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The Malaysian 1MBD fraud scandal - can RegTech overcome kleptocracy?

Last Tuesday, the 28th of July 2020, disgraced former Malay Prime Minister Najib Razak was found guilty on the seven charges brought against him relating to the multi-billion dollar ‘1 Malaysia Development Barhad’ (1MBD) scandal, which saw billions of dollars worth of Malay taxpayer’s money funnelled out of Malaysia and into the pockets Najib and his associates.

Tuesday’s ruling is a major landmark in the 1MDB case, and marks the first indictment against former Prime Minister (PM) Najib, who as the 6th Prime Minister of Malaysia, has also become the first Malay Prime Minister to be convicted of corruption.

The main controversies surrounding the 1MDB scandal began in 2015, as it became increasingly apparent that the funds, intended to grow the Malay economy and “support the Malaysian people through the 1MDB investments,” instead, “were stolen, laundered through American financial institutions and used to enrich a few officials and their associates” according to US Attorney General Loretta Lynch in a 2016 statement, after the US Department of Justice (DoJ) launched its own independent investigation into the scandal.

The ‘American institutions’ Ms Lynch was referring to in that statement include prominent US banks like that of Goldman Sachs, who underwrote much of the 1MDB fund, and was facing a host of criminal and regulatory proceedings in Malaysia since Malay prosecutors filed charges against the firm in 2018. Earlier in July, Goldman Sachs agreed to pay a US$3.9bn settlement to the Malay government for their involvement in the scandal, US$2.5bn in cash, and US$1.4bn in seized international assets, dealing a huge blow to their already scarred reputation.

It is alleged that Goldman Sachs was somewhat aware of the illegality surrounding its dealings with 1MDB, even at one point misleading investors when it helped to raise US$6.5bn for the fund, but as we’ve seen time and time again, the firm ultimately made the inexcusable decision to overlook these red flags in a critical compliance failure in the pursuit of potentially exorbitant profits.

The settlement between Goldman Sachs and the Malay government marks “an important step” towards resolving the issue and "there are important lessons to be learned from this situation ... we must be self-critical to ensure that we only improve from the experience," said Goldman Sachs in a statement in response to the ruling.

The 1MDB fund was created soon after Najib took office in April 2009, and quickly received billions in government investment for the purpose of "market-driven initiatives to assist the government in propelling Malaysia towards becoming a developed nation (that is) highly competitive, sustainable and inclusive". Instead, according to United States prosecutors, 1MDB was used as a slush fund by Najib and associated persons, including financier Jho Low, to steal more than US$3.5bn over the course of six years. The actual figure however, is still disputed, with Swiss prosecutors placing it in excess of US$4bn.

Though political opponents had long criticised Najib’s decisions to invest such substantial government funds into 1MDB, which in 2010 was less than a year old, the major controversy came in early 2015, British journalist Clare Rewcastle-Brown recovered 227,000 leaked documents relating to 1MDB. Following months of investigations, Brown published a story accusing the former PM of channelling over RM 2.67B (≈ US$700 million) from the 1MDB fund into his personal bank accounts over the course of the scandal. The story was quickly picked up by many major news outlets including the Wall Street Journal.

Following the wave of accusatory articles in early 2015 Malay authorities raided 1MDB’s offices in Kuala Lumpur and investigations were launched into 1MDB by the governments of Singapore, Australia, Hong Kong, Switzerland and the US, all of which had previously had financial dealings with 1MDB.

This resulted in widespread criticism amongst Malaysians, with many calling for his resignation.

Najib, of course, has consistently denied these allegations, attributing them to a number of alternate causes and actions including political jealousy and pure fabrication. In early March 2015, amid the growing public discontent over the perceived lack of transparency surrounding 1MDB, Najib, who is also the chairman of 1MDB’s board of advisors, ordered the Auditor General of Malaysia (a government ministry reporting to the Malay parliament) to carry out an audit of 1MDB. On completion of the audit however, the final report was classified as an “official secret” and only for viewing by members of the Public Accounts Committee (PAC) tasked to investigate improprieties at 1MDB. The lack of a publicly available report only served to generate further discontent amongst the Malay public.

