BRIEFING NOTE

PICKING UP THE PIECES: RECENT DEVELOPMENTS IN THE 1MDB SCANDAL

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www.crime.financial T H E M I S INTRODUCTION

On 23rd October 2020, U.S. bank agreed to pay nearly USD 3 billion to regulators in four countries to bring an end to an investigation into its role in the corruption scandal involving 1MDB, the Malaysian sovereign wealth fund. The deal represents the latest regulatory response to the 1MDB saga - one of the world’s biggest fraud cases that uncovered a global corruption network and sent shockwaves across Malaysia’s political establishment.

Building on the success of an event hosted by Themis in February 2020, Themis revisited the 1MDB story during a webinar on 15th December 2020, this time in partnership with Encompass. Themis CEO, Dickon Johnstone, sat with award-winning Wall Street Journal reporter and co-author of “Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World” Bradley Hope to talk about the latest developments in this multipronged and multijurisdictional financial heist.

Defined by Bradley Hope as a “guide to how the world really works”, the 1MDB case involved a medley of illicit international practices that extended their tentacles to far-flung corners of the globe, generating a multiplicity of scandals that implicated offshore entities, the banking industry, Hollywood, charities, political slush funds and foreign politicians.

During the interview, Hope reflected back on the scandal, its main protagonist and its many recent twists and turns. How was a young Malaysian able to orchestrate such an extensive global fraud? Here is the answer.

02 BTAHEC 1KMGDBR COASUE ENXPDLAINED

A warning from Hope: “This is not a story with many heroes”. First uncovered in 2015, the 1 Malaysia Development Berhad (1MDB) scandal is among the most serious corruption and fraud cases ever recorded. The case centres around the 1MDB sovereign fund, which was set up in 2009, whilst then Prime Minister was in office. According to Malaysian and United States authorities, this fund was embroiled in the embezzlement of USD 4.5 billion of public funds and its subsequent laundering through reputable international financial institutions situated in global financial centres such as Singapore, Switzerland, Luxembourg, the and the United States.

The scandal revolves around the puzzling figure of now-fugitive Jho Low, described by Hope as a “millennial nobody” who, without the rigour you would expect from established criminals, still managed to pull off what many have deemed the heist of the century. Low persuaded Najib to create the 1MDB fund, then siphoned billions of dollars away from it in a multitude of different ways. Once Low executed his first heist, nothing could stop him: 1MDB was a network of Saudi, Emirati and other international joint ventures; offshore, fake and look-alike companies that channelled the money and facilitated a global spending binge like no other; luxury real estate, champagne-drenched parties and Hollywood movies; not to mention a USD 250 million worth yacht named “Equanimity”, which means composure, especially in the face of difficult events.

Low remained unchallenged until almost the very end - relying on the idea that his “friends”, or co-conspirators, would help him navigate the illicit flows. And he had the right to think so. According to Hope, “Low was extremely generous, giving away other people’s money”. Anything you wanted, you had it: Low not only helped rich people become even richer, he helped a web of middlemen become millionaires overnight, gaining their trust and leaving them seeking more. That is, until the house of cards collapsed.

03 B1AMCDBK ING NRUOMBUERNS D

US$ 4.5 billion - amount allegedly siphoned off from the 1MDB state investment fund between 2009 and 2014.

US$ 600 million - fee earned by Goldman Sachs for its role in underwriting and arranging bond sales that raised USD 6.5 billion for 1MDB in 2012 and 2013.

US$ 34 billion - est value of (rail, oil, pipeline & other) deals reached by Jho Low and Najib Razak with Chinese state companies to bail out 1MDB.

US$ 250 million - price of Equanimity, Jho Low’s yacht.

US$ 126 million - fine imposed by the FCA and the PRA on Goldman Sachs for risk management failures connected to 1MDB.

c.US$ 5 billion - total international fines to be paid by Goldman Sachs, including US$ 2.9 billion deal reached to settle the US-led 1MDB inquiry.

US$ 700 million - settlement reached by Jho Low with the U.S. DoJ to resolve a string of civil forfeiture lawsuits targeting his assets.

12 years - length of Najib's sentence for his role in 1MDB.

10 - number of countries in which authorities have launched an investigation into 1MDB.

04 WHAT’S NEW? LATEST DEVELOPMENTS BIAN CTHKE CGARSEOUND

“Sometimes I think we only find out about financial crime when a company has financial problems”, said Hope. Even if the 1MDB case was not one of heroes, the fall of Low, Najib and others was only possible thanks to the relentless work of a few people in Malaysia who decided to say “no” to ongoing corruption, and to brave journalists who answered their call for justice. The fraud, unsophisticated as it was, was easy to uncover: an analysis of mismatches between 1MDB and one of the connected entities, International Petroleum Investment Company (IPIC) rapidly unmasked the look-alike subsidiaries and other stratagems used by Low to funnel the money.

