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Lessons from 1MDB

Learning from 'world's largest kleptocracy'

Members of the board of 1MDB — a Malaysian federal strategic investment fund — and top Malaysian government officials plus private citizens allegedly illegally syphoned and laundered billions from the fund. Here’s how they escaped controls and lined their pockets.

1Malaysia Development Berhad (1MDB), the Malaysian sovereign wealth fund described by then-U.S. Attorney General Jeff Sessions in December 2017, as “kleptocracy at its worst,” started off as a “Malaysian strategic development company,” according to its website, which has since been shut down. At the very core of the 1MDB scandal was the “less than satisfactory corporate governance and internal controls,” as reported by the former Malaysian Auditor General Ambrin Buang in the 1MDB audit report. The result? 1MDB officials illegally drained and laundered billions from the fund “through a complex web of opaque transactions and fraudulent shell companies with bank accounts in countries ranging from Switzerland and Singapore to Luxembourg and the United States,” according to Sessions.

It all began in February 2009 with the incorporation of the Terengganu Investment Authority, a state-owned sovereign wealth fund. Soon after, 5 billion ringgit (about US$1,217,450,000) was raised from a bond issue. By the end of July 2009, the federal government had taken over the Terengganu Investment Authority and subsequently renamed it 1Malaysia Development Berhad. Henceforth, the Ministry of Finance wholly owned 1MDB, and made it a federal strategic investment fund that invested billions of ringgit in Malaysia’s energy, real estate and hospitality sectors. (See 1MDB: Giant ponzi scheme or strategic investment fund? by Jose Barrock, Kinibiz Online, March 26, 2013.)

1MDB was structured like a typical Malaysian publicly listed company with a board of directors and was subject to domestic regulators such as the central bank and the securities commission. However, 1MDB wasn’t a typical Malaysian publicly listed company. As a company wholly owned by the Ministry of Finance it was required to have a board of advisors chaired by the finance minister. Despite having more corporate governance mechanisms than publicly listed companies, the breakdown of these mechanisms contributed to executive fraud at 1MDB.

This article studies the 1MDB scandal from the perspective of the “Crime Triangle of Routine Activity Theory” — an environmental criminology theory — and focuses on its board of directors and board of advisors plus Malaysian regulators and law enforcement agencies. The underlying rationale of environmental criminology is that the immediate environment is a key determinant of human behavior. As such, each crime is a result of the interaction between people and the situations they’re in. (See the book, Environmental Criminology and Crime Analysis, by Richard Wortley and Lorraine Mazerolle, Social Science, 2008.)

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