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Author: savemalaysia   |   Latest post: Sun, 26 May 2019, 6:52 PM


How Malaysia's 1MDB Scandal Shook the Financial World

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(Jan 10): 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. In May, Najib was ousted in a general election as the scandal fueled a voter backlash that ended his party’s 61 years of rule. As the investigations continue, Najib faces trial on corruption and other charges and U.S. prosecutors implicated at least three senior Goldman Sachs Group Inc. bankers in a multiyear criminal enterprise, one of whom admitted 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 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. The U.S. alleges that 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. 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 Jho Low. Malaysia’s new Prime Minister, Mahathir Mohamad, says his country is seeking to recoup billions of dollars of 1MDB funds, including fees from Goldman. The bank 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.

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.) Its first charges against individuals were announced in November. 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 revived the country’s own probes, after the previous administration joined 1MDB in insisting all monies were accounted for. Malaysia is also looking into allegations that China offered to help deter probes into 1MDB in exchange for infrastructure projects, after the Wall Street Journal reported that senior Chinese leaders offered to help bail out the troubled state fund in 2016.

4. Who has been charged in Malaysia?

Najib was charged with dozens of counts of corruption, criminal breach of trust and money laundering involving 1MDB-related monies. He and ex-1MDB President Arul Kanda were charged for their alleged roles in tampering with a state audit report into 1MDB. He has denied wrongdoing and pleaded not guilty to all charges. His wife was also charged. Luxury items and cash seized by police from various premises linked to Najib were valued at about 1.1 billion ringgit ($270 million). Authorities are seeking a quick sale of a $250 million yacht owned by Jho Low. He was initially charged in absentia with eight counts of money laundering, though his whereabouts aren’t publicly known. In the first criminal charges against Goldman since it got embroiled in the scandal, Malaysia is seeking fines in excess of $3.3 billion. Malaysia alleges that Goldman misrepresented to investors that the proceeds of three 1MDB bonds sales would be used for legitimate purposes, when the bank knew that the funds would be misappropriated. Related charges were also filed against Tim Leissner -- Goldman’s lead banker for 1MDB bond issues -- and Leissner’s deputy, Roger Ng. Goldman says the charges against the bank are misdirected and it will vigorously defend them.

5. What about outside Malaysia?

The U.S. has also charged Low, Leissner and Ng. Leissner admitted in a U.S. plea that he bribed officials to get the bond deals, and that he and others arranged the fundraising as bond offerings because it would generate higher fees for the bank. Leissner also admitted that more than $200 million in proceeds from 1MDB bonds flowed into accounts controlled by him and a relative. Prosecutors assert that beyond Leissner, a number of employees at Goldman knew about a bribery scheme but worked to hide it from the firm’s compliance and legal departments. Goldman has for years said it raised money for 1MDB without knowing that it would be diverted from the development projects. 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. Low has asserted his innocence on his website. Meanwhile, Singapore is said to have expanded a criminal probe into fund flows linked to 1MDB 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.

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

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:

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. 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.” The monetary authority set up a review of the deal. UBS Group AG, DBS Group Holdings Ltd., Credit Suisse Group AG, United Overseas Bank Ltd. and Standard Chartered Plc are among those who have 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. In 2017, 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. Now Malaysia is seeking to challenge an arbitration award that requires it to make multi-billion dollar payments to Abu Dhabi’s International Petroleum Investment Co. - Bloomberg




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