Originally it was an investment fund started with good intent, but as is often the case, when there are bad actors lurking just below the dollar bills, intent is replaced by theft. And so it is with Malaysian state fund 1MDB. At the outset, the fund was set up to help the Southeast Asian nation’s economic development, with a business model built on raising debt from across the world to acquire assets. On the fund’s webpage the mission statement is very clear, “to drive sustainable economic development by forging strategic global partnerships and promoting FDI.” Nowhere on the page is there any mention about purchasing high-end real-estate and hotels in New York, London, and Los Angeles, or for that matter artwork of Van Gogh or Claude Monet, or a 35 million dollar jet, but that’s exactly what has happened, among other things.
Recently, the opposition party has accused the current Prime Minister Mr. Najib Razak of raiding the fund for his own personal gain. Something he has denied doing. Interestingly though, in a civil forfeiture suit brought by the US Department of Justice on 20 July 2016 seeking the return of one billion dollars in assets acquired by misappropriated money, it mentions a person cryptically named as “Malaysian Official 1.” Through what appears to be an elaborate scheme of laundering money through offshore companies, $681 million mysteriously appeared in the prime minister’s personal bank account. He first insisted it was a donation from the Saudi Royal Family, though there is of course a question about that. What is very clear is that Malaysia, which was recently knocking on the door of developed market status, has just taken a huge step backwards. An article in the 15 April, 2016 edition of WSJ.com details the transactions in full.
So besides the country and its political system walking around with a black eye, it appears that certain investment banks and at least one international accounting firm is also involved in aspects of the transactions, and the cover-up. According to an article on Malaysiakini, accounting firm KPMG refused to sign off on 1MDB’s financial statements in 2013 because they were unable to authenticate a $2 billion investment in what they called “a dodgy investment fund parked in the Caymans.” Shortly after this, KPMG resigned as the company’s external auditors, and was replaced by Deloitte Malaysia where Najib’s first son – Nizar – is a partner.
In addition to the US, Malaysia also has seven other countries investigating the fund’s activities, so we haven’t seen the end of this yet. By the time it is resolved, the country will have to dig itself out of a hole of substantial proportions.
Malaysia has a lot going for it economically from natural resources, to being a global manufacturing hub. Recently GDP growth has begun to trend downwards from a high of 6.5% year-on-year in January 2014, down to 4.2% the first six months of 2016 mainly due to a significant decrease in investment and exports. According to the UNCTAD 2015 World Investment Report, Malaysia is the fifth largest recipient of FDI inflows in the world, and is one of the top 15 countries favored by multinational companies according to Santandertrade.com.
So it would behoove the political powers to resolve the 1MDB situation that stinks to high heaven, before it metastasizes and in the process scares away any and all future foreign investments.
Peter Kohli, CEO of emerging market specialist DMS Funds.