Michael Peel and Jeevan Vasagar
Financial Times
February 15, 2016

The chief executive of BSI, the Swiss private bank, was jubilant about its foray into Asia. So much so that he wrote to a star employee in Singapore who had helped lead the effort. “I wanted to personally thank you for your immense contribution not only to the growth of our new Asia business, but to BSI Group as a whole,” enthused the December 2011 letter from Alfredo Gysi, who is now BSI’s honorary chairman.

What a difference four years makes. Today that same bank official in Singapore, Yak Yew Chee, is battling a criminal investigation by the city-state’s authorities on suspicion that he benefited “from criminal conduct”.

At issue are transactions allegedly linked to the very company that helped him earn his boss’s gratitude and more than S$27m ($19m) in pay and bonuses since 2011: Malaysia’s 1MDB state investment fund, which is at the centre of a growing international scandal over claims of the misappropriation of billions of dollars. Mr Yak denies wrongdoing. BSI declined to comment, other than to say it would co-operate with the authorities, when and if requested.

The letter was part of a bundle of documents disclosed this month that undermined the Malaysian government’s effort to contain the 1MDB scandal.

The papers emerged after Mr Yak began proceedings to transfer money back to Singapore to pay tax and legal bills. He withdrew the claim after authorities agreed to allow him to bring in funds. The case came a week after Swiss authorities said their investigations into suspected bribery involving former 1MDB officials and others had found “serious indications” that $4bn — earmarked for development projects — had been misappropriated from Malaysian state companies.

At the same time Najib Razak, Malaysia’s prime minister, is under pressure to explain the $680m that ended up in his personal bank account, officially from the Saudi royal family. The prime minister says it was a political contribution and denies it is linked to 1MDB. The revelation of the payment, however, has rocked Southeast Asia’s third-largest economy and threatens the near six-decade rule of the governing United Malays National Organisation.

It is not just a matter of domestic politics. The impact of the cases is being felt way beyond Malaysia’s borders due to the amount of money allegedly involved and its scope. The parties said to be affected include foreign officials, leading banks and offshore financial centres, with transactions stretching from Kuala Lumpur to the Cayman Islands and from Abu Dhabi to New York.

1MDB has become a test of regulators’ ability, and desire, to penetrate a web of dealings that take full advantage of the privacy and cross-border complexity available in the global financial system. It is also being seen as a measure of how well authorities deal with cases of suspected grand corruption. Laws have been tightened worldwide to force regulators and companies to gather more ownership information, in the wake of scandals such as the looting of billions of dollars from Nigeria by General Sani Abacha, the late dictator.

“Do the banks in the 1MDB case have that information — and do the authorities have the political will to investigate this properly?” asks Prof Jason Sharman, a governance specialist at Australia’s Griffith University. “The other thing is, if the transactions were as suspicious as they look, what the hell were the banks doing accepting the money?”

Growth plan

At the heart of the 1MDB affair are two overlapping failures of governance: in Malaysia, where political power has increasingly been centralised; and in the global financial architecture, where it appears that opaque corporate structures remain open to abuse.

The country’s politics have long been greased with money — cash handouts to voters are a standard tactic at election time — while political power is concentrated in the hands of a small network. The prime minister is also head of the finance ministry, an unusual combination of roles, which has been the norm in Malaysia since the era of Mahathir Mohamad, the long-ruling premier who modernised the country while also holding it in an authoritarian grip.

1MDB was born out of a resurgent appetite for emerging markets following the global financial crisis. Launched in 2009, it benefited, along with other parts of Malaysia’s economy, from capital inflows as central banks in industrialised states took extraordinary measures to rescue the global financial system. Originally a regional wealth fund, 1MDB was taken over and renamed by the finance ministry. It is a project closely linked with the dapper Mr Najib, who still chairs its advisory board.

The official aim was for 1MDB to make investments that promoted economic growth, but with a twist: unlike most sovereign wealth funds, it did not start with a big pile of cash. From the outset, 1MDB’s business model was built on raising debt to acquire assets, ranging from power generation to land, with some of the property being given to it at nominal prices by the government.

Goldman Sachs was heavily involved in the capital raising and arranged three bond sales in 2012 and 2013 for the fund, including a transaction in which it collected a fee worth nearly $300m on a $3bn issue. The Wall Street bank has denied any wrongdoing. 1MDB’s debts ballooned — rising to more than $11bn by March 2014, the last financial snapshot available — amid questions over both the fate of the money and the fund’s ability to pay the interest on its loans.

