Low and associates. A former BSI banker, Yeo Jiawei, has been charged in Singapore with money laundering in connection with 1MDB, while the Singaporean government has also seized US$89 million worth of assets from Low. The Monetary Authority of Singapore has additionally found that Standard Chartered and two other banks failed to report suspicious 1MDB-related transactions; as a result, they would face “firm regulatory actions”.
Doubts now prevail over the extent of the value of the funds that can be recovered by KARI. During its 6-year existence, the initiative has frozen $2.8 billion stolen by foreign officials across the globe, from Honduras to South Korea. To date, however, a mere 5% of those funds has been recovered and sent back to its rightful owners. While much of the remainder of the funds are still tied up in court proceedings, and therefore could still be recovered in the future, it does underline the difficulty facing the kleptocracy unit’s challenge in recovering the funds in a timely manner. With 1MDB, a myriad of legal challenges will undoubtedly have to be addressed by KARI, particularly given the global nature of the misappropriation and the sheer size of the case, one which dwarfs all previous cases overseen by the unit. Moreover, the $1 billion in assets being seized by the US is just a fraction of the money that was stolen from 1MDB. The chance of recovering the full $3.5 billion that is estimated to have been misappropriated from the bank, therefore, seems increasingly slim.
One of the rare bright spots to have emerged from this entire affair, however, is the demonstration of considerable strength from Malaysia’s economy. A recent report from political consultancy Global Risk Insights concluded that despite 1MDB attracting the headlines within the country and beyond, the economy has remained “remarkably resilient”. According to the consultancy’s analyst Alexander Macleod, investors continue to have confidence in Malaysia’s regulatory framework, while the stock market has regained much stability in recent times, “Malaysia has seen the worst of this political and economic storm, and will seek to renew its status as an exciting emerging market”.
Nevertheless, the scandal has highlighted the sheer magnitude of some of the money laundering operations currently being carried out within the global financial system – with a host of international banking institutions deemed to be involved in the web of 1MDB transactions – as well as illustrating the various creative ways in which stolen money can be hidden. It has also inflicted scars on Malaysia as a nation, with tens of thousands of protesters taking to the streets to call for Najib’s resignation. Although he was internally cleared of any wrongdoing earlier this year by the newly appointed attorney-general, news sources continue to allege that Malaysia’s Anti-Corruption Commission privately recommends he faces criminal charges. Whether the country’s financial and political reputation can recover any time soon remains to be seen; in the meantime, however, a greater degree of financial transparency within the county seems the most appropriate first steps in restoring public confidence.