BY UNA GALANI

1Malaysia Development Berhad is back to haunt banks. Wall Street fingerprints were all over the scandal in which billions of dollars from the sovereign fund were allegedly laundered overseas. After a shock election defeat for Najib Razak, the former prime minister, a new government led by 92-year-old Mahathir Mohamed could reopen enquiries and come after lenders involved in raising and moving money. That stirs things up the most for Goldman Sachs and Deutsche Bank.

Goldman pocketed eye-popping fees arranging three offshore bond deals in 2012 and 2013 that raised $6.5 billion for the fund. At its client’s highly unusual request, Goldman even arranged to send almost half the proceeds to a small Swiss private bank. Even after the fee controversy, Deutsche arranged two further loans worth more than $1 billion for the already-indebted fund in 2014.

Investigative agencies have already done much of the digging. A local parliamentary report, in 2016, detailed suspect payments and the role of banks but stopped short of implicating Najib who denies any wrongdoing. Foreign agencies, led by the U.S. Justice Department, allege as much as $4.5 billion was misappropriated although they received little support from Malaysian authorities, which cleared Najib after he effectively removed the chief prosecutor investigating the fund.

With help, foreign agencies could turn their focus from seizing assets – including a yacht, jewellery and a Picasso painting – to nailing Najib and the banks. That’s an unwelcome headache for Deutsche, which is struggling to restore profitability and curtailing its global investment banking ambitions. For Goldman, renewed attention on its past dealings comes just as the bank is enjoying a trading revival and expanding its retail banking arm. However, with Gary Cohn, former Goldman president, out of the Trump administration, going after the bank will be less awkward.

The best hope of reprieve rests with Mahathir. He has also been dogged by scandal, and may decide it’s not worth the trouble of reviving the 1MDB affair and inviting a potentially damaging counterattack by Najib. If he does seek to hold people and entities to account, lenders will almost certainly find themselves in the firing line sooner or later.

First published May 10, 2018

(Image: REUTERS/Athit Perawongmetha)