How the priceless reputation of one of the world’s leading investment banks has been put at risk through ambition and greed over-riding ethics and good practice
1MDB and Goldman Sachs: background
In 2009 Najib Razak was elected prime minister of Malaysia. With a background of political aristocracy, his father and uncle were both prime ministers before him, he received his higher education in the UK and, so it was said, spoke English better than Malay.
An early act as new prime minister was to set up an organisation called 1 Malaysia Development Berhad (1MDB), created in 2009 by the Malaysian Government, as part of the Economic Transformation Programme. Najib Razak became chairman of the advisory board.
This was seen by some outsiders as the creation of a sovereign wealth fund, but, unlike other sovereign wealth funds, it wasn’t created by an injection of national funds, but rather it raised significant capital from external sources. In 2009 1MDB signed a $2.5bn joint venture with PetroSaudi in which 1MDB put in $1bn and PetroSaudi put in exploration assets in Turkmenistan and Argentina.
What happened next?
What emerged some years later was that the funds invested in the JV were supposedly fraudulently transferred by certain 1MDB officials to a Swiss bank account controlled by a Malaysian businessman, Low Taek Jho (Jho Low), who subsequently moved $700m across to another private account controlled by him. From this $700m, he bought properties and what were described as other luxury assets. A later court filing claimed that Jho Low then set up a company called Jynwel Capital in the USA, using Jynwel to buy a stake in publishing group EMI and also two expensive hotels, funded out of the $700m.
A later US Dept of Justice case said that $24.5m was transferred by Jho Low in tranches to a Riyadh account in the name of a Saudi prince (a co-founder of PetroSaudi) and thence, all but $4.5m to a person it described as Malaysian Official 1, identified by observers as Najib Razak.
By the time the JV was ended in 2012, after a series of financial transactions, it seems to have made questionable investment gains and little progress in its declared aim of transforming the economy of Terengganu state in the Malaysian federation.
In 2012, 1MDB did some more fund-raising, issuing two $1.75bn bonds to buy power assets from Malaysian corporations, Tanjong Group and Genting Group, assets later sold at a massive loss. Supposedly, 40% ($1.36bn) of the funds raised through these bonds was diverted to what was supposed to be the Abu Dhabi company, Aabar Investments, but instead was apparently a fake company, with a similar name, controlled by Jho Low. Interestingly, its directors included the CEOs of Abu Dhabi’s International Petroleum Investment Company (Ipic) and Aabar Investments, itself a subsidiary of Ipic. From these funds, then, apparently $238m was transferred to a company called Red Granite Capital, which was used to buy properties in Manhattan, Beverley Hills and London, and to make the film Wolf of Wall Street.
Then, in 2013, 1MDB issued a $3bn bond to fund investment into a joint venture with Aabar Investments. However, the ex-CEO of the JV later testified that not only did Aabar put no funds into the JV, but the JV itself never invested anything. However, it was later stated that out of the $3bn injected by 1MDB, $1.26bn was routed to Tanore Finance, a company controlled by Eric Tan, a Malaysian associate of Jho Low. Tanore then sent $681m to Najib Razak. Tan separately acted as front man for Jho Low to buy art masterpieces.
Now Goldman Sachs’ name starts to appear, since, in relation to the $3bn bond, it collected an unusually high $300m fee. Moreover, its total fees for bond deals in the period 2012-2013 amounted to $593m.
By 2014, 1MDB had run up debts exceeding $11bn and the following year, to deal with the emerging cashflow and debt crisis,1MDB announced its intention to sell $4bn assets. Coincidentally, Ipic’s MD and Aabar’s CEO both resigned.
Questions start to be asked
In mid-2014, allegations emerged in several newspapers that $680m was sent to Malaysia by a British Virgin Is shell company via a Singapore account of a Swiss bank, suggesting that these funds ended up in the account of Najib Razak.
