This article has been republished, with permission, from EcoTalker, HERE.
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In what is considered one of the world’s biggest financial scandals, billions of dollars meant to aid the development of a nation disappeared into the shadows of the global financial system. Some blame the primary benefactors who used the public fund as a private bank account, some blame the financial giants backing them and others have no clue of the scandal that shook the world, led to the downfall of a dominating political party, and opened up investigations of one of the world’s largest financial institutions.
The Beginning: Sovereign Wealth Funds
Funds and investments are essential for any nation. They bring in additional growth and development- something imperative to every economy. However, many countries find themselves heavily dependent on just one source of income- for instance, many countries such as those in the Middle East, and Norway are largely dependent on revenues from their oil production. This dependency on a single source can be highly risky due to which many nations opt for diversification of their financial portfolios.
This is where Sovereign Wealth Funds come into action. These are state-owned investment funds for countries to invest in shares, bonds, property or other areas of potential growth. Such investments help countries dependent on single resources such as oil and gas, making them less vulnerable to fluctuations in the prices of these resources. SWFs gained popularity and recognition after they were used to bail out US banks after the 2008 US housing and mortgage crisis. In fact, one-third of today’s 78 SWFs were created in the years following 2010. The wealth controlled by these funds now amounts to approximately 8 trillion dollars of which Norway owns the largest SWF tantamount to 1 trillion dollars.
One sovereign wealth fund that has recently received public scrutiny is the 1MDB fund in Malaysia.
One (in)famous fund: 1MDB
The One Malaysia Development Berhad (1MDB) is a (now insolvent) Malaysian sovereign wealth fund aimed at increasing economic development in Malaysia. The fund was founded in July 2009 by then Malaysian Prime Minister Najib Razak as a way for Malaysia to invest in strategic investments to help manage the nation’s wealth and to reduce dependency on income from natural resources – such as rubber.
The Prime Minister and the Spender
The 1MDB saga has always been centred aroundMalaysia’s former PM Najib Razak. In July 2016, the US Department of Justice filed a civil lawsuit against Razak and associates involved with the fund alleging that more than $3.5 billion had been looted. This figure was later increased to more than $4.5 billion. As per Loretta Lynch, then US Attorney General, ‘a number of corrupt officials treated this public trust as a private bank account.’
The former PM was initially cleared of all these accusations by Malaysian authorities while he and his political party were still in power. However, the tables dramatically turned following his party, BarisanNasional or BN’s, iconic defeat. Razak is now facing 42 charges levelled against him citing corruption, money laundering and abuse of power- all of which he continues to plead not guilty to. In a move to appeal to pathos to prove his innocence, the ex-PM even organised a choir to sing a ballad with him. However, NajibRazak’s image was further slandered after he saw his private property raided- from which the police seized approximately $28.6 million in cash.
Now, it is important to note that Najib Razak would have never been able to pull this off on his own. There were several more of his accomplices involved in the 1MDB scam. One very important figure one must talk about is Chinese-Malaysian financier Low Taek Jho– more commonly known as Jho Low.
Often called, ‘the most interesting person in the IMDB affair,’ Jho Low is thought of by many as the mastermind of the entire scam. Many even think he convinced Najib Razak to open up the SWF in the first place.
US prosecutors claim that Low used his many powerful connections to bribe his way into business for 1MDB. Of the approximately 5 billion dollars stolen from 1MDB between 2009 and 2014, a lot of it was used on ridiculously extravagant parties, expensive and highly coveted artwork, private property and even film production.
Now a fugitive sought by the authorities of Malaysia, Singapore and the US- reporters have speculated that Low may have once had access to more liquid cash than anyone in the world!
The Partygoers (ft. That Guy from Gangnam Style)
Jho Low is notoriously known for his A-list connections. Lavish parties and celebrations that he threw (most likely paid for by the people of Malaysia) for his high-profile friends helped pave the way to his initial success. One particularly infamous event, that many use to cite the level of cash he had access to, was Jho Low’s 31st birthday party. Sources say that Low called Psy, Pharrell Williams, Jamie Foxx, LMFAO’s Redfoo, American rapper Busta Rhymes, Q-tip, Swizz Beats, Ludacris and Chris Brown to perform, and got Britney Spears to jump out of a birthday cake.
Other well-known expenses made by Jho Low include partying with hotel heiress Paris Hilton, various gifts for then-rumoured girlfriend Australian supermodel Miranda Kerr (such as an acrylic see-through piano- worth $1 million- and an 11-carat diamond necklace with earrings to match). Kerr has since turned in millions of dollars to US prosecutors.
That one Leonardo DiCaprio movie
According to US prosecutors, funds stolen by Jho Low were also known to help set up a production company that financed various Hollywood movies such as 2013’s Leonardo DiCaprio-starrer The Wolf of Wall Street. In fact, in his acceptance speech for Best Actor at the subsequent Golden Globe awards, DiCaprio even thanked both Jho Low and Riza Aziz (Najib Razak’sstepson) by name.
The actor has since pledged to help authorities in any way he can and has handed over a Picasso painting allegedly gifted to him by Jho Low.
The Touch of Credibility
At this point, one must ask- how did two people manage to pull this heist off? Why would the people of a country trust one fund with such ease? Both questions have one answer- Goldman Sachs.
