It is the biggest fraud to ever hit the South East Asian nation of Malaysia. ‘1MDB’ or 1 Malaysia Development Berhad is the state investment fund whose goal was to boost Malaysia’s economy through investments and infrastructure deals with various nations. One of these nations was the equally ambitious Saudi Arabia, who has made a concerted effort to reform and diversify its economy with today’s low oil prices.
The 1MDB fund was set up and formerly overseen by Malaysia’s Prime Minister Najib Razak. But things started to get messy when the fund started missing scheduled bond payments to creditors on the roughly $11 billion in debt it had racked up.1
Authorities soon raided the office of 1MDB, confiscating computers and files. Investigators concluded money was being stolen and redirected to various entities directly related to the fund. According to U.S. fraud officials, the diverted money was allegedly spent on a private jet, works of art, luxury properties, lavish Las Vegas gambling trips. Money was even used to help finance the ‘Wolf of Wall Street’ movie.2 The U.S. is looking to seize $1 billion of the fund, which they alleged engaged in financial mismanagement and misconduct.
That amount would still make up just 28% of the $3.5 billion total that was misappropriated.3 According to U.S. officials, $681 million was transferred to the Prime Minister from a Singapore bank account owned by Tanore Finance Corporation. Four months later, Najib transferred back $620 million to Tanore of it but that still leaves $61 million unaccounted for.4 The money from Tanore Finance allegedly originated from a $3 billion bond offering for 1MDB, underwritten by Goldman Sachs.5
The money from Tanore Finance allegedly originated from a $3 billion bond offering for 1MDB, underwritten by Goldman Sachs.5
It is also rumored that some public money was also used and subsequently stolen in the fraud. Not surprising, as news leaked out about the actions of their Prime Minister, the Malaysian people were up in arms. The court of public opinion certainly seems to be turning on Najib and a public referendum on Najib’s leadership is being proposed by rival party leaders. More importantly, the reputation of Malaysia’s business climate is at risk.
Still, Najib has denied everything and the Malaysian Attorney General is defending the Prime Minister. It should be noted that the former attorney general was fired by Najib for creating a special task force, the ‘Malaysian Anti-Corruption Commission’, aimed at investigating the 1MDB scandal.6
The Fraud Investigation
The investigation was undertaken by both the F.B.I. and I.R.S. and in addition to analyzing the standard bank transfer information, agents also combed through memos and internal emails in piecing together the fraud.7
The misconduct was apparently conducted with elaborate layers to conceal the transactions. Once again, the use of offshore entities was involved. “In some instances shell or unauthorized companies domiciled in various jurisdictions were used to conceal the true beneficiaries of the fund” according to the Monetary authority of Singapore.8
Standard Chartered’s Financial Crime Compliance
If you are one of the 87,000 employees of Britain’s Standard Chartered bank, you are probably ready for a vacation (rather, ‘holiday’).9 This is especially true if you work in the bank’s risk management or compliance departments.
The bank’s troubles started with the stunning Brexit vote which caught the world, especially the odds makers, off guard. Standard Chartered’s stock plummeted more than most during trading following the vote, ending down as much as 13% intraday.
Standard Chartered’s stock plummeted more than most during trading following the vote, ending down as much as 13% intraday.
But the British bank was already down big year to date, after the bank reported a full year loss- its first since 1989. And the Brexit vote only made things worse-stoking fears of reduced business in Europe, increased wholesale funding costs and less demand for credit (even though Standard Chartered focuses much of its activities in Asia). It was exactly that exposure to Asia that led to the earnings drought as commodity prices ravaged Asia’s economy, and Standard Chartered’s profits there. The British pound has also been hit hard which some economists estimate could restrict new lending.
Last week, Standard Chartered revealed it had assets frozen in certain commercial real estate funds. These funds quickly became very illiquid when investors started requesting redemptions and withdrawing their funds. Trading was soon halted in the fund and Standard Chartered, along with a handful of other banks, and their money essentially locked up as the fund couldn’t sell underlying assets quickly enough to meet these redemption requests.
Given its large presence in Asia, it’s no wonder Standard Chartered also became embroiled in the 1MDB scandal. Singapore fraud investigators revealed Thursday that Standard Chartered Bank displayed “weaknesses in the processes for accepting clients and monitoring transactions”.10 Soon, you can expect hefty fines coming Standard Chartered’s way for such deficiencies. Internal audits at Standard Chartered also uncovered “lapses and weaknesses in anti-money laundering controls”.11
The 1MDB investigation revealed other banks, including Falcon Private Bank, experienced breaches of anti-money laundering laws and a failure to report suspicious transactions.12 This is of paramount importance because often its operations personnel that are the first line of defense against financial crime. They typically see all the transactions coming in and out of accounts before anyone else.
The Need for Better Risk Management
Many finance professionals are realizing that fraud and money laundering are only increasing. As such, companies are willing to pay up for qualified fraud investigators, risk managers and anti-money laundering professionals considering the money at stake for such improprieties. These include not only the actual monetary losses but also punitive and reputational damages.
While it may seem like the media is a broken record with regards to the needs of tighter controls at financial institutions the message clearly needs to be repeated, since breaches continue with frequency. The United States may be ahead of most nations with regard to compliance and risk management procedures. But if their foreign partners aren’t as vigilant, these financial crimes should continue.
Often it’s something as simple as enforcing the “know your customer” rule, where bankers have a traditional meeting with prospective clients, or at the very least have adequate background checks while cross-checking databases for known aliases and DBAs (‘doing business as’) for entities.
We know that a disproportionate amount of money laundering occurs in the Caribbean, namely the British Virgin Islands, so restricting transactions to entities domiciled in questionable jurisdictions should be first and foremost for compliance and operations personnel.
Master’s in Financial Crime
If shining a light on this shadowy banking world intrigues you, consider it as a career. Job growth for auditors, fraud specialists and AML professionals should see strong demand over the next decade. These positions are in demand as companies are forced to staff these positions due to regulatory oversight.
Getting an advanced degree or certification can open the doors for employment opportunities in risk management, financial crime compliance and prevention and anti-money laundering (AML). Many universities offer convenient ways to earn your degree online while you’re busy working.
For example, Utica College offers an online Master’s degree in Financial Crime and Compliance Management which teaches students fraud and risk management techniques with an emphasis on global finance. This is important since so much financial crime stems from transactions done across borders. The degree prepares students for careers as fraud investigators, risk and compliance managers and auditors.
Utica also offers an online MBA in Fraud Management. The online Economic Crime and Fraud Management MBA teaches the detection and prevention of fraud, including forensic accounting techniques. An advanced degree puts professionals in line for managerial positions within organizations. And these managers can be well-compensated. The median annual salary for Fraud Prevention Managers is $83,830 according to Salary.com.13