In regard to this $680m, apparently paid by the Saudi royal family into the personal bank account of Najib in 2013, ahead of the elections, it subsequently emerged that the chief of the Malaysian Anti-Corruption Commission (MACC) had decided to bring charges, but pressure was brought by the Prime Minister’s office not to proceed. The Deputy PM said the money had been used for benefit of the party (UMNO) and “at need” communities around Malaysia. The resulting investigation by the (MACC) then declared that it had found no evidence, and the attorney-general overseeing the probe by MACC into 1MDB retired for ill-health reasons – an event seen as resulting from his dismissal by the prime minister for probing too deeply.
The new Malaysian attorney-general then said that Mr Najib had committed no crime, and that he had returned $620m later the same year. He instructed the MACC to close its investigation. Former premier, Mahathir Mohamad, accused Najib of undermining the legal system for his role in removing the attorney general, and called for Najib’s resignation.
Later in the year, the new attorney-general refused to press charges against 1MDB after the central bank had recommended it be charged for irregularities in the way it had handled $1.8bn of assets held in the Cayman Is. Auditor KPMG raised concerns about the Cayman investment, and were later sacked.
As 2016 dawned, with debts of $13bn versus assets of $13.8bn, 1MDB was forced into further asset sales, and offered to sell a 60% stake in its Bandar Malaysia real estate project to a part-Chinese consortium for $1.7bn. But the China Railway Engineering Corp (part of the JV) challenged the valuation, assessing the true cost of the proposed deal as equivalent to only $1.2bn, depending whether certain Malaysia-related liabilities could be passed on. So the cash flow and debt crisis continued to press on 1MDB.
In regard to filing accounts, the accounts of 1MDB were now over two years late.
Goldman Sachs’ troubles were now starting to become more public, as Tim Leissner (recently Goldman Sachs’ SE Asia chairman) took what was described as personal leave from Goldman Sachs. The bank accused him of having made inaccurate and unauthorised statements in regulatory filings in 2015 relating to a reference letter for a 1MBD financier. It later transpired that he had said Goldman Sachs had done due diligence on Jho Low, and had detected no money laundering concerns, which was untrue.
The pressure builds
Then Swiss authorities started criminal investigations into 1MDB and Swiss bank Banca Svizzera Italiana (BSI), one of the oldest banks in Switzerland, having found serious indications that some $4bn might have been misappropriated, and requested assistance from the Malaysian authorities. It was looking at four cases relating to five companies including PetroSaudi, SRC a former subsidiary of 1MDB, Malaysian leisure and property companies Genting and Tanjong, and ADMIC, the JV between 1MDB and Aabar Investments.
Singapore authorities also announced that they were investigating possible money-laundering offences and had frozen at least 12 bank accounts.
The US Justice Dept said it was investigating New York luxury property sales suspected of being linked to 1MDB.
Then Tim Leissner resigned from Goldman Sachs.
By April, the whole 1MDB board offered to resign after a critical report by the Malaysian parliamentary public accounts committee. It made special reference to transfers of $3.5bn as not accounted for, from 1MDB to Aabar Investments PJS Ltd, the company registered in the Virgin Is, whose name was remarkably similar to Aabar Investments PJS, controlled by Abu Dhabi’s Ipic.
The Swiss probe then said it was investigating former officials at Ipic regarding a $1.4bn payment as collateral for the pair of $1.75bn bond issues in 2012. This was part of the $3.5bn referred to in the parliamentary public accounts committee report. The Swiss suggested this might have been used to finance the film Wolf of Wall Street, funded by Red Granite Pictures, whose co-founder was Riza Aziz, who happened to be the stepson of Najib.
The response of 1MDB was that their records showed the payment had been made to Aabar PJS in accordance with agreements made with the CEOs (who had later resigned) and they had verified ownership, but Ipic and Aabar said they had received no payments.
At this point, 1MDB defaulted on one of the $1.75bn bonds, failing to pay interest payments of $50m, and triggering cross-defaults on the other two bonds totalling $1.9bn. It blamed a dispute with Ipic over the terms of the guarantee. The dispute was settled the following Spring.
