Malaysia has lost at least $3.5bn in what could be the world’s largest money-laundering scandal. Who’s going to pay for it?
In Martin Scorsese’s Wolf of Wall Street, Leonardo DiCaprio plays a stockbroker whose lack of moral compass eventually leads to his downfall. Blinded by greed and self-confidence, the main protagonist ends up making blunders that put the FBI on his tracks. In real life DiCaprio did rather better, winning a Golden Globe Award for his trouble. But it is the movie’s financiers that now find themselves in the FBI’s crosshairs.
US investigators believe that Red Granite, a US production company, used millions of dollars stolen from a Malaysian sovereign wealth fund to finance the Wolf of Wall Street. But that’s only a fraction of the $1 billion of assets America’s Department of Justice is looking to freeze: the ill-gotten money was also funnelled into luxury properties, Van Gogh paintings and a private jet, investigators reckons.
“Unfortunately and tragically, a number of corrupt officials treated this public trust as a personal bank account,” Loretta Lynch, US attorney general, said at a news conference in July.
These officials appear to have been rather spendthrift. Lynch estimates that at least $3.5 billion belonging to 1MDB, as the Malaysian fund is dubbed, has gone missing. The probe is the largest kleptocracy case it has ever investigated, the DoJ says. Similar actions have been launched in at least six other countries. Last year, Malaysia’s auditor-general – whose report has since been classified as secret, shielding it from public view – said as much as $7 billion may have been siphoned off.
“On the face of it, it’s an outrageous form of alleged grand corruption,” says Michael Levi, a professor of criminology at the University of Cardiff and a prominent anti-money laundering expert.
Investigators seem to have a good idea of who’s been pulling the strings. Through layers of shell companies, Jho Low, a confidante of Malaysian prime minister Najib Razak, is said to have pocketed much of the bounty. Helping him along the way, a few others seem to have fed off the beast: two executives of an Abu Dhabi investment firm, the founders of a Saudi oil-services business, and Riza Aziz, co-founder of Red Granite and a grandson of Najib.
“Who’s given the US the right to usurp the sovereignty of Malaysia?”
The prime minister himself is not named by the DoJ. But in court documents the US government filed last month, a character dubbed “Malaysia Official 1”, whose description fits neatly with Najib, is cited 32 times. Doubts had already emerged in 2015, when Sarawak Report, a blog, alleged that $700 million leaked from 1MDB had landed in Najib’s personal accounts (he argues the funds came from an unidentified donator). A year later, the net finally seems to be tightening on the Malaysian leader.
This is not making everyone comfortable. One of the few to stick his head over the parapet is Brisbane-based lawyer Quintin Rozario, who last month told Bernama – the Malaysian government’s news agency – that the DoJ’s action was “legally flawed”. Eager to find out why, I interviewed him last week. He sounded rather crossed.
“The US is trying to enforce moral rather than legal judgement on countries and individuals they call ‘non-compliant’,” he said. “Who’s given the US the authority to take money from somebody belonging to a sovereign fund in Malaysia, whatever its perceived problems are? Who’s given them the right to usurp the sovereignty of Malaysia and pick up the assets, just because they are in the US?”
There’s a technical answer to Rozario’s questions. The US claims jurisdiction over any dollar-denominated transaction anywhere in the world, Levi tells me – in part because the money, at some point, has to flow through a US-based bank.
But Rozario had other strings to his bow. “Any sovereign fund makes losses. Singapore, for example, lost $65 billion during the global financial crisis. What do you do, do you attack the government and say somebody took it away?”
Here the lawyer seems to forget that the billions that went off 1MDB’s balance sheet simply can’t be accounted for. His demand that an auditor “looks at it and identifies those issues from facts, not from rumours” ignores the fact that three of the world’s four major auditing houses have already tried to make sense of 1MDB’s accounts, only to subsequently resign or be sacked (the latest was Deloitte, who threw in the towel in July).
The amount of debt the fund has accumulated over its seven-year life – totalling more than $10 billion last year, reports say – also looks somewhat fishy. Part of it was raised with the help of Goldman Sachs, which received hundreds of millions for underwriting a $3 billion bond issue in March 2013 – two months before Najib narrowly won a hotly contested election.
