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Journal of Money Laundering Control

ISSN : 1368-5201

Article publication date: 4 June 2020

Issue publication date: 31 July 2021

This case study highlights why and how the Swiss banking sector played a crucial role in the 1Malaysia Development Berhad (1MDB) corruption scandal. In particular, the paper illustrates how different actors in the Swiss financial sector neglected compliance guidelines and due diligence, thus effectively facilitating the laundering of misappropriated 1MDB funds. The purpose of this paper is to give bankers and compliance officers an overview of the methods money launderers use to circumvent compliance measures so that the Swiss banking sector can be protected more effectively from abuse. In addition, there is discussion whether current regulations, including banking secrecy, should be amended.

Design/methodology/approach

This paper used a content analysis methodological approach to collect data from media sources. Qualitative methods were used to analyze these sources.

The findings reveal that the Swiss banking sector played a major role in facilitating the siphoning and subsequent laundering of 1MDB funds by neglecting due diligence obligations.

Practical implications

This paper advocates a more consequential implementation of the existing anti-money laundering and corruption regulations.

Social implications

A reworking of the 1MDB scandal should be of interest to compliance professionals in the banking sector and citizens that have been negatively affected or are concerned by the involved high-level corruption.

Originality/value

This paper is the first of its kind to study the role of the Swiss banking sector in the 1MDB scandal.

• Due diligence
• Money laundering
• Swiss banking
• Najib Razak
• Banca della Svizzera Italiana (BSI)
• Banking secrecy
• Goldman Sachs
• Switzerland

Teichmann, F.M.J. and Falker, M.-C. (2021), "The 1MDB case and the Swiss banking sector", Journal of Money Laundering Control , Vol. 24 No. 2, pp. 278-290. https://doi.org/10.1108/JMLC-04-2020-0037

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Lessons from 1mdb, learning from 'world's largest kleptocracy', march/april 2019, by grace y. mui, ph.d., cpa (australia), cpa (asean), acfe educator associate; huat lai thye, cpa (asean).

Members of the board of 1MDB — a Malaysian federal strategic investment fund — and top Malaysian government officials plus private citizens allegedly illegally syphoned and laundered billions from the fund. Here’s how they escaped controls and lined their pockets.

1Malaysia Development Berhad (1MDB), the Malaysian sovereign wealth fund described by then-U.S. Attorney General Jeff Sessions in December 2017, as “kleptocracy at its worst ,” started off as a “Malaysian strategic development company,” according to its website, which has since been shut down. At the very core of the 1MDB scandal was the “less than satisfactory corporate governance and internal controls,” as reported by the former Malaysian Auditor General Ambrin Buang in the 1MDB audit report . The result? 1MDB officials illegally drained and laundered billions from the fund “through a complex web of opaque transactions and fraudulent shell companies with bank accounts in countries ranging from Switzerland and Singapore to Luxembourg and the United States,” according to Sessions.

It all began in February 2009 with the incorporation of the Terengganu Investment Authority, a state-owned sovereign wealth fund. Soon after, 5 billion ringgit (about US$1,217,450,000) was raised from a bond issue. By the end of July 2009, the federal government had taken over the Terengganu Investment Authority and subsequently renamed it 1Malaysia Development Berhad. Henceforth, the Ministry of Finance wholly owned 1MDB, and made it a federal strategic investment fund that invested billions of ringgit in Malaysia’s energy, real estate and hospitality sectors. (See 1MDB: Giant ponzi scheme or strategic investment fund? by Jose Barrock, Kinibiz Online, March 26, 2013.)

1MDB was structured like a typical Malaysian publicly listed company with a board of directors and was subject to domestic regulators such as the central bank and the securities commission. However, 1MDB wasn’t a typical Malaysian publicly listed company. As a company wholly owned by the Ministry of Finance it was required to have a board of advisors chaired by the finance minister. Despite having more corporate governance mechanisms than publicly listed companies, the breakdown of these mechanisms contributed to executive fraud at 1MDB.

This article studies the 1MDB scandal from the perspective of the “Crime Triangle of Routine Activity Theory” — an environmental criminology theory — and focuses on its board of directors and board of advisors plus Malaysian regulators and law enforcement agencies. The underlying rationale of environmental criminology is that the immediate environment is a key determinant of human behavior. As such, each crime is a result of the interaction between people and the situations they’re in. (See the book, Environmental Criminology and Crime Analysis , by Richard Wortley and Lorraine Mazerolle, Social Science, 2008.)

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Lessons from the 1MDB Scandal

What happened.

