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The Story Behind the 1MDB Scandal

Editor, TRANSFIN
Feb 18, 2022 1:07 PM 5 min read
Editorial

Last Thursday, we decoded the story of the Crypto Crocodiles of Wall Street who pulled off the "mother of all Bitcoin scams". 

Today, we bring you the story of what the US Department of Justice once described as the "largest kleptocracy case to date". 

Honestly, every time we cover a story on financial crimes, we have a tough time believing and decoding the precision with which the crimes were pulled off - just like the West is having a tough time believing that Russia is pulling out troops at the Ukrainian border. 

The tale we bring you today is that of 1Malaysia Development Berhad (1MDB), an entity that lies at the centre of a $4bn corruption/bribery/money laundering/embezzlement scam. Even though it started in Malaysia, it soon gained epic proportions to spread across continents and shake financial markets worldwide. 

Here's how…

Just so we're clear: 1MDB is a now-insolvent Malaysian company. IMDb is an online database of information related to movies, TV series etc. :)

Where It All Began

The year was 2009. Malaysia had just elected a new Prime Minister - Najib Razak. Four months into his term, 1MDB was created. 

 

It was originally a "fund" that was supposed to finance infrastructure and other economic deals in the country. PM Razak was the head of its advisory board. But the most contentious personality associated with the fund was Low Taek Jho - a businessman who is the prime suspect in the case. 

Low is what you can best describe as a billionaire playboy educated from Harrow and a friend of Razak's stepson. The DOJ filings describe him as a "baby-faced young man who likes to party with Lindsay Lohan and Paris Hilton and calls his banker 'bro'". Few passages later, the same filings identify him as the mastermind behind the scam. 

Turns out that Low courted investments into the 1MDB fund through various ways. One, by having the government sign a bond issue of $1.2bn. Two, through loans offered by the government from Malaysia's civil service pension fund. Three, and this is where it goes international, though three conventional bond issues amounting to $6.5bn arranged and underwritten by Goldman Sachs

The sum total of all borrowings by 1MDB stood at $10bn in 2015. Turns out that almost half of it was swindled by middlemen…aka Low and his associates.

 

Enter the Co-conspirators

Money flew faster out of the fund than it flew in. Low developed a network of joint ventures and subsidiaries (prominently with Saudi- and UAE-based oil companies) to redirect funds into his own control. Some institutional help from two Goldman bankers came in handy to achieve this end. 

The bankers in reference are Roger Ng and Tim Leissner, both former Goldman employees that made fast friends out of Low, who at the time, had risen to high-brow New York and LA circles. The two gentlemen evidently aided and abetted the transfer of 1MDB funds into offshore accounts in exchange for handsome kickbacks. The list of embezzled proceeds is as bizarre as the story itself. For instance, this is where some of the siphoned money went to:

  • A grand piano made of pure acrylic (which was reportedly gifted to a supermodel)
  • A 20% stake in EMI, the world's largest music-publishing company
  • The movie Wolf of Wall Street 

In fact, rumour has it that Riza Aziz, the producer of Wolf of Wall Street who also happens to be the stepson of PM Razak, gave Leonardo Di Caprio the Best Actor Oscar trophy won by Marlon Brando for On the Waterfront (1955). Mr. Di Caprio was later forced to return the gift (which cost upward of $600,000) as part of the DOJ investigation. 

As long as we're talking about "return gifts", the supermodel Miranda Kerr also had to return the jewellery which Low had once gifted her.

Sadly, unlike these gifts, most of the funds embezzled are yet to be returned. Here are some numbers to let you gauge the size of the scam: $4.5bn flowed from the fund through opaque transactions into fraudulent shell companies. $7bn passed to and from 1MDB into Swiss banks. $681m landed in PM Razak's personal account (which he said was a "donation" from the Saudi royal family). 

And then there is Goldman Sachs, America's blue-eyed bank which made $593m in assisting the bond sales, an amount which dwarfed what banks typically make from deals of this kind.

 

All That Glitters Is Not Goldman Sachs

Goldman charged a 9% commission from 1MDB - an amount that was almost double the market rate at the time. 

Why, so pricey? Well, the Malaysian government (post-Razak) says it was hush money which the bank received as insurance because its officials were fully aware of the wrongdoing. 

But let's assume that it wasn't. Let's assume that the scam was perpetrated by a few rogue executives like Roger Ng, Leissner, Andrea Vella etc. Even if that was true, there was lack of any enforcement, whatsoever, from the bank's administrators to prohibit business with Low, even after the scandal became public. "The bank shouldn't have taken the assurances from Leissner and other executives dealing with Low at 'face value'", says a prosecution filing. 

That said, Goldman did something unusual here. Instead of simply cutting a check and moving on, the bank did what it rarely does - admit wrongdoing. It paid $3bn in penalties, fines and disgorgement. Not only that, it also coughed up a substantial amount as compensation clawback, meaning that some of the key executives paid for these penalties out of their own pockets. 

Makes one wonder that if the payback is so costly then how dubious was the cover-up?!

 

Where's the Money?

Mostly scattered, but slowly coming back to Malaysia. In July 2020, the government dropped all charges against Goldman in exchange for a $2.5bn settlement. 

At least $1.4bn has also been seized from 1MDB assets with the help of US prosecutors. The Malaysian regulators are also moving to seize $340m in PetroSaudi's international accounts. Singapore has returned some $25m forfeited by Roger Ng who is a Malaysian citizen. 

 

Where are the Culprits?

Well, Low is laying low in China which basically means he is a fugitive at large. Roger Ng is undergoing trial in US courts. Leissner has forfeited $45.7m and has accepted a guilty plea in addition to testifying against the other co-conspirators which effectively makes him a government witness. 

As for the former PM Razak, he faced widespread unpopularity and lost the re-election in 2016. He was arrested in 2018 and charged with a roster of crimes before being sentenced to 12 years of imprisonment. However, given that his army of lawyers have been quick to chase appeals, it remains unclear as to when he will set foot in prison. 

Has justice been served? Seems, not entirely. Cheaters will cheat, financiers will fake out and regulators will regulate. But every time a fraudulent enterprise of this scale strikes, one can almost hear Balzac's maxim echo,

"Behind every great fortune lies a great crime".

FIN.
 

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