case study 1mdb

“Goldman executives and their lawyers have depicted Tim Leissner, a former top investment banker, as a master con man, someone so sneaky that even the retired military intelligence officers who work for the bank couldn’t sniff him out.”

Doesn’t Goldman brag about having the worlds’ state-of-the-art, high-tech, comprehensive systems and multiple, robust layers of compliance, risk, legal, audit and management designed to ensure that something like this could never happen, even at fractions of the size of this fraud and these fraudulent activities? Aren’t they supposed to be experts at due diligence?

Given that Leissner was only one of many Goldman partners involved with 1MDB and not even the only one criminally charged so far, the bank’s defense appears absurd. Moreover, neither Leissner nor his co-conspirators were “master con m[e]n.” As detailed in Billion Dollar Whale and other impressive reporting, this was a brazen, crude and massive fraud orchestrated by a bunch of youthful, inexperienced amateurs who were sloppy, careless and obvious in many ways. None of this required Sherlock Holmes or even a business degree to uncover; scratch almost any surface with the most basic questions and the fraud seemingly would have been visible for anyone to see and quickly unravel.

The Rogue is Goldman

For those reasons and more, Goldman’s rogue defense will likely fail.

First, 1MDB itself was a huge red flag. Just a few examples (detailed in Billion Dollar Whale and elsewhere): there was significant staff and executive turnover; those working there had little or no experience; the Chairman of the Board of Directors resigned abruptly as did another director just weeks later; its first auditors, Ernst & Young, resigned as did its second auditors KPMG and its third auditors, Deloitte, was just fined by Malaysian authorities (although Deloitte is contesting that).

Second, the primary conspirator, Jho Low, was actually caught by Goldman’s compliance system (known as the “ business intelligence group ”) not once, but at least twice. He was rejected as a client of the private bank because the origin of his wealth couldn’t be determined (a huge red flag, as stated above) and “a few years later” was rejected as a direct client on a deal involving the Abu Dhabi state energy investment company IPIC in 2013. Nevertheless, a Goldman executive’s email to others at Goldman on March 27, 2012 (just two months before the first 1MDB bond offering in May 2012) “acknowledged that Low was a ‘1MDB Operator or intermediary in Malaysia.’”

After Low “had been deepening his connections to Goldman and had gotten to know [Goldman’s] Dubai-Based head of investment banking,” he was being “informally advised by Goldman” on a proposed deal. However, “Goldman’s compliance department told its bankers to stop working with Low or his entity in the deal, again citing concerns over his wealth.” However, Goldman just “switched to advising” the IPIC unit in the deal, “even though its bankers were aware that Low was still involved.” Consistent with a familiar pattern, one week after the deal closed $350 million was reportedly transferred into a shell company owned by Low, providing him with a “600% return in a matter of days.”

Third, after Goldman’s compliance department “ repeatedly ” flagged Jho Low as so much of a risk that they refused to let him become a client of the bank’s private client group, he nonetheless had a personal private audience with then-CEO Blankfein :

“One day in December 2012, a young Malaysian V.I.P. entered the gleaming headquarters of Goldman Sachs in Lower Manhattan. The man, Jho Low, a financier with close ties to the Malaysian prime minister at the time, was there for a private meeting with one of the most power people on Wall Street: Goldman’s longtime chairman and chief executive, Lloyd C. Blankfein.”

This was reportedly a “ one-on-one sit-down ” with Goldman’s CEO, a rare and extremely difficult audience to get and presumably only after the person is subject to the most rigorous background checks and due diligence. Even if all the other red flags were somehow missed, it’s inconceivable that the information in Goldman’s own compliance system would not have been known. (This is true even if, as Goldman reportedly claims , this was a two-on-one meeting.)

Fourth, Leissner and the other criminals just weren’t that smart and there were red flags waving all over the Malaysia relationship and Goldman’s 1MDB offerings, which caught the attention of senior Goldman officers . For example, “David Ryan, President of Goldman in Asia [and Mr. Leissner’s superior in Asia], was among those urging caution. He had visited 1MDB’s staff in Malaysia and came away with concerns over its plans to take on so much debt, and the inexperience of its management, none of whom seemed to have overseen multi-billion-dollar investments before.” He also “ voiced concerns ” about the unusual and incredibly lucrative no-bid contracts, which “struck” him “and other Goldman executives as possibly too good to be true .”

He went so far as to argue that “Goldman should reassess, and potentially end, its relationship with 1MDB.” Those concerns were rejected by the very senior people and committees that reviewed and approved the 1MDB offerings (including reportedly some of Goldman’s most senior officers). Mr. Ryan, a Goldman partner, was first “effectively sidelined” when another Goldman executive (a “proponent of the 1MDB business”) was installed senior to him and then he left in 2014 “partly because he was frustrated that his concerns about the 1MDB deals were not heeded.”

Mr. Ryan was reportedly not the only Goldman executive with concerns. Alex Turnbull, a Hong Kong based Goldman banker, “also raised concerns internally.” As detailed in Billion Dollar Whale , he “wasn’t involved in the deal but he knew how bond markets worked and he sent an email to colleagues expressing disbelief about Goldman’s profits. The email led to a reprimand from Goldman’s compliance department, while Turnbull’s boss told him to keep his mouth shut if he ever wanted to get promoted.”

Fifth, another red flag was the structure of the very first 1MDB offering. Goldman had suggested that it be guaranteed by the $70 billion Abu Dhabi state energy investment fund, International Petroleum Investment Company (IPIC):

“Leissner’s colleagues at Goldman’s Middle Eastern headquarters in Dubai, who did regular business with IPIC, found the idea preposterous and declined to get involved.”

This is significant because “Goldman Sachs, Morgan Stanley, and others made huge profits arranging derivatives financing for IPIC,” but refused to participate in the 1MDB bond offerings. Could that be because of the involvement of Khadem al Qubaisi, an aide to Sheikh Mansour bin Zayed, who reportedly “had a reputation for taking kickbacks on deals”? Mr. al Qubaisi is now in prison in Abu Dhabi , although he claims to be a “ scapegoat for Emiratis .”

Sixth, Goldman asked the investment banking firm Lazard to value the power plants that 1MDB was supposed to purchase with the proceeds from one of the offerings but it refused because it “believed the whole deal smelled of political corruption.” Apparently lacking the same sense of smell, Goldman then assumed the additional role as an advisor to 1MDB and reportedly valued the power plants at a sufficiently high price to justify the purchase price. (Presumably because the prices paid for the power plants were grossly overvalued, the purchaser was one of the buyers of the bonds that Goldman had pre-sold prior to the offering.) In a prior 1MDB deal, Goldman’s Leissner tried to get Lazard to also value certain assets, but “it couldn’t come up with a valuation anywhere near high enough to make [the] plan work.”