The Swiss authorities suspect criminal conduct via a “systematic course of action carried out by means of complex financial structures”, relating to five companies linked to 1MDB. Two of the businesses referred to directly or indirectly — Aabar Investments, the Abu Dhabi state investment vehicle, and PetroSaudi, an oil company — had joint ventures with the Malaysian fund. The Swiss did not say that either PetroSaudi or Aabar were themselves under investigation. PetroSaudi has denied any wrongdoing and says it is not being probed. Aabar also denies wrongdoing and is awaiting the results of a review of its 1MDB entanglements by Ipic, its parent company.

Key developments

2009

April Najib Razak becomes Malaysia’s prime minister
September The newly created 1MDB announces launch of $2.5bn joint venture with PetroSaudi International

2012

1MDB issues two $1.75bn bonds to buy power assets from Tanjong Energy and Genting Group

2013

March 1MDB issues $3bn bond to fund a joint venture with Aabar Investments of Abu Dhabi.

May Mr Najib’s United Malays National Organisation retains power after controversial general election in which opposition alleges ballot-rigging

2014

March 1MDB’s debts climb above $11bn

2015

1MDB announces the sale of about $4bn of assets to deal with cash flow and debt crisis

July Reports emerge that Mr Najib received transfers of $680m from unnamed foreign donors in his personal bank account. He denies wrongdoing

2016

January Swiss investigators reveal ‘serious indications’ that $4bn has been misappropriated from Malaysian state companies

The PetroSaudi venture illustrates the opaque nature of the 1MDB money trail. When the venture was ended in 2012, 1MDB used its share of the proceeds to buy investments purportedly worth more than $2.3bn in a Cayman Islands-registered fund that had been incorporated just a month earlier. KPMG, 1MDB’s auditor, raised concerns about the Cayman Islands investment, according to a draft report by Malaysia’s auditor-general completed last year. 1MDB later sacked KPMG. Neither the fund nor the accounting firm have commented on the episode.

International scope

Many of the transactions suspected of being linked to 1MDB that are under investigation are said to have been routed through international banks. A small portion was sent to accounts held in Switzerland by former Malaysian and UAE public officials, according to Swiss investigators.

Singapore is investigating possible money laundering offences and has frozen at least 12 bank accounts. The US justice department is scrutinising New York luxury property sales suspected of being linked to the 1MDB scandal and is also probing the $680m payment to Mr Najib.

The 1MDB affair has come to light at a time when global regulators are taking a sterner view of the theft of state assets. In particular, Switzerland — still criticised by many over the high levels of privacy in its banking system — claims it is now vigorous in tracking down and returning stolen funds.

Domestically, the prime minister’s tight grip on power allows him to defy his foes. His government last year forced a succession of critics and people involved in 1MDB-related investigations from their posts. They included Muhyiddin Yassin, the deputy premier, and Gani Patail, the attorney-general, who retired suddenly on ill-health grounds. Several members of parliament’s public accounts committee were promoted to government jobs, stalling their investigation.

Newspapers were suspended, opposition MPs banned from travel and two people who had been lobbying for foreign investigations of the case were detained and later released. The central bank announced last year it had called for criminal prosecution of 1MDB, only to be overruled by Mohamed Apandi Ali, the new attorney-general.

National security legislation, rushed through parliament in December, allows the prime minister to suspend restraints on police powers under certain conditions. Even social media, one of the few remaining outlets for dissent, is being monitored. Malaysian police recently tweeted a warning to an artist who posted a caricature of Mr Najib in clown’s make-up.

“Najib is like the emperor with no clothes,” says Tian Chua, an opposition MP. “People are afraid that their heads will be chopped off, so they just keep quiet and praise the emperor.”

Arul Kanda, a Malaysian banker who had worked in Abu Dhabi and London, was appointed as 1MDB’s president last year to deal with its cash flow and debt problems. He has launched a multibillion-dollar fire-sale of many of its main power and property assets.

The government and 1MDB insist the allegations are false and politicised while the attorney-general appointed by Mr Najib delivered what seemed to be the coup de grâce against the premier’s enemies. He cleared him of wrongdoing over the case of the payment to his bank account, and Mr Najib urged people to “unite and move on”.

It has not worked out that way. The unusually forthright Swiss statement suggests Mr Najib and his allies may have overplayed their hand. The announcement appears to be a direct response to fears that the Malaysian government was trying to bury the case. Investigators in Bern and elsewhere may have been particularly surprised to hear an elected head of government argue, as Mr Najib did, that a probe into mysterious payments of $680m to him had been an “unnecessary distraction”.