1Malaysia Development Berhad (1MDB) was a Malaysian state investment vehicle created in 2009. In 2015, documents leaked to journalists evidenced widespread corruption and the embezzlement, on an unprecedented scale, of Malaysian state funds via 1MDB. Hundreds of millions of dollars (USD) were taken out of 1MDB illegally and went to Razak, the then prime minister of Malaysia, and his immediate family, as well as their close associates. Notoriously, tens of millions of dollars of 1MDB money was used to fund the Hollywood production of the Wolf of Wall Street. According to the US Department of Justice, the estimated total money embezzled from 1MDB is c.USD4.5bn. In 2015, the Malaysian Anti-Corruption Commission began investigating allegations of criminal behaviour relating to 1MDB and there were separate law enforcement and regulatory investigations opened in Australia, Hong Kong, Singapore, Switzerland, the UK and the US. Eventually, the scandal led to the demise of Razak's government and his arrest and imprisonment. Following the subsequent law enforcement and regulatory investigations, it became clear that a number of banks and financial institutions (FIs) across the globe had been utilised by the protagonists in the scandal and were, therefore, involved in numerous regulatory and criminal breaches that occurred via 1MDB. Many institutions were initially involved with 1MDB legitimately, either to raise funds for the vehicle, or to manage its investments. However, many of those same institutions were subsequently used to misappropriate funds from 1MDB and / or to launder that money around the globe. 

How did it happen?

There are a myriad of reasons as to how and why the scandal managed to engulf established global FIs. There have been various root causes suggested by regulators and commentators globally regarding the failures of FIs involved in the scandal. These have ranged from weak compliance cultures and insufficiently designed and maintained compliance controls, to the deliberate and complicit criminal acts of certain individuals within FIs. One of the highest profile financial institutions engulfed in the scandal was Goldman Sachs International (GSI). GSI was subject to a financial penalty by the UK regulator, the Financial Conduct Authority (FCA). The FCA's investigation relating to 1MDB identified material failures by GSI to:

• Assess and sufficiently manage financial crime risks;
• Ensure that appropriate information regarding financial crime risks was escalated to the relevant committees approving the 1MDB transactions;
• Manage allegations of bribery and misconduct regarding individuals involved in or associated with the 1MDB transactions; and
• Keep sufficient records to illustrate how the relevant committees had assessed the risks arising out of the 1MDB transactions or the reasons for approving them.