Seventh, 1MDB used a “struggling Swiss bank called BSI,” which Low picked because it “was a small bank, one that would be dependent on his business and took compliance even less seriously than Wall Street behemoths.” As reported in Billion Dollar Whale , “BSI had thrived for generations in a similar fashion to all Swiss banks: aiding wealthy Europeans and Americans who wanted to hide their cash in private accounts and evade the payment of taxes at home.” Low (really 1MDB) quickly became “by far the biggest client that BSI had anywhere in the world.” Notwithstanding all that, at times, even BSI’s own compliance department got suspicious of 1MDB activities and had to be mollified.

Yet, for the largest of the three bond offerings (for $3 billion in March 2013 just before Malaysia’s elections), 1MDB wanted Goldman to deposit the entire amount into its Swiss bank account at BSI. Seeing the red flags waving, even Goldman’s lawyers in Singapore “pointed out in an email that it was unusual to use such a small private bank for a $3 billion deposit.” However, “Goldman shrugged off” those concerns: “Only days later Goldman deposited the proceeds from the $3 billion bond with BSI, and $1.2 billion immediately was purloined,” with $681 million reportedly moving into the prime minister’s account. It would seem that much of this would have been discoverable with even minimal diligence.

This is the money that enabled the then-prime minister to reportedly steal the election and remain in power for five more years: “Armed with the dirty 1MDB cash, the prime minister had a powerful weapon to win the 2013 election. As the vote approached, Low managed the account, diverting hundreds of millions of dollars to the prime minister’s allies across the country,” which enabled him to win by the “slenderest of margins.” However, as reporting started to reveal the extent of the prime minister’s alleged corruption and the activities of 1MDB, Malaysians protested and the prime minister moved to crush the opposition. At the same time, the deputy public prosecutor in the attorney general’s office leading the investigation of 1MDB and the prime minister’s corruption was murdered.

Eighth, Leissner, Goldman’s former Chairman of Southeast Asia, stated when pleading guilty: “During the course of the conspiracy, I conspired with other employees and agents of Goldman Sachs very much in line with the culture of Goldman Sachs to conceal facts from certain compliance and legal employees…”

The criminal allegations include that Goldman’s “system of internal accounting controls could be easily circumvented” and that the “business culture, particularly in southeast Asia, was highly focused on consummating deals, at times prioritized this goal ahead of the proper operation of its compliance functions.” DOJ’s entire criminal Information is worth reading.

This statement and allegation bear an eerie echo to statements attributed to Goldman’s new CEO, David Solomon, quoted by former New York Federal Reserve Bank regulator Carmen Segarra in her recent book “Noncompliant: A Lone Whistleblower Exposes the Giants of Wall Street.” In her book she quotes from hours of tape recordings, including Mr. Solomon reportedly saying

“A conflict is a perception, OK, of something that could affect the advice you’re giving, the judgment, et cetera,…. Our job … is to discuss those things and to work collectively with [clients] to decide whether or not those perceptions inhibit us.”

This also seems to echo the cultural bankruptcy and disreputable practices outlined in Greg Smith’s New York Times resignation as Goldman Sachs’ executive director and head of the firm’s U.S. equity derivatives business in Europe, the Middle East and Africa.

Interestingly, the Financial Times exclusively reported that the New York Fed secretly required Goldman to “correct” deficiencies in its internal controls in 2013: “Goldman told to improve risk reporting shortly after 1MDB deal; Notorious 1MDB deal was approved after meeting where recused bankers stayed in the room.” It remains an open question whether these controls were evadable by design so that the bank could point to the appearance of compliance as a defense in the circumstances presented by the 1MDB case, even if in reality they lacked substance.

Finally, an advisor on the 1MDB offerings who worked for the former prime minister was quoted as saying there were red flags for anyone looking:

“This fund was dodgy from the beginning. There is no excuse for not knowing this fund had to do with [the former Prime Minister’s] political patronage and his election plans. This was an open secret.”

In fact, Lazard apparently quickly discovered this when it refused Goldman’s requests for it to participate in 1MDB deals, not once, but twice. Additionally, the real-life criminal portrayed in the movie “Wolf of Wall Street” (about brazen Wall Street fraud that itself was allegedly financed with money stolen from the 1MDB bond offerings), Jordan Belfort, quickly saw in 2011 before a single bond offering that that “these guys are f—king criminals… It was so obvious.”

But, Goldman Sachs, the leading global bank that sells itself to clients, customers and governments worldwide as having unparalleled intelligence and due diligence capabilities, either didn’t know this “open secret” or chose to ignore it, along with the many other red flags.

The Road Ahead for Goldman: Criminal and Financial Liability

It should be clear that Goldman’s attempted “rogue” defense is not likely to be successful, no matter how many fancy, glossy power points it gives to DOJ or how many inflammatory unsubstantiated allegations it makes against its former partner Leissner. However, Goldman’s new CEO, David Solomon—who was co-head of the investment banking division from July 2006 to December 2016 while that division handled the $6.5 billion 1MDB offerings and pocketed the $600 million—regrettably appears to be sticking to this ill-advised script.

He might get a better reception if this was Goldman’s first brush with the law, but, as is well known, its alleged involvement with 1MDB is just the latest in Goldman’s long history of reported scandalous and illegal behavior, including but not limited to the Abacus and other subprime wrongdoings, the “ vampire squid” expose , the AIG CDS backdoor bailout , Greek debt offering , Libyan Investment Fund , the firing of Fed examiner Carmen Segarra detailed in her recent book , the Greg Smith New York Times resignation over Goldman’s cultural bankruptcy , and numerous whistleblower complaints .

While it remains unclear exactly how much money 1MDB still has and how much money 1MDB will ultimately cost the people of Malaysia (60% of whom live on “ less than $1,600 a month ”), it reportedly amassed around $13 billion in debt as of April of 2016 from the Goldman bond offerings and other borrowings. Thus, Malaysia’s criminal and civil proceedings seeking $7.5 billion from Goldman seems potentially reasonable (particularly because it appears to also overlap with the Abu Dhabi lawsuit regarding its guarantee for some of the 1MDB bonds).

The key question remains: “How could so much money—originally meant to lift up a nation and improve the lives of its people—have been laundered and embezzled under everyone’s noses?” After all, what else is Goldman’s compliance division for? According to Goldman’s website , “the global compliance division is dedicated to protecting the reputation of the firm and managing risk across all business areas.” The compliance division is supposed to “ensure compliance with regulatory requirements and determine how the firm can appropriately pursue global market opportunities.”

This report is, of course, based solely on what is in the public record, including in particular from court filings, some fantastic investigative reporting and the terrific book Billion Dollar Whale . Presumably, with FBI agents, subpoena power and a grand jury to investigate, the DOJ can more thoroughly test the “four monkeys” rogue defense.

