by Shamim Adam and Laurence Arnold
Bloomberg
October 11, 2016

Malaysia’s state-owned investment fund, 1MDB, was supposed to attract foreign investment. Instead, it has spurred criminal and regulatory investigations around the world that have cast an unflattering spotlight on financial deal-making, election spending and political patronage under Prime Minister Najib Razak. A Malaysian parliamentary committee identified at least $4.2 billion in irregular transactions. Singapore on Oct. 11 announced it will revoke the local license for a second bank for breaches of anti-money laundering rules in relation to its 1MDB probe.

1. What is 1MDB?

It’s a government investment company — full name, 1Malaysia Development Berhad — that took shape in 2009 under Najib, who went on to lead its advisory board. Its early initiatives included buying privately owned power plants and planning a new financial district in Kuala Lumpur. The fund proved better at borrowing — it accumulated $12 billion in debt — than at luring large-scale investment.

2. What’s the issue?

Investigators have been trying to trace whether money flowed through and around 1MDB and illegally into personal accounts. Some of the money is alleged to have ended up with Najib and his family. That includes $681 million that landed in the prime minister’s personal bank account, according to U.S. prosecutors. Malaysia’s attorney general, backed by Saudi authorities, said the $681 million was a donation from the Saudi Arabian royal family, much of which was returned. The U.S. Justice Department says the money instead came from, and was returned to, an offshore entity called Tanore Finance Corp. Another $700 million in 1MDB funds meant for a joint venture with a company known as PetroSaudi International was found to have landed in an unrelated offshore account. Najib has denied wrongdoing.

3. Who is investigating?

There are probes related to 1MDB in at least 10 countries, focused on possible embezzlement or money laundering. At home, investigations have been less pointed. The U.S. Justice Department is seeking to seize more than $1 billion in assets that it says were illegally acquired through money diverted from 1MDB, including real estate, art and proceeds from the film “The Wolf of Wall Street.” Singapore and Switzerland have imposed financial penalties on several banks for lapses in anti-money laundering controls related to funds allegedly from 1MDB.

4. Who is involved?

Though not all have been accused of doing anything wrong, financiers and financial companies have found themselves part of the 1MDB saga:

*Falcon Private Bank Ltd., a Zurich-based bank linked to $3.8 billion of 1MDB fund flows, was ordered to cease operations in Singapore while Switzerland threatened to withdraw its license if there were any further breaches of money-laundering regulations.

*Goldman Sachs made $593 million working on three bond sales that raised $6.5 billion for 1MDB in 2012 and 2013, dwarfing what banks typically make from government deals. It said last year that fees and commissions “reflected the underwriting risks” it had assumed. New York’s bank regulator has asked the firm for a summary of its 1MDB work.

*Low Taek Jho, a bon vivant who did consulting work for 1MDB, is portrayed by U.S. prosecutors as a central figure who set up shell companies to collect proceeds from the fund and arranged the withdrawal of tens of millions of dollars to pay Malaysian government officials and for his own lavish spending. Efforts to reach Low, who had previously denied wrongdoing, have been unsuccessful.

*Tim Leissner, Goldman Sachs’ Southeast Asia chairman, wrote an unauthorized reference letter for Low on the bank’s letterhead. He resigned in February and hasn’t been accused of wrongdoing.
BSI SA, a 143-year-old Swiss bank that worked with 1MDB, lost its license to do business in Singapore for breaches of money laundering rules. Singapore authorities charged in October two ex-BSI employees, accusing them of failing to disclose suspicious transactions involving Low.

*UBS Group AG and DBS Group Holdings Ltd. have also drawn penalties from the Singapore central bank for anti-money laundering lapses. UBS and DBS said they will strengthen controls and take actions against employees responsible for the lapses.