BY UNA GALANI

It’s hard to bury a big scandal. That is the awkward lesson that Najib Razak is learning. The Malaysian prime minister is attempting to draw a line under a multi-pronged financial controversy that almost toppled him. But initial findings from Switzerland’s attorney general that around $4 billion may have been misappropriated from Malaysian state firms is a sharp reminder of the lingering threat posed by foreign investigations.

Even by the standards of Malaysian politics, it has been an extraordinary few days. On Jan. 26, the country’s chief prosecutor concluded that $681 million that was transferred into the Prime Minister’s personal account in 2013 was a donation from the royal family in Saudi Arabia, not money from 1Malaysia Development Berhad, an indebted fund he championed. Najib was cleared of graft. Three days later, however, Swiss authorities published preliminary conclusions from its own probe into 1MDB which found that billions may have been squirreled away between 2009 and 2013.

The Swiss findings implicate former Malaysian officials and current and former ones in the United Arab Emirates. Four companies are in the frame: PetroSaudi, a privately-held Saudi oil company; former 1MDB subsidiary SRC International; Malaysian conglomerate Genting, and ADMIC, a joint venture with Aabar Investments – which is ultimately backed by Abu Dhabi royal Sheikh Mansour bin Zayed al-Nahyan. The findings are also uncomfortable for Goldman Sachs as the Wall Street bank, which helped raised $6.5 billion for 1MDB, was closely involved with two of these entities.

However, Najib himself does not appear to be the focus of the inquiry. It is highly doubtful that any of the four ongoing Malaysian probes into 1MDB will result in any outcome that hurts the prime minister. After all, the present attorney general’s predecessor was axed by Najib at the height of the funding furore.

The happiest outcome for Najib would be for the investigations in Switzerland and elsewhere to also fizzle out. Malaysia says it will cooperate with its Swiss counterparts. Yet foreign investigators’ dependence on domestic help has helped to stymie past inquiries, including a more than decade-long probe into alleged money laundering by former president of Pakistan Asif Ali Zardari and his late wife former Prime Minister Benazir Bhutto – both of whom always denied the charges.

Najib still has the domestic support he needs to stay on top. But the foreign probes into 1MDB are a continued embarrassment at best. At worst, further revelations could threaten aftershocks for the prime minister – and for Malaysia.

First published Feb. 1, 2016

(Image: REUTERS/Olivier Harris)

BY UNA GALANI

Wall Street banks played a key role in helping a Malaysian sovereign fund raise and move money, much of which went missing. That is a key takeaway from a damning 106-page report by a bi-partisan parliamentary committee into the goings-on at 1Malaysia Development Berhad. The report, which highlights over $4 billion in suspect payments, shows how Deutsche Bank, JPMorgan, and Goldman Sachs had their fingerprints all over the disgraced fund.

Goldman has long been at the centre of the controversy surrounding 1MDB, where Malaysian Prime Minister Najib Razak remains chairman of the board of advisors. The firm pocketed eye-popping fees arranging three bond deals between 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.

Now the Malaysian report has cast a spotlight on other lenders as well. It shows that 1MDB PetroSaudi, a joint venture of the fund, received $300 million in a JPMorgan account in 2009. Separately, the report suggests that a 1MDB PetroSaudi account was moved to the U.S. bank without the full knowledge of the fund’s board.

The parliamentary committee also found that, even after the controversy around Goldman’s deals, Deutsche went on to arrange two further loans worth a total of $1.23 billion for the already indebted fund in 2014. Deutsche extended the two loans shortly after it hired Yusof Yaacob from Goldman as its chief country officer for Malaysia.

Those deals proved messy too. Creditors subsequently worried about the collateral supporting one of the loans Deutsche arranged. 1MDB repaid it early by borrowing $1 billion from Abu Dhabi’s International Petroleum Investment Company. The Malaysian fund now owes at least $4.5 billion to IPIC and must transfer assets of the same value to its Gulf counterpart by the end of June. Deutsche, Goldman and JPMorgan all declined to comment on the report’s findings.

Crucially, some of the funds that the banks helped raise for 1MDB ended up at an entity incorporated in the British Virgin Islands, which the report says received $3.5 billion. It has a similar name to an IPIC subsidiary called Aabar. IPIC finally admitted on Monday that the vehicle that received the money was not part of the group. 1MDB pointed out that it was “curious” that the Abu Dhabi group waited so long to make that clear, suggesting the relationship between the two sides has soured.

Ultimately, the report paints a picture of banks working side-by-side with 1MDB as it accumulated worrying levels of debt and became the subject of growing controversy which, in the words of the Swiss financial regulator, looks like a case of “blatant and massive corruption”. U.S. authorities have asked the banks to provide details of their dealings with the fund. At the very least, the 1MDB money trail will leave parts of Wall Street red-faced.

First published April 12, 2016

(Image: REUTERS/Brendan McDermid)

BY UNA GALANI

Abu Dhabi’s sovereign fund woes are a reminder to asset managers of the benefits of staying focused. One of the Gulf state’s investment companies strayed far from its original mandate to invest in oil and gas. A nasty multi-billion dollar tangle with rival state-backed investor 1Malaysia Development Berhad shows how pairing big ambitions with poor governance can backfire.

International Petroleum Investment Company, which was set up more than three decades ago, is chaired by Sheikh Mansour bin Zayed Al Nahyan, a ruling family member and owner of Manchester City football club. It now has assets worth almost $70 billion of which one quarter are “diversified investments” including everything from private banks to space travel.

IPIC’s mission creep has mostly come through Aabar, a company the fund took private in 2010. Over the years, Aabar appears to have racked up big losses from investments including commodities trader Glencore, Malaysian bank RHB Capital and Italian bank UniCredit.

Now it has been dragged into the growing scandal surrounding 1MDB. Aabar says it is not the owner of a company called Aabar Investments PJS Limited, which received $3.5 billion from the Malaysian investor. 1MDB says it made the payments based on agreements negotiated with two senior Aabar executives, both of whom have since left the group.

The dispute has scuppered a $4.5 billion debt deal the two agreed last year, and cast a cloud over $3.5 billion of bonds issued by 1MDB and jointly guaranteed by IPIC. Missed interest payments could trigger cross-defaults on both sides.

Aabar’s ties with 1MDB go deeper, though. In 2013, the Malaysian group raised $3 billion to fund a joint venture agreement with Aabar to develop a big real estate project in Kuala Lumpur. Meanwhile, Falcon Private Bank, a Swiss lender owned by Aabar, has come under scrutiny for its transactions relating to 1MDB. Falcon says it will cooperate with authorities.

Indeed, the full extent of the Abu Dhabi fund’s troubles are only just becoming clear. Its mistake appears to have been to concentrate too much power in the hands of a few individuals. Either way, the fallout is deeply embarrassing for its sovereign owner. It is hard to imagine that IPIC would have got itself into so much hot water if it had stuck to its core competency.

First published April 25, 2016

(Image: REUTERS/Arnd Wiegmann)

BY UNA GALANI

Singapore is finding that being the Switzerland of Asia has its downside. The city-state’s central bank has shut down the local operations of BSI as Swiss authorities opened a criminal probe into the private bank, relating to disgraced sovereign fund 1Malaysia Development Berhad. The battle against illicit money flows is global. But Singapore seems only now to be properly facing up to the risks of its push to court private wealth.

The city-state made an aggressive push to capitalise on Switzerland’s distress following the global financial crisis, when Swiss authorities reined in their secrecy laws and saw their home-grown banking giants UBS and Credit Suisse collectively fined over $3 billion by U.S. authorities for enabling tax evasion. Deloitte reckons that Singapore grew its net new assets in international wealth management by 11 percent compared to a 7 percent decline for Switzerland between 2009 and 2014.

Now that relative success is posing a big threat to Singapore’s reputation as a financial centre. BSI was a correspondent bank for 1MDB, from which Swiss authorities said earlier this year as much as $4 billion appeared to have been misappropriated in a scandal that has engulfed Malaysia’s Prime Minister Najib Razak.

Singapore’s closure order on BSI, a S$13.3 million ($9.61 million) fine, and move to refer current and former executives of the bank to the public prosecutor, appears decisive. But the central bank said it had found policy lapses and problems with internal controls at the Swiss-headquartered bank, which was recently sold to EFG International, as far back as 2011. Swiss regulator Finma, in comparison, clawed back $95 million of BSI’s earnings.

The fallout underscores the tension the city-state faces between the desire to grow as a financial centre and the need to maintain a reputation for robust enforcement. Maintaining this balance is especially difficult given some of the key pillars of Singapore’s financial centre have been struggling in recent years; fees for merger advice are flagging and the country is losing out to its Southeast Asian rivals as a destination for new stock-market listings.

Switzerland is already all too aware of the risks that come with private banking. For Singapore, the Malaysian fund scandal may force a rude awakening.

First published May 24, 2016

(Image: REUTERS/Edgar Su)

BY UNA GALANI

Abu Dhabi is papering over its sovereign fund woes by merging two of the emirate’s most prominent investment vehicles. Combining International Petroleum Investment Company (IPIC) with local peer Mubadala should lead to better governance. Creating a new $135 billion fund will also help the Gulf state to scrub out the stain of past missteps – notably a scandal involving IPIC and 1Malaysia Development Berhad.

The two Abu Dhabi funds are similar in size and both arms of the state but are distinct entities. Under Chairman Sheikh Mansour bin Zayed Al Nahyan – owner of Manchester City football club – IPIC has strayed from its original mandate to invest in oil and gas. It has recently made bets from private banks to space travel, mostly through a subsidiary called Aabar. It also appears to have racked up big losses by investing in commodities trader Glencore, Malaysian bank RHB Capital, and Italian bank UniCredit.

IPIC’s main source of shame, however, is its entanglement in a global money laundering investigation centred on 1MDB. The Malaysian fund made payments worth $3.5 billion to an entity called Aabar Investments PJS Limited. IPIC says it is not the owner of that company. Last year the Abu Dhabi fund replaced two senior executives who 1MDB claims it dealt with when the payments were made.

The dispute has cast a shadow over 1MDB bonds, also worth $3.5 billion, which were jointly guaranteed by IPIC. The Malaysian group has stopped paying interest on the securities, leaving IPIC to pick up the tab. A London court will decide who is ultimately on the hook.

Mubadala’s mandate seems clear by comparison. It has assembled holdings ranging from clean energy to technology and aerospace in an effort to diversify the oil-based economy. It has even recovered the value of a $2 billion preferred equity investment into the holding company of bankrupt Brazilian tycoon Eike Batista by claiming assets including a Colombian gold mine and a key port. Most significantly, the well-governed fund is highly respected both within the emirate and overseas.

A merger will not save Abu Dhabi from its troubles with 1MDB. But it could be a neat way to erase a fund that has embarrassed the emirate, while placing IPIC’s valuable energy assets in better hands.

First published June 29, 2016

(Image: REUTERS/Satish Kumar)

BY UNA GALANI

Malaysia’s sovereign-fund scandal is still hot. The U.S. Department of Justice alleges that more than $3.5 billion was misappropriated from 1Malaysia Development Berhad, known as 1MDB, over the course of several years through a web of fraudulent transactions. The legal details join the dots of the long-running controversy, with plenty of colour and grit. Everyone involved with 1MDB, from Malaysian Prime Minister Najib Razak to bankers at Goldman Sachs, should feel mighty uncomfortable.

U.S. authorities on Wednesday launched a civil campaign to seize assets worth almost one-third of the total amount allegedly siphoned off. The spoils include a Bombardier jet, artwork by Monet, an interest in EMI Music Publishing, prime real estate in Beverly Hills, and – rather aptly – the rights to the award-winning movie, “The Wolf of Wall Street”. It’s the largest such effort under the DOJ’s so-called Kleptocracy Asset Recovery Initiative.

Numerous banks are named in the complaint but Goldman Sachs’ dealings with 1MDB come out looking the worst. Of the more than $6 billion the bank raised for the fund through three bond deals in 2012 and 2013, almost half was fraudulently diverted, according to the complaint. In one case, the funds began to disappear days after they were raised. These are the same transactions for which Goldman pocketed huge fees and led one opposition politician to conclude that the Malaysian government had been “royally screwed”.

It’s also bad news for Najib. The complaint doesn’t name him, but it does reference a Malaysian official with responsibilities that match the premier’s. And his stepson, Riza Aziz, is cited as having benefited from the stolen money. That will put Najib in an awkward position. The prime minister has shored up support at home, winning recent regional elections. But the U.S. legal move is likely to embolden dissenters within the ruling party and the opposition.

U.S. authorities were at pains to emphasise that their investigation remains ongoing – and explain that other individuals and institutions could yet be named and investigated. That will turn up the heat on high-profile individuals and institutions that were entangled in a scandal that fat-tailed overseas legal risks are helping to make impossible to bury.

First published July 20, 2016

(Image: REUTERS/Brendan McDermid/File Photo)

BY UNA GALANI

A sovereign fund scandal has exposed shortcomings in Goldman Sachs’ post-crisis overhaul of its business practices. Five years ago, the Wall Street firm led by Lloyd Blankfein went to great lengths to assure regulators, investors and clients that it was tightening up standards. But its dealings with the now disgraced 1Malaysia Development Berhad cast doubt on the depth of Goldman’s changes.

An attempt by the U.S. Department of Justice to seize assets bought with some of the $3.5 billion it says was stolen from 1MDB offer the clearest account yet of the bank’s deep relationship with the Malaysian fund. Though Goldman has not been accused of any wrongdoing, its name appears frequently in lawsuits that detail a complex web of fraudulent transactions over several years.

Back in 2009, Goldman helped set up the fund which counted Malaysian Prime Minister Najib Razak as its top advisor. An excerpt of an email suggests that, from the very start, Goldman executives were concerned about the issue of transparency at the new fund and its reliance on borrowed money. By the time the bank started raising money for 1MDB in earnest three years later, corrupt officials had already sucked around $1 billion from the fund, the legal documents show.

Nevertheless, between 2012 and 2013 Goldman helped 1MDB raise $6.5 billion by issuing three bonds. The Justice Department suggests that around 40 percent of that money was siphoned off, and indicates that $681 million ultimately found its way into Najib’s personal bank account, though the prime minister is not directly named.

Some of the rest of the funds taken from 1MDB ended up in a Bombardier jet, artwork by Monet, an interest in EMI Music Publishing, prime real estate in Beverly Hills, and the movie “The Wolf of Wall Street”.

The relationship with 1MDB was highly lucrative for Goldman. In total, the bank earned roughly $590 million in fees, commissions and expenses, according to the legal filings – far more than a bank would normally expect to earn on bond deals for a quasi-sovereign client. Goldman was able to charge more because it put its balance sheet at risk by buying the bonds from 1MDB before selling them on to other investors. One of the bond offerings was given the code name “Project Maximus”.

1MDB says that it has not been contacted by the Justice Department or any other foreign agency in relation to their investigations. Najib’s press secretary said in a statement that the law will be enforced without exception if any wrongdoing is proved.

For its part, Goldman says it had no visibility on whether the funds it raised for 1MDB were diverted for other purposes. The bank has previously stressed that its fees were commensurate with the risk it assumed and that it did proper due diligence on 1MDB.

Nonetheless, the transactions may yet drag Goldman into a criminal investigation. U.S. law enforcement officials are probing whether the bank failed to comply with the U.S. Bank Secrecy Act with regards to its fundraising for 1MDB, according to a person familiar with the situation. The Act requires financial institutions to report suspicious transactions to regulators.

Whatever the outcome of the ongoing investigations, however, Goldman’s reputation has already taken a savage beating. This was exactly the kind of mess it was trying to avoid by overhauling its standards following the financial crisis.

Around the time that the bank agreed in 2010 to pay $550 million to settle charges it improperly sold a product linked to subprime mortgages, chairman and Chief Executive Blankfein launched a global review to strengthen the firm’s practices and culture. The following year, Goldman published a 63-page document with 39 recommendations designed to ensure its bankers and traders paid as much attention to reputational risks as financial ones.

Goldman says Blankfein dedicated more time to reinforcing the message about personal accountability, client service and reputational risk management with employees than to any other initiative in 2011 and early 2012.

Moreover, a 28-page assessment of the reforms published by Goldman in 2013 claimed the bank’s approach to transactions was now “fundamentally different”. Committees that approve individual transactions were required to vet deals more vigorously and differentiate “from those we could have done, but should not do, to transactions that we both can and should do”.

It is impossible for outsiders to understand all that transpired inside Goldman while it was vetting the 1MDB deals. But plenty of warning signs were visible. The three most obvious were that a quasi-sovereign client wanted to raise a large amount of money at short notice, was willing to pay hefty fees, and directed the proceeds to a small Swiss private bank.

Goldman’s top bankers doubtless had a vigorous debate about the merits and structure of the various 1MDB bonds. The bank did propose cheaper ways for the sovereign fund to raise cash, according to a person familiar with the situation. On one occasion, it insisted that 1MDB went to rival banks to seek alternative pricing. Nevertheless, the transactions still went ahead.

The 1MDB saga does not invalidate Goldman’s efforts to reform the way it does business around the world. But the Malaysia mess does raise questions about the depth of these reforms – and serves as a reminder about how hard it is to change a bank’s culture.

First published July 21, 2016

(Image: REUTERS/Brian Snyder)

BY UNA GALANI

China has won another enthusiastic friend. Malaysian Prime Minister Najib Razak struck the country’s first major defense deal with China and says relations with its eastern neighbor are “set to reach new highs”. He is the latest Asian leader after Philippine President Rodrigo Duterte to cozy up to Beijing. But his motivations for singing the praise of the People’s Republic, while bashing Western allies, appear unique.

Unlike the Philippines, Malaysia already counts China as its largest trading partner, and the middle-income nation is not desperate for foreign capital to finance basic infrastructure. However, a warm embrace is a good way for Najib to express gratitude for China’s continuing investment support during the ongoing corruption scandal engulfing state fund 1Malaysia Development Berhad.

The carefully cultivated relationship between the leader of the majority-Muslim nation and his former golf buddy President Barack Obama was ruined in July when the U.S. Department of Justice alleged over $3.5 billion was misappropriated from the fund. The agency indirectly linked the corruption to Najib, who denied any wrongdoing.

Ahead of that, Chinese buyers, mostly state-backed, stepped up to buy 1MDB’s energy and real estate assets at generous prices. The $4 billion proceeds helped Malaysia to protect its delicate public finances – and took some pressure off the embattled leader.

Now more Chinese capital is heading for the country, including into a major railway project spanning four states, in what some observers see as quid pro quo. Net foreign direct investment into Malaysia from Hong Kong and China totalled $3.5 billion in the first six months of fiscal 2016, over triple the amount from the United States since 2014.

Chinese investment could help Najib meet his ambitious goal of making Malaysia a “high-income” country by 2020. The tilt east may also be a vote-winner in a nation where anti-U.S. sentiment has always been present; there are signs that Najib is preparing for a general election next year.

But the gamble is not without risks. One reason Malaysia’s economy has proved resilient in a world of low oil prices is because of robust demand from the West for its higher value manufactured exports, whereas Chinese imports from Malaysia are down nearly 20 percent year to date. If the pivot east jeopardises other valuable trade links, the political payback to China will be costly.

First published Nov. 3, 2016

(Image: REUTERS/Wang Zhao/Pool)