Nevertheless, this public reporting raises a key question: if it wasn’t just a rogue employee, but at least partly the fault of the bank itself, should the bank itself be held liable for any of the crimes committed by its executives and others as well as the systemic breakdown of what it claims was a compliance system? Isn’t this particularly so given Goldman’s RAP sheet over the last 20 or so years includes at least 33 major legal actions alleging violations of dozens if not hundreds of laws and resulting in almost $10 billion in fines and settlements?

Put differently, is DOJ just going to prove again that Wall Street’s biggest, most politically connected banks still get special treatment and are still too-big-to-jail , no matter how many crimes they commit, how many laws they break, how many victims there are or how much damage they inflict?

CEO Solomon’s Golden Opportunity: The Choice of True Leadership or More of the Same

Interestingly, the 1MDB crisis also provides CEO Solomon with a unique opportunity to create his own brand and chart his own course as he leads Goldman Sachs into the 21st Century. Will he follow the path of the past in a take-no-prisoners, defend and deny at all costs approach? Or, will he usher in a new era of responsibility and accountability for a bank that claims it wants to be trusted as a retail consumer bank and that wants to build genuine long-term customer relationships in wealth and corporate cash management (referred to as “ Solomon’s plan ”).

This would be a return to the partnership business model of “long term greedy,” rather than IBG-YBG (“I be gone; you be gone”) immediate profit and bonus maximization, clients, customers and counterparties be damned. That model was epitomized by the Abacus built-to-blow-up CDO as highlighted by the Senate Permanent Subcommittee on Investigations hearings and the $550 million fine Goldman had to pay in its settlement with the SEC.

While it may not seem like a choice to Mr. Solomon, he is making a choice right now, every day. He can make an alternate choice, but it would require courage, boldness and enlightened self-interest. He wouldn’t minimize, deflect, deny and blame others. He would clearly and genuinely take responsibility. He would admit wrongdoing and take clear, forceful action to hold deficient people accountable and make injured people whole.

There appears little room for doubt that certain Goldman officers and partners committed crimes—Leissner at a minimum; allegedly Ng; and potentially the unindicted co-conspirator—and whoever or how many others there may be should suffer the full weight of the criminal law. There’s also little room for doubt that, however many criminals there are, they lied to and misled lots of people, including at Goldman.

That may have made it somewhat more difficult to uncover their criminal conduct, but despite Goldman’s current posture , that didn’t make it impossible. Any fair-minded review of the publicly known facts suggests that it shouldn’t even have been that difficult. More importantly, it simply cannot be an excuse for every level of Goldman’s management and every one of Goldman’s systems of checks and balances to fail. At a minimum, “Goldman’s internal committees, set up to catch fraud, had failed at their jobs.”

Mr. Solomon would also send a loud, clear message that such conduct and failures won’t be tolerated, not just among those who committed criminal acts, but also to those who were responsible for the breakdown in management, compliance and risk systems and controls.

They all—to varying degrees—egregiously failed, harming not just clients, but damaging Goldman Sachs itself.

People from senior executives on down need to suffer meaningful consequences for those failures, including terminations, demotions and compensation claw backs. That should start with Mr. Solomon himself and his entire management team. Leadership starts at the top and they should all have their bonuses cut and repay whatever amounts they previously received directly or indirectly attributable to 1MDB. (Disgorgement alone is insufficient: it only puts you back to even, with no penalty or pain.)

1MDB was ostensibly set up to “improve Malaysians daily lives.” Not only didn’t that happen, but those very same Malaysians are now on the hook to repay more than $6.5 billion in bonds and apparently billions more in other 1MDB borrowings, even though more than half of that was reportedly looted and will never benefit anyone in Malaysia. Thus, the Malaysian people have been doubly victimized and will continue to be so for many years, if not decades, to come.

That is wrong. Mr. Solomon should recognize that and say so, plainly, directly and unqualified. Then, rather than just adding to reserves and preparing to claw back compensation as a result of future costs, Goldman should publicly release a full accounting of whatever Goldman received in fees and commissions from 1MDB and immediately repay that to Malaysia, whether it’s $600 million or more. Voluntary full disgorgement of all gains associated with 1MDB simply must be the first step. Goldman must realize that, in doing this, it will gain more in credibility than it will ever pay in dollars, which will be the foundation for Goldman resolving all the many other aspects of the scandal.

Yes, the partners, lawyers, PR experts and others will scream, but this is going to happen sooner or later anyway so why not do it now in recognition of the horrible wrongs inflicted on the Malaysian people and build up a reservoir of good will? Mr. Solomon should then in good faith offer to mediate with Malaysia to determine an appropriate amount to settle all claims. It presumably has, after all, joint and several liability and will almost certainly be the deepest pocket in every litigation and other proceeding. Mediation will be the quickest and least costly way out of this hydra-headed legal morass.

Goldman should even consider offering its services for free to Malaysia in managing the unwinding of 1MDB, including dealing with the outstanding bonds it issued. Part of the settlement with Malaysia could even be contingent on maximizing the returns from the unwinding.

In the meantime, Goldman should enter a tolling agreement with the DOJ (which extends the time prosecutors can file charges), and, once it settles with Malaysia (and Abu Dhabi and anyone else) and after all the appropriate internal personnel and systems actions have been taken, go to DOJ with a reasonable offer, strike the best deal and live with it.

Those choices will put this crisis behind the bank in the quickest, least expensive way and with a repaired, if not enhanced, reputation. That’s being a true leader and will set the tone and direction not just for Mr. Solomon’s time as CEO, but for the bank’s future.

That won’t be successful, however, if Goldman maintains its current position that it did nothing wrong and that there are no “ deficiencies or weaknesses in its internal compliance mechanisms .” That attempt to prioritize minimizing legal liability above all else is blinding Mr. Solomon and Goldman to a more fundamental reality: given what has happened and the damage done not just to clients, but to the bank itself, there were massive, systemic failures of Goldman’s systems and, unless taken seriously and fixed, this will happen again. The contemplated window dressing is a bad legal strategy and an even worse business strategy.

Nevertheless, this is the choice currently being pursued: years of trench warfare litigation around the globe that enriches hundreds of lawyers, destroys the bank’s reputation, tarnishes Mr. Solomon’s ascent to CEO while distracting and consuming him, his leadership team and profits for years to come.

Most will conclude that it is naive and laughable to think that someone like Mr. Solomon, who has come up through the Goldman ranks, would ever do anything other than fight to the death rather than admit even the most minimal wrongdoing, failure or deficiency. However, sometimes an existential crisis like a pending criminal indictment helps clarify not only choices, but that there is in fact a choice to be made.

What’s it going to be Mr. Solomon?

The complete publication, including footnotes, is available here .

One Comment

I’m starting to believe that money is the root of all evil. These kinds of people should learn their lesson in prison.

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1MDB Trial Will Take a Break So the Defense Can Study New Documents

Prosecutors in a case involving a former Goldman Sachs executive and a Malaysian fund found 15,000 emails and other documents they need to turn over.