Najib’s government continuously acted quickly to block any probes that appeared to threaten his image or grip on power including the removing of the Attorney General who was investigating Najib and Deputy Prime Minister Muhyiddin Yassin in July of 2015, who in a speech, called on Najib to answer questions about the heavily indebted fund. “Members of the cabinet should not air their differences in an open forum that can affect public opinion against the government and Malaysia,” Mr. Najib said in a televised statement following the removal of his Deputy Prime Minister.

Najib replaced the removed Attorney General with a prosecutor, who cleared Najib of any wrongdoing when in August 2015, the Malaysian Anti-Corruption Commission (MACC) returned a verdict confirming that no funds had been transferred from 1MDB into Najib's personal bank accounts. 1MDB then went on to claim in September of 2015 that some media reports concerning the company in negative light appeared to have been politically motivated due to Najib’s relationship with them and dismissed any claims of wrongdoing.

In February 2016, the US Federal Bureau of Investigations (FBI) launched an investigation into the relationship between regional directors at Goldman Sachs and Prime Minister Najib, and the nature of Goldman Sachs’ involvement in the multi-billion dollar deals with 1MDB.

By this time, political tensions were running high in Malaysia, with many members of the public calling for Najib’s removal from office. Najib was ousted from office in a shock election result on the 10th of May 2018, and was arrested by the MACC on July 3rd that same year, having investigated how RM42 million (US$10.6 million) went from SRC International, a company related to 1MDB, into Najib's bank account. Police seized huge quantities of fashion accessories worth $273 million while searching Najib’s properties.

Najib has consistently proclaimed his innocence, and even welcomed the trial upon its announcement as a chance to clear his name. Ahead of Tuesday’s verdict, Najib wrote on Facebook that “"no matter what the decision is tomorrow in the High Court, it doesn't end here" and indicated that he would appeal the ruling if it was unfavourable - "I don’t give up"

On the 28th of July 2020, High court judge Nazlan Mohammed Ghazali found Najib guilty on the counts of: Abuse of power, Money Laundering, and Criminal breach of trust among others, in this current trial relating to the US$10m. Other trials against Najib in relation to 1MDB are still ongoing.

Jho Low, Najib’s alleged financier, much like Najib, has consistently professed his innocence, and in 2019 struck a US$700m deal with the US government to end the legal case against him involving the largest ever US government forfeiture of assets, located across the UK, US and Switzerland.

Goldman Sachs, who claimed that the allegations brought against them were “misdirected” and would be “vigorously defended” in August 2019, now agree to pay the Malaysian government US$2.5bn in fines, as well as provide a guarantee the government will also receive "at least $1.4 billion in proceeds from assets related to 1MDB seized by governmental authorities around the world". "This settlement by Goldman Sachs represents its acknowledgment of the misconduct of two of its former employees in the broader 1MDB fraudulent and corruption scheme” said the Malaysian Ministry of Finance in a statement referring to the critical regulatory shortcomings of the company surrounding their involvement with 1MDB.

For many years, the bank has tried to rebuild its tarnished reputation, but the formidable institution is now once again at the centre of public attention following what may be the biggest bank fraud in history.

Addressing money laundering on this scale requires complex and vigourous compliance procedures from asset declaration, enforced freedom of information laws and open contracting in procurement.

Many of the money laundering headaches derive from anonymous shell companies which avoid regulator suspicion and edentulous compliance departments. A ploy specifically used by Mr Low.

Technology has been proven to better unearth money laundering, from better being able to identify clients and the parties involved in a transaction, to monitoring the transaction itself and even automatically investigating the red flag to confirm it as a 'true positive'.

However, although technology can better identify and then halt such activity, unfortunately technology cannot prevent the arrogance of those who wish to appropriate funds. The incentive of personal gain is something technology can mitigate against, but currently not prevent altogether.




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