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Shah and Grant: How to steal billions

From 2009 to at least 2013, private individuals were allegedly able to siphon off more than $3.5 billion from the wealth fund of Malaysia and go on a high-end luxury shopping spree in several countries including the United States, the United Kingdom and Switzerland for property, museum-quality art and a private jet. 

Gatekeepers such as auction houses, the real estate industry, lawyers and banks played supporting roles (sometimes unwittingly) in the alleged wrongdoing.

The perpetrators used shell companies, where the real names of the ultimate owners were obscured. Ironically, in a plot twist made in Hollywood, they even financed a film, The Wolf of Wall Street, about living high off financial fraud.

To ensure this lurid tale isn’t solely remembered for its audacity and scale, we need to take active steps to close the obvious loopholes in the U.S. legal framework and compliance practices, and shore up the international financial system that has allowed this brazen money laundering to happen.

The good news is that we know what needs to be done. The bad news is because this fund is tied to the government of Malaysia, political concerns in Malaysia may also get in the way of bringing all the perpetrators to justice.

The story so far, however, is promising. The well-named Kleptocracy Asset Recovery Initiative of the U.S. Department of Justice in bringing the largest ever civil complaint seeking to forfeit and recover over $1 billion in assets involving Malaysia’s 1MDB (1Malaysia Development Berhad), is taking the first step in wresting the proceeds of corruption away from the corrupt. It named several individuals, three in particular, who allegedly lived high off the money and had close ties to one unnamed individual in the Malaysian government.

The named individuals include Riza Aziz, the stepson of Malaysian Prime Minister Najib and a Hollywood film producer, Jho Low, a longtime friend of Aziz and his family, and Mohamed Badawy al-Husseiny, a former official at a government fund in Abu Dhabi, United Arab Emirates, that participated in deals with Malaysia’s fund.

As U.S. Attorney General Loretta Lynch noted Wednesday, this is “… a significant step in our ongoing work to combat global corruption and to ensure that the United States offers no haven to those who illegally use public funds for private gain….And it should make clear to corrupt officials around the world that we will be relentless in our efforts to deny them the proceeds of their crimes.”

The fact that assets are frozen in a civil suit, however, does not mean that the people who took them will face criminal proceedings, though that may follow. We believe it should. The biggest obstacle to fighting corruption is impunity.

The case also highlights the role of intermediaries — bankers, lawyers and the real estate industry. In order to prevent dirty money from entering the U.S., gatekeepers, such as the real estate industry, involved in sale of luxury goods need to conduct due diligence into buyers’ identities and the sources of their funds.

Additionally, we know how easy it is in the United States to use shell companies to mask ownership of assets. That has to change. The Panama Papers leak earlier this year also highlighted the use of anonymous or shell companies to disguise the identities of individuals who want to evade taxes and launder money. Transparency International is calling for more transparency into the identities who those who control and benefit from these anonymous companies globally and for the creation of a global register that lists the true owners of companies.

The United States can lead the way by enacting federal legislation to collect, maintain and update beneficial ownership information upon company formation thereby regulating states like Delaware, Nevada and Wyoming where lax rules make setting up shell companies cheap and easy. Just one building in Delaware is home to 285,000 shell companies. Other jurisdictions like the UK can clamp down on these activities in its crown dependencies and overseas territories.

What is also clear is the need for international cooperation. In a world where creating complex international webs of corruption to hide laundered funds is easy, authorities must work together in order to uphold both national and international laws. As noted by Assistant Attorney General Leslie Caldwell, “the significant assistance we received from our international partners was critical in identifying and restraining assets. Gaps in the legal regimes across the globe — including in the United States — allowed these criminals to avoid disclosing the ultimate beneficial owners of the accounts to which 1MDB funds were diverted.”

The Justice Department is also reportedly separately investigating the role of Goldman Sachs in setting up the IMDB fund. Switzerland is investigating 1MDB funds and banks involved in the scandal and Singapore is also on the case. Malaysia has its own probe too.

Unfortunately for Malaysians, the true victims in this story of fraud, there is little action on the home front. The high-level official named by the DOJ only as “Malaysian Official 1” remains legally anonymous though the hashtag #MalaysianOfficial1 lit up the twitter sphere where links were made directly to Malaysian Prime Minister Najib. Last year $681 million was found in his personal account. Najib denies all wrong doing and his attorney general’s investigation said the money was a political donation from Saudi Arabia.

The Kleptocracy Asset Recovery Initiative has much work to do to bring the perpetrators of this billion dollar fraud to justice. Legislatures must also do their part and tighten up the global financial system so the corrupt cannot exploit its weaknesses anywhere in the world.


Shruti Shah is a contributing editor of the FCPA Blog. She’s Vice President of Programs and Operations at Transparency International-USA. She can be contacted here.

Samantha Grant is Transparency International’s regional coordinator for the Asia- Pacific Region. She can be contacted here.

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1 Comment

  1. The case of investing sovereign wealth funds is not new. It has been going on for decades if the editors and writers of this article were not aware of. Remember Goldman Sachs’ involvement in Libyan Sovereign Wealth Fund, where parties on Yachts with brothels, were the name of the Game?
    I remember well when Venezuela had a Coup d'état and late Hugo Chavez was exiled in neighboring Columbia. The Banco Central of Venezuela was looted. They took every coin and currency that they can take with their bare hands not knowing what type of currency they took and what to do with.

    It is amusing to note editors’ notes: Gatekeepers such as auction houses, the real estate industry, lawyers and banks played supporting roles (sometimes unwittingly) in the alleged wrongdoing.
    I do not particularly see nor agree with words “sometimes unwittingly”. Third parties, such as Attorneys, Public Accountants, Brokers, and all others do line up to get their piece of action when it comes to Sovereign wealth Funds. Proceeds of Crime Act was passed in 2002 and later amended in 2013 in the UK. All Solicitors in the UK are bound by above acts later polished and amended as Money Laundering Acts. They do take signed letters to that extent from their clients and prospects. But they do not investigate further over their origin of funds. So is the case of Banks when mouthwatering, eye ball rolling $, £ are coming. KYC and AML procedures were put in back back burners. They all see “Opportunity” first to rationalize their involvement. It is the basic principle of WIIFM (What’s In It For Me). Quite simple as Dr. Watson said.
    There was no Due Diligence and investigative work on all 20 odd entities where the 1MDB sovereign wealth fund was squandered. Due Diligence is not conducted in sitting 58th floor of Sky Scrapers of NY, Houston, LA, London and in Zurich. If any of the Third Parties had used Boots on the Ground procedures, well before they see opportunity, there would not have been such an uproar and pointing fingers at each and every one.

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