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Roger Ng, right, a former Goldman Sachs executive who is charged with bribery and money-laundering, arriving at U.S. District Court in Brooklyn on Tuesday.

By Matthew Goldstein

Feb. 23, 2022

The bribery and money-laundering trial of a former Goldman Sachs executive was thrown into turmoil after federal prosecutors — for the second time in a little over a week — said the government had failed to promptly turn over thousands of pages of emails and other personal documents belonging to a key witness for the prosecution.

The federal judge presiding over the trial of Roger Ng in Brooklyn said Wednesday that the government’s failure to produce documents was “particularly troubling” and would result in a delay in the proceedings so that defense lawyers had time to review the additional materials.

“I am going to give the defense as much time as they need,” said Judge Margo K. Brodie, the chief judge for the Eastern District of New York, during a brief hearing with the jury.

She made her decision after Marc Agnifilo, one of Mr. Ng’s lawyers, said he was considering asking the judge to declare a mistrial. He added that he might ask for the charges against his client to be dismissed because of what he called “government misconduct.”

Judge Brodie offered no insight on how she might rule on those requests. But a mistrial would be a shocking development in the case, 16 months after Goldman pleaded guilty to a criminal charge and paid $5 billion in fines for its role in a far-reaching foreign corruption and bribery scheme involving a big Malaysian sovereign wealth fund.

Mr. Ng, who was a banker for Goldman in Malaysia, is likely to be the only person to stand trial in the United States over the scandal, since the mastermind of the scheme — Jho Low — is a fugitive and believed to be living in China.

In a letter filed with the court late Tuesday, federal prosecutors said they had just become aware that about 15,000 emails and other documents belonging to the government’s star witness, Timothy Leissner, were never turned over to the defense. They added that the belated discovery of those documents was an “inexcusable error” and that they were open to a delay in the trial, which began on Feb. 14.

Prosecutors blamed the problem on another team of government lawyers tasked with reviewing the documents to make sure they could be provided to defense lawyers without violating any of Mr. Leissner’s rights. A similar issue arose after the trial started when the government belatedly turned over 120,000 pages of emails and other documents belonging to Mr. Leissner, a former Goldman partner.

“We are still going over the 120,000 pages we got,” Mr. Agnifilo said. “This is a categorical failure.”

The break is likely to last for several days after Mr. Leissner wraps up his direct testimony. He agreed to cooperate with the government and pleaded guilty in 2018 for his part in the brazen scheme to loot more than $4 billion from Malaysia’s 1MDB fund. He also agreed to forfeit about $47 million in ill-gotten gains and is expected to be sentenced this summer.

Starting last week, Mr. Leissner has been walking the jury through the details of the scheme. He testified that he and Mr. Ng had been integral players in the plot to use some of the looted money to pay bribes to foreign officials so that Goldman would secure the rights to arrange $6.5 billion in bonds for the 1MDB fund.

He testified that both he and Mr. Ng were at a 2012 meeting where Mr. Low described the plan to pay bribes. Mr. Leissner said Mr. Low, a flamboyant Malaysian businessman with a penchant for high living, had told the former Goldman executives that they would be “taken care of.”

Mr. Leissner also testified that he had used $10 million of the looted 1MDB money to buy a house for a former girlfriend. He said he had bought the house to stop the girlfriend from alerting the authorities to his activities.

Prosecutors have claimed that Mr. Ng and his wife got up to $35 million in illicit proceeds from the scheme. But Mr. Agnifilo has said the money came from legitimate unrelated transactions. He said the $35 million had been owed to Mr. Ng’s wife by Mr. Leissner’s former wife, Judy Chan, who owns a large vineyard in China.

Mr. Agnifilo said the documents that the government had been slow in producing could be critical to his client’s defense. He said Covid-19 restrictions had limited his ability to pursue investigative leads in Asia.

An earlier version of this article misstated the amount of the bonds Goldman Sachs was trying to underwrite for the 1MDB fund. It was $6.5 billion, not million.

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Matthew Goldstein covers Wall Street and white collar crime and housing issues. @ mattgoldstein26

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Lessons from 1mdb, learning from 'world's largest kleptocracy', march/april 2019, by grace y. mui, ph.d., cpa (australia), cpa (asean), acfe educator associate; huat lai thye, cpa (asean).

Members of the board of 1MDB — a Malaysian federal strategic investment fund — and top Malaysian government officials plus private citizens allegedly illegally syphoned and laundered billions from the fund. Here’s how they escaped controls and lined their pockets.

1Malaysia Development Berhad (1MDB), the Malaysian sovereign wealth fund described by then-U.S. Attorney General Jeff Sessions in December 2017, as “kleptocracy at its worst ,” started off as a “Malaysian strategic development company,” according to its website, which has since been shut down. At the very core of the 1MDB scandal was the “less than satisfactory corporate governance and internal controls,” as reported by the former Malaysian Auditor General Ambrin Buang in the 1MDB audit report . The result? 1MDB officials illegally drained and laundered billions from the fund “through a complex web of opaque transactions and fraudulent shell companies with bank accounts in countries ranging from Switzerland and Singapore to Luxembourg and the United States,” according to Sessions.

It all began in February 2009 with the incorporation of the Terengganu Investment Authority, a state-owned sovereign wealth fund. Soon after, 5 billion ringgit (about US$1,217,450,000) was raised from a bond issue. By the end of July 2009, the federal government had taken over the Terengganu Investment Authority and subsequently renamed it 1Malaysia Development Berhad. Henceforth, the Ministry of Finance wholly owned 1MDB, and made it a federal strategic investment fund that invested billions of ringgit in Malaysia’s energy, real estate and hospitality sectors. (See 1MDB: Giant ponzi scheme or strategic investment fund? by Jose Barrock, Kinibiz Online, March 26, 2013.)

1MDB was structured like a typical Malaysian publicly listed company with a board of directors and was subject to domestic regulators such as the central bank and the securities commission. However, 1MDB wasn’t a typical Malaysian publicly listed company. As a company wholly owned by the Ministry of Finance it was required to have a board of advisors chaired by the finance minister. Despite having more corporate governance mechanisms than publicly listed companies, the breakdown of these mechanisms contributed to executive fraud at 1MDB.

This article studies the 1MDB scandal from the perspective of the “Crime Triangle of Routine Activity Theory” — an environmental criminology theory — and focuses on its board of directors and board of advisors plus Malaysian regulators and law enforcement agencies. The underlying rationale of environmental criminology is that the immediate environment is a key determinant of human behavior. As such, each crime is a result of the interaction between people and the situations they’re in. (See the book, Environmental Criminology and Crime Analysis , by Richard Wortley and Lorraine Mazerolle, Social Science, 2008.)

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The Case of Goldman Sachs and 1MDB

By: Audrey Zhang

In August 2005, anti-corruption officials began investigating 1Malaysia Development Berhad (1MDB) for alleged graft, triggered by reports that almost US$700 million from the lucrative deals issued for 1MDB by Goldman Sachs ended up in the pockets of Malaysia’s Prime Minister, Najib Razak. SPI investigates the alleged corruption claims and the ethical implications of Goldman’s involvement.

