The 1Malaysia Development Berhad scandal or 1MDB
scandal is an ongoing political scandal in Malaysia. In 2015, Malaysia's
then-Prime Minister Najib Razak was accused of channeling
over RM 2.67 billion (≈ US$700 million) from 1Malaysia
Development Berhad (1MDB), a government-run strategic development company,
to his personal bank accounts. The event triggered widespread criticism among
Malaysians, with many calling for Najib Razak's resignation.
According to its publicly filed accounts, 1MDB has nearly RM
42 billion (US$11.73 billion) in debt. Some of this debt
resulted from a $3 billion state-guaranteed 2013 bond issue led by Goldman
Sachs, who is believed to have made as much as $300 million in fees
from that deal alone, although it disputes this figure.
At least six countries have launched money laundering,
financial mismanagement and criminal probes into 1MDB dealings. Malaysia has
also charged Jho Low (a Malaysian financier who helped set up the fund),
Low’s associates and former 1MDB officials, while forfeiture lawsuits have been
filed to recover funds originating from 1MDB.
The whistle-blower for this scandal was the Swiss banker and
former director of PetroSaudi – Xavier Justo.
History of 1MDB
1Malaysia Development Berhad (1MDB) started off as Terengganu
Investment Authority (TIA) which was initiated by the
former Menteri Besar of Terengganu, Ahmad Said in 2008. TIA was
a sovereign wealth fund with an initial fund of RM11 billion aimed
at ensuring the economic development of Terengganu state. The fund's
purpose was to ensure long term sustainable development while safeguarding the
economic well-being of Terengganu residents.
On 27 May 2009, Ismee Ismail and Shahrol Azral
Ibrahim Halmi signed a deal arranged by AmInvestment Bank Bhd to
raise RM5 billion via the issuance of Islamic medium term
notes (IMTNs), despite being told not to do so by
the Terengganu state government. This exercise was advised by TIA's
special advisor, Jho Low. On 29 May 2009, TIA received RM4.385
billion in net proceeds from IMTN from the full value of RM5
billion.
On 31 July 2009, Minister of Finance
(Incorporated) (MOFI) took over TIA and amended its name to 1Malaysia Development
Bhd (1MDB). This acquisition by MOFI took place four months
after Dato Sri Najib Razak became the Prime Minister of
Malaysia. In his announcement on 22 July 2009, Najib said the decision to
expand TIA into a federal entity was made to enable its benefits to reach a
broader spectrum of Malaysians rather than the residents of only one state.
1MDB was established to drive strategic initiatives for long-term
economic development for the country by forging global partnerships and
promoting foreign direct investment. 1MDB focuses on strategic
development projects in the areas of energy, real
estate, tourism and agribusiness. 1MDB was involved in
several high-profile projects such as the Tun Razak Exchange, Tun
Razak Exchange's sister project Bandar Malaysia, and the
acquisition of three independent power producers.
In general, 1MDB investments can be summarized as:
´ Investment
in PetroSaudi Holdings (Cayman) Ltd
´ Investment
in Segregated Portfolio Company (SPC)
´ Investment
in SRC Group
´ Investment
in real estate sector
´ Investment
in the energy sector
It is now an insolvent Malaysian strategic development
company, wholly owned by the Minister of Finance (Incorporated).
The Scandal
In 2017, the then US Attorney General, Jeff Sessions called
the 1MDB scandal ‘the worst form of kleptocracy’. It has been called
potentially “one of the greatest financial heists in history,” with possibly
more than $10 billion looted.
Worst of all, hundreds of millions of those looted dollars
were allegedly used to win an election and keep the corrupt prime
minister in power for five additional years, when his opponents were crushed
and at least one prosecutor was brutally murdered, suffering “a horrific
death.”
Leaked financial documents allege that 1MDB was a hub of
fraudulent activity from the outset. Vast sums were borrowed via government
bonds and siphoned into bank accounts in Switzerland, Singapore and the US.
Some $731m appeared in the personal bank account of
Najib just ahead of the 2013 election, and is alleged to have been used to
pay off politicians, his credit card bill and fund the lavish
shopping habits of his wife. Najib denies the allegations and
insists the money was donated by a Saudi prince.
Overseas, it is alleged the money funded the ostentatious
lifestyle of one of the consultants allegedly brought in to
oversee 1MDB, Malaysian businessman Jho Low.
Under Low’s watch, it is alleged the fund bankrolled
purchases including tens of billions of dollars’ worth of property in
Beverly Hills and Manhattan, including an apartment once owned by Jay Z and
Beyonce; a $35m private jet; a $260m yacht; a $3.2m Picasso
given to Leonards DiCaprio; $85m in Las Vegas gambling debts; a
birthday party for Low and $8m in diamonds for Australian model
Miranda Kerr.
