Billions’ Worth of Baubles Could Wind Up in U.S. Hands in 1MDB Case

New York Times
JUNE 19, 2017

You can almost hear Robin Leach narrating the introduction to an episode of “Lifestyles of the Rich and Famous” by describing a luxury yacht, diamond jewelry, a Picasso painting, and real estate in New York, Beverly Hills and London.

All those baubles — and much more — may end up in the hands of the federal government as the Justice Department filed its latest asset forfeiture lawsuit in Federal District Court in Los Angeles seeking an additional $540 million in goods obtained from looting a Malaysian investment fund, bringing the total sought to $1.7 billion.

Prosecutors may not be able to convict the individuals involved in suspect transfers, but an important tool in the federal arsenal lets them seize assets that are tied to foreign corruption, even if none of the criminal conduct took place within this country.

The complaint details how 1 Malaysia Development Berhad, known as 1MDB, raised money by selling bonds that would help fund development in the country. The Justice Department claims that from 2009 through 2014, over $4.5 billion was diverted to benefit those with ties to Malaysia’s prime minister, Najib Razak, who ostensibly oversaw the fund, including as much as $1 billion funneled to accounts he may have controlled.

The Justice Department identifies Mr. Najib only as “Malaysian Official 1,” and The New York Times reported that his attorney general found no evidence that money had been misappropriated. 1MDB says it is cooperating in the case, and has not been named as a defendant.

Asset forfeiture dates back over 200 years, first used to seize pirate ships or goods imported without payment of the proper duties. Today, the law authorizes the government to sue for the item sought to be forfeited, known as an “in rem” proceeding, because it was used for a crime or represents the proceeds of illegal conduct.

That means the cases sometimes have odd names, like United States v. 92 Buena Vista Avenue, a Supreme Court decision involving a home in New Jersey that the government sought to seize because its purchase was traceable to the proceeds of drug dealing.

Among the items named in the lawsuits are the rights to “Dumb and Dumber To” and “The Wolf of Wall Street,” movies financed with funds from 1MDB; a Bombardier jet; a penthouse in the Time Warner Center in New York City; and an apartment in the fashionable Mayfair section of London.

The Justice Department routinely seeks to seize assets in criminal cases as one part of the indictment. If it wins a conviction, then a defendant is liable to return anything of value derived from the crime. In addition, the government can also seek “substitute assets,” which means it can seize any other money or property that might be available if the proceeds of the crime are not enough to satisfy the full amount of the forfeiture order.

Unlike a criminal prosecution, a civil asset forfeiture case allows the government to seize only assets that it can trace to the underlying crimes. That puts a premium on following the flow of money, and the complaint goes into great detail in describing how cash flowed out of accounts controlled by 1MDB through banks in Switzerland, Singapore and Luxembourg before reaching the United States and Britain to pay for the assets prosecutors want to seize.

Even though most of the transactions took place outside the United States, the money laundering statute can be violated by “an offense against a foreign nation,” including bribery, misappropriation or embezzlement in that country. The only requirement is that the proceeds of those crimes pass into or through the United States for the purpose of concealing the source or ownership of the assets. Buying property and jewelry, or even movie rights, can constitute money laundering, so those assets can be seized if the Justice Department can show the transactions hid the source of the funds.

A property owner can fight an asset forfeiture claim by offering an innocent owner defense. This provision was adopted in 2000 as part of the Comprehensive Asset Forfeiture Reform Act to curb abuses in how the federal government seized assets without affording claimants a reasonable opportunity to assert their ownership. The defense requires the person to show that he or she did not know about the criminal conduct that led to the forfeiture action, or “did all that reasonably could be expected under the circumstances to terminate such use of the property.”

A crucial limitation on this defense is that if the person acquired the property after the illegal conduct, then that person must be a “bona fide purchaser or seller for value” to avoid forfeiture. If it was received as a gift, rather than being bought or sold in an ordinary transaction, then the person can be compelled to turn it over to the government, regardless of whether the recipient knew how it was acquired. So the adage that “possession is nine-tenths of the law” does not apply here.

The complaint identifies gifts given to Leonardo DiCaprio by Jho Low and Riza Aziz, Mr. Najib’s stepson, who set up the movie production company Red Granite Pictures with 1MDB funds. Among the gifts to Mr. DiCaprio, who starred in “The Wolf of Wall Street,” which Red Granite financed, were a collage by Jean-Michel Basquiat valued at $9.2 million, a Picasso painting worth $3.2 million and the Oscar statuette won by Marlon Brando in 1955.

The complaint also seeks the return of an 11.72-carat diamond given by Mr. Low to his girlfriend at the time, who has been identified as the prominent Australian model Miranda Kerr.

Mr. DiCaprio has returned the gifts, perhaps because he had no basis to claim he was an innocent owner to resist the government’s effort to seize them.

Banks in the United States are at the center of the global financial system, and most foreign banks have a correspondent relationship with an American bank so that they can do business in this country. It would be difficult to avoid having the proceeds of illegal activity touch the United States in some way, which is one reason the Justice Department set up a kleptocracy team in the money laundering and asset recovery section of the criminal division to pursue these cases.

Mr. Aziz filed a motion in February challenging an earlier asset forfeiture complaint, arguing that the government cannot show any of the funds are the proceeds of criminal conduct and that he is an innocent owner because he was unaware of any wrongdoing at 1MDB.

One potential issue facing any defendant outside the country who wants to fight an asset forfeiture case is that the court could require the person to come to the United States to be examined as part of the discovery process. That would entail a risk that the government could arrest and charge the person with the money laundering if there is evidence of involvement in diverting funds from 1MDB.

If the Justice Department succeeds in seizing the property, an interesting question is whether those assets should be returned to Malaysian officials. Since the complaint in effect names Mr. Najib as a recipient of some of the money diverted from the fund, it would be anomalous to then turn it back over to his government.

The size of the supposed misappropriation from 1MDB is stunning, and the power of the Justice Department to fight foreign corruption means that government officials who try to loot their own treasuries must beware that the United States will do its best to take the proceeds of crime away from them.

  1. #1 by Bigjoe on Tuesday, 20 June 2017 - 10:10 am

    Malaysia can learn a thing or two from Venezuela about protest.

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