Malaysian scandal engulfing leading global banks and politicians is far from done

The 1MDB scandal could prove to be one of the biggest, if not the biggest, corruption scandals in human history.

It’s a story more outrageous than any fiction – a Malaysian government owned development fund was allegedly used as a vehicle to embezzle billions. Much of the money turned up in the accounts of Malaysian Prime Minister Najib Razak and is believed to have helped fund his lavish lifestyle, including his wife’s collection of 567 designer handbags whose value dwarfs that of the famed shoe collections of Imelda Marcos.

Meanwhile, Najib Razak’s metaphorical bag man is widely held to have been Jho Low a well-known figure in Hollywood for his partying with celebrities including Jamie Foxx and Leonardo DiCaprio. Ironically, some money was even allegedly laundered via funding the film The Wolf of Wall Street. Popular outrage over the scandal was enough to cause the ruling Malaysian coalition to lose a general election last year, and lose power for the first time since independence in 1957. Despite flagrant gerrymandering, attempts to muzzle outspoken press outlets, and imprisonment of key opposition leader Anwar Ibrahim the government still lost to an opposition led by former Prime Minister Mahathir Mohamad who, now age 94, is the oldest democratically elected leader in the world.

Goldman Sachs has found itself profoundly implicated in the scandal. The American bank played a key role in helping 1MDB raise $6.5 billion in bonds, allegedl making some $600 million dollars in the process. Ex-Goldman Sachs bankers allegedly bribed Malaysian officials to secure the bank’s involvement in the bond issuance.

Now that the scandal has broken and the former Malaysian Prime Minister Najib Razak faces trial it seems that Goldman will also face sharp consequences. It has already offered the Malaysian government roughly $2 billion dollars in compensation over its role in the scandal, a truly astonishing sum considering this would be just under a fifth of its total net earnings in 2018. Even this will likely be not enough. The Malaysian government rejected the offer and demanded $7.5 billion in compensation for its losses. While there has been some indication that this is a starting figure open to negotiation Mahathir has also declared Malaysia will sue Goldman Sachs if talks over compensation fail. In addition, 17 former or current Goldman Sachs executives are facing criminal charges in Malaysia over misleading investors about 1MDB.

In the US the Department of Justice has already charged two former Goldman Sachs employees Roger Ng Chong and former top partner Tim Leissner over their role in the 1MDB scandal. Both have pled guilty.

Jho Low, who the DOJ claims worked closely with the two Goldman Sachs employees, has also forfeited $700 million in assets to settle claims of money laundering which Malaysia is now trying to claim. However, he still faces criminal charges in New York ties to the scandal.

The DOJ is expected to rely on Low and the two former Goldman Sachs employees to build a case against Goldman Sachs itself in the coming months. While some suggest this might result in plea bargaining that sees criminal charges dropped the Financial Times has reported that veteran prosecutors at the DOJ have recommended any settlement include a guilty plea at the parent company level. This would be the toughest penalty the DOJ could level against the investment bank.

Nor will this scandal end there. UBS and Deutsche Bank are also facing investigation by the Malaysian attorney-general for their role in the scandal.

Another bank, the Bank of Cyprus, has just been sucked in. It emerged this week that large sums of money were lodged in the bank by Jho Low without proper scrutiny. Low even gained Cypriot citizenship aided by the Archbishop of Cyprus who contacted ministers on his behalf saying investments in church lands had been promised.

This development may lead to further repercussions in the US as the current Secretary of Commerce Wilbur Ross was the bank’s Vice Chairman at the time. It is not difficult to imagine that this and a high-profile case against Goldman Sachs could have an important effect on US politics in the 2020 race. Left-wing populists such as Bernie Sanders and Elizabeth Warren who have made attacks on Wall Street central to their campaigns will find plenty in this that is grist to their mill. The Malaysian scandal will continue to reverberate, dragging certain big banks and Western politicians deeper into the mire.