1Malaysia Development Berhad Scandal

Background of the 1Malaysia Development Berhad Scandal

To begin with, 1Malaysia Development Berhad is a Malaysian government-run strategic development company. In 2014, it was reported that 1Malaysia Development Berhad had accumulated $11 billion in debt, posing a threat to the Malaysian ringgit. This is when the scandal began to unravel. Since 2015, the Malaysian company has been under investigation for its suspicious money transactions and evidence pointing to money laundering, fraud, and theft.

Investigators have been attempting to trace how money illegally flowed from 1Malaysia Development Berhad into personal accounts. They have committed to cooperate with global counterparts as they attempt to make sense of how these 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 ambiguity in the global financial system that open the way to corruption.

It has been declared by the U.S. Justice Department that over $4.5 billion flowed from the fund to finance spending sprees by corrupt officials and their associates. This had been done through a complex web of opaque transactions and fraudulent shell companies. They claim that a coterie of Malaysians, led by Penang based businessman Jho Low, channeled money from 1Malaysia Development Berhad into personal accounts disguised to look like legitimate businesses.

Political Involvement in the Berhad Scandal

In 2015, the former Prime Minister of Malaysia, Najib Razak, was accused of channeling $681 million from 1Malaysia Development Berhad to his personal bank accounts. In 2016, Malaysia’s attorney general at the time, backed by Saudi authorities, claimed the $681 million was a donation from the Saudi Arabian royal family, much of which was returned. U.S. investigators say the money actually came from, and was returned to, one of Low’s offshore entities.

Low, a bon vivant who said he did consulting work for 1Malaysia Development Berhad, is represented by U.S. prosecutors as the central figure who set up shell companies to collect earnings from the fund and organised the withdrawal of tens of millions of dollars for paying Malaysian government officials and his own lavish spending. Authorities are seeking a quick sale of his yacht, valued at $250 million. He was initially charged in absentia with eight counts of money laundering, though his whereabouts are not publicly known. Low would declare his own innocence on his website.

Razak removal

In May 2018, Najib Razak was removed from power in a general election as the scandal fueled a voter backlash. Razak was charged with multiple counts of corruption, criminal violation of trust and money laundering involving 1Malaysia Development Berhad related money, and his wife was also charged. He has denied any wrongdoing and pleaded not guilty to all charges. Luxury items and cash seized by police from a variety of premises linked to Najib Razak have accumulated a valued of $239 million. The new Prime Minister of Malaysia, Mahathir Mohamad, says his country is seeking to regain billions of dollars of 1Malaysia Development Berhad funds, including fees from Goldman Sachs.

The U.S. has also charged Tim Leissner, Goldman Sachs’ lead banker for 1Malaysia Development Berhad bond issues, when he confessed 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 lead to higher fees for the bank. Tim Leissner also admitted that over $200 million in proceeds from 1Malaysia Development Berhad bonds flowed into accounts controlled by him and a relative.

Prosecutors declare that other than Leissner, there were a number of employees at Goldman Sachs who knew about a bribery scheme, but worked to hide it from the firm’s compliance and legal departments. For years, Goldman Sachs said it raised money for 1Malaysia unware that it would be diverted from the development projects.

US Justice Department’s involvement in Berhad Scandal

The U.S. Justice Department discovered $1.7 billion in assets that were illegally obtained through money diverted from 1Malaysia Development Berhad, including real estate, art, a luxury yacht and proceeds from the film “The Wolf of Wall Street” which reached a $60 million settlement with its producer. Its first charges against individuals were announced in November. Singapore and Switzerland have forced financial penalties on several banks for lapses in anti-money laundering controls related to funds allegedly from 1Malaysia Development Berhad. According to the Federal Bureau of Investigation, potential witnesses did not want to talk because they feared retaliation.

Using leaked email correspondences, news portal Sarawak Report and British newspaper The Sunday Times reported that Jho Low (having ties with Razak’s stepson) drew out $700 million from a joint venture deal between 1Malaysia Development Berhad and PetroSaudi International through Good Star Ltd. Low apparently earned the loan approval from Razak for $1 billion without any approval from Bank Negara. The Sarawak Report investigation would briefly show a meeting at 1Malaysia Development Berhad that the CEO, Arul Kanda, gave out false bank statements relating to its subsidiary’s accounts at the Singapore branch of BSI Bank.

In turn, Kanda would deny the allegation that he gave false bank statements to Bank Negara.

Financiers involved and fallout

There were many financiers and financial companies involved in the 1Malaysia Development Berhad saga. However, not all have been accused of doing anything wrong. Riza Aziz, Najib’s stepson and a friend of Jho Low, co-founded the movie production company that paid $60 million to settle U.S. Justice Department claims that it financed the “Wolf of Wall Street” with money taken from 1Malaysia Development Berhad. Switzerland’s Office of the Attorney-General said that six people and two Swiss banks are suspected in the involvement of using 1Malaysia Development Berhad-intended financing for other purposes, “most particularly for the personal enrichment of the persons involved.”

