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The 1alaysia Development Berhad (1MDB) Malaysian sovereign wealth fund scandal broke almost three years ago, but new details continue to emerge. The Malaysian sovereign wealth fund was established in 2009 to promote the country’s economic development. However, under unexplained circumstances, nearly USD 4.5 billion disappeared unaccounted for.
Malaysia demands billions in compensation
At the end of 2018, the Malaysian government brought charges against the investment bank Goldman Sachs through the Public Prosecutor’s Office in order to recover Malaysian taxpayers’ money. Employees of the financial institution had participated in setting up the state fund. The Malaysian state’s claim for damages totals USD 7.5 billion.
The claim states that the American bank deceived investors by issuing three bonds and providing them with false information. The bank apparently knew that capital had been diverted and embezzled. Goldman underwrote three bond issues for the sovereign wealth fund in 2012 and 2013, receiving a total of around USD 600 million in fees. The Malaysian authorities are also insisting on a refund of this sum as it far exceeds the usual fees charged for bond issues. In addition, the prosecution is demanding that USD 2.7 billion of misappropriated funds from these bonds be reimbursed.
What is the current status of the investigation?
For now, investigators are turning in circles. At least six nations are investigating the 1MDB case, including the USA, Singapore, Luxembourg and Switzerland. Malaysian Prime Minister Mahathir bin Mohamad, who has been in office since May 2018, has done much to speed up these investigations into the scandal. His predecessor, Najib Razak, is said to be involved in the affair. Najib founded 1MDB and was chairman of the board until the fund was dissolved in 2016. Funds were ostensibly diverted to accounts controlled by Najib, and later spent on jewels, luxury yachts, and extravagant parties with celebrities. His trial was due to begin in mid-February, but has now been postponed.
The prosecution has reached a new level with the lawsuit focusing on the U.S. bank as a whole. So far, the action has been limited to the misconduct of individual managers within the bank. The U.S. judiciary has already charged two bank employees with bribery and money laundering, including a German manager. The former head of the investment bank’s Southeast Asia business has already pled guilty to charges against him. Additionally, the Malaysian public prosecutor’s office is looking to have two former bank managers imprisoned for up to ten years and held accountable to pay back the billions embezzled. One of the two accused is a former employee of the sovereign wealth fund, and the other is the disgraced Malaysian businessman Jho Low, who is considered to have been the mastermind of the operation.
Goldman Sachs denies accusations
The SWF affair came at a high cost to Goldman Sachs shareholders. By the end of 2018, the bank’s share price had fallen to the lowest in the industry. Yet its numerous scandals making headlines raise doubts as to whether Goldman Sachs has learned anything from the financial crisis or takes compliance seriously. The US Federal Reserve has also begun investigating the effectiveness of compliance regulations on the Wall Street company. This brings with it the threat of follow-up costs from further lawsuits. For example, the Abu Dhabi sovereign wealth fund IPIC has filed a lawsuit with a New York court to sue the investment bank for losses from transactions with the Malaysian sovereign wealth fund.
The potential fines not only burden the bank’s results, but also damage its overall image. This is likely to have an impact on other businesses. Goldman has announced that it will vigorously defend itself against the allegations and will cooperate thoroughly with the investigating authorities. All allegations have been denied. The Bank is considering tightening internal regulations and controls to prevent employees in vulnerable regions from bypassing the rules against bribery and embezzlement. The company also announced that it would drastically reduce bonus payments by millions of dollars, for both top managers and former CEO Lloyd Blankfein, should investigations confirm the allegations.
