(Bloomberg) -- 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. A Malaysian parliamentary committee identified at least $4.2 billion in irregular transactions related to 1MDB. Najib was ousted from power in a May general election as the scandal contributed to a voter backlash, ending his party’s 61 years of rule.
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 whether money flowed through and around 1MDB and illegally into personal accounts. 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 attorney general, backed by Saudi authorities, said the $681 million was a donation from the Saudi Arabian royal family, much of which was returned. The U.S. Justice Department says the money instead came from, and was returned to, an offshore entity called Tanore Finance Corp. Another $700 million in 1MDB funds meant for a joint venture with a company known as PetroSaudi International was found to have landed in an unrelated offshore account.
3. Why does it matter?
A cooperative Malaysia could help investigators around the world piece together how billions may have been embezzled and laundered through major financial centers in the U.S., Europe and Asia. The U.S. said 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. It alleges a small coterie of Malaysians diverted money from 1MDB into personal accounts disguised to look like legitimate businesses, and kicked back some of those funds to officials. Answers to how they did it could potentially close loopholes in the global financial system that allowed such wrongdoings to take place.
4. 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 is seeking to seize 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 has 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 are too scared to talk to U.S. investigators because they fear retaliation. Malaysia’s new government has now revived the country’s own probes, after the previous administration joined 1MDB in insisting all funds were accounted for.
5. What impact did Najib’s defeat have?
On the campaign trail, then opposition leader Mahathir Mohamad lambasted Najib as a “thief.” Within days of becoming prime minister, the 92-year-old Mahathir barred Najib from leaving Malaysia and said he’d reopen a graft probe targeting 1MDB. He placed the attorney-general who had cleared Najib on leave, and instructed the auditor-general to declassify a 1MDB report that was protected by the Official Secrets Act. Police searched Najib’s house, the anti-graft agency called him in to answer questions related to 1MDB, and a new task force comprising a few people involved in a previous probe was formed to lead the renewed investigation. “If the law says Najib has done something wrong, then he will have to pay the consequences,” Mahathir said.
6. What does Najib say?
He has consistently denied wrongdoing and reiterated his innocence since he was ousted. Speaking weeks before the election, Najib said 1MDB had governance issues but “you cannot just accuse somebody of being a thief or anything unless there is evidence. It’s been cleared, there’s been no wrongdoing -- I stand by it.’’ He acknowledged “some reputational damage’’ both to Malaysia and his own government. “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.’’
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:
- Low Taek Jho, a bon vivant who did consulting work for 1MDB, is portrayed by U.S. prosecutors as a 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. He is a "key person of interest" in Singapore investigations and the Wall Street Journal says U.S. authorities could file criminal charges against him. Low said in July that attempts to link him to recent guilty pleas in 1MDB-related probes in Singapore are based on “unfounded assumptions.” He had previously denied wrongdoing.
- Riza Aziz, Najib’s stepson and a friend of Low Taek Jho, 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.
- Malaysia central bank governor Muhammad Ibrahim resigned as questions swirled over the role the monetary authority played in a 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.”
- 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.
- 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. New York’s bank regulator has asked the firm for a summary of its 1MDB work. Singapore’s prosecutors and police have interviewed current and former Goldman Sachs executives who worked on the bond offerings. They are also looking into the firm’s links with Low.
- Tim Leissner, the former Southeast Asia chairman for Goldman Sachs, wrote an unauthorized reference letter for Low on the bank’s letterhead. He resigned in February 2016. Singapore banned him from the securities industry for 10 years. The U.S. securities regulator barred him indefinitely.
- 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.
- 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 last year.
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