“Paying high commissions is not a criminal offence,” says Rozario. Indeed. But the US bank is now being probed for failing to ask questions when half of the money disappeared offshore.
It remains to be seen how far the investigation can go. “It’s one thing to freeze assets, it’s another thing to be able to mount a successful prosecution,” Levi notes. In particular, the US may find it hard to get Najib to testify for a prospective trial – let alone have him extradited, should evidence suggest his personal involvement in the case. “So long as the prime minister remains in post, there’s not much investigators can do in practice.”
It’s not Najib’s electorate who’s going to give him the boot. “Just how many people in Malaysia are there left who haven’t made their mind up about 1MDB?” asks Sholto Byrnes, a senior fellow at Malaysia’s Institute of Strategic and International Studies. “There’s been a deluge of news, comments and accusations for a year and a half now. People who are already angry are just going to get angrier.”
Malaysians are feeling increasingly strongly about their prime minister. Strengthening his grip on power each time the 1MDB scandal got closer to the bone, Najib has in effect removed anyone – from the deputy prime minister to the attorney general – willing to examine his role in the affair. Last week, a draconian national security act came into force, allowing the government to establish martial law in any designed area seen as a potential source of “harm”. Critical media has been taken off the air.
This, at least, is the view held by educated urban elites. “There are large sections of the population in rural heartlands who feel 1MDB has not much to do with their lives,” Byrne says. These more conservative types form the prime minister’s voting base. “People judge the government by its ability to deliver for them. And currently, if they want a new school, a new road, it’s being delivered.”
Byrne notes that Najib has been “doing the rounds” lately, spending much time visiting these constituencies. “One-on-one,” he says, “the prime minister is extremely courteous, personable and impressive.” It probably helps that the economy is weathering low commodity prices reasonably well: GDP is expected to grow 4.2 percent in 2016 – the slowest since 2009, but hardly a disaster for Southeast Asia’s second-largest oil producer.
Does it mean the theft’s alleged architects remain off limit? Not quite, says Levi. Suspected officials could be put on a financial sanctions list, or become subject to a visa ban. But regardless of its determination to pursue the case, the US will hesitate to go that far. Malaysia is seen has a moderate Muslim bulwark against extremism in Southeast Asia; it is also a staunch Western ally at a time when Washington seeks to counterweight Beijing’s growing clout in the region.
“America has always been pragmatic and willing to put security issues first. I don’t think anything’s going to change on that,” says Byrne.
“It is a humiliation for the global system of anti-money laundering that these things can still happen”
But there’s many other people the US could go after. “Barring a prime minister from your jurisdiction might not be regarded as very smart politically,” Levi says. “But this only apply to the alleged beneficiaries of corrupt payments. Intermediaries, by contrast, might well find themselves in the firing line.”
Levi thinks life could soon become “very uncomfortable” for the law firms and investment banks that – consciously or not – served as the fraudsters’ middlemen. “One of the big questions people will ask is what did they know and if they didn’t know anything, why didn’t they know it? Did they allow the profit from the deal to overcome their judgement?”
The affair may well end up giving Wall Street a shake – and not only in New York. “What may be a bit surprising is that not only small or boutique banks were involved in the scandal, some big names – including global giants like UBS or StanChart – were also mentioned by the Monetary Authority of Singapore,” Chris Chen, assistant professor of law at Singapore Management University, tells me.
In May, Swiss private bank BSI was told to shut down its operations in the city-state, who’s also investigating the affair, over possible criminal conduct. Other banks based in Singapore have allegedly been used to channel the stolen money.
“It is a humiliation for the global system of anti-money laundering that these things can still happen – assuming of course that there is anything criminal about it,” says Levi. It’s not for want of having rules: the multilateral Financial Action Task Force (FATF), which emerged as a response to the war on drug and grew bigger during the war on terror, requires the likes of banks, law firms, casinos and car dealers to report customers who have more cash than they can legally account for.
The problem is one of enforcement. And that’s why the 1MDB case matters so much: like the 2015 FIFA scandal, it may indicate a new phase for FATF rules, with regulators now looking to test the real effectiveness of the system rather than verify formal compliance. “There will likely be civil litigation, if not criminal prosecution arising from this. I would also be very surprised if there wasn’t serious regulatory action,” Levi says.
As the scenario unfolds, the wolves of Wall Street may be in for a shock.