The governor of the Central Bank of Malaysia, Muhammad Ibrahim, resigned as questions arose over the role the monetary authority played in its land purchase deal from Najib Razak’s government, who in turn used the proceeds to pay the debt of 1Malaysia Development Berhad. Muhammad Ibrahim denied the acquisition was made to “intentionally aid and abet the misappropriation of public funds.”

Anatomy of the deal

A review of the deal has been commissioned by the monetary authority. A 143-year-old Swiss bank, BSI SA, that worked with 1Malaysia Development Berhad lost its license to do business in Singapore, due to the violations of money laundering regulations. Other banks that drew penalties from the Singapore Central Bank include:

• UBS Group AG;
• DBS Group Holdings Ltd.;
• Credit Suisse Group AG;
• United Overseas Bank Ltd. and;
• Standard Chartered Plc.

in their cases, these violators said they will strengthen controls in their businesses.

Falcon Private Bank Ltd. of Zurich was linked to $3.8 billion of 1Malaysia Development Berhad fund flows. They were ultimately ordered to end operations in Singapore. Meanwhile, Switzerland threatened to remove its license if there were any further violations of money-laundering regulations.

Switzerland’s financial regulator would, as a result, would conduct a thorough review of JPMorgan Chase & Co.’s anti-money laundering controls. This as a result of the discovery the bank gravely violated regulations in its business with 1Malaysia Development Berhad. Previously, Singapore prohibited eight financial professionals in connection with 1Malaysia Development Berhad. In 2017, Malaysia’s finance ministry and 1Malaysia Development Berhad reached a $1.2 billion settlement with Abu Dhabi’s sovereign wealth fund over a debt dispute and made the payments.

Analysis

In short, the most logical explanation as to why the Berhad scandal took place is greed. Many people, like Jho Low and Najib Razak, took money from 1Malaysia Development Berhad that they simply did not need. They already had good lives and were financially stable. These people are very greedy because they just wanted more money and unnecessarily took millions of dollars. In addition to this, others admitted to taking bribes though they knew it was morally wrong. It seems like greed was the main factor in this situation.

The 1Malaysia Development Berhad scandal, as well as many other scandals that have occured, could have been prevented. Many people were involved in this scandal. In truth, all it would have taken was one honest person to come clean and admit everything. As mentioned, prosecutors state there were a number of employees at Goldman who knew about a bribery scheme. But instead of coming clean, they would work to hide it from the firm’s compliance and legal departments. In turn, if just one employee did manage to display good morals, the Berhad scandal would not become so damaging.

GAAP Breakdown

A GAAP that was not followed in the 1Malaysia Development Berhad scandal is the “Business Entity Concept”. According to this GAAP, business affairs must be kept separate from personal affairs. But Razak and others did face accusations of channeling millions of dollars from 1Malaysia Development Berhad into personal accounts. Therefore, a breach of the GAAP.

Another GAAP that was not followed in this situation is the “Principle of Conservatism.” For example, the CEO of 1Malaysia Development Berhad, Arul Kanda, gave out false bank statements. This is a violation of the GAAP because he was not truthful about the affairs of the business.

Works Cited

• Shukry, Anisah, and Sridhar Natarajan. “Goldman Sachs Faces First Criminal Charges in 1MDB Scandal.” Bloomberg.com, Bloomberg, 17 Dec. 2018, www.bloomberg.com/news/articles/2018-12-17/malaysia-files-criminal-charges-against-goldman-its-employees.
• Shukry, Anisah, and Yudith Ho. “Najib Pleads Not Guilty to Corruption Charges in 1MDB Case.” Bloomberg.com, Bloomberg, 4 July 2018, www.bloomberg.com/politics/articles/2018-07-04/former-malaysian-leader-najib-charged-in-1mdb-corruption-probe.
• “1Malaysia Development Berhad Scandal.” Wikipedia, Wikimedia Foundation, 10 Feb. 2019, en.wikipedia.org/wiki/1Malaysia_Development_Berhad_scandal.
• Adam, Shamim, et al. “The Story of Malaysia’s 1MDB, the Scandal That Shook the World of Finance.” Bloomberg.com, Bloomberg, 24 May 2018, www.bloomberg.com/news/articles/2018-05-24/how-malaysia-s-1mdb-scandal-shook-the-financial-world-quicktake.
• Thompson, Larry D., and Larry D. Thompson. “The Corporate Scandals, Why They Happened And Why They May Not Happen Again.” Brookings.edu, The Brookings Institution, 29 July 2016, www.brookings.edu/on-the-record/the-corporate-scandals-why-they-happened-and-why-they-may-not-happen-again/.