Tens of millions of dollars also allegedly went towards
funding the film The Wolf of Wall Street, through a production company
run by Najib’s stepson Riza Aziz. Low maintains his innocence.
The alleged embezzlement of 1MDB money between 2009 and 2012
went unchallenged until 2015. That year, British
journalist Clare Rewcastle-Brown, who ran the website Sarawak
Report, was handed 227,000 leaked documents detailing the depth of
fraud. The Wall Street Journal was also given documents. The Malaysian
anti-corruption agency (MACC) began investigating and was about to issue a
warrant for the prime minister’s arrest when Najib acted. During the “week
of the long knives”, Najib fired the attorney general, the deputy prime minister and four other
ministers who were critics of 1MDB.
Najib’s government also refused to co-operate with
investigations in the US, Singapore and Switzerland. In 2016, the
Najib-appointed attorney general cleared the prime minister of all
wrongdoing and said the issue had “comprehensively been put to rest”.
A former PM Mahathir Mujahid was not convinced of
this, and stood for election against Najib in 2018. After winning, his party
immediately put 1MDB on the agenda and thus action was taken against Najib
and his co-conspirators. Low still hasn’t been found.
Impact of the Scandal
It led to
the downfall of a coalition that had ruled the country since its independence
from Britain in 1957.
The US
Department of Justice launched a probe due to claims that stolen Malaysian
public money was laundered through the US financial system, and filed lawsuits
seeking some US$1.7bil in assets allegedly purchased with the cash.
Najib
Razak, the then prime minister, 64, was charged with three counts of criminal
breach of trust and one count of using his position for gratification. The
offences were allegedly carried out between 2011 and 2015.
It led to
the shutting down of two banks, BSI Bank and Falcon Bank and financial
penalties totalling $29.1 million being imposed on eight banks - BSI, Falcon,
DBS, UBS, Standard Chartered Bank, Coutts, Credit Suisse and United Overseas
Bank.
The
prolonged impact of 1MDB is prompting investors to seek out other markets in
South-east Asia, according to Baring Asset Management.
The
government has also taken steps seen by critics as limiting discussion of 1MDB,
including detaining civil rights activists, suspending a newspaper, and
blocking websites and blogs.
In 2016,
Mahathir resigned from the ruling coalition saying he was disgusted by the 1MDB
scandal, and later joined forces with opposition leader Anwar Ibrahim, his
former foe.
1MDB After 2015
Questions
arose about the fund’s transparency and performance as early as 2010. But
international exposure became more pronounced in 2015, when 1MDB’s bonds, then
worth around $12 billion, were downgraded to junk status by ratings agencies
Standard and Poor’s and Fitch.
In February
2016, the US FBI began probing the connection between Tim Leissner, a top
regional executive of Goldman Sachs, with former Prime Minister Najib Razak.
Leissner has since pleaded guilty in the US to conspiracy relating to money
laundering and bribery. It's alleged that Leissner had a cozy relationship with
Malaysian officials and may have used bribes to further Goldman's business in
the country.
In 2015, billions
of dollars of loans issued by 1MDB, arranged by Goldman Sachs, were guaranteed
by IPIC. IPIC claimed the fund defaulted on $1.1 billion in repayments in 2016
and Malaysia's then-government agreed to pay the UAE investment fund, a
settlement which has since been challenged by the country's new government.
The scandal
has touched the top of both Goldman and the country's government: Before the
debut of the fund, former Goldman CEO Lloyd Blankfein reportedly met with both
the Malaysian prime minister at the time and Jho Low. Goldman's stock is
suffering amid fears by some analysts that the bank may have to pay billions in
fines.
In May 2018, a surprise Malaysian election
result saw the ruling party ejected for the first time since independence in
1957. Razak was removed from power and a special position audit was ordered
into 1MDB by the new coalition and will be conducted PriceWaterhouse Coopers.
The 1MDB Scandal as a case of Accounting Fraud
The case
of the 1MDB should be of a particular interest for students and scholars of
auditing, accounting and corporate governance since it involves the following :
´ The alleged disappearance of a huge amount of company’s funds
´ The apparent hiding of
significant amount of real losses year after year with the accounting of paper
profits originated from repeated fair revaluations of properties or other
assets
´ The possibility of repeated cases
of audit failure.
´ The probe conducted by various
parties locally which include the office of the Auditor General.
´ The lack of evidence of best
practices in corporate governance being implemented since its formation.
Each of
these five areas of concern is laid bare in a series of five case studies
derived from selected materials published mainly in three news portals which
are based inside the country: MalaysiaKini, The Malaysian Insider and Free
Malaysia Today.
The present series of case studies is nothing but an initial and tentative
effort of studying an ongoing development that may have a huge impact on
Malaysia for years to come.