Key Learnings 

1. Risk Management The FCA highlighted that due consideration was not given to the risks associated with the 1MDB transactions, which involved clients and counterparties in jurisdictions with known higher financial crime risks. The risk factors surrounding the transactions were also not assessed on a sufficiently holistic basis. All firms should have in place an anti-money laundering (AML) business wide risk assessment (BWRA) that is proportionate to the nature, scale and complexity of the firm, to enable senior management to understand the inherent and residual risk exposure of their firm, particularly as a result of its client relationships. BWRAs must take into account risk factors relating to: customers, jurisdictions, distribution channels, transactions, and products and services. The results of any BWRA should then feed into a firm's calculation of a risk appetite statement, which acts as a benchmark and guide for senior management to measure business risks. Firms that lack sufficiently detailed risk appetite and risk management frameworks inhibit the ability of senior management to make informed decisions on risk. Senior Management of FIs should be able to evidence that they have considered higher risk situations (e.g. higher risk clients or particularly complex transactions) against their firm's risk appetite statement and accordingly, have made considered decisions. This is particularly the case in light of the obligations imposed under the Senior Managers and Certification Regime (SMCR). 2. Customer Due Diligence Customer due diligence (CDD) failings have been identified by several regulators as a key issue for 1MDB exposed firms that led to illicit activity going undetected. Several banks in Singapore, for example, were found by the Monetary Authority of Singapore (MAS) not to have performed sufficient CDD at on-boarding or throughout the course of the business relationship. This resulted in an inaccurate picture of the level of risk posed by customers and inadequate relationship monitoring based upon the true risk that those relationships and connected activity posed. In a number of cases highlighted by regulators, firms were unable to demonstrate that they had identified the beneficial owners of corporate clients, a crucial requirement to help firms ensure they know who they are dealing with and quantify the level of risk posed. Part of the CDD undertaken for establishing a commercial relationship should enable firms to understand, and evidence, the economic rationale for a client opening an account. Firms must understand the nature of their clients' activities and the rationale for the structuring of legal entities and/or transactions. This is especially important to firms in potentially higher risk circumstances, such as where a client's legal structure or transactions appear overly complex, or where transaction structures seem to lack commercial sense because they are more expensive than other available alternatives. To mitigate potential risks, firms must implement effective policies, procedures and training regimes in relation to CDD in order to ensure that staff understand their obligations and execute internal controls effectively. These activities need to be reinforced with ongoing monitoring applied on a risk-sensitive basis, reflecting the identified and situation risks of the client relationship.  3. Transaction Monitoring Multiple regulators around the globe found that a lack of effective transaction monitoring systems and controls meant that firms were unable to spot suspicious transactions relating to 1MDB. The Swiss Financial Market Supervisory Authority (FINMA) and the MAS have both highlighted this issue following their investigations into firms implicated in the scandal. The MAS said its 1MDB investigations revealed a complex international trail of transactions involving numerous legal entities and individuals in multiple jurisdictions. The MAS also found that many institutions involved in 1MDB related transactions were either late in filing suspicious transaction reports, or failed to do so because their transaction monitoring systems and controls were ineffective. Results of the investigations carried out by the FINMA and the MAS showed that the transactions carried out FIs on behalf of 1MDB were often suspicious and appeared to lack economic sense. The MAS stated that its investigations revealed extensive layering of transactions aimed at disguising the true nature of certain activities and transactional flows – which went reported and undetected. Firms must have effective transaction monitoring systems and controls in place in order to detect and report suspicious transactions in accordance with their obligations under the applicable AML regimes. It is particularly important in the current remote working environment that firms' transaction monitoring systems are reviewed periodically, and re-calibrated if necessary, in order to reflect emerging financial crime risks.  4. Second Line Monitoring Effective second line monitoring helps FIs to understand the effectiveness of their AML controls and the financial crime risks they face. The FCA highlighted in its 1MDB findings that key information and red flags were not included in management information (MI) provided to the relevant decision-making committees, which resulted in those committees being unable to assess fully the risks involved in the transactions. It is, therefore, imperative that firms implement clear guidelines on MI being produced, it's purpose, that this is tailored where appropriate by the recipient committee and the level of detail required in the MI, to ensure that appropriate data is provided to decision makers, and that the MI accurately represent the relevant risks.  5. Escalation procedures and appropriate disclosures to regulators Allegations surrounding bribery in relation to some of the 1MDB transactions surfaced in 2013. However, the FCA found that these concerns were not escalated in accordance with the firm's policies and procedures. It is, therefore, essential for firms to ensure that their staff are aware of, and trained on, the relevant escalation policies and procedures, particularly where financial crime risks are concerned. Implementing periodic refresher training should assist in mitigating the risk of policies and procedures not being followed. Further, when allegations of an employee's potential misconduct relating to the 1MBD transactions came to light, these were escalated to the relevant control functions, but there was no record of how the allegations were investigated. The FCA was later notified of the same employee's non-1MBD related misconduct, but the allegations of potential misconduct surrounding 1MDB were not notified at the same time. In light of the obligations imposed on firms under the SMCR, it is now particularly important that firms: 

• Accurately record and deal with allegations of misconduct; and
• Consider information that needs to be included in any notifications to the FCA, including any past allegations that have not previously been notified.

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1MDB scandal explained: a tale of Malaysia's missing billions

The alleged misuse of the government fund has brought out tales of lavish spending, mass sackings and a long search for truth

What is 1MDB?

Originally 1MDB – an abbreviation of 1Malaysia Development Berhad (which means limited) – was nothing more than a Malaysian state fund, set up in 2009 to promote development through foreign investment and partnerships. The then prime minister, Najib Razak, was its chairman.

The fund has since been at the heart of one of the biggest corruption scandals in the world. The US justice department believes more than $4.5bn was stolen and the resulting scandal has been responsible for the toppling of a government this year and the arrest of Najib , his wife, Rosmah Mansor, and a growing number of close associates.

How was the money spent?

Leaked financial documents allege that 1MDB was a hub of fraudulent activity from the outset. Vast sums were borrowed via government bonds and siphoned into bank accounts in Switzerland, Singapore and the US. Some $731m appeared in the personal bank account of Najib just ahead of the 2013 election, and is alleged to have been used to pay off politicians, his credit card bill and fund the lavish shopping habits of his wife. Najib denies the allegations and insists the money was donated by a Saudi prince.

Overseas, it is alleged the money funded the ostentatious lifestyle of one of the consultants allegedly brought in to oversee 1MDB, Malaysian businessman Jho Low.

