Picasso, diamonds and gambling – where are things up to on the 1MDB scandal?

1Malyasia Development Berhad (“1MDB”) has made international headlines again with international celebrities continuing to be embroiled in the scandal.

We thought this was a good opportunity to re-cap what brought this to the headlines and the current state of play.

What is 1MDB?

1MDB is a Malaysian-based company, wholly owned by The Minister of Finance Incorporated (a Malaysian government entity). Its mission is to “drive sustainable economic development” in Malaysia, focussing on areas such as energy, real estate, tourism and agribusiness – with a broad spectrum of projects.

It has also been the subject of a number of allegations of corruption and money laundering associated with its assets.

US court proceedings

In July 2016, the government of the United States (“US”) filed a complaint for forfeiture in the United States District Court for the Central District of California. The complaint was in respect of the movie the “Wolf of Wall Street” and related profits, royalties and distribution proceeds as well as other assets.

The court documents alleged:

“…multiple individuals, including public officials and their associates, conspired to fraudulently divert billions of dollars from 1MDB through various means, including by defrauding foreign banks and by sending foreign wire communications in furtherance of the scheme, and thereafter, to launder the proceeds of that criminal conduct, including in and through U.S. financial institutions. The funds diverted from 1MDB were used for the personal benefit of the co-conspirators and their relatives and associates, including to purchase luxury real estate in the United States, pay gambling expenses at Las Vegas casinos, acquire more than $200 million in artwork, invest in a major New York real estate development project, and fund the production of major Hollywood films.”

The Wolf of Wall Street was a movie produced by Red Granite Pictures – a movie production company co-founded by Riza Aziz, the stepson of Malaysian Prime Minister Najib Razak.

International regulatory action

A number of stakeholders have become embroiled in regulatory action in connection with 1MDB. The following chart illustrates some key examples:

Our alert on the BSI Bank branch shutdown is available here.

Why is 1MDB making headlines recently?

On Thursday 15 June 2017 the US Justice Department filed a new suit identifying further assets linked to 1MDB, bringing the assets subject to the action to almost US$1.7billion.

The new filing includes the following links to celebrities:

  • Australian model Miranda Kerr is alleged to have been given a $1.29million 11.72-carat heart-shaped diamond by Low Taek Joh (Jho Low), a Malaysian business man involved in the creation of 1MDB and identified as having significant control over its dealings. The funds used to purchase the diamonds are alleged to be traceable to misappropriated assets from 1MDB; and
  • Leonardo DiCaprio is described as receiving multiple gifts which had allegedly been acquired through misappropriated funds. This includes a painting by Pablo Picasso, movie memorabilia and other artwork as well as gambling using the account of Jho Low.

Some food for thought

#1 If it’s too good to be true…

For celebrities and other well-connected people, the scandal is an evident lesson in accepting diamonds and precious artwork from acquaintances with a degree of scepticism lest your name become associated with a money laundering scandal.

#2 More companies are adopting AML/CTF controls

Due diligence, in this respect, is not just for financial institutions. For example, many of our clients are adopting controls and contractual protections to guard against reputational risks, and compliance with general obligations to avoid dealing with the proceeds of crime, terrorist financing, breaching sanctions etc.

These include:

  • precious metals and precious stones dealers;
  • large multinationals and corporate groups;
  • telecommunications providers;
  • extractive industries;
  • pharmaceutical and chemical companies; and
  • manufacturing and shipping companies.

There are numerous reasons for adopting these sorts of controls. For example, we’ve published recent alerts on issues such as dual-use goods and anti-slavery issues.

#3 The financial sector is still being held to the highest standard

For the financial sector, the 1MDB scandal highlights the underlying rationale for higher due diligence when dealing with politically exposed persons as well as the importance of understanding source of funds and identifying suspicious transactions more generally.

There are, of course, limits. For example, financial inclusion remains high on the agenda in Hong Kong, as illustrated in our September 2016 alert.

#4 More is on the way

We expect more fall-out from the 1MDB scandal from a range of angles, including police and regulatory prosecution.

In addition, the global standard setter, the Financial Action Task Force, is continuing to shape legal and regulatory expectations. This includes the large number of reforms slated for Hong Kong over the coming months, which we summarised in our May 2017 alert.   Fines also continue to increase across Asia-Pacific region: see here for a snapshot of just a few.

Note: This post is based on public information and is not advice. Please contact us if you have any queries.

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