How Malaysia’s 1MDB Scandal Shook the Financial World
May 9, 2019
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.
- Who’s investigating?
There have been probes in at least 10 countries focused on possible embezzlement or money laundering. According to the U.S. Federal Bureau of Investigation, some potential witnesses were scared to talk because they feared retaliation. Singapore and Switzerland have fined some banks for lapses in anti-money laundering controls. Malaysia also has said it was looking into allegations that China offered to help fend off probes into 1MDB in the U.S. and elsewhere in exchange for stakes in infrastructure projects in Malaysia.
5. Who else is charged?
- 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 withdrawals for payoffs and for his own lavish spending. He has been charged in absentia in Malaysia with money laundering and other offenses. His whereabouts are unknown.
- Goldman’s former Southeast Asia Chairman Tim Leissner has pleaded guilty to U.S. charges including conspiracy to launder money and has admitted to bribing officials in Malaysia and the United Arab Emirates to get bond deals for Goldman. He agreed to forfeit $43.7 million ahead of his sentencing.
- Ng has been extradited from Malaysia to the U.S. to face similar charges. (The U.S. Federal Reserve has banned both men from the financial industry.)
- Malaysia filed criminal charges against three Goldman units, accusing the bank of misrepresenting to investors that the proceeds of the three 1MDB bond sales would be used for legitimate purposes, when the bank knew the funds would be misappropriated. It’s seeking more than $3.3 billion. Goldman has blamed rogue employees for any wrongdoing, and said it would vigorously defend itself.
- Malaysia leveled the same charges of securities law violations against Leissner, Ng, Jho Low and 1MDB’s former general counsel, Jasmine Loo Ai Swan.
- Ex-1MDB President Arul Kanda was charged along with Najib for allegedly tampering with a state audit report into the fund. Both men have denied wrongdoing.
- Rosmah Mansor, Najib’s wife, was also charged. Luxury items and cash seized from properties linked to the former first couple were valued at about 1.1 billion ringgit ($265 million). According to U.S. prosecutors, Jho Low in 2013 allegedly funneled $27.3 million that was looted from 1MDB to a New York jeweler who designed a pink diamond necklace for her.
6. What’s still brewing?
As well as bribing officials to get the bond deals, Leissner admitted in his U.S. plea that he and others arranged the fundraising as bond offerings because it would generate higher fees for the bank. Prosecutors assert that beyond Leissner, some employees at Goldman knew about a bribery scheme but worked to hide it from the firm’s compliance and legal departments. Singapore was said to have expanded a criminal probe to include Goldman; two Abu Dhabi funds have filed a civil suit against Goldman in New York seeking damages for alleged fraud in connection with embezzlement at 1MDB;
and a Justice Department employee has pleaded guilty to funneling money into the U.S. to pay for a lobbying effort to influence the 1MDB probe, with the filing identifying the fund’s source as Jho Low.
7. Exactly how much money is involved?
In all, 1MDB raised more than $8 billion in bond sales but accumulated several billions more in debt through loans and interest payments. Swiss investigators say about $7 billion of 1MDB funds passed into the global financial system from 2009 to 2015. They’re still assessing how much was misappropriated; the U.S. estimates more than half that amount was siphoned off. Some 1MDB projects are going ahead under the new government, including the plan for a new financial district in the capital and a $34 billion property and transport hub. As for 1MDB, it has been reduced to a shell after the finance ministry took over its assets and debt.
8. Why does it matter?
Authorities in Asia, the U.S. and Europe have been working to coordinate their investigations into the money trail from 1MDB, as well as legal approaches toward Goldman and asset recovery. Their findings could potentially identify, and help close, loopholes in the global financial system that open the way for corruption.
9. Who else is involved?
- Switzerland’s Office of the Attorney-General continues to investigate six people on suspicion of criminal mismanagement, bribery and money laundering related to the case. The top Swiss prosecutors have also opened criminal proceedings against two Swiss banks, Falcon Private Bank Ltd. and BSI SA, for “organizational deficiencies that may have permitted the commission of offenses currently being investigated.”
- Zurich-based Falcon Private Bank, linked to $3.8 billion of 1MDB fund flows, was ordered to cease operations in Singapore, and Switzerland has threatened to withdraw its license if there were any further breaches of money-laundering regulations.
- Switzerland’s financial regulator said it would review JPMorgan Chase & Co.’s anti-money laundering controls after finding the bank seriously breached regulations in its dealings with 1MDB.
- BSI lost its license to do business in Singapore for breaches of money laundering rules.
- Malaysia central bank governor Muhammad Ibrahim resigned in 2018 amid questions over the role the monetary authority played in a land-purchase deal linked to 1MDB. The monetary authority set up a review of the deal.
- UBS Group, DBS Group, Credit Suisse, United Overseas Bank and Standard Chartered are among those that have drawn penalties from the Singapore central bank for anti-money laundering lapses. They said they will strengthen controls in their businesses.
- Singapore has banned at least eight financial professionals in connection with 1MDB.
- Singapore authorities have interviewed Tan Boon-Kee, Deutsche Bank AG’s former Asia Pacific head of financial institutions group, about the extent of her involvement with the 1MDB account. She hasn’t been accused of wrongdoing.
MAS Issues Prohibition Orders on Three Individuals
May 10, 2019
Two traders and an insurance agent, who were found to have engaged in dishonest conduct, were given prohibition orders ranging from two to four years.
The Monetary Authority of Singapore (MAS) has issued prohibition orders (POs) on three individuals working separately for Jefferies Singapore and Legacy FA for dishonest conduct, the financial regulatory authority said on Thursday.
Between May 2011 and December 2012, Jeremy Lee Seow Poh, managing director and head of sales for the fixed income desk for Jefferies Singapore, traded in bonds using his private banking account that was intentionally not disclosed to his employer.
He also colluded with Ong Eng Keong, the company’s senior vice president, credit trading, to trade against Jefferies Singapore using privileged information which they obtained in their course of work and shared the trading profit. For this, they were issued POs of four years and two years respectively.
Insurance agent Yap Chee Hoe, who represented Legacy FA, between May and July 2017 forged the signatures of five individuals in their insurance application forms as he wanted to expedite their purchases of the insurance policies.
He also provided false information about an individual’s health and employment status in one of the applications. He was issued with a PO lasting two years.
Under the PO, the three are all banned from performing any regulated activity under the Securities and Futures Act (SFA), and from providing any financial advisory service under the Financial Advisors Act (FAA). They are also not allowed to take part in the management, acting as a director or becoming a substantial shareholder of any capital market services firm under the SFA and FAA.
«MAS expects financial service professionals to uphold high standards of integrity and proper conduct. Professionals who fall short of these standards must be dealt with firmly to safeguard public trust in our financial institutions,»
Lee Boon Ngiap, Assistant Managing Director (Capital Markets), MAS, said.
In March, MAS issued its inaugural enforcement report detailing actions taken against breaches of rules and regulations in the 18 months to December 2018.
It said that enforcement actions lasting till mid-2020 would focus on corporate disclosures, business conduct of financial advisers and their representatives, AML/CFT compliance among financial institutions, internal controls at brokerage houses, as well as insider trading.