In May, the Swiss private bank BSI, having come under criminal investigation in Switzerland, was ordered to shut down its Singapore offices by the local authorities and fined. 1MDB’s subsidiaries were its clients, one of which handled the transfer of money to the Cayman Is. Another client was Jho Low, the Malaysian financier associated with the 1MDB enquiries. BSI had received the proceeds of the £3bn bond in 2013 – it was deemed unusual for a small bank to handle a sum of this size. BSI was accused of serious breaches of anti-money laundering rules between 2011 – 2015. The CEO resigned and although BSI appealed against the sanctions, the bank was later taken over and closed down.
About this time, the Malaysian finance ministry dissolved the advisory board of 1MDB to appoint replacements.
In July, the US Justice Dept moved to seize assets associated with Mr Najib, including paintings, properties and film royalties, following the allegations that $1bn of funds intended for the JV with PetroSaudi had been spent on these assets. Moreover, it was alleged that $20m had gone to a prince associated with PetroSaudi and thence to the Malaysian unnamed official (whose description matched Mr Najib).
At this point, the Malaysian attorney-general denied there was any evidence of misappropriation of funds.
In Singapore the regulator widened its investigation to include UBS, Standard Chartered and DBS, a Singaporean bank.
In August, the head of the Malaysian Anti-Corruption Commission (MACC) investigating 1MDB resigned early, apparently accused in a police report of supplying confidential information to “foreign agencies”.
And in Singapore, the authorities said they had seized $89m of assets belonging to Jho Low. Low’s company, Jynwel, having failed to raise new capital, then fell into default.
The Swiss investigation was now targeting the ex-CEO of Ipic, Khadem Al Qubaisi, and also the ex-CEO of Aabar, Mohammed Badawy al Husseiny. A US action claimed Al Qubaisi received $473m into his personal account of the $1.37bn bond proceeds transferred into Aabar Investments PJS in 2013. Al Qubaisi was then arrested in Abu Dhabi and later given a 15 year jail sentence by the Abu Dhabi court.
In October, the Swiss authorities accused Zurich-based Falcon Bank, owned by the Abu Dhabi State Fund, of anti-money laundering failings in handling $3.8bn of 1MDB funds, particularly moving $1.2bn to Jho Low’s account, and sending $681m to Najib. Singapore then withdrew Falcon Bank’s local banking licence.
In November, the Malaysian officials were still refusing to cooperate with the Swiss investigation, and for the next eighteen months, or so, the situation in Malaysia went relatively quiet as the government got the scandal under its personal control. But around the world, developments continued.
In December, the Monetary Authority of Singapore fined Standard Chartered and Coutts for breach of money laundering regulations, and the following March it issued a prohibition order against Tim Leissner, which was later extended to a lifetime ban from practising in Singapore. In May, it fined Credit Suisse and United Overseas Bank in relation to their dealings with 1MDB.
In June, the US authorities were pursuing $540m assets allegedly stolen from 1MDB, and a civil lawsuit named the wife of “Malaysian Official No 1” as the recipient of $30m of jewellery bought from the allegedly stolen funds.
In August, the issues between Ipic and 1MDB were still bubbling away, as Ipic threatened 1MDB over a missed July $600m payment. 1MDB remitted $350m, paying the balance later in the year.
By October, Interpol were looking for Jho Low, and in February 2018, the Indonesian authorities seized Jho Low’s yacht.
In April 2018, in a separate investigation, the Italian authorities were investigating Mr Al Qubaisi over possible insider trading by Falcon Private Bank, relating to a planned share purchase by Aabar in UniCredit.
And in the US, where the Dept of Justice were attempting to seize a Manhattan hotel part-owned by Symphony, a company controlled by Jho Low, Wells Fargo issued a challenge to try to prevent this since it was still owed $267m on related mortgage.
