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Insight

3 weaknesses that led to Malaysia’s 1MDB scandal

Written by Jake Plenderleith on Monday March 9, 2020

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1 Malaysia Development Berhad (1MDB), the sovereign wealth fund at the centre of worldwide investigations into misappropriated cash, was controversial at its inception just over a decade ago. Its lack of transparency was immediately a target of criticism, and over the years that followed investigative journalists began slowly piecing together rumours of wrongdoing. By 2016, The Guardian was calling 1MDB ‘a scandal meriting the world’s attention’.

Events came to a head in the first week of October 2018. On Monday 1, the whistle-blower who broke 1MDB announced he was writing a book to expose ‘the ignominy of [the] criminals’ at the heart of the alleged corruption (as yet unpublished). On the Tuesday, news broke that the former Malaysian PM Najib Razak was, along with his wife, being questioned at separate locations by Malaysian police. The next day, Malaysia’s new PM was accusing the Gulf states of sheltering individuals wanted in connection with the scandal.

Thursday saw Razak’s wife Rosmah Mansor arrested on 17 charges, including money laundering (and was already being dubbed the ‘Malaysian Imelda Marcos’), pleading not guilty. And on the Friday, it was revealed that the $250 million yacht Equanimity, thought to have been bought with proceeds taken from 1MDB, and seized at the request of the US Department of Justice (DOJ), was to be sold off at auction.

Added to this cocktail of alleged bribery and corruption was an unbeatable cast of characters: Razak and Mansor, both vehemently denying wrongdoing, were pugnacious and unpleasant in the face of criticism; Yeo Jiawei, a former wealth manager at BSI Bank, who claimed in a Singapore court that he was ‘just taking instructions’ in setting up shell companies to shelter millions, received a 54-month sentence; and Yvonne Seah Yew Foong, a private banker, was jailed after a failure to report suspicious transactions following millions being moved in and out of various accounts.

Hollywood, money laundering and Picasso

Those accounts were linked to the most compelling individual, Jho Low, the playboy billionaire at 1MDB’s shadowy heart, known for his friendship with Hollywood celebs including Paris Hilton and Leonardo DiCaprio (Britney Spears jumped out of Low’s birthday cake on his thirty-first birthday). As if straight from the script of a Hollywood thriller, our protagonist Mr Low is on the run. In a delicious ironic twist, it was Low’s friend Riza Aziz whose production company made The Wolf of Wall Street (Aziz is Razak’s stepson – do keep up!). Indeed, the DOJ reached a civil lawsuit settlement with the company behind the film, Red Granite Pictures, after alleging the money used to produce it was stolen from 1MDB.

Low and DiCaprio were pals though the DOJ may have caused a rift to develop between the pair when it requested the actor hand back a painting by Picasso, which Low had given to DiCaprio as a birthday present, on the charge that it was obtained with 1MDB money. The DOJ also had supermodel Miranda Kerr, Low’s ex-girlfriend, hand in a $1.8 million necklace amongst other sparkly things totalling $8 million – again, given to her by Low.   

The Malaysian government announced in February that Low will face criminal charges.[1] It will come as no surprise to you that Low continues to deny any wrongdoing. Razak, meanwhile, has been on trial since 2018 on multiple charges.

No doubt the Great 1MDB Unravelling will be further along its inevitable course by the time you read this, with investigations ongoing in the US, Switzerland, Malaysia, Singapore, Australia, Hong Kong and the UK in connection with the wealth fund. Before they do so, let us briefly recap what happened at 1MDB, because as a case study it is hugely instructive – and a powerful lesson.   

The 1MDB story: Money laundering in Malaysia

1 Malaysia Development Berhad (1MDB) was initially set up for Malaysia’s Terengganu state. Led by the PM Razak, in 2009 it was rebranded and immediately drew criticism for its lack of transparency. It entered into a joint venture with PetroSaudi International, which, it is alleged, was acting as a front company for Low’s company Good Star, based in Switzerland (with the Justice Department claiming $1 billion was siphoned off by Low). What followed was, frankly, a mess. By 2014 1MDB was $11 billion in debt. The Wall Street Journal reported in 2015 that Razak had received $700 million directly from 1MDB into his personal bank accounts. In 2016 BSI Bank in Singapore was closed following the Monetary Authority of Singapore’s (MAS) brutal assessment of ‘widespread control failures’, ‘poor and ineffective oversight by the senior management’ and an ‘unacceptable risk culture, with blatant disregard for compliance and control requirements’ – all in relation to 1MDB.

Based on what we know so far, there’s important episodes from the scandal that should alarm those working in financial services and compliance.  

1) PEP failure

Najib Razak’s bank account with AmIslamic Bank was set up in January 2011. It is alleged that $680 million went into this account, registered as AmPrivate Banking-MR, because the bank ‘wanted to avoid any leakage of information’.[2] Relationship manager Joanna Yu, already managing the 1MDB account, spoke to the AmBank managing director Cheah Tek Kuang who went to meet Razak. Razak had previously asked Malaysia’s central bank governor whether it was OK to receive a $100 million donation from Saudi Arabia into his personal account. Allegedly, he was told it was.

2) Approving unusual transactions

MAS noted that there were major lapses at BSI with regards to the processing of a number of unusual transactions. Indeed, MAS revealed that the approval of these unusual transactions was ‘based purely on [the] faith of client representations despite deficient documentation and concerns raised by the bank’s compliance officers’. 

3) Ineffective oversight

BSI Bank, whose license was withdrawn by MAS in 2016 in connection to 1MDB, had a litany of failures connected to its name, including weak anti money laundering (AML) controls, misconduct by staff and control failures. Most noticeably though was MAS’s description of senior management at the bank as having ‘poor and ineffective oversight’ and having displayed a ‘gross dereliction of duty’.[3] Six senior management were subsequently reported to the public prosecutor.

These examples are clearly evidence of weak controls and a poor culture. Such was the brazen nature of the alleged criminality that has occurred that Malaysians have questioned why something wasn’t done about it earlier, leading to soul searching by the Malaysian media as to their passive complicity in the saga. Much of what we do know was diligently and brilliantly unpacked by the investigative journalist Clare Rewcastle Brown on her website Sarawak Report.[4]

Investigations into 1MDB continue. It should serve as a warning and reminder for those in financial services and compliance.

 

 

 

 

[1] Anisah Shukry, ‘Jho Low, PetroSaudi Directors Face New 1MDB Charges in Malaysia, Bloomberg, 11 February 2020: https://www.bloomberg.com/news/articles/2020-02-11/jho-low-petrosaudi-directors-face-new-1mdb-charges-in-malaysia – accessed February 2020

[2] The Edge Markets, ‘Update on 1MDB: How the infamous bank account was opened’, 24 September 2018: – https://www.theedgemarkets.com/article/update-1mdb-how-infamous-bank-account-was-opened – accessed February 2020

[3] Monetary Authority of Singapore, ‘MAS directs BSI Bank to shut down in Singapore’, 24 May 2016: https://www.mas.gov.sg/news/media-releases/2016/mas-directs-bsi-bank-to-shut-down-in-singapore – accessed February 2020

[4] The Sarawak Report: http://www.sarawakreport.org/ – accessed February 2020

 

 


This article forms part of the #BigCompConvo - Join us as we explore and debate the latest challenges and issues facing you and regulatory and financial crime compliance professionals all over the world. If you’d like to contribute an article as part of the Big Compliance Conversation get in touch with us at contributions@int-comp.org

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