How Malaysia’s 1MDB Scandal Shook the Financial World

(Bloomberg) -- Read More: Ex-Malaysia PM Najib Razak Faces Court for Biggest 1MDB Corruption Trial

Malaysia’s state-owned investment fund, 1MDB, was supposed to promote development. Instead, it has spurred investigations around the world into 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, and two years later he was convicted in the first of a series of trials. Goldman  Group Inc. has agreed to pay more than $5 billion, including a record $2.3 billion fine in the U.S., and enter its first-ever guilty plea for its role in the scandal.

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. The U.S. Justice Department says that some $2.7 billion of the $6.5 billion Goldman helped raise for 1MDB was stolen by people connected to Najib and diverted for bribes, a luxury yacht, fine art and even funding for the Martin Scorsese movie “The Wolf of Wall Street.” According to a 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 (he has said most of the money was returned). Malaysia’s then-attorney general cleared Najib of wrongdoing in 2016. But after losing office, Najib was charged with corruption, breach of trust and money laundering. The first trial involved $10 million deposited in his personal accounts from a former 1MDB unit. He was found guilty in 2020 on all seven counts and sentenced to 12 years; an appeals court upheld the conviction in December 2021. Jho Low, a fugitive, has also denied any wrongdoing.

3. Where’s the money?

Scattered, but slowly coming in. Under a July 2020 settlement, Malaysia dropped all criminal charges against Goldman in exchange for a $2.5 billion cash payment and at least $1.4 billion from seized 1MDB assets being returned with the help of U.S. prosecutors and Goldman. (Goldman made $593 million working on three bond sales that raised $6.5 billion for 1MDB in 2012 and 2013 -- far more than what banks typically make from such deals.) The bank’s October 2020 settlement with the U.S. Justice Department included the largest-ever penalty for foreign bribery. Goldman units also paid $350 million to Hong Kong’s financial regulator, $122 million to Singapore’s government and 96.6 million pounds ($126 million at the time) to the U.K.’s Financial Conduct Authority.

In addition:

• U.S. prosecutors struck a deal in 2020 with Jho Low to recoup almost $700 million worth of assets, including a Beverly Hills hotel and real estate in New York and London. That’s in addition to $260 million of assets, including a $126 million super yacht, seized earlier on Malaysia’s behalf.
• The U.S. reached a $60 million settlement with the producers of “The Wolf of Wall Street.” The production company was co-founded by Riza Aziz, Najib’s stepson and a friend of Jho Low.
• Malaysia moved to seize $340 million in PetroSaudi International’s accounts in London.
• Singapore said it would return S$35 million ($25 million at the time) forfeited by former Goldman banker Roger Ng.

4. What’s happened with the investigation?

The U.S. Justice Department has been at the forefront, focusing on bribery, theft and money laundering. A small Malaysian unit of Goldman pleaded guilty to a single conspiracy charge. But the parent company avoided a criminal conviction under an agreement that allows the bank to put off any prosecution as long as it cooperates with ongoing U.S. investigations and submits compliance reports. (A conviction might have cost it some institutional clients.) According to the Federal Bureau of Investigation, some potential witnesses were scared to talk because they feared retaliation. Several other countries also conducted probes. Singapore and Switzerland have fined some banks for lapses in anti-money laundering controls. Malaysia also has said it is 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. A former Najib aide testified that the ex-premier offered projects to China in return for help resolving 1MDB’s debt.

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 and the U.S. with money laundering and other offenses. Malaysian police have bemoaned the lack of help from other jurisdictions in finding him, after saying they had located him and were in talks with a party they suspect of protecting him. Jho Low’s settlement with the U.S. didn’t include an admission of guilt or release him from criminal charges.
• Goldman’s former Southeast Asia Chairman Tim Leissner pleaded guilty to U.S. charges including conspiracy to launder money and admitted to bribing officials in Malaysia and the United Arab Emirates to get bond deals for Goldman. He agreed to forfeit $43.7 million and was expected to be sentenced this year.
• Ng was extradited from Malaysia to the U.S. to face similar charges. After a long delay tied to the coronavirus outbreak, his trial began in February 2022, with Leissner as the prosecution’s star witness. (The U.S. Federal Reserve has banned both men from the financial industry.)
• Malaysia leveled charges of securities law violations against Leissner, Ng, Jho Low and 1MDB’s former general counsel, Jasmine Loo Ai Swan.
• PetroSaudi International directors Tarek Obaid and Patrick Mahony were charged by Malaysia in absentia in 2020 for allegedly receiving $300 million from 1MDB through unlawful activity.
• 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 charged with money laundering and tax evasion. Luxury items and cash seized from properties linked to the former first couple were valued at about 1.1 billion ringgit ($259 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.
• A Justice Department employee 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. Exactly how much money is involved?

In all, 1MDB raised more than $8 billion in bond sales and accumulated 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. Some 1MDB projects are going ahead under the new government, including the plan for a new financial district 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.

7. 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.

8. Who else is involved?

• The Fed banned ex-Goldman banker Andrea Vella from the financial industry for life, saying the former co-head of investment banking in Asia engaged in “unsafe and unsound practices” by failing to ensure all of Goldman’s internal committees were aware that the 1MDB bond deals involved Jho Low.
• Swiss bank BSI, which was caught up in the scandal, 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.

The Reference Shelf

• A graphic showing the worldwide scale of the 1MDB probe.
• Author-journalists Tom Wright and Bradley Hope’s account of the 1MDB scandal, published by Hachette Books: Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World.
• The U.S. indictment against Jho Low and Ng.
• A Bloomberg article on Jho Low, alleged Zelig of the good life.
• QuickTakes on what Goldman should expect from Malaysia’s legal system and its 1MDB deals.

©2022 Bloomberg L.P.