Goldman Sachs and 1MDB: The Players

Goldman Sachs Group, Inc. – A leading global investment banking, securities, and investment management firm, founded in 1869. [1] Ranked #88 on the World’s Most Valuable Brands list by Forbes, the firm provides a wide range of financial services—including strategic advisory assignments, risk management, and investment and lending—to a diverse client base such as corporations, financial institutions, governments, and high-net-worth individuals. [2] The firm maintains offices in all major financial centers around the globe, with its headquarters on Wall Street, and is considered one of the most prominent financial giants of today.

1Malaysia Development Berhad (1MDB) – a strategic development company, wholly owned by the Malaysian government, established to drive strategic initiatives for long-term economic development of the country. It focuses on strategic development projects in the areas of energy, real estate, tourism, and agribusiness. Through forging global partnerships and promoting foreign direct investment, 1MDB seeks to “lead market-driven initiatives to assist the Government in propelling Malaysia towards becoming a developed nation that is highly competitive, sustainable and inclusive”. [3]

Najib Razak – the sixth and current Prime Minister of Malaysia, and President of the United Malays National Organization (the leading party in Malaysia’s ruling Barisan Nasional coalition). He was elected on a platform of economic liberalization measures, including cuts to government subsidies, loosening of restrictions on foreign investments, and reductions in preferential measures for ethnic Malays in business. In 2009, Prime Minister Razak announced the expansion of the Terengganu Investment Authority (TIA) – a sovereign wealth fund aimed at ensuring economic development for the state of Terengganu – into a federal entity called 1Malaysia Development Berhad.

The Instruments

Goldman Sachs advised 1MDB on multiple ventures, including the purchases of energy assets Tanjong Energy, Genting Sanyen Power and Jimah Energy Ventures at dubiously high prices. [4] The scandal, however, revolves around three bond sales that Goldman arranged between 2012 and 2013, totaling US $6.5 billion. [5] This section gives a brief explanation of Bonds A type of debt investment in which an organization borrows money from investors with the agreement to pay back the money at a certain date with a certain interest rate. A bond’s interest rate is mainly determined by two factors: the quality of the issuing company’s credit and the duration of the bond. If the company’s credit is low then it means that the bond is riskier as the odds of being paid back are less. Thus, the interest rate on the bond rises. In addition, the longer the bond(...) ">bonds , and the role of investment banks in the transaction.

A bond is a debt Security An instrument representing financial value. Stocks, Bonds, Futures, Options, and Swaps are all examples of securities. Securities are usually tied to the price of some underlying product, such as commodities, a corporation, or another security or basket of securities.<br /><br /> ">security , which allows a government, municipality, corporation, federal agency, or other types of issuers to borrow large amounts of money usually more than a single average bank can provide. [6] These bonds are issued to a public market, where thousands of investors can lend the borrower a portion of the capital needed, while collecting a rate of interest during the life of the bond. [7] The maturity date is the date on which the issuer (borrower) needs to repay the amount borrowed to the lender (the investor). Bonds are known as fixed-income securities, because an investor knows the exact amount of interest collected if she holds the security until maturity. [8]

An investment bank serves as an intermediary between the organization issuing the bonds and the investors who wish to purchase them. The bank is an underwriter for the bonds – assuming the risk of buying the newly-issued bonds from the corporation or government unit, then reselling the bond to the public or to dealers who then sell them to the public. The investment bank generally prepares required documents for Securities and Exchange Commission (SEC) filing, helps set a price for the issue, and takes the lead in forming an underwriting group which spreads the risk of the new issue to a larger number of participating investment bankers. This arrangement improves the likelihood of selling all of the newly issued bonds. The investment bank earns a profit, based on the difference between its purchase price and the selling price. The difference is called the underwriting spread. The bank also has the option of not underwriting the new issue, and instead simply acts as a sales agent, marketing the bonds to investors and only purchasing enough bonds to meet the buyer demand. In this case, the bank receives a commission on the bonds sold. Goldman’s played the former role in the 1MDB bond deals.

Goldman’s involvement with 1MDB began when the company was still a state-level sovereign wealth fund called the TIA. Goldman Sachs and Boston Consulting Group advised the TIA in its early days, helping it raise 5 billion ringgit (US$1.3 billion) through selling 30-year Islamic bonds in 2009. [9] Guaranteed by the federal government, the bonds were sold at a discounted price that effectively yielded bondholders a high of 7 percent in interest, an especially bad deal for a government-owned company. [10] As the former Prime Minister Mahathir Mohamad asks, “Who approved such terrible terms for a loan to a government-owned company?” [11]

Two months after this deal, the Najib administration took over the TIA and renamed it 1Malaysia Development Berhad, expanding the strategic development company into a federal entity. Najib stood in front of global investors, promising a “1Malaysia”, where Malaysians of different races would work together to turn Malaysia into a developed nation by 2020. [12] Najib surely aimed high, riding on the optimism of Malaysians at the time, yet from the get-go, the dealings of 1MDB were shrouded in mystery.

Just two months after the expansion, 1MDB established dealings with PetroSaudi International with the help of a well-connected Jho Low—the son of a wealthy Malaysian businessman, cobbling together a $2.5 billion joint venture. [13] Under the guidance of Roger Ng, Goldman’s head of Southeast Asia sales and fixed-income trading, and Tim Leissner, then Goldman’s co-president for Southeast Asia based in Singapore, 1MDB also forged especially close ties with Goldman.

In December 2009, Goldman won a license from Malaysia’s Securities Commission to set up fund management and corporate finance advisory operations in the country. It announced plans to open an office in Kuala Lumpur during the first half of 2010. Leissner released a statement that “The future outlook for Malaysia’s capital markets and its asset management industry is very positive and through our local presence we look forward to playing a larger role in their development.” [14]

With Goldman as advisor, 1MDB acquired Tanjong Energy Holdings from Malaysian billionaire T. Ananda Krishnan for US$2.2 billion in March, 2012. Former Prime Minister Mahathir would later criticize this purchase: “The prices paid for [Tanjong Energy were] well above market price.” Since the power plant was nearing expiration of its license, the price of purchase would have been next to nothing if 1MDB had waited until the licenses expired. [15]

Two months later, Goldman acted as underwriter for the sale of 10-year bond notes with a 5.99 percent yield, from which 1MDB raised US$1.75 billion. This was the first of three bond deals that would spark the corruption scandal.