Brutal politics

1MDB’s troubles have added to wider economic problems for Malaysia. The plunging global oil price has forced the government to trim its spending plans, while the ringgit has tumbled and consumer debt has notched regional highs. The next election due by 2018 promises to be a brutal affair, after the opposition won the popular vote in the 2013 poll and claimed it was denied a parliamentary majority only by government gerrymandering.
Speculation about Mr Najib’s future is growing. He has also been named in a French inquiry as a suspected recipient of bribes in a submarine deal he oversaw when he was defence minister in 2002. He denies any wrongdoing.

In the short term, he has a sensitive trip to a summit between the US and Southeast Asian countries in Sunnylands, California which began yesterday. Neither President Barack Obama nor Mr Najib, who played a round of golf together in Hawaii in December 2014, mentioned the 1MDB affair or the payments to the prime minister directly in statements they issued after they met in Malaysia last year. But the case is becoming harder for the US administration to ignore, even if it still has a strong interest in courting Malaysia over the Trans-Pacific Partnership trade deal, antiterrorism efforts and security in the South China Sea.

In the longer term, Mr Najib’s allies dismiss claims that he’s negotiating an exit in exchange for some kind of immunity from prosecution. Many analysts and even opponents echo his supporters’ argument that he is more secure now than he was a few months back.

Ibrahim Suffian, director of the Merdeka Center, a Malaysian polling agency, says the prime minister’s ratings have “tumbled” as a consequence of the 1MDB affair and the weakening economy, but his position has remained robust. “He has strong control over his own party, which allows him to sideline any individual who is critical of him,” says Mr Suffian. “The next election is a challenge for the ruling party, but it has tremendous resources and a fragmented opposition which isn’t able to provide any kind of alternative.”

Mr Najib’s supporters insist he has done nothing wrong and that he will lead the governing party to yet another election victory. The question now is whether he will survive long enough to lead UMNO into the election or will he be overwhelmed by the fallout from a fund whose activities were supposed to drive Malaysia’s continued prosperity — but have instead damaged its reputation and left a fog of suspicion on several continents.

Cast of characters

Mahathir Mohamad

Prime minister of Malaysia between 1981 and 2003, Mr Mahathir has led efforts to topple Najib Razak, who now occupies the position, calling for “people’s power” to oust a “corrupt leader”.

Critics accuse Mr Mahathir, 90, of double standards, as his rule was intolerant of dissent and notable for political patronage and cronyism — as well as strong economic growth.

Jho Low

Malaysian financier and socialite who has faced increasing questions over his role, if any, in helping broker 1MDB’s multibillion-dollar joint ventures with companies from Saudi Arabia and Abu Dhabi. Mr Low has denied wrongdoing and said he was never an adviser to 1MDB. New York property deals suspected of being linked to Mr Low and Riza Aziz, Mr Najib’s stepson, are being probed.

Tim Leissner

The driving force behind Goldman Sachs’ expansion in Malaysia, during which the bank arranged $6.5bn of bond deals for 1MDB in 2012 and 2013. It emerged last month that Mr Leissner, who is married to Kimora Lee Simmons, the US model, has taken “personal leave” and moved from Singapore to Los Angeles.

Mr Leissner has not been accused of any wrongdoing.

Najib Razak

Malaysia’s prime minister and chair of 1MDB’s advisory board. The son of a former premier, aged 23 he became the youngest parliamentarian in the country’s history. That was the start of a rise through the ranks of the dominant United Malays National Organisation, including spells as defence minister and deputy prime minister.

He has denied any wrongdoing.

Riza Aziz

Mr Najib’s stepson and the co-founder of Red Granite Pictures in the US, which has produced films including The Wolf of Wall Street . US investigators are probing New York property deals suspected of being linked to Mr Aziz and his friend Jho Low as part of a wider inquiry. Both men deny any wrongdoing. Red Granite says there has “never been anything inappropriate” about its or Mr Aziz’s business activities.

Khadem al-Qubaisi

The former head of Ipic, the Abu Dhabi state investment fund, stepped down in April without explanation, after overseeing ventures with 1MDB worth billions of dollars. Ipic is seeking to clarify what happened to more than $1.4bn that 1MDB said it had paid out, but was never recorded as received in the Abu Dhabi fund’s accounts. Mr Qubaisi has not been accused of any wrongdoing.