Under Low’s watch, it is alleged the fund bankrolled purchases including tens of billions of dollars’ worth of property in Beverly Hills and Manhattan, including an apartment once owned by Jay Z and Beyoncé; a $35m private jet; a $260m yacht; a $3.2m Picasso given to Leonardo DiCaprio ; $85m in Las Vegas gambling debts; a birthday party for Low where Jamie Foxx, Chris Brown, Ludacris, Busta Rhymes and Pharrell Williams performed live and Britney Spears jumped out of a cake; and $8m in diamonds for Australian model Miranda Kerr .

Tens of millions of dollars also allegedly went towards funding film the Wolf of Wall Street, through a production company run by Najib’s stepson, Riza Aziz. Low maintains his innocence.

How was the scandal uncovered?

The alleged embezzlement of 1MDB money between 2009 and 2012 went unchallenged until 2015. That year, British journalist Clare Rewcastle-Brown , who ran the website Sarawak Report, was handed 227,000 leaked documents detailing the depth of fraud. The Wall Street Journal was also given documents.

The Malaysian anti-corruption agency (MACC) began investigating and was about to issue a warrant for the prime minister’s arrest when Najib acted. During the “week of the long knives”, Najib fired the attorney general , Abdul Gani, who had been leading the investigation, sacked deputy prime minister and 1MDB critic Muhyiddin Yassin, and four other ministers who had raised the scandal. The MACC offices were raided and four officials arrested.

Najib’s government also refused to cooperate with investigations in the US, Singapore and Switzerland. In 2016, the Najib-appointed attorney general cleared the prime minister of all wrongdoing and said the issue had “comprehensively been put to rest”.

When was Najib ousted from power?

Not everyone was convinced by Najib’s declaration of his innocence . Mahathir Mohamad, a former PM who had helped Najib to power, continued to be outspoken on the issue. Convinced he was the only person able to act, he announced he would run against Najib in the general election in 2018. His opposition party was elected for the first time in a historic moment , and immediately put 1MDB on the agenda.

Within days of his fall, properties linked to Najib were searched by police . They seized 1,400 necklaces, 567 handbags, 423 watches, 2,200 rings, 1,600 brooches and 14 tiaras, most of which were thought to belong to Rosmah, worth a total of $273m.

What charges does Najib face?

Najib faces 42 charges across five separate trials, and could face years in prison. He has denied any wrongdoing.

So far, a verdict has only been announced in relation to his first trial, where he was found guilty of seven charges including criminal breach of trust, money laundering and abuse of power. Sentencing is yet to be announced but he could face decades in jail. The case centred on the transfer of 42m ringgit ($9.9m) from former 1MDB unit SRC International into his bank accounts through intermediary companies.

Najib’s second trial is the most significant, and deals with 25 charges over the alleged flow of $731m of 1MDB funds into his bank accounts. This case is ongoing.

Rosmah has been charged with 17 counts of money laundering. She pleaded not guilty on all counts.

Najib’s lawyer, Shafee Abdullah, was also charged with money laundering and tax evasion, while MP Abdul Azeez Abdul Rahim, who belonged to Najib’s Umno party, was arrested and charged in connection with allegations of bribery and money laundering.

Where is Jho Low?

This has been the subject of endless speculation. In 2018, it was said he was partying on a Thai island, though left quickly when Najib fell. Later that year, his yacht, allegedly bought with 1MDB money, was seized in Bali and it has since been rumoured Low was staying variously in the Chinese gambling enclave of Macau, in Bangkok and in Taiwan.

Mahathir, who is no longer in power in Malaysia, had previously appeared to confirm rumours Low was now in China. “It’s quite tricky for us to accuse China of hiding him, so we’re trying to work out some ways or private efforts to get back Jho Low from China,” he said. Mahathir’s former government confirmed Low has made repeated attempts to strike an immunity deal but they have been refused.

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Most viewed.

Timeline: How Malaysia’s 1MDB financial scandal unfolded

1MDB was set up as a state fund to drive new investment in Malaysia, but investigators say the money went elsewhere.

Malaysia is awaiting the verdict in the first of a series of cases charging former prime minister Najib Razak with corruption over his alleged involvement in the scandal at 1Malaysia Development Berhad (1MDB), a state fund that Najib founded to drive new development in the country.

The fund’s business is under investigation in at least six countries over allegations that billions of dollars were siphoned off to buy luxury property, designer jewellery and art, and to fund the Hollywood movie Wolf of Wall Street.

Keep reading

Russia arrests deputy defence minister suspected of taking bribes, ukraine’s agriculture minister suspected of corrupt land grab, slapped: speaking up in thailand, vietnam tycoon truong my lan sentenced to death in $12.5bn fraud case.

Najib, the son of the country’s second prime minister, is the first Malaysian leader ever to go on trial for corruption in the country.