In May, Swiss prosecutors launched a criminal probe against two officials of PetroSaudi relating to 1MDB for what was described as criminal mismanagement, bribery of foreign public officials, money laundering, misconduct in public office, and forging documents.
The storm breaks
But now everything changed overnight when Najib lost the election he had expected to win, following the unprecedented intervention by former premier, 92 year old Mahathir Mohamad. The Malaysian authorities then seized cash and luxury goods valued at $275m from premises linked to Najib. And the following month, the new Prime Minister, Mahathir Mohamad,was quoted as saying that the authorities were building an “almost perfect case” against Najib.
In July, Najib was arrested and charged with criminal breaches of trust and abuse of power in relation to SRC International, a subsidiary of 1MDB, and the following month, his wife was arrested. Warrants were also issued for the arrest of the two former senior 1MDB officials who were being investigated by the Swiss authorities. And the Swiss and Malaysian authorities were now cooperating closely. The Malaysian Central Bank had sought these two officials in 2015, but the pursuit was fended off by the government and in 2017 Najib had announced they were no longer being sought.
In August, the Malaysian Institute of Chartered Accountants announced that it was investigating Deloitte and KPMG for their role in 1MDB, signing off accounts between 2009 and 2014, albeit KPMG was fired in 2013, Deloitte resigned in 2016, and EY had been fired in 2010.
In October, in defence of the large sum paid into his personal account in 2013, Najib said that the $681m was from the Saudi government prior to the forthcoming election to support political movements supporting moderate Islamic policies. It was not from 1MDB and not for his own use, and most of it was returned to the source. All the jewellery seized was gifts, he said. At the same time, he praised 1MDB’s role in a social development project paid for by 1MDB. However, the Finance Minister said most of the funds going to the project had been misapplied to pay off unrelated loans.
Now the focus came back on Goldman Sachs with a vengeance.
In November, the US Dept of Justice indicted Goldman Sachs employees, Tim Leissner and Roger Ng, and also Jho Low, charging them with the misappropriation of 1MDB funds and bribing government officials so that Goldman Sachs would win business advising 1MDB, also mentioning (though unnamed at that point) Andrea Vella, an Italian senior Goldman executive. By this time, Leissner had already pleaded guilty to money laundering and conspiring to violate the Foreign Corrupt Practices Act. In his defence, he said he was acting in line with the corporate culture of Goldman Sachs. Goldman by now was seeking to portray the events as the actions of rogue individuals rather than bank culture, but its reputation in Malaysia by this stage was very poor and similarly in Indonesia and Singapore. A big come-down from 2008 – 2013 when it was the leading western bank in Malaysia.
Now the new Malaysian deputy PM accused Goldman of inexcusable behaviour in its earlier dealings, calling for them to return the $600m fees they earned from 1MDB in the bond fund raising. And the vulnerability of Goldman Sachs was evidenced by disclosures that thirty top Goldman executives had reviewed the bond deal, including CEO Lloyd Blankfein, his subsequent successor David Solomon, and Gary Cohn former COO and president. It emerged that in autumn 2009, Blankfein was at a meeting with Jho Low and Najib in New York and in 2012 at a meeting with the CEO of Aabar when Jho Low was present.
The Abu Dhabi Sovereign Wealth Fund (it was guarantor of two of the bonds) now sued Goldman for bribing its officials regarding the 1MDB deals.
And, adding his contribution as a former employee, the son of Malcolm Turnbull, Australian Prime Minister at the time, said that in 2012 Goldman Sachs sidelined him after he raised questions about 1MDB and the size of the fees charged. Goldman spokesmen denied this, saying he had no direct involvement in the deals.
In December, Malaysia declared it would sue Goldman in the UK, Singapore, and Hong Kong regarding the 1MDB bond issues, and the Finance minister said he wanted the entire bond proceeds back plus fees, a sum totalling around $7.5bn. The following month, the Malaysian Securities Commission fined Deloitte regarding its work for 1MDB.
