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When conducting business on a large, international scale, investigations and corporate intelligence are (or should be) par for the course. Relying on a company or personal reputation alone is unwise. Reputation itself is not enough for a smooth, safe business transaction. Investigative vetting, on the other hand, helps determine if a company or person is safe to do business with.
The 1Malaysia Development Berhad Scandal
An excellent example of what can happen when background investigations are not performed is the 1Malaysia Development Berhad (1MBD) scandal, one of the largest financial scandals of all time. Ongoing since 2015, the scandal began when Malaysia’s then-Prime Minister, Najib Razak, was accused of siphoning the equivalent of $700 million from 1MDB, a strategic development company run by the government.
1MDB was launched four months after Razak took office and was originally meant to finance infrastructure and make other economic deals in Malaysia. It raised billions of dollars in bonds between 2009 and 2013, supposedly to go toward those projects. Instead, the company veered off course, using funds to purchase casinos, expensive art, and financing The Wolf of Wall Street film.
Over several years, 1MDB accumulated nearly $12 billion in debt, not only due to lavish spending, but mainly because funds were siphoned off to personal bank accounts that were presented as legitimate business accounts. The US Department of Justice claims that approximately $4.5 billion was diverted to offshore bank accounts and shell companies.
In 2018, the newly-elected prime minister of Malaysia, Mahathir Mohamad, reopened the investigation. Razak was charged with criminal breach of trust, money laundering, and abuse of power. He was found guilty on seven charges and sentenced to 12 years in prison. Low Taek Jho, known as Jho Low, a Malaysian businessman and the alleged mastermind behind the entire fraud, was charged with money laundering. He fled the country and is now pursued by authorities in Malaysia, Singapore, and the United States as an international fugitive.
Goldman Sachs’ Involvement
In 2012, Goldman Sachs helped 1MDB raise funds, undoubtedly drawn to the company because of the mega-fees it stood to earn. The financial firm raised $6.5 billion for 1MDB in three bonds and made nearly $600 million in commissions, which critics point out is higher than standard for such deals.
In 2016, the FBI began investigating the relationship between Tim Leissner, a former Goldman Sachs superstar regional executive, and former Prime Minister Najib Razak. Leissner was charged with money laundering and corruption by the Malaysian government and pleaded guilty in the US to conspiracy relating to money laundering and bribery. Goldman Sachs was subsequently charged in a foreign bribery case and the company’s settlement included a payment of more than $2.9 billion to the US Department of Justice. The agreement allowed Goldman Sachs to dodge a criminal conviction.
What Went Wrong?
The 1MDB scandal shows that relying on an entity’s reputation is not enough. 1MDB had top connections and advisors, making it seem like a safe bet. However, digging a little deeper would show that everything was not as it seemed. Even a basic asset search would have shown that business accounts were actually personal accounts and that shell companies connected to 1MDB were used for fraudulent money transfers.
Frankly, Goldman Sachs had no business working with 1MDB. If it performed even a little due diligence, it would have discovered foul play, saving billions of dollars and its good name.
Interfor International offers innovative investigative and intelligence services in numerous specialties like tax evasion asset searches, corporate fraud, complex commercial litigation, and more. Our clients include Fortune 500 companies, major law firms, and sovereign governments.
Relying on reputation alone can lead to serious consequences. Performing due diligence and reputation inquiries can save a lot of money and potential legal troubles in the long-run.
For additional resources and guidance, the Interfor team is here to help.