The 1MDB Scandal: Explained
Recently, former Prime Minister of Malaysia, Najib Razak, was found guilty of corruption and sentenced to 12-years of imprisonment. Why? Read on.
Recently, former Prime Minister of Malaysia, Najib Razak, was found guilty of corruption and sentenced to 12-years of imprisonment. What caught our attention was not that a corrupt politician had been convicted (however rare that may be), but the alleged involvement of big names like Goldman Sachs, Miranda Kerr, and the mention of the movie ‘The Wolf of Wall Street.’
Once we started digging, we knew we had struck gold.
Tuck in, for this one’s gonna be a hell of a read!
Malaysia, with its beautiful beaches, secluded islands and World Heritage Sites, is a go-to holiday (read: honeymoon) destination for South-east Asians. The citizens of the country are used to living a serene and lavish life.
While Malaysians are a foodie lot (excuse the generalisation), their appetite for change is not that great.
The country is divided along ethnic lines (Malay, Chinese and Indians). This is reflected not only in the language opted for in schools (Malay, Mandarin or Tamil) but also in their ethnocentric political parties.
For sixty years, there was no one to dethrone The Barisan National Alliance. So much was their popularity that they won the 2004 elections with a historical 198/219 or 90% seats.
Until ...
Enter Najib Razak.
Najib Razak was first elected to the Malaysian parliament at the age of 23.
A child prodigy? Naah. His father was a long-standing politician. After his demise, the son got the seat. From leading the youth wing of his party to becoming a Deputy PM at the age of 23, his political career looked promising.
In 2009, Najib took over as the Prime Minister of Malaysia - and this is where our story unfolds.
To promote his liberal economic policies, he established 1Malaysia Development Berhad (Berhad = Limited; for convenience’s sake, we’ll call it 1MDB). The government-controlled company’s aim was to usher in a period of rapid growth.
How to achieve rapid growth?
Of course, get other countries to “invest” in infrastructure development of your country.
By relaxing the foreign investment policies, a country tries to lure interested foreign investors. Najib also followed this path. However, his foreign investment policies were so “relaxed” that...
“...the prime minister has been accused of “selling out” Malaysia to the Chinese following a series of loans and high-profile investment deals to the country... The deals included the sale of struggling national carmaker, Proton, the sale of 1MDB’s power plants, the construction of three ports and an RM55 billion rail link.” - Asia News Network.
Another very interesting aspect of Malaysian politics is that there is absolutely no limit on how much money a political party can raise, and from whom. Moreover, these donations can be to the party fund or directly to the individual candidate. That’s not all - there is absolutely no restriction on anonymous donations. You can take money from a rival party boss, and no one will ever know!
The Scandal
It all started with a whistleblower.
The Washington Post received numerous documents showing the misappropriation of funds from 1MDB projects by party members for personal pleasures.
The 1MDB fund was created to promote infrastructure spending in Malaysia.
Now, how these funds raise money is by hiring an investment banker, who sells the company’s bonds to investors in return for a fee. A big, hefty fee.
Goldman Sachs was appointed as the Investment Banker to sell bonds issued by 1MDB.
Now, there’s no one stopping any company from issuing bonds. However, it is the duty of the investment banker (acting as a matchmaker) to review all the facts and figures of the company (like whether it would be able to repay the money raised and report - truly and fairly - if they find anything fishy).
Note: To be honest, the entire investment banking system is twisted. The bankers get their fee from the very people they are supposed to keep in check. They say they work for the investors, but they are paid by the people on the other side of the table. Get the dilemma? Time to rethink their incentive structures?
And corporate incentives do nothing to restrain the greed - in fact, the fatter cheques you bring in from clients, the more money you make.
All hell broke loose when 1MDB bonds worth $12BN were rated as “junk” by Standard and Poor’s and Fitch. That’s when the US FBI started poking its nose around and found two senior officials from Goldman Sachs involved in the crime.
In the zest to capture the Asian market and show his mettle, one of these senior officials, Tim Leissner, took bribes from 1MDB officials, and allegedly hid the fact that there was something fishy going on with 1MDB funds.
Between 2012 and 2013, Goldman Sachs sold bonds worth $6.5Bn for 1MDB, netting a neat fee of $593Mn.
Where did all the money go?
The money raised by 1MDB went into shell (fake) companies and was used to fuel the luxurious lifestyle of certain Malaysian politicians and financiers.
One such “beneficiary,” who is also suspected to be the mastermind of this scandal, was Jho Low.
What’s super interesting is Jho Low’s not-so-lowly life of yachts, jewellery and parties.
“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 Beyonce;
a $35 million private jet;
a $260 million yacht;
a $3.2 million Picasso given to Leonards DiCaprio;
$85 million 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
$8 million in diamonds for Miranda Kerr.” - The Irish Times reported.
Yep. He dated Miranda Kerr, the supermodel from Australia (jealous much?).
Well, the best use of the fund (personal opinion) was in producing the movie “The Wolf of Wall Street.” Maybe Jho Low was trying to flex his own lifestyle through the protagonist?
So what if Malays don’t get their infrastructure in place? We got to see Leonardo DiCaprio’s butt, right?
The cost of the lavish lives led by its Prime Minister and some favoured citizens has left Malaysia with $12.57BN in debt. Who will ultimately pay this amount?
Yep, the tax-paying, innocent fools - labouring their lives away for His Majesty’s pleasure.
Wrap Up
When those in power start feeling entitled and get too comfortable, hubris takes over and the darker side of their human-make is revealed. However, they fail to comprehend that when collective voices start making a noise, it turns into an uproar.
There is nothing more beautiful than a nation rising to its oppressor; nothing more satisfying than the chill down a dictator’s spine. And nothing more dramatic than the fall of a corrupt leader.
In 2018, the Malaysian citizens finally embraced change - they ousted the party that had ruled since their independence in 1957.
Their former Prime Minister was tried and convicted in court and will be serving a 12-year imprisonment sentence, along with a ~$50MN fine to be paid to the Government of Malaysia.
Meanwhile, Jho Low is still on the run and was last seen in China.
Feels like straight out of a Martin Scorsese movie, doesn’t it?
-The End-
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The author of this write up is a movie buff. So much so that he can watch the same movie for the umpteenth time and still not get bored. Other than movies, he loves mentoring young professionals (read: giving gyaan) and aims to make India financially literate.