1MDB scandal: the Malaysian fraud explained

The 1MDB scandal is one of
the greatest financial frauds in history. $4.5bn was allegedly
misappropriated from the Malaysian state investment
fund and used to buy luxury real estate, expensive
works of art, and even to produce a Hollywood
movie about, of all things, financial fraud. But how did they do it? According to the US
Department of Justice, one strategy involved
setting up bank accounts under fake company names
that resembled real firms. BlackRock Commodities
(Global) Limited sounds a lot like the
global investment manager, while Affinity Equity
International Partners Limited could easily be mistaken
for the private equity firm. There’s no law against this, but
it could help put investigators off the scent. Another scheme saw money
transferred to trust accounts at US law firms. Client confidentiality
rules in the US mean these accounts
are barely regulated, making suspicious transactions
difficult to find. The DOJ alleges that firms like
Shearman and Sterling and DLA Piper were unwittingly used
to sneak a billion dollars from 1MDB into the US. The third strategy
allegedly employed is what the DOJ calls layering. Moving funds from bank
account to bank account, adding layers of complexity,
until the original source of the funds is camouflaged. Let’s follow the
money allegedly used to buy this pink diamond
necklace for Rosmah Mansor, the wife of former
Malaysian prime minister and founder of
1MDB, Najib Razak. It all starts with
a $3bn bond arranged by Goldman Sachs in 2013. That was issued by a
wholly-owned subsidiary of 1MDB incorporated in the
British Virgin Islands, and the proceeds were
earmarked for a joint venture with a firm in Abu Dhabi. But instead of heading to the
Middle East, most of the money was transferred into an account
at Swiss private bank BSI, in Lugano. From there, the DOJ claims
it was shifted to investment funds in offshore centres. The money was wired by a
correspondent bank account at JPMorgan Chase in
the US to two accounts at the Singapore branch of
Swiss private bank, Falcon Bank. Funds went back and forth
between these accounts, adding layer upon
layer of complication, gradually obscuring the origin. Eventually, $681m were
transferred from [INAUDIBLE] into a Malaysian bank
account held by Najib Razak, a sum he insists was
a political donation from the Saudi royal family. Five months later, most
of it was returned. The money bounced around
accounts at Falcon and DBS Bank in Singapore before
a sum of $27.3m was, according to the DOJ, wired
to jeweller Lorraine Schwartz to buy the necklace. The complexity of these
cross-border flows has made getting to the bottom
of the 1MDB fraud painstaking and difficult. But with
Malaysia’s government keen to burnish its
graft-fighting credentials and claw back the money
stolen, the investigation shows no signs of slowing down.

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About the Author: Oren Garnes

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