In August of that same year, 1MDB purchased Genting’s domestic power-generation assets for 2.4 billion ringgit under Goldman’s advice—a steep price for a power company. 1MDB defended the price it paid for the company, stating the price was based on “advice received from independent valuation advisers”. [16] If by “advisers” the spokesman meant Goldman, it was far from “independent”, as Goldman would benefit financially if the transaction was completed. [17] Genting later reported a 1.9 billion ringgit gain on this sale, implying the value for its stake was less than one-fifth what 1MDB paid for it. [18] A few months after the sale, a unit of Genting called Genting Plantations Bhd. donated about US$10 million to a Najib aligned charity, which soon got involved in spending that appeared to help Mr. Najib retain power in the May 2013 election. The charity, along with others linked to the government, was revealed to having spent millions before the voting in the swing state of Penang, including donating two million ringgit to local schools serving communities that are not demographically poor. [19]

In October 2012, 1MDB raised US$1.75 billion by selling 10-year bonds yielding 5.75 percent. Five months later, it raised another US$3 billion by selling 10-year bonds yielding 4.4 percent. Goldman Sachs underwrites both transactions. Overall, the three bond issues between 2012 and 2013 raised a total of US$6.5 billion, with Goldman earning an impressive 9.1 percent of the profits raised (US$590 million) [20] , almost 4 times the typical rate for a quasi-sovereign bond at the time. Partly earned from the underwriting spread—buying bonds at a discount and then selling them at a higher price—this total is almost as much as Malaysia pays each month on its debt. [21]

Then, in 2014, 1MDB reported financial results for the fiscal year, reporting that debt surged 16 percent, to a total of US$11 billion. Since then, Najib and the Malaysian government have been caught in a whirlwind of allegations, while disasters (the disappearance of Malaysia Airlines Flight 370 and the crash of Malaysia Airlines Flight 17) plagued the government.

Around the same time, the Sarawak Report began a series of exposés of 1MDB, claiming to have obtained documentation showing how Jho Low and several business associates siphoned US$700 million from 1MDB’s partnership with PetroSaudi Holdings, which was registered in the Cayman Islands. [22]

In February 2015, 1MDB reportedly missed two repayment deadlines for debt owed to a group of domestic lenders, after getting at least one extension. The lenders, led by Malayan Banking Bhd. and RBH Capital Bhd., had earlier demanded 1MDB to repay the loan before the end of February or risk going into default. The loan was finally settled in advance of the due date, although it wasn’t clear whether billionaire Ananda Krishnan, who had guaranteed the loan, put up the funds. Mr. Krishnan had guaranteed the 2012 loan as part of the agreement to sell Tanjong Energy Holdings to 1MDB. [23] The tension only gets worse from there. In March 2015, 1MDB got US$250 million in standby credit from the Ministry of Finance. [24] In May, the Abu Dhabi-based International Petroleum Investment and its Aabar Investments unit agree to provide US$1 billion to 1MDB so it can pay off US$957 million of a Deutsche Bank-led syndicate loan. [25] As public pressure grew, the Malaysian auditor general, the parliament’s public accounts committee, the central bank, and the police have all focused investigations on 1MDB, digging into reports of corruption and misconduct.

On July 3 rd 2015, documents from government probes reported that investigators believe almost US$700 million in cash moved through various state agencies, banks, and companies linked to 1MDB, before eventually ending up in Najib’s personal accounts. [26] In August 2015, anti-corruption officials began investigating this state investment company for alleged graft. Najib claims he never took these funds for personal use, and threatened to sue the paper. Although reports have not been finalized, these documents shed some light into the non-transparent dealings of 1MDB, alarming citizens in a country with a long history of struggles against “corruption and economic disappointment”. [27] The current full-scale inquiry by agencies ranging from the Public Accounts Committee to the Anti-Corruption Commission would surely unearth much more of the rotten dealings made by 1MDB. The Federal Bureau of Investigation and the US Justice Department have also launched separate investigations to examine Goldman’s role in the series of 1MBD transactions.

Ethics Analysis

Goldman acted as underwriter for three 1MDB bond deals:

May 2012: The sale of 10-year bond notes with a 5.99 percent yield, from which 1MDB raised US$1.75 billion.

October 2012: The sale of 10-year bonds yielding 5.75 percent raising a total of US$1.75 billion for 1MDB.

March 2013: The sale of 10 year-bonds yielding 4.4 percent raising another US$3 billion for 1MDB.

Overall, the three bond issues between 2012 and 2013 raised a total of US$6.5 billion, with Goldman earning an impressive 9.1 percent of the profits raised (US$590 million), almost 4 times the typical rate for a quasi-sovereign bonds at the time.

According to an SCMP report , the commission represents a huge commission for fixed-income underwriting. For the March 2013 US$3 billion bond issue, Goldman earned fees of nearly US$300 million, equivalent to a 10 percent service charge. The average fee for underwriters in 2015 was 1.32 per cent on US high-yield junk bonds rated below sovereign issues. These startlingly high commissions and service fees for underwriting the bond issues raise eyebrows and one can reasonably suspect Goldman of unethical treatment of its client, 1MDB for the following reasons:

Advising on the Purchase of Assets

Goldman acted as investment banking advisor to 1MDB for the following purchases:

March 2012: Acquisition of Tanjong Energy Holdings from Malaysian billionaire T. Ananda Krishnan for US$2.2 billion. The power plant was nearing expiration of its license and the purchase price would have declined substantially if 1MDB had waited until the license expired.

August 2012: Purchase of Genting’s domestic power-generation assets for 2.4 billion ringgit, a steep price for a power company.

Analysts agree 1MDB overpaid for these two power generating companies. The question then is whether Goldman was incompetent or corrupt when it advised its client on the value of these companies. If the latter, then Goldman once again lacked the virtue of honesty when it allowed its client to pay much more than those companies were worth. If the former, then its reputation as a top investment bank staffed with high intellects is questionable.

General Ethical Considerations

The outcry over the state of 1MDB’s finances has reached a level that the Prime Minister’s position may be at stake. Although there is no evidence that Goldman had any idea of the corruption that permeated 1MDB, or the US$700 million that ended up in Najib’s private accounts, someone in Goldman’s risk or compliance unit should have looked into the dubious deal. Or perhaps questions were raised at the time, but the economic rewards were high and difficult to forego especially for ethical reasons. Goldman apparently chose (enormous) fees over reputational or conduct risks. [30]

To add further suspicion, Prime Minister Najib’s wife, Rosmah, has a close friendship with Leissner’s wife, Kimora Lee Simmons. Simmons, the US model/actress and ex-wife of Russell Simmons, has various photographs on her website of her and Leissner and the Prime Minister’s family. [31] Her friendship with Rosmah, who has been criticized for controversial habits such as spending US$400 on a home visit by a personal stylist, makes reasonable minds wonder whether Leissner, and therefore Goldman, was in on the scheme from the beginning. Again, reputational risk was not assessed correctly.

Ultimately, it comes down to ethical obligations of financial institutions. Should they simply be profit-generating entities that pay attention to ethics only when convenient? Or should they adopt and implement serious conduct rules to avoid implications in morally wrong actions that affect other people?