In March 2019, the US Federal Reserve banned Leissner and Ng from the banking industry, and later, Ng was extradited to the US to face charges.
In April, the trial of former Prime Minister Najib commenced, amid concerns that if it didn’t proceed speedily, the supporters of Najib, and those who had benefitted from what had happened, would bring influence to bear to slow the process down to a standstill, awaiting the election of a more sympathetic government.
In September, the Malaysian finance minister announced plans to take civil action against several offshore entities to claw back a $950m loan from the Malaysian state pension fund to a subsidiary of 1MDB, which had been transferred to these entities by SRC International. Later, in giving evidence, Najib blamed Jho Low.
The following month, Jho Low, whose whereabouts were still a mystery, made a deal through his representatives with the US Justice Dept to settle $1bn lawsuits. But in November, Cyprus decided to strip 26 people of their citizenship gained under the “golden passport” scheme for rich foreign investors. These included Jho Low, who got one in 2015. It later emerged that Deutsche Bank had cleared funds as correspondent bank for Jho Low to buy property in Cyprus in 2015, several months after the 1MDB scandal started breaking, bringing Low’s involvement into the public domain.
Early in 2020, Goldman Sachs’ Q2 results showed a $1bn charge in relation to 1MDB. And at this point it was discussing with the Dept of Justice whether the bank’s Asian subsidiary would plead guilty as part of a criminal settlement deal. And in February, former senior executive, Andreas Vella, left Goldman after being permanently banned from banking by the US authorities.
What lessons do we draw from this saga?
Applying our Five Golden Rules of Good Corporate Governance, the key issues here were clearly ethics and goals.
The ethics of the key players were seriously faulty by any independent standards, and the goals of the participants materially different.
In summary: the goals of the various parties who invested were to create an investing institution which would advance the chosen elements of the state of Malaysia, and in the process earn a return for themselves. The goal of Goldman Sachs in promoting the investments was to earn big fees while building its presence in South East Asia. However, the goal of the parties accused of misfeasance was to extract large sums of money for their own benefit.
The ethical behaviour of the accused parties clearly needs no comment, but the possibility of ethical misbehaviour seems to have been treated as of no consequence by the investing bodies and Goldman Sachs. That is, until the spotlight was directed on their own behaviour and lack of attention to this dimension.
Two earlier examples come to mind. In 1995, one of the oldest and most respected City merchant banks, Baring Bros, was felled by the actions of a rogue trader, Nick Leeson, operating out of its Singapore office. The directors apparently had no idea exactly how this junior trader was producing such outstanding results, but rather than investigate, they simply gave him further backing and basked in the glow, and earnings, he was apparently generating.
A later example was Nat Rothschild, who raised nearly $1bn to invest in Bumi, a coal mining enterprise with local partners in Indonesia. His goal was, by raising the standards of corporate governance to levels acceptable in the City, to raise the valuation of the business accordingly. Sadly, his Indonesian partners had a different goal, which resulted in almost the entire funds being drawn out to fund their local business interests, and that was the end of Bumi and his investors’ investment.
In the case of 1MDB, the Malaysian government elected in 2018 is seeking to claw back as much as it can of the $6 – 7 bn that was raised in the early days of the company, and has made some progress. Jho Low is still at liberty somewhere in the world and has so far made his peace with the US authorities, and presumably still has significantly more assets than he started with. Najib Razah is still at liberty, albeit with severe charges hanging over him, but still with very influential friends in high places. And what about Goldman Sachs?
At the time of writing, it looks as if the bank will avoid being charged directly and will be successful with its defence that this was all the result of rogue employees, who were dismissed as soon as the nature of their misbehaviour became clear. But, as was played out with Wells Fargo, and in the more recent Australian banking scandal, and at Volkswagen, the top brass can surely, justifiably, be accused of negligence if they avoid being charged with complicity. And the damage to reputation, as with Wells Fargo, the Australian banks and Volkswagen, will last for quite a long time.