Insight
It’s been ten years since the Wall Street Journal reported that the Prime Minister of Malaysia, Najib Razak, had received some US$700m into his own bank accounts from 1Malaysia Development Berhad (1MDB), the Malaysian Sovereign Wealth Fund.
1MDB started out as a development fund specifically for Terengganu state and was acquired by Najib when he first became Prime Minister of Malaysia in 2009. He was supported in this endeavour by Jho Low, a Malaysian businessman and expert networker who established wealthy connections in the United States and Middle East. The follow-up court cases in multiple jurisdictions have determined that funds intended to