Throughout 2020, law enforcement and regulators have been hard at work addressing this fraud case which had slipped under their radar for many years. The deal reached by Goldman Sachs with the U.S. Department of Justice in late October 2020 represents the latest development in the regulatory unfolding of 1MDB. The bank had already reached a USD 3.9 billion settlement with the Malaysian government in July for the bribes that were exchanged between its officers, officials of the sovereign fund and the Malaysian government. Hope said we should not expect another multi-million dollar fine: while there are a few smaller ongoing regulatory and criminal proceedings against other banks involved in the case, such as Swiss BSI, we have probably passed the phase of big headlines.

The very latest update came in December, when the former president of Goldman Sachs Gary Cohn agreed to pay millions of dollars to charity rather than returning it to the company, as its board had requested. What is extraordinary about that, according to Hope, is the fact that the Goldman Sachs fine came mainly from the bonuses of the bank’s executives, who arranged the 1MDB bond issues for a very high underwriting fee and 10 percent profit for a bond proceeding - when the fee is usually around 1 percent. These figures were a huge red flag that even Goldman Sachs executives should have questioned, said Hope.

In Malaysia, Najib Razak was sentenced to twelve years in prison for abuse of power, and ten years imprisonment, to run concurrently with the former sentence, for six counts of money laundering and breach of trust. Najib, who Hope argued was sentenced for just a small part of the fraud, denies any wrongdoing, and argues he was misled and defrauded by Low. However, it is difficult for Najib to mask his participation in the conspiracy: Hope expects his case to develop further, now that the Malaysian Anti-Corruption Commission (MACC) has released hours of wiretapping which feature “extraordinary conversations” between Najib, Saudi princes and other co-conspirators.

Brazen and dedicated conman Jho Low - the other big personality in the 1MDB case is still a fugitive. When asked about his whereabouts, Hope did not give a straightforward answer but estimated that Low, who has been forced to stay away from countries following a Malaysian Red Notice, is likely to be in an embrace of sorts with China. The Malaysian authorities are certain Low is in China, although the Chinese government consistently denies his presence in the country, perceiving him to be an embarrassment rather than an asset. Furthermore, Low still has access to much of the money he stole. Unlikely to get any sort of pardon in the future, he will probably either be apprehended or spend the rest of his days in a golden cage.

05 PICKING UP THE PIECES: KEY TAKEAWAYS BFAROCMK OGURR TOALUK NWIDTH BRADLEY HOPE

Money calls for money - but you also need that one “special talent”

“Dinero llama dinero” is a Spanish saying that translates quite literally as “money calls for money”, meaning that people with money will connect with people with money, generating even more wealth. Jho Low understood that. According to Bradley Hope, this “millennial nobody” had a very special talent: he would spend a lot of time with others in order to understand what they wanted - be that a solution to their liquidity problems, more votes to win elections, or money to fund their beauty company or latest film.

Low’s low-key personality often helped him gain the trust of high-profile individuals, but it was his ability to understand people’s intentions and desires that handed him his spoils. Another “special talent” that Hope deemed crucial to Low’s ability to execute the 1MDB scheme was a somewhat “sociopathic” personality trait, which meant that Low very rarely felt anxious or stressed. His confidence in his own untouchability was apparent.

When 1MDB was teetering on the edge of the precipice, Low and his co-conspirators managed to raise a final tranche of money to placate auditors’ inquiries. He could have used the money to buy himself some time; instead, he decided to buy something else, namely a new yacht, Equanimity, for a quarter of a million dollars. According to Hope, this reckless behaviour was the result of Low’s capacity to remain unperturbed in the face of difficult circumstances, a trait that also prevented him from seeing the bigger picture about the complex fraud which he had orchestrated.

The international political twist you would not expect

Not only did Jho Low attract high-profile individuals, he also managed to ingratiate himself with powerful foreign politicians. As the 1MDB fund took its last breaths and the grasp of regulators and law enforcement tightened, Jho Low decided that he would not leave without a fight. It was at this final stage that he managed to pull off what Hope deemed to be one of the most heinous of all his crimes.

With the U.S.-based part of his empire in peril due to FBI investigations, Low turned to China for help. Armed with the blackmailing power he exerted over Najib due to the former Prime Minister’s five-year long participation in the fraud, Low acted like a Malaysian minister to negotiate a bail out of the 1MDB fund. Chinese officials agreed to use their influence to try to convince the U.S. and other countries to drop their investigation into 1MDB, Najib and the other co-conspirators, including Low. In return, Malaysia offered up USD 34 billion worth of railway and pipeline projects for China’s One Belt, One Road programme - to be handled by Chinese companies and built by Chinese workers.

06 This was not only an important business deal that would bolster the Chinese economy to the detriment of the Malaysian people. According to Hope, by agreeing to participate in the Belt and Road Initiative - and on this scale - Najib handed part of the sovereignty of Malaysia, a country of particular strategic importance in South- BEAast AsCia duKe to Gits poRsitionO by onUe of Nthe woDrld's busiest sea lanes, to China. Thanks to Najib and to Low, who brokered the deal, Chinese authorities have been able to exert significant influence on Malaysia’s governance.

