MalaysiaThe Swiss Attorney General’s office declared that approximately $4 billion has been misappropriated from state-owned companies in Malaysia much of which originated from the Malaysian State Fund, named 1MDB. Using a network of intricate financial transactions, more than $1 billion was transferred from 1MDB into the Malaysian Prime Minister’s personal bank account between 2011 to 2013.  

The Malaysian Attorney General who was investigating the illegal use of public funds concluded that the money transfer into the Malaysian Prime Minister’s private bank account was a legal donation from Saudi Arabia’s royal family. The Saudi government officials, however, have publicly denied making any such donation. In the meantime, the Malaysian Prime Minister continues to serve as the chairman of the board of advisors to 1MDB.

Why Swiss Authorities

Swiss Attorney General’s Office have found evidence of unlawful money transfers linked to 1MDB relying on the Swiss banking system. Swiss officials became interested in suspicious financial activities around 1MDB because of concerns that their banking system is being used to bribe public officials, launder money, and other criminal activities.

The investigators allege that funds were transferred into private accounts using a web of complex financial transactions with the help of two senior former officials of a state-owned Abu Dhabi company called Aabar Investments PJS. Abu Dhabi is the largest of the United Arab Emirate’s (UAE) seven member emirates. It is also the capital of UAE.

Malaysian State Fund

Malaysia Development Berhad (1MDB) is a strategic development company, which is wholly owned by the Government of Malaysia, established to fund strategic long-term economic development projects through global partnerships and foreign direct investment. 1MDB Fund began as a sovereign wealth fund under the name “TIA” to propel economic development of one of the states of Federal Malaysia. In 2009, the Malaysian Prime Minister broadened TIA into a federal entity and renamed the wealth fund as 1MDB. 

What Transpired

  • In 2009, Aabar Investments PJS, a state-owned Abu Dhabi company, pledged to help 1MDB acquire power plants and build a finance center in Kuala Lumpur. Aabar Investments PJS is a fully owned subsidiary of International Petroleum Investment (IPIC), an Abu Dhabi sovereign-wealth fund. IPIC guaranteed billions of dollars of 1MDB bonds.
  • In 2012, to facilitate illegal wire transfer, about $1.4 billion was paid to Aabar Investments PJS Ltd, which was a company registered in British Virgin Islands with a name similar to Aabar Investments PJS but additionally had the word “Ltd.” This company was created by senior former officials of Aabar Investments and IPIC.  
  • The money was then moved from Aabar Investments PJS Ltd to Tanore Finance Corp., which was also registered in British Virgin Islands.
  • Among other bank accounts, Tanore Finance Corp. holds bank accounts in Singapore and an account in a Swiss private bank named “Falcon Bank,” which is owned by Abu Dhabi sovereign-wealth fund. Falcon Bank had business dealings with 1MDB. 
  • Via these various interconnected accounts, Tanore Finance Corp was able to  transfer funds from its bank account in British Virgin Islands, to a bank account in Singapore, to another account in a Swiss private bank where names are concealed, and then eventually to the Malaysian Prime Minister’s personal bank account.

Corruption and Economic Development

Corruption involves the abuse of entrusted power for private gain. Because of the concentration of entrusted power in politics, the most outrageous cases of corruption involve high level politicians. According to a “Corruptions Perception Index” constructed by Transparency International, where 1 is the least corrupt country, Malaysia is ranked 54th in corruption and UAE is ranked 74th.  

Emerging markets and less developed countries must rely on reputation to attract much needed private and public funds to spur economic development. Therefore, the costs to society from corruption in these countries are disproportionately higher than wealthier countries. Yet, much too often, the most egregious cases of corruption are confined to poorer countries. Because of the massive benefits of corruption, there are few incentives to institute legal and enforcement structures to confront corruption in poorer nations, which in turn hinders economic development.

The vicious circle of corruption!

March 5, 2016; 1.48P–sector.html

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