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The money trail

12 April 2016 By Una Galani

Wall Street banks played a key role in helping a Malaysian sovereign fund raise and move money, much of which went missing. That is a key takeaway from a damning 106-page report by a bi-partisan parliamentary committee into the goings-on at 1Malaysia Development Berhad. The report, which highlights over $4 billion in suspect payments, shows how Deutsche Bank, JPMorgan, and Goldman Sachs had their fingerprints all over the disgraced fund.

Goldman has long been at the centre of the controversy surrounding 1MDB, where Malaysian Prime Minister Najib Razak remains chairman of the board of advisors. The firm pocketed eye-popping fees arranging three bond deals between 2012 and 2013 that raised $6.5 billion for the fund. At its client’s highly unusual request, Goldman even arranged to send almost half the proceeds to a small Swiss private bank.

Now the Malaysian report has cast a spotlight on other lenders as well. It shows that 1MDB PetroSaudi, a joint venture of the fund, received $300 million in a JPMorgan account in 2009. Separately, the report suggests that a 1MDB PetroSaudi account was moved to the U.S. bank without the full knowledge of the fund’s board.

The parliamentary committee also found that, even after the controversy around Goldman’s deals, Deutsche went on to arrange two further loans worth a total of $1.23 billion for the already indebted fund in 2014. Deutsche extended the two loans shortly after it hired Yusof Yaacob from Goldman as its chief country officer for Malaysia.

Those deals proved messy too. Creditors subsequently worried about the collateral supporting one of the loans Deutsche arranged. 1MDB repaid it early by borrowing $1 billion from Abu Dhabi’s International Petroleum Investment Company. The Malaysian fund now owes at least $4.5 billion to IPIC and must transfer assets of the same value to its Gulf counterpart by the end of June. Deutsche, Goldman and JPMorgan all declined to comment on the report’s findings.

Crucially, some of the funds that the banks helped raise for 1MDB ended up at an entity incorporated in the British Virgin Islands, which the report says received $3.5 billion. It has a similar name to an IPIC subsidiary called Aabar. IPIC finally admitted on Monday that the vehicle that received the money was not part of the group. 1MDB pointed out that it was “curious” that the Abu Dhabi group waited so long to make that clear, suggesting the relationship between the two sides has soured.

Ultimately, the report paints a picture of banks working side-by-side with 1MDB as it accumulated worrying levels of debt and became the subject of growing controversy which, in the words of the Swiss financial regulator, looks like a case of “blatant and massive corruption”. U.S. authorities have asked the banks to provide details of their dealings with the fund. At the very least, the 1MDB money trail will leave parts of Wall Street red-faced.




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