How Malaysia’s 1MDB Scandal Shook the Financial World

May 9, 2019

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Malaysia’s state-owned investment fund, 1MDB, was supposed to promote development. Instead, it has spurred criminal and regulatory investigations around the world that have cast an unflattering spotlight on deal-making, election spending and political patronage under former Prime Minister Najib Razak. The figures are mind-boggling: Of the $8 billion that 1MDB raised via bond sales, the U.S. alleges more than half was siphoned off. Angry voters ousted Najib in a 2018 election that ended his party’s 61 years of rule. A series of trials on corruption and other charges has begun in Malaysia and U.S. prosecutors have implicated at least three senior bankers from Goldman Sachs Group Inc., one of whom admitted to bribery. Malaysia has also filed criminal charges against the U.S. bank.

1. What is 1MDB?

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

2. What’s the issue?

Much of the money raised was allegedly embezzled or laundered. The U.S. Justice Department says more than $4.5 billion flowed from the fund through fraudulent shell companies to corrupt officials and their associates.

According to the U.S. indictment, a small coterie of Malaysians, led by businessman Low Taek Jho (known as Jho Low), diverted money from 1MDB into personal accounts disguised to look like legitimate businesses, and kicked back some of those funds to officials. There were questions about a $681 million payment that landed in Najib’s personal bank account. Malaysia’s then-attorney general cleared Najib of wrongdoing in 2016. Since losing his reelection bid, Najib has been charged with 42 counts of corruption, breach of trust and money laundering. He has pleaded not guilty and said most of the $681 million was returned. Jho Low, a fugitive, has also denied any wrongdoing.

3. Where’s the money?

Scattered. Malaysia’s Prime Minister Mahathir Mohamad says his country is seeking to recoup $7 billion, while his finance minister says it would consider dropping charges against Goldman in return for $7.5 billion in “reparations and compensations.” That includes fees from Goldman, which 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. The U.S. Justice Department is seeking to seize (on Malaysia’s behalf) about $1.7 billion in allegedly illegally acquired assets, including a private jet, artworks by Picasso and Monet, a $39 million Los Angeles mansion and a stake in the Park Lane Hotel in New York. It reached a $60 million settlement with the producers of “The Wolf of Wall Street,” a 2013 movie allegedly funded with siphoned money. The production company was co-founded by Riza Aziz, Najib’s stepson and a friend of Jho Low. Malaysia sold Jho Low’s super yacht, seized in Bali, for $126 million, and has been going after family properties. Singapore is returning S$35 million ($26 million) forfeited by former Goldman banker Roger Ng.