U.S., Singapore and Abu Dhabi Take Legal Action in Connection with Malaysian Sovereign Wealth Fund 1MDB
22 November 2016
In the largest civil action brought under the Kleptocracy Asset Recovery Initiative, a program set up by the U.S. Department of Justice (DOJ) in 2010, the DOJ filed a civil complaint on July 20, 2016 in the U.S. seeking forfeiture of over USD1bn in property (including real estate in the U.S. and UK, a corporate jet, artwork, business assets and the rights to the movie “The Wolf of Wall Street”). The DOJ complaint alleges that the assets at issue were acquired with, or traceable to, funds unlawfully diverted from 1MDB, a Malaysian sovereign wealth fund.
The complaint alleges that individuals and officials associated with 1MDB misappropriated USD3.5bn in funds through a series of complex transfers and transactions, including through shell companies and their bank accounts located in Singapore, Switzerland, Luxembourg and the U.S. In some instances, misappropriated funds flowed through lawyer trust accounts. Over USD1bn of the diverted 1MDB funds were ultimately used to make investments and purchases in the U.S. and UK – assets that the DOJ is now seeking to seize for the benefit of the Malaysian people.
According to the complaint, there were three phases of the alleged misappropriation. The first, or "Good Star" phase, involved more than USD1bn 1MDB funds intended for a joint venture between 1MDB and a private Saudi Arabia-based oil services company set up to develop energy assets. Rather than send the funds to the joint venture account, 1MDB funds were allegedly diverted to the Swiss bank account of Good Star Limited, which was beneficially owned by Mr. Low Taek Jho (Low), a Malaysian national who was an adviser to 1MDB and associated with 1MDB officials.
The second phase involved diversion of USD1.37bn in funds raised in two bond offerings for the purpose of acquiring Malaysia-based energy assets. Although the proceeds were intended to go to a legitimate subsidiary of an Abu Dhabi government-owned investment fund (Government Investment Fund) as part of an investment program, a substantial portion of the proceeds of the bond offerings were sent instead to a Swiss account of a company with a similar name to the Government Investment Fund. From there, the funds were sent to a Singapore account held by Blackstone Asia Real Estate Partners (which is not affiliated with Blackstone Group, the well-known, U.S. investment firm) and then distributed through various accounts to officials connected to 1MDB and the Government Investment Fund, among others. Mr. Eric Kim Loong Tan (Tan), a Malaysian national and associate of Low, was identified in bank records as the beneficial owner of Blackstone Asia Real Estate Partners.
The "Tanore" or third phase of misappropriation involved more than USD1.26bn in 1MDB funds raised in another bond offering, the proceeds of which were intended for investment in a joint venture with the Government Investment Fund. However, the proceeds were diverted instead to a bank account of Tanore Finance Corporation, which had no legitimate affiliation with 1MDB or the joint venture. Tan was the beneficial owner of record for Tanore. From there, some of the funds were distributed for the benefit of at least one government official associated with 1MDB, who later returned most of the funds to the Tanore account. According to the complaint, the Tanore funds were used to buy artwork and purchase other assets in the U.S.
Under U.S. law, a civil forfeiture action can be brought to recover proceeds (such as luxury assets) traceable to violations of U.S. or non-U.S. law involving misappropriation of public funds, fraud, wire fraud or international transportation or receipt of stolen or fraudulently obtained property. Once the court has determined that the assets are derived from proceeds traceable to money laundering or misappropriation (or another related crime), the DOJ has wide discretion to transfer the confiscated property for law enforcement purposes, including to other governments or to compensate victims. U.S. authorities frequently work with other governments using both informal and formal mechanisms (including mutual legal assistance treaties and international conventions) to return forfeited assets to the victims of crimes outside the U.S. Indeed, since 2004, the U.S. has returned over USD168m in forfeited assets to victims of these crimes outside the U.S. and there continue to be asset confiscation cases at various investigative and legal stages.
On the heels of the DOJ action, the Singapore Government announced that since 2015 it has been investigating various 1MDB-related fund flows through Singapore for possible money laundering, securities fraud, cheating and other offences. It has seized assets including bank accounts totaling SGD240mn, SGD120mn of which belong to Low and his immediate family members. In addition, the Monetary Authority of Singapore (MAS) announced that it would take "firm regulatory action" against several banks in Singapore for AML control failures in connection with the 1MBD investigation. MAS has already revoked the banking license of BSI Bank Limited Singapore due to serious breaches of AML requirements and poor management oversight as well as gross misconduct by some of the bank’s staff. In October 2016, it shut down another private bank in Singapore for “a persistent and severe lack of understanding of MAS’ AML requirements and expectations.” Financial penalties have been assessed against several international banks as well.
Singapore prosecutors have also charged several individuals connected to the 1MDB matter. In November 2016, former BSI banker Yak Yew Chee was convicted of forgery and failing to report suspicious transactions by a Singapore court and sentenced to 18 weeks in prison and fined SGD24,000. He will also disgorge SGD7.5mn.
On 18 August 2016, press reports indicated that Abu Dhabi authorities arrested one of the key figures in the alleged 1MDB fraud. The Abu Dhabi assets of the individual had previously been frozen and he was restricted from leaving the country several months ago. The U.S. is also expanding its investigation into the individual’s dealings in alleged 1MDB funds potentially used for a Las Vegas nightclub investment.
Separately, press reports link misappropriated 1MDB funds to purchases of artwork by Low at a charity auction intended to benefit actor Leonardo DiCaprio’s charitable foundation. The foundation has been called on to return any money connected to diverted 1MDB funds or to individuals associated with 1MDB. In October 2016, Leonardo DiCaprio released a statement saying that he will return any charitable donations or gifts connected to the 1MDB and that he “continue[s] to be entirely supportive of all efforts to assure that justice is done in this matter.”
As there are numerous ongoing investigations into matters related to 1MDB by jurisdictions around the world (including the continuing U.S. investigation), these issues will certainly remain in the public eye, particularly as further facts unfold and government legal actions are brought and resolved. The fall-out for banks and companies will likely result in further focus on compliance programs and, more specifically, effective identification of higher risk transactions and remediation.