Singapore banker and PEPs emerge in the 1 Malaysia Development Berhad Scandal

The 1 Malaysia Development Berhad Scandal (1MDB) is a continuing local political scandal which has the attention of international securities regulators and law enforcement. Police in Switzerland, the United States, Europe, Middle East and Asia are investigating transfer of funds by politicians and associates, politically exposed persons (PEPs). 

In 2015, Malaysia's Prime Minister, Najib Tun Razak, was accused of receiving political donations of $680 million from 1MDB to his personal bank accounts which are held in a number of jurisdictions. The international investigations raise issues of suspected corruption, dishonest management of public funds, "lost" funds and money laundering as Malaysia faces an upcoming election.

Last week, serious concerns emerged as Singaporean authorities moved quickly to freeze millions of dollars in accounts of a private banker employed by Swiss bank, BSI. Their fear is the banker was used as a conduit for the transfer of 1MDB funds on behalf of other parties. 

More recently, investigations have started in Abu Dhabi where one of the largest sovereign wealth funds is trying to find how $1.4 billion "vanished." Some months ago there were moves in the Middle East to "bail-out" 1MDB; it is unclear how it will emerge from an $11 billion dollar shortfall as government agencies circle.

Background to IMBD international probe

Numerous authorities and banks are trying to find and retrieve funds. The 1MDB scandal has tested Muslim banking arrangements that were built on close relationships of trust with institutions within a majority of Muslim countries including Saudi Arabia and UAE. It has also raises the issue of compliance with Financial Action Task Force guidelines in relation to opening accounts for PEPs and their associates. 1MDB has an estimated $11 billion debt and involves the issue of securities by some international banks such as Goldman Sachs and a range of banks in the Middle East.

Singapore banker at the centre

Last week, private banker, Yak Yew Chee, had S$9.7 million in his accounts, frozen by the Singapore Supreme Court, at the request of the Commercial Affairs Department (CAD) and the Monetary Authority of Singapore (MAS). The CAD and MAS, made an announcement that they were investigating a large number of bank accounts in relation to 1MDB. 

The Supreme Court froze the S$9.7 million in Singapore but allowed Chee to remit S$1.7 million from money held in another jurisdiction to pay fees to the Commercial Bank of China. The court said it had no authority to make orders in respect of funds held in another jurisdiction.

Chee handled the lucrative 1MDB account after he joined Swiss private bank, BSI, in Singapore in 2009. He was suspended last year while BSI investigated him for alleged misconduct, according to Supreme Court documents. They did not disclose details of the internal probe.

Abu Dhabi is looking for "vanished" funds

The 1MDB scandal has rocked the second largest investment fund in Abu Dhabi where more than $1 billion has vanished in a 1MDB investment bond transaction. The Gulf Emirates International Petroleum Investment Company (IPIC) is trying to find how $1.4 billion dollars was invested with 1MDB in circumstances were proper procedures may not have been followed and when the 1MBD fund is carrying losses of $11 billion. Two IPIC officials have left without explanation and Deloitte, which audits 1MDB, is making enquiries into the $1.4 billion payment from IPIC. IPIC's investigation is part of a wider Abu Dhabi audit of institutions and banks tangled up with payments from banks to 1MDB of more than $675 million. 

Due diligence requirement from FATF

The question 1MDB has raised in Asia and internationally is that there appeared to be a complete lack of due diligence when bankers opened accounts and received transfers from 1MDB.

The FATF defines a PEP as an individual who is or has been entrusted with a prominent public function. Due to their position and influence, it is recognised that many PEPs are in positions that potentially can be abused for the purpose of committing money laundering offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing. 

The potential risks associated with PEPs have the application of additional anti-money laundering/counter-terrorist financing (AML/CFT) measures with respect to business relationships with PEPs. FATF Recommendations 12 and 22 addresses these concerns requiring countries to ensure that financial institutions and designated non-financial businesses and professions (DNFBPs) implement measures to prevent the misuse of the financial system and non-financial businesses and professions by PEPs, and to detect such potential abuse if and when it occurs. 

Concerns and non compliance with FATF

1MDB's ability to open accounts internationally with numerous banks raises the question of what due diligence international banks and institutions undertook given the high level political individuals and associates they are dealing with. It also raises questions in relation to what degree the FATF guidance concerning PEPs was considered given the "lost" billions of dollars channelled from Malaysian state companies to overseas banks and then transfers of millions of dollars to 1MDB. 

The investigations from Swiss authorities and U.S. agencies reveal a chessboard of bank accounts of 1MDB entities from Switzerland to the British Virgin Islands and Singapore. These accounts, or how they were opened, reveal the emerging risks banks have when dealing with PEPs or connected entities. Regulators and legal authorities will want to know the steps taken to comply with the FATF guidelines, the level of enhanced due diligence when they interview Chee and senior officials at BSI. 

Final comments

As Malaysia faces elections, Razak has to deal with continued accusations and there have been calls from his political opponents for a judicial review of his involvement. 

International enforcement agencies are proceeding with their investigations in trying to find the missing pieces of the multibillion dollar jigsaw puzzle. In doing so, they may question the appropriate degree to which financial institutions have applied FATF guidelines in relation to opening accounts for PEPs and their associated entities and understanding the underlying investment. 

There are many moving parts which may take years to resolve. Funds have "vanished" in circumstances were numerous PEPs were involved and where government agencies and institutions appear to have no answers and little idea what happened to billions of dollars of client funds.
 

 

  • Niall Coburn is the Asia-Pacific regulatory intelligence expert for Thomson Reuters. He is a barrister and former director of enforcement at the Dubai Financial Services Authority and senior specialist adviser to ASIC. He is based in Brisbane, Australia.