In the 1MDB case, the Malaysian public could have been saved from years of government corruption had Goldman taken ethical considerations into the decision. Banks have fiduciary responsibilities towards their clients, and should prevent debt accumulation when those clients cannot financially afford heavy debt service payments. Goldman should incorporate a system for weighing reputational risks alongside purely financial ones, revising its regulations instated by the bank’s Business Standards Committee in 2010 to avoid future implications in scandals like this one.

Although Goldman suffered somewhat from the scandal, finding it difficult to land new clients in Malaysia, it still remains a respectable institution, ranking #23 on Fortune Magazine’s “The World’s Most Admired Companies”. [32]

Sources Cited:

Baer, Justin and M. Lamar, “U.S. Examines Goldman Sachs Role in 1MDB Transactions.” Wall Street Journal . Accessed January 19, 2016. http://www.wsj.com/articles/goldman-entangled-in-malaysia-fund-scandal-1444795262

“Bond Basics: What Are Bonds?” Investopedia . Accessed September 20, 2015. http://www.investopedia.com/university/bonds/bonds1.asp.

Bowring, Philip. “Goldman’s Role in the 1MDB Controversy.” Asia Sentinel . Accessed September 24, 2015. http://www.asiasentinel.com/econ-business/goldman-role-1mdb-controversy/.

Chew, Elffie, and Yoolim Lee. “The Scandal That Ate Malaysia.” Bloomberg.com . Accessed September 20, 2015. http://www.bloomberg.com/news/articles/2015-07-21/malaysia-s-najib-razak-feels-heat-as-state-owned-1mdb-melts-down.

“Goldman Sachs and 1MDB.” Free Malaysia Today . Accessed September 20, 2015. http://www.freemalaysiatoday.com/category/nation/2015/07/22/goldman-sachs-and-1mdb/.

“Goldman Sachs Group Inc.” Accessed September 19, 2015. http://topics.nytimes.com/top/news/business/companies/goldman_sachs_group_inc/ Index A formula that tracts the progress of a basket of stocks. Some such as the S&P 500 or Dow Jones are commonly used as benchmarks for the American economy.<br /><br /> ">index .html.

“Goldman Sachs Group on the Forbes World’s Most Valuable Brands List.” Forbes . Accessed September 19, 2015. http://www.forbes.com/companies/goldman-sachs-group/.

“Goldman Sachs Group – World’s Most Admired Companies – Fortune.” Accessed September 24, 2015. http://fortune.com/worlds-most-admired-companies/goldman-sachs-group-23/.

Guy, Peter. “Goldman Tested the Limits of Banking Morality with Huge Fees from 1MDB.” South China Morning Post . Accessed September 23, 2015. http://www.scmp.com/business/banking-finance/article/1855746/goldman-tested-limits-banking-morality-huge-fees-1mdb.

Ng, Jason, and P. R. Venkat. “1MDB Settles $550 Million Loan From Malaysian Lenders.” Wall Street Journal , February 13, 2015, sec. Markets. http://www.wsj.com/articles/1mdb-settles-550-million-loan-from-malaysian-lenders-1423828609.

Russell, Edward. “Goldman Sachs Receives Malaysia Licenses.” FinanceAsia . Accessed September 20, 2015. http://www.financeasia.com/News/162398,goldman-sachs-receives-malaysia-licenses.aspx.

“Why Is 1MDB so Stupid, Asks Dr M – The Malaysian Insider,” 12 2015. http://www.themalaysianinsider.com/malaysia/article/why-is-1mdb-so-stupid-asks-dr-m.

Wright, Tom. “1MDB Defends Price Paid in Genting Deal.” Wall Street Journal , June 24, 2015, sec. Markets. http://www.wsj.com/articles/1mdb-defends-price-paid-in-genting-deal-1435147466.

———. “Web of Entities Spent Ahead of Malaysia’s Tight Election.” Wall Street Journal , June 19, 2015, sec. World. http://www.wsj.com/articles/web-of-entities-spent-ahead-of-malaysias-tight-election-1434689755.

Xie, Elffie Chew Ye. “Goldman Said to Earn $500 Million Arranging Malaysia Bond.” Bloomberg.com . Accessed September 20, 2015. http://www.bloomberg.com/news/articles/2013-05-08/goldman-said-to-earn-500-million-arranging-malaysia-bond.

[1] “Goldman Sachs Group Inc.”

[2] “Goldman Sachs Group on the Forbes World’s Most Valuable Brands List.”

[3] “About Us What We Do”

[4] “Goldman Sachs and 1MDB.”

[6] “Bond Basics.”

[9] Chew and Lee, “The Scandal That Ate Malaysia.”

[14] Russell, “Goldman Sachs Receives Malaysia Licenses.”

[15] “Why Is 1MDB so Stupid, Asks Dr M – The Malaysian Insider.”

[16] Wright, “1MDB Defends Price Paid in Genting Deal.”

[19] Wright, “Web of Entities Spent Ahead of Malaysia’s Tight Election.”

[20] Haer, “U.S. Examines Goldman Sachs Role in 1MDB Transactions.”

[21] Xie, “Goldman Said to Earn $500 Million Arranging Malaysia Bond.”

[22] Chew and Lee, “The Scandal That Ate Malaysia.”

[23] Ng and Venkat, “1MDB Settles $550 Million Loan From Malaysian Lenders.”

[24] Chew and Lee, “The Scandal That Ate Malaysia.”

[28] Guy, “Goldman Tested the Limits of Banking Morality with Huge Fees from 1MDB.”

[29] “Goldman Sachs and 1MDB.”

[30] Guy, “Goldman Tested the Limits of Banking Morality with Huge Fees from 1MDB.”

[31] Jasin, “Mass Protests Sweep Malaysian Capital As Anger At Goldman-Backed Slush Fund Boils Over | Zero Hedge.”

[32] “Goldman Sachs Group – World’s Most Admired Companies – Fortune.”

Timeline: How Malaysia’s 1MDB financial scandal unfolded

1MDB was set up as a state fund to drive new investment in Malaysia, but investigators say the money went elsewhere.

Malaysia is awaiting the verdict in the first of a series of cases charging former prime minister Najib Razak with corruption over his alleged involvement in the scandal at 1Malaysia Development Berhad (1MDB), a state fund that Najib founded to drive new development in the country.

The fund’s business is under investigation in at least six countries over allegations that billions of dollars were siphoned off to buy luxury property, designer jewellery and art, and to fund the Hollywood movie Wolf of Wall Street.

Najib, the son of the country’s second prime minister, is the first Malaysian leader ever to go on trial for corruption in the country.

An arrest warrant has been issued for Jho Low, the elusive Malaysian financier at the centre of the 1MDB allegations, as well as for others believed to have been involved.

Here is a timeline of some major developments in the scandal.

