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Every so often the world is hit by financial scandals that result in political and economical shakeups. The 1MDB scandal uniquely involved a Head of the State, his friends, and a financial broker who collectively misappropriated $4.5 Billion between 2009-14.
1Malaysian Development Berhad was a fund set up in 2009 to finance infrastructural projects that ended up being the subject of multi-jurisdictional investigation as it was being used for the personal enrichment of numerous individuals, including Malaysian Prime Minister Najib Razak who has now been charged with abuse of power and criminal breach of trust in relation to SRC International, a unit of 1MDB. The Fund was used to produce films like ‘The Wolf of Wall Street’, buying casinos, and lavish spendings. The US Department of Justice reported that the misappropriation of 1MDB funds was accomplished through an extravagant web of lies and bogus transactions that were brought to light after robust investigations to prevent international corruptions from taking place in the name of sovereign wealth funds.
How it Started
1MDB met with Goldman Sachs in 2012 to discuss a bond deal that would lead to a huge fee for the bank and Goldman Sachs raised $6.5 Billion for the fund. Goldman Sachs’ Ex-CEO Llyod Blankfein met Malaysian financier Jho Low. Jho Low advised on investments and negotiated deals for the 1MDB, Goldman Sachs earned $600 Million from the bonds it purchased.
Critics argue that bonds arranged by Goldman Sachs worth $6.5 billion in the deal with a fee totaling $593 Million, was more than the average fee charged and Malaysian prosecutors speculated that Goldman Sachs made false statements and omitted key facts in giving circulars for the bonds it sold to the Malaysian State Fund. The charges levied on Goldman are based on the omission of key facts from fund management including the role of Jho Low who is identified as the operator and key intermediary for 1MDB.
Furthermore, 1MDB raised suspicion after it requested a six-month extension period to file its Annual Report and the suspicions grew stronger after it changed its auditors three times. Accounts signed off by Deloitte in 2013 had a major responsibility as part of Audit for FY13 including obtaining sufficient appropriate evidence that the opening balances as of April 1, 2013, didn’t contain misstatements that would materially affect the financial position of 1MDB as of March 31st, 2013.
Speculations about the transparency of funds started raising as early as 2010, but it was only in 2015 that these allegations were made seriously investigated when 1MDB bonds downgraded to junk status and investors sought greater clarity over state investment fund’s plan to wind down and sell off assets. In 2016, the FBI began its investigation to find the link between Tim Leissner, a top executive of Goldman Sachs, and former Malaysian PM Najib Razak. Since then, Tim Leissner has pleaded guilty to charges of money laundering, bribery, and violating the Foreign Corrupt Practices Act that helped Goldman Sachs expand its business in Malaysia.
How it’s Going
The scandal has sent tremors throughout the world and investigations continue to discover the true extent of the scandal.
International Petroleum Investment Corporation (IPIC) has sued Goldman Sachs over the money lost as part of the scandal that unfolded in 2015. The civil action by IPIC, claims that Goldman Sachs and associated parties played a major role in offering bribes and misleading IPIC officials. IPIC claimed that funds arranged by Goldman Sachs defaulted in repayments worth $1.1 Billion in 2016 and the government of Malaysia at that point agreed to repay the fund to IPIC but the settlement made by the previous government is now being challenged by the current government elected in Malaysia.
In 2018, Goldman’s stock price took a massive hit after fears escalated in the market speculating that the bank would’ve to pay billions in fines for the role it played in the 1MDB scandal. Adding to difficulties, 2018 witnessed an election in Malaysia that ousted PM Najib Razak and the new coalition government ordered a special position audit into 1MDB.
The Audit revealed the weak and non-transparent functioning of the sovereign wealth fund set up by the Malaysian government and now the reparations that Goldman Sachs has to pay for colluding with the state investment fund which if not paid would put major infrastructural projects like the oil and gas pipeline connecting the strait of Malacca to a Petronas refinery and petrochemical plant in the strait of Johor under jeopardy.
Malaysia’s fiscal deficit was revised from 2.8% to 3.7% since the new government faces debt repayments of up to $10.5 billion linked to the investment fund set up by the previous government. As Goldman Sachs has repeatedly denied any involvement in the scandal and has been verbal about contesting these claims ‘vigorously’, the onus of the entire scandal has fallen onto a single entity, Tim Leissner, who worked for the company and the reparations demanded from Goldman Sachs due to its employee’s involvement are still due causing problems for the present government. Goldman Sachs is averting the risk of bad publicity and huge losses for its bank which could see another hit in stock prices driving the investors away and leading to loss of funds for the bank.
(Image from BBC; Jho Low with Leonardo Dicaprio)
The 1MDB Scandal unfolded with big shot financiers coming under the radar with only Tim Leissner admitting to the charges put on him while Roger Ng (another accused) is still in Malaysia tussling through his extradition to the US while Jho Low still being on the run. Government transparency in disclosing funds and auditing becomes imperative when huge investment funds are set up for public goods and infrastructural projects. Repeated faults in 1MDB, corruption, and lack of transparency were the key factors that led to the financial scandal and the repercussions of which are still being felt by both the Malaysian government and Goldman Sachs.