1Malaysia Development Berhad (also known as 1MDB) is a multibillion sovereign wealth fund set up by the ex-Malaysian prime minister Najib Razak following his 2009 election victory, under the guise that it would finance projects like power plants to help the Malaysian people but in truth was one of the biggest frauds in history. Razak, the fund’s mastermind and so-called “Zelig of the good life” Jho Low, Malaysian politicians and global bankers were beneficiaries of this embezzlement. By diverting 1MDB funds to use for personal gain, they illegally acquired “billions of dollars worth of assets, including real estate, art, a luxury yacht and proceeds from the film The Wolf of Wall Street” (Bloomberg). The irony that a film about Jordan Belfort – a stockbroker who made untold riches and then was imprisoned for fraud – was financed with laundered money would be rich enough. This detail represents only a minuscule part of a scandal which has brought down a prime minister and now involves multinationals across nearly a dozen countries.
Court filings claim that, over the past decade, Razak’s personal bank accounts were filled with approximately $700 million of the fund’s assets. Upon learning of the prime minister’s central role in the fraud, Malaysians enacted deserved retribution by voting Razak out of office in January. Six months ago, the ruling Barisian Nasional coalition, which had been led by Razak’s party, lost command for the first time since Malaysia became an independent nation in 1957. The coalition officially disbanded in August. Malaysia’s central bank governor also resigned. As the scandal’s fallout has unexpectedly brought opposition leader Mahathir Mohamad, the nonagenarian former prime minister, to power, Malaysia teeters on the brink of legitimacy; it remains to be seen what measures will be taken to ensure the protection of its finances.
The penalties for Goldman Sachs, which earned an unusually high share of $600 million in commissions for underwriting three 1MDB bond offerings worth $6.5 billion, could be significant (FT). The firm, now under Justice Department investigation, has told investors this month that its “potential losses related to legal proceedings involving 1MDB could run as high as $1.8 billion” above initial estimates (FT). These allegations could damage Goldman’s reputation even more so than in the postscript to the 2008 financial crisis. Why? In this case, it is the senior members of the firm who have pleaded guilty to bribery, been indicted or placed on leave –– former partner Tim Leissner, former managing director Roger Ng, and co-head of Asian investment banking Andrea Vella, respectively (WSJ). Additionally, the bonds were approved by 30 executives, including immediate past head Lloyd Blankfein and newly appointed CEO David Solomon (FT). Overall, this scandal threatens to cast doubt on Solomon’s leadership abilities at the embryonic stages of his tenure as CEO and erase the goodwill Goldman has desperately sought to regain following massive fines paid out for its role in the crisis.
According to Britannica, “investigations launched by Swiss and U.S. authorities determined that an estimated $3.5 billion had been embezzled from 1MDB and laundered” around the world. Singapore, off of Malaysia’s coast, has barred multiple Swiss banks from operating within its borders due to their rule-breaking; Switzerland is delving deep into the books of J.P. Morgan Chase, Credit Suisse, UBS and other powerful financial institutions to determine possible crimes. The United States Department of Justice’s anti-kleptocracy unit seeks to recover billions in 1MDB assets – “the largest asset recovery operation in the organization’s history” (Bloomberg). While the scandal-plagued will face severe consequences, there is now cause for governments and international authorities to enact stringent laws – true global financial reform – vis-à-vis money laundering and corruption. It will be fascinating to see how Malaysian society and institutions throughout the world recover from this calamity.
Sources:
Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World, by Tom Wright and Bradley Hope, Hachette, RRP. 2018.
https://www.bloomberg.com/graphics/2018-malaysia-1mdb/
https://www.britannica.com/biography/Najib-Razak
https://www.nytimes.com/2018/11/01/business/goldman-sachs-malaysia-investment-fund.html
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