Here’s a little backstory: most nations with SWFs have one aim- to expand the money or funds they have. For this, they make use of services provided by investment banks, such as Goldman Sachs, to help them find bonds and various deals to facilitate this goal. However, one drawback many have come to observe about this process is that investment banks may take advantage of their expertise against these countries who have little-to-no knowledge about these bonds. Many such cases include: Goldman, ‘knowingly and wilfully cheating clients in 2008,’ where executives from the financial giant even boasted about the profits they made from the housing crisis. Another notable case is of Libya’s experience with Goldman Sachs. In 2006, Libya set up a SWF worth around 60 billion USD (in oil wealth) looking for opportunities to grow, for which Goldman Sachs was approached. While Libyan officials preferred risk-free bonds and safe investments, what the investment bank did was that it took the country’s money and invested in risky trades and deals. Goldman took home around $200 million in fees while Libya claims that it lost around $1.2 billion. Libyan officials assert that they had no clue of what was going on, and it was this ignorance-of-sorts on their part coupled with Goldman’s expertise that helped the bank get away with this.
Coming back to the doomed 1MDB fund, in its early days Najib Razak tried to get investors to invest in it telling them that their money would help pay for power plants. However, since 1MDB had no credit rating back then, it was harder to get investors to deem the fund credible. Therefore- in 2012- to make the deal look more legitimate, Goldman Sachs executives Tim Leissner and Roger Ng used the investment bank’s credibility as one of the world’s most powerful financial institutions to pair 1MDB with Abu Dhabi’s SWF International Petroleum Investment Company, or IPIC (which, at the time, had $70 billion in assets and credit). With the Malaysian PM, Goldman and IPIC in the picture, investors bought into the deal and invested in the fund. Over the next year, Goldman Sachs helped raise $6.5 billion for 1MDB, of which approximately $1.5 billion went into Jho Low’s pocket (and a total of $2.5 billion was embezzled in that year). Experts claim that this deal and scam would not have been possible without the help provided by the financial institution. Goldman earned around $600 million from this deal which, as per reporters and experts, is 200 times more than they would have normally earned on a deal of that size and assumed risk.
The US filed charges of, ‘conspiring to launder money and violating anti-corruption laws by bribing foreign officials,’ against Tim Leissner, to which the latter pleaded guilty. Malaysian officials have also filed charges against Leissner, Roger Ng and 17 other former and current Goldman Sachs bankers. The bank, which has itself also been charged, denies any wrongdoing. Goldman claims that the Malaysian charges against it and the 17 employees (former and current) are ‘misdirected’ and that the bank will ‘vigorously defend them.’ Roger Ng, who left the bank in 2014, also denied all the charges imposed against him. Goldman Sachs now blames the entire ordeal on Tim Leissner, who they suspended in 2016 upon portraying him as an ‘employee gone rogue.’ Goldman further went on to apologise for Leissner’s behaviour, which the Malaysian government rejected and instead asked the bank for 7.5 billion dollars to make amends.
The Reporters and The Whistleblower
The 1MDB chronicle would have never come into the light without the effort of various reporters who dug into this story for years.
In July 2015, the Wall Street Journal released a report by Tom Wright and Simon Clark alleging $700 million of deposits had flowed into Najib Razak’spersonal bank accounts. Five days after this, a special task force was formed to probe these allegations against the then-PM and the very next day, Malaysian police raided the 1MDB office. These allegations were made rock-solid a month later after Swiss National Xavier Andre Justo admitted to stealing information from his former employer, PetroSaudi International (a Saudi oil company working also working in a joint venture with 1MDB). Justo’s subsequent leaking of PetroSaudiInternational’s documents made clear the corruption surrounding 1MDB. It was then these documents that further helped British journalist Clare Rewcastle-Brown uncover funds that were found in a Jho Low-controlled company as a part of the 1MDB deal.
Also notable is Malaysia’s financial publication The Edge who took the risk of reporting the true course of the scandal while many other newspapers remained silent under fear or pressure by 1MDB officials. Furthermore, Tom Wright (the WSJ journalist who first wrote about the scandal) and Bradley Hope also penned a meticulous recount of Jho Low’s alleged exploits titled Billion Dollar Whale. According to Hope, the book, ‘crystallised,’ the negative impact of the scandal on Malaysia, and many believe that the book increased global pressure to find and arrest Jho Low.
The People of Malaysia
With Jho Low on the run, Najib Razak on trial and Goldman Sachs in hot water, are the people of Malaysia who invested their savings content?
Thanks to this scandal, ordinary Malaysians are stuck with $13 billion in debt. As per Moody’s Investor Service, the country’s debt-to-GDP ratio is 50.8%, much higher than the median 40.1% for similar countries. However, according to current PM Mahathir Bin Mohamad, this ratio is much higher (somewhere at the 80% mark). The Malaysian government has openly talked about how the perpetrators not only stole money but also, ‘destroyed the economy and the confidence in the system.’ Malaysia’s Finance Minister Lim Guang Engeven went on to talk about how Goldman Sachs should, ‘understand the agony and trauma,’ suffered by the Malaysian people.
On the bright side, many Malaysians also do have hope that the nation’s new government will ameliorate the economy. Therefore, while the effects of the 1MDB scandal should not be underestimated, perhaps there is, after all, some scope of change and betterment.
Sovereign Wealth Funds are important for most economies. However, many of these funds often go unregulated- leading to cases of money laundering and corruption, the risk of which is further intensified when investment banks come into the equation. Notwithstanding this, not having SWFs is not a good solution given that they aren’t inherently bad and are in fact crucial for many economies. The only plausible solution is to keep SWFs in check at all times and to have absolute transparency between the public and such funds. Given the complexity of doing so, I am afraid financial scandals such as 1MDB’s are not completely preventable. Nonetheless, the story of 1MDB does give us an insight into the shortcomings of the financial system and corruption within a public fund, which is a start for us to become more aware as individuals.
‘Indian Election Update and the 1MDB Scandal’, Patriot Act with Hasan Minhaj, Netflix (e.g. Web Series)
Photo by Bank of England on Flickr.