Accessories To Kleptocracy
I have previously described how the professional classes, especially in finance, accounting, and law, willingly conspire with transnational crime syndicates in an orgy of corruption. Relatedly, Global Witness just released an incredible analysis of just how those professional classes abetted the embezzlement of billions of dollars by helping launder those billions through the global financial system in one of the largest financial frauds in history.
1Malaysia Development Berhad (1MDB) was a Malaysian government-run strategic development fund that was used by the Malaysian Prime Minister, his family, and friends as their own personal piggy bank. From the beginning, even the way the 1MDB was originally funded was suspect. In the wake of the financial crisis, Goldman Sachs was looking to expand its presence in Asia and, in the course of a couple of years, helped 1MDB raise nearly $6 billion. Goldman’s fee for those deals were unusually high, the firm was also in the unique position of being an adviser and financer to 1MDB, and those running 1MDB had little experience in investing the rather large sums to be raised. In addition, an outside analyst told Goldman that 1MDB was vastly overpaying for its initial investment. In other words, the whole deal should have been a red flag for Goldman. Yet the company persisted in consummating the deal. Goldman’s partner on the deal kept Goldman’s senior management, including Gary Cohn and Lloyd Blankfein directly informed of the its progress. When the embezzlement scandal finally broke, that Goldman partner subsequently pled guilty to money laundering and bribery in connection with bringing the 1MDB deal to fruition.
Of that $6 billion originally funded, it appears that about $4.5 billion was embezzled from the fund by the Malaysian Prime Minister and his cronies. The Global Witness reports delineates all the many firms that helped launder that $4.5 billion and illustrates the mere lip service that financial firms, lawyers, and accountants pay to anti-money laundering regulations.
The Malaysian embezzlers first found willing accomplices in two other foreign firms, a Saudi oil company, Petrosaudi, and an Abu Dhabi sovereign wealth fund, Aabar. Those two companies helped provide the fraudulent investment opportunities through which 1MDB monies could be transferred to seemingly unrelated accounts that were actually controlled by the Malaysian embezzlers.
Of course, transfering that money out of 1MDB to accounts controlled by those individuals is exactly what the global anti-money laundering (AML) system was designed to prevent. But just as Goldman was there to help fund 1MDB, other banks, both reputable and relatively unknown, were there to enable the embezllement. Those banks include RBS Coutts, Standard Chartered, and two lesser known Swiss banks, BSI and Falcon. All of these banks ignored serious AML red flags and kept on processing transactions for the embezzlers simply because it was too lucrative to pass up.
These were not sophisticated scams and the banks were well aware of what was going on. An email from the RBS Coutts compliance team stated “It would be the first time in my career that I would see a case where [in] an agreement over the amount of $600 million or so the role of the parties has been confused”. The firm’s legal team described the explanations about the beneficial owners of one of the embezzler’s accounts as a “total fabrication”. The CEO of Falcon Bank also questioned the ownership of accounts at his bank, telling his Singapore branch manager, “the rest of the documentation, which our friend in Malaysia has delivered is absolutely ridiculous, between you and me…This is…gonna get everybody in trouble. This is done not professionally, unprepared, amateurish at best. The documentation they’re sending me is a joke…if anybody just looks at it remotely, this is going to be all over the place…if any other bank just make ‘peep!’ and this gets reported,…we are gonna have a huge problem”. The bank still went ahead and processed these transactions when the CEO was overruled by the chairman of the bank. BSI went even further, offering a series of investment funds that could be used to launder the 1MDB money to the Malaysian embezzlers and then providing fraudulent valuations in order to help 1MDB hide the fact that funds had been embezzled.
Most Americans are surprised to learn that the US is now a premier haven for tax evasion and money laundering, although the Trump campaign and presidency has perhaps raised some awareness of the problem. Having championed the creation of the global AML system and the Common Reporting Standards (CRS) which is its backbone, the US refused to join the CRS, instead remaining on the US version called FATCA from which CRS was derived. But there are serious holes in FATCA, including the fact that accounts opened by lawyers on behalf of their clients are never really vetted. Banks only have to run AML checks on the law firm and the law firm is under no obligation to vet the actual beneficial owner of the account.
Shearman and Sterling is a top notch, white shoe, New York law firm. Yet the Malaysian embezzlers were able to use accounts set up by Shearman to purchase numerous luxury properties around the US and in London. Those accounts were also used to pay for private jet and boat rentals as well as gambling debts. One New York lawyer described the amounts deposited in the Shearman accounts as “ridiculous” and clearly requiring greater scrutiny.
Meanwhile, as billions were being sucked out of 1MDB, one “Big Four” accounting firm after another would come in and provide the firm with a clean bill of health. EY, formerly Ernst & Young, was the first. It audited 1MDB’s first big deal in which $1 billion was actually embezzled but was unable to find any documents “that showed the actual ownership of the joint venture, or information about the assets it held”. When it raised this issue with 1MDB, the company terminated its contract with EY and turned to KPMG. Remarkably, KPMG signed off on 1MDB’s accounts within one month of coming onboard and provided the firm with a clean bill of health in the subsequent two years. KPMG may have been deceived during this time by the fraudulent valuation of a 1MDB subsidiary provided by the Swiss bank BSI. Finally, in 2013, KPMG asked for documentation on that valuation. When that documentation was not forthcoming and KPMG pressed 1MDB for it, their contract was also terminated. In stepped Deloitte, and based on the exact same fraudulent valuations that had caused KPMG concern, Deloitte signed off on 1MDB’s accounts for the next two years. Deloitte was also misled by a serious of circular transactions that mimicked the flow of funds the investment fund would normally see. In fact, the same billion dollars was recycled through various entities controlled by the embezzler’s five times in order to project a false appearance of activity.
Every step of the way, the Malaysian embezzlers were abetted by professionals in the banking, legal, and accounting fields. Those professionals either ignored the laws and regulations or willfully turned a blind eye in order to bank lucrative fees. More importantly, these individuals did so with the knowledge that they were extremely unlikely to be held responsible for what they did. As the head of the Monetary Authority of Singapore stated, “In my view, that’s one of the failings of our current regime globally – that people continued to do wrong things because they are not being held personally liable and responsible”.
And this is hardly a victimless crime, either. Those original bonds that were sold by Goldman and funded 1MDB were backed by the government of Malaysia. That means that the citizens of Malaysia are on the hook to pay back the billions embezzled from 1MDB, currently estimated to be more than the country’s entire health care budget. And the Malaysian PM used some of those embezzled funds to bribe support in his 2013 re-election campaign, corrupting the democratic process.
The current global AML system is really a farce. It is estimated that it catches just 1% of the ill-gotten funds that are laundered through the global financial system. Often, a bank can relieve itself of responsibility simply by reporting a suspicious transaction to the authorities and then continue servicing that account. The system relies far too much on the assumption the professionals involved in it will act appropriately and ethically, despite the enormous sums to be made by abetting its abuse. And, as the situations at RBS and Falcon illustrate, even those in these firms who want to act ethically are often overridden by their superiors.
There is no real accountability. So far, all of the firms mentioned above, with the exception of BSI whose actions were so egregious it was shuttered by Swiss banking authorities and Falcon whose banking license in Singapore was revoked, simply paid their fines and continued with business as usual, promising to do better. But the rewards both monetarily for the firm and individually for the specific professional involved combined with that lack of accountability only encourage becoming accessories to kleptocracy. I suggest you read the whole Global Witness report as my description does not nearly do it justice in describing the porousness of the global AML systems and the greed and mendacity of everyone involved.