The 1MDB Scandal

The 1MDB Scandal

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 2009Minister 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.