An arrest warrant has been issued for Jho Low, the elusive Malaysian financier at the centre of the 1MDB allegations, as well as for others believed to have been involved.

Here is a timeline of some major developments in the scandal.

Then prime minister and finance minister Najib launches 1MDB, a “strategic development company driving new ideas and new sources of growth”. The fund is wholly owned by the government of Malaysia and Najib is chairman of its board of advisers.

September 2009

1MDB signs a deal with PetroSaudi International to set up a joint venture company and invests $1bn cash for a 40 percent stake. PetroSaudi,  backed by oil and gas assets said to be worth $1.5bn, takes 60 percent in the business.

Najib launches the Tun Razak Exchange, built by 1MDB as a new financial district for Kuala Lumpur. Najib tells invited guests the first phase of the development will bring in RM3.5b ($856.8m) in direct foreign investments.

May and October 2012

US investment bank Goldman Sachs helps 1MDB sell bonds worth $3.5bn to raise money to buy power assets.

Goldman Sachs helps 1MDB raise a further $3bn in an additional bond sale, this time to cover “new strategic economic initiatives” between Malaysia and Abu Dhabi.

December 2013

The “Wolf of Wall Street”, with Leonardo DiCaprio in the lead role, is released in the United States. The $100m film was produced by Red Granite Pictures, a newcomer co-founded by Najib’s stepson Riza Aziz. The end credits included a thank you to Jho Low, a young Malaysian financier.  

January 2015

1MDB misses a loan payment of about $550m.

Under pressure, Malaysia’s government sets up a ‘special taskforce’ to investigate 1MDB.

The Wall Street Journal and Sarawak Report say nearly $700m suspected to have originated with 1MDB was deposited into Najib’s personal bank account.

Najib sacks the attorney general who was leading the Malaysian investigation and reshuffles his cabinet, removing key critics, including deputy prime minister Muhyiddin Yassin. The ruling party politician leading the parliamentary inquiry into 1MDB is made a deputy minister.

The changes effectively shut down the domestic investigation.

January 2016

The new attorney general clears Najib of any wrongdoing, saying the $681m was a donation from a prince in Saudi Arabia and $620m was returned.

The United States Department of Justice files a civil suit to seize assets it alleges were bought with funds stolen from 1MDB. The suit says $681m found its way into the personal account of ‘Malaysian Official 1’, later identified as Najib by both the US and a Malaysian minister.

The justice department announces it believes more than $4.5bn was siphoned from 1MDB by senior officials and their associates.

August 2017

The justice department says a criminal investigation into the fund is underway. The attorney general later describes the scandal as “kleptocracy at its worst”.

Najib is defeated in Malaysia’s general election amid deepening anger over 1MDB and the rising cost of living, and his United Malays National Organisation (UMNO) finds itself out of power for the first time since independence. Two days later, Najib and his wife, Rosmah Mansor, are barred from leaving the country.

Malaysian police raid Kuala Lumpur properties connected to Najib, seizing jewellery, designer handbags, luxury watches and cash valued at around $275m.

The first charges are laid against Najib in relation to 1MDB.

October 2018

Rosmah also finds herself in court where she is charged with money laundering and tax evasion.

December 2018

Malaysia files criminal charges against Goldman Sachs in relation to the 1MDB bond sale.

Najib appears in the Kuala Lumpur High Court on April 3 to face seven charges in relating to SRC International, a unit of 1MDB, in the first of a series of trials relating to the failed fund.

Malaysia announces it has completed the sale of Equanimity, the $250 million superyacht allegedly bought with money diverted from 1MDB. 

August 2019

Najib goes on trial in Kuala Lumpur in the biggest of his five 1MDB-linked trials. The lead prosecutor told the court that Najib had carried out an “elaborate charade” that was acted out in four phases. “His objective was to enrich himself,” Gopal Sri Ram said.

December 2019

After being told to enter his defence in the SRC trial, Najib takes to the witness box in his own defence, reading from a prepared statement.

A power grab within the ruling Pakatan Harapan coalition triggers the resignation of Mahathir Mohamad as prime minister. After a week of uncertainty, the king names Muhyiddin Yassin to the top job saying he has a majority in parliament. The manoeuvring returns UMNO, where Najib remains influential, to government.

Malaysian prosecutors agree a $107.3 million settlement with Riza Aziz, and drop money laundering charges against the former prime minister’s stepson.

Malaysia reaches a $3.9bn settlement with US investment bank Goldman Sachs, agreeing to drop its criminal investigation into the bank’s role in the 1MDB scandal.