China denies the allegations. For the Chinese government, their association with Jho Low is now an embarrassment. He has, however, given them the key to the Strait of Malacca.

A closer look at the law firms and other middlemen involved in the heist

It is no surprise that Najib Razak, Goldman Sachs and former Goldman bankers like Tim Leissner were the first to feel the weight of the law. The same cannot, however, be said of many of the hundreds of middlemen who aided and abetted the scandal’s main perpetrators. “The law firms involved in 1MDB haven’t been hit at all”, commented Hope, offering up the example of Sherman & Stirling, the U.S. law firm that unwittingly acted as “Low’s chief money launderer”, helping him launder the stolen funds by paying nightclubs or buying estate assets on his behalf. One has to wonder what form of due diligence the firm conducted while handling Low’s - or more precisely put, the Malaysian people’s - money, if any at all.

The fact that so many of those implicated in the scandal have either not been punished at all or only minimally so derives, in Hope’s opinion, from the view of law enforcement that, since they cannot pursue each and every criminal, it is best to carry out few select high-profile punishments rather than try and target everyone.

The scale of the 1MDB fraud, he adds, was so large and multi-jurisdictional that it is by no means clear whether we will ever unmask all the individuals involved in the conspiracy. While it is easy to spot those who benefited from 1MDB the most, it is also true that the fraud would not have not been possible without all the middlemen in banks, law firms, auditors and the sovereign wealth fund itself. As Hope and his co-author Tom Wright outlined in “Billion Dollar Whale”, not all of the fresh Ivy League graduates who joined the new 1MDB fund left within the first years of its existence. Those who remained either never asked what was going on or indeed actually benefited from it.

07 BACKGROUND

It can be worse than you expect - but there is a silver lining

As Hope says, “a major transnational crime is hard to police”. reporter recalls how conservatively he viewed the scale of the fraud orchestrated by Low and his co-conspirators when he first began to investigate the 1MDB case. It did not take long for him to realise that the web involved in the scandal stretched much further than he had expected. Charities, offshore entities, look-alike companies, cash flow investments, bribery, corruption - these were only some of the pieces of the puzzle that Hope and Wright tried to put together.

Hope argues that, from a cynical perspective, one could take the 1MDB case as clear evidence that everything in this world has a price. Hope himself is not so sure. In the end, with a little help from the Wall Street Journal and Sarawak Reports, the house of cards was so big it simply had to come crashing down.

There is another silver lining. According to Hope, “the Malaysian people now understand financial crime better than ever before”. It is important to remember that behind the daredevil glitz of this story, Malaysia and the Malaysian people now have to face the consequences of Low and his entourage’s wrongdoings. The next chapter in this story is one of a country that will struggle financially to get back on its feet, but will also hopefully act more decisively to prevent such financial crime from taking place again.

Finally, even if law firms, smaller banks and all the other institutions that helped Low get away with his scheme have not (yet) suffered a regulatory hit, Hope is convinced that the reputational damage is sufficient enough to urge them to take action. “Nobody wants to be identified as the chief money launderer of Jho Low”, he says.

08 CONCLUSION

The 1MDB case was a complex scandal that 1MDB is a shocking example of how far financial involved a variety of criminal offences, a web of crime can go, and of the deep consequences that it individuals and extremely large amounts of money has on people’s lives as well as international politics. - yet it still went unnoticed for several years. If Not only does it enable illegitimate lavish spending one thing is certain, however, it is that it could in lieu of public service provision, it can also affect have been detected. power dynamics between countries. It is the scale of corruption involved in the 1MDB scandal, rather than From the early stages of Low’s scheme, different the money itself, that moved Bradley Hope the most. financial institutions admitted to recognising red Because of Low’s sale of 1MDB (and, one could say, flags, ranging from offshore companies with part of Malaysia alongside it) to the highest bidder, similar names embroiled in suspicious the Malaysian people will face the consequences of transactions and bank accounts owned by the 1MDB case for years to come. subsidiaries of 1MDB to the simple presence of Low at every decision-making meeting even Themis has produced briefing notes covering though he was not officially on any board. Still, several of the crime types that reared their head banks decided to ignore these red flags, and during the 1MDB scandal, as well as mitigation auditors always found an excuse to justify missing strategies. Consult our work on corruption, money money or mismatches in company records. laundering risk for high value dealers and adverse media screening to find out more. We are also able Jho Low was a chameleon who learnt how to fit in to help you implement a tailored financial crime everywhere, often unnoticed unless he explicitly prevention framework and carry out enhanced due set out to be. However, if you look closely, he was diligence on your clients or suppliers. Please get in everywhere: from songs to movie credits and touch with one of our advisors if you would like charity balls nominations. It was a pact with the support. devil, but by giving people what they wanted, Low managed to get away with the heist for more than five years.

Henry Williams Carel van Randwyck Head of Investigations CGO [email protected] [email protected] +44 (0) 7780 746 290 +44 (0) 7802 232681 1

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