Then prime minister and finance minister Najib launches 1MDB, a “strategic development company driving new ideas and new sources of growth”. The fund is wholly owned by the government of Malaysia and Najib is chairman of its board of advisers.

September 2009

1MDB signs a deal with PetroSaudi International to set up a joint venture company and invests $1bn cash for a 40 percent stake. PetroSaudi, backed by oil and gas assets said to be worth $1.5bn, takes 60 percent in the business.

Xavier Justo, PetroSaudi International's director-turned-whistleblower, gave evidence to Malaysia's Anti-Corruption Commission last May [Lai Seng Sin/Reuters]

Najib launches the Tun Razak Exchange, built by 1MDB as a new financial district for Kuala Lumpur. Najib tells invited guests the first phase of the development will bring in RM3.5b ($856.8m) in direct foreign investments.

May and October 2012

US investment bank Goldman Sachs helps 1MDB sell bonds worth $3.5bn to raise money to buy power assets.

Goldman Sachs helps 1MDB raise a further $3bn in an additional bond sale, this time to cover “new strategic economic initiatives” between Malaysia and Abu Dhabi.

December 2013

The “Wolf of Wall Street”, with Leonardo DiCaprio in the lead role, is released in the United States. The $100m film was produced by Red Granite Pictures, a newcomer co-founded by Najib’s stepson Riza Aziz. The end credits included a thank you to Jho Low, a young Malaysian financier.

Riza Aziz, left, Najib's stepson and a coproducer of The Wolf of Wall Street on the red carpet in London with the film's leads, Leonardo DiCaprio and Margot Robbie [Paul Hackett/Reuters]

January 2015

1MDB misses a loan payment of about $550m.

Under pressure, Malaysia’s government sets up a ‘special taskforce’ to investigate 1MDB.

The Wall Street Journal and Sarawak Report say nearly $700m suspected to have originated with 1MDB was deposited into Najib’s personal bank account.

Najib sacks the attorney general who was leading the Malaysian investigation and reshuffles his cabinet, removing key critics, including deputy prime minister Muhyiddin Yassin. The ruling party politician leading the parliamentary inquiry into 1MDB is made a deputy minister.

The changes effectively shut down the domestic investigation.

January 2016

The new attorney general clears Najib of any wrongdoing, saying the $681m was a donation from a prince in Saudi Arabia and $620m was returned.

Malaysians took to the streets in November 2016 protesting against 1MDB and calling for Najib's resignation [Edgar Su/Reuters]

The United States Department of Justice files a civil suit to seize assets it alleges were bought with funds stolen from 1MDB. The suit says $681m found its way into the personal account of ‘Malaysian Official 1’, later identified as Najib by both the US and a Malaysian minister.

The justice department announces it believes more than $4.5bn was siphoned from 1MDB by senior officials and their associates.

August 2017

The justice department says a criminal investigation into the fund is underway. The attorney general later describes the scandal as “kleptocracy at its worst”.

Najib is defeated in Malaysia’s general election amid deepening anger over 1MDB and the rising cost of living, and his United Malays National Organisation (UMNO) finds itself out of power for the first time since independence. Two days later, Najib and his wife, Rosmah Mansor, are barred from leaving the country.

US officials reveal the US was seeking the forfeiture and recovery of more than $1bn in assets misappropriated from 1MDB in Washington in July 2016 [James Lawler Duggan/Reuters]

Malaysian police raid Kuala Lumpur properties connected to Najib, seizing jewellery, designer handbags, luxury watches and cash valued at around $275m.

The first charges are laid against Najib in relation to 1MDB.

October 2018

Rosmah also finds herself in court where she is charged with money laundering and tax evasion.

December 2018

Malaysia files criminal charges against Goldman Sachs in relation to the 1MDB bond sale.

Najib appears in the Kuala Lumpur High Court on April 3 to face seven charges in relating to SRC International, a unit of 1MDB, in the first of a series of trials relating to the failed fund.

Malaysia announces it has completed the sale of Equanimity, the $250 million superyacht allegedly bought with money diverted from 1MDB.

August 2019

Najib goes on trial in Kuala Lumpur in the biggest of his five 1MDB-linked trials. The lead prosecutor told the court that Najib had carried out an “elaborate charade” that was acted out in four phases. “His objective was to enrich himself,” Gopal Sri Ram said.

December 2019

After being told to enter his defence in the SRC trial, Najib takes to the witness box in his own defence, reading from a prepared statement.

A power grab within the ruling Pakatan Harapan coalition triggers the resignation of Mahathir Mohamad as prime minister. After a week of uncertainty, the king names Muhyiddin Yassin to the top job saying he has a majority in parliament. The manoeuvring returns UMNO, where Najib remains influential, to government.

Malaysian prosecutors agree a $107.3 million settlement with Riza Aziz, and drop money laundering charges against the former prime minister’s stepson.

Malaysia reaches a $3.9bn settlement with US investment bank Goldman Sachs, agreeing to drop its criminal investigation into the bank’s role in the 1MDB scandal.

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3 weaknesses that led to Malaysia’s 1MDB scandal

Written by Jake Plenderleith on Monday March 9, 2020

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

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Please note you do not have access to teaching notes, the 1mdb case and the swiss banking sector.

Journal of Money Laundering Control

ISSN : 1368-5201

Article publication date: 4 June 2020

Issue publication date: 31 July 2021

This case study highlights why and how the Swiss banking sector played a crucial role in the 1Malaysia Development Berhad (1MDB) corruption scandal. In particular, the paper illustrates how different actors in the Swiss financial sector neglected compliance guidelines and due diligence, thus effectively facilitating the laundering of misappropriated 1MDB funds. The purpose of this paper is to give bankers and compliance officers an overview of the methods money launderers use to circumvent compliance measures so that the Swiss banking sector can be protected more effectively from abuse. In addition, there is discussion whether current regulations, including banking secrecy, should be amended.

Design/methodology/approach

This paper used a content analysis methodological approach to collect data from media sources. Qualitative methods were used to analyze these sources.

The findings reveal that the Swiss banking sector played a major role in facilitating the siphoning and subsequent laundering of 1MDB funds by neglecting due diligence obligations.

Practical implications

This paper advocates a more consequential implementation of the existing anti-money laundering and corruption regulations.

Social implications

A reworking of the 1MDB scandal should be of interest to compliance professionals in the banking sector and citizens that have been negatively affected or are concerned by the involved high-level corruption.

Originality/value

This paper is the first of its kind to study the role of the Swiss banking sector in the 1MDB scandal.

Due diligence
Money laundering
Swiss banking
Najib Razak
Banca della Svizzera Italiana (BSI)
Banking secrecy
Goldman Sachs
Switzerland

Teichmann, F.M.J. and Falker, M.-C. (2021), "The 1MDB case and the Swiss banking sector", Journal of Money Laundering Control , Vol. 24 No. 2, pp. 278-290. https://doi.org/10.1108/JMLC-04-2020-0037

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IMAGES

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