Tension continues to build in Kuala Lumpur, Malaysia this month. The corruption investigation into the Malaysian sovereign wealth fund, 1Malaysia Development Fund (1MDB), captured headlines over the summer when U.S. Attorney General Loretta Lynch announced the Justice Department’s entry into the controversy. Attorney General Lynch announced that the Justice Department would seek forfeiture of $1 billion in assets tied to an international conspiracy linked to luxury real estate, Leonardo DiCaprio, and the film The Wolf of Wall Street (which is, ironically, in part about the damage caused by unchecked greed).
The DOJ’s investigation into 1MDB is not alone. It is just one of many investigations either conducted or pending, into the fund. Public protests in Malaysia over the scandal began in the summer of 2015. But the announcement that DOJ’s Kleptocracy Asset Recovery Unit would be pursuing legal action, rekindled the controversy and prompted action by the Malaysian government. Nearly five months after the announcement of the action, the public debate concerning 1MDB and the possible involvement of Malaysian Prime Minister Najib Razak continues to grow.
Nearly three weeks ago, a Singaporean banker was convicted of forgery and failure to disclose information in connection with his assistance in the 1MDB scandal. The conviction tied the banker to Jho Low, a Malaysian investor turned celebrity high-roller and partier, who is implicated in the DOJ’s case. In the days following this conviction, an opposition member of Malaysia’s Parliament, Rafizi Ramli, was sentenced to 18 months in prison for publicly disclosing classified information from an official audit into 1MDB. Critics of the Prime Minister claimed that the prosecution was only because of Mr. Rafizi’s opposition to the government. Police raided the offices of the Bersih 2.0 opposition movement and arrested two of the movement’s leaders prior to a large protest on November 19th.
The escalation of the public debate in Malaysia prompts renewed focus on the DOJ’s case concerning 1MDB. The complaint was groundbreaking in size and scope for DOJ’s Kleptocracy Asset Recovery Unit. DOJ claims that over $3.5 billion in assets were misappropriated from the fund and the agency is seeking over $1 billion of those assets in the form of property in the United States and abroad. The DOJ needed to unwind a complex series of relationships in building its complaint. Below is an overview of the factual and legal issues involved in the case and a discussion of the cases current status in the U.S. District Court for the Central District of California.
What is 1MDB?
1Malaysia Development Berhad is an investment and development entity that is owned by the government of Malaysia. The fund was developed in 2009 after it assumed the debts of a smaller, state investment fund. Leadership of 1MDB is comprises a Board of Directors, a Board of Advisors, and a Senior Management Team. Prime Minister Najib served as head of the Board of Advisors. According to the complaint, this provided Mr. Najib with the authority to approve all appointments and removals from the Board of Directors and the Senior Management Team. The Wall Street Journal reported that Mr. Najib’s involvement in 1MDB also included authorizing several investments and arranging financial services with Goldman Sachs.
What are DOJ’s factual allegations?
The narrative of DOJ’s complaint is that from 2009 through at least 2013, Malaysian public officials and their associates fraudulently diverted billions of dollars from 1MDB to personal ends rather than investment for the benefit of the Malaysian people. The complaint divides these activities into three phases of conduct:
- The “Good Star” Phase: the DOJ alleges that funds from 1MDB were diverted to Good Star Limited, a company owned by Jho Low, a Malaysian who is connected to the founding of 1MDB and a friend of the Prime Minister’s stepson. DOJ claims that Low laundered more than $400 million of 1MDB funds through Good Star into the United States.
- The “Aabar-BVI” Phase: the complaint alleges that 1MDB funds raised through two bond offerings were fraudulently transferred to the Singaporean bank account of Eric Tan, who used the funds to pay officials at 1MDB among others.
- The “Tanore” Phase: In 2013, a third bond offering was issued and the proceeds were diverted to Tan and used for the personal benefit of Low, his associates, and officials at 1MDB.
The assets purchased include rare artwork, jewelry, and luxury real estate. The funds were also used to hire personal airplanes, pay gambling expenses, and hire musicians and celebrities to attend parties.
The complaint describes formal and informal networks of individuals who facilitated the transfers of money. The DOJ names Jho Low, “Eric” Tan Kim Loong, and Riza Shahriz Bin Abdul Aziz (known as Riza Aziz) as individuals outside of the government who illicitly received substantial sums of money from 1MDB. Riza Aziz is chairman of Red Granite Pictures, which produced The Wolf of Wall Street, and stepson of Prime Minister Najib. The complaint alleges a variety of unnamed Malaysian officials and bankers facilitated these transfers. While the individuals are anonymous in the complaint, several news sources have purported to accurately identify the individuals based upon the circumstances of the allegations provided in the complaint.
What legal action did DOJ take?
The DOJ is pursuing a civil action for forfeiture in rem. The DOJ argues that the property and assets at issue in the case were involved in one or more money laundering offenses in violation of the Money Laundering Control Act (18 U.S.C. §§ 1956, 1957). The United States brought the complaint for forfeiture pursuant to the civil forfeiture laws (18 U.S.C. § 981). It is not pursuing criminal charges against any of the parties at this time.
What is the current status of the case?
In early August, attorneys from Boies, Schiller & Flexner LLP entered their appearance on behalf of Red Granite Pictures. In September, Red Granite Pictures and its related entities submitted claims for the assets stemming from The Wolf of Wall Street. Red Granite and DOJ agreed to extend the deadline to file claims and statements of interest by other third parties. In October, the Directors Guild of America, Screen Actors Guild – American Federation of Television and Radio Artists, and other associations representing workers in the film industry filed a claim on behalf of residuals payments that they would receive for distribution of the film. At the end of October, Judge Dale Fischer granted an extension of the time to answer the initial complaint for the film industry association and Red Granite claimants until November 28, 2016.
The case is still early in its development. It is notable, however, that the only claimants relating to the assets at issue are Red Granite, the film industry associations, and 1169 Hillcrest Road LLC, which owns property in Beverly Hills.
It is also notable that other law enforcement agencies continue to investigate 1MDB and the scandal’s connection to their jurisdictions. There are law enforcement probes on going in Luxembourg, Switzerland, the United Kingdom, Australia, and Singapore. The Singaporean government, in particular, already seized $177 million of assets linked to 1MDB and continues the investigation into Jho Low.
The case is as notable for the amount of funds at issue as it is for the alleged dramatic and flashy style in which those funds were spent. The actions of law enforcement also will serve as a test case to see how regulators will be able to unwind the complex fact pattern and work across borders with their counterparts in order to deter these financially sophisticated schemes. The 1MDB scandal promises to be a focus of Malaysian politics, international corruption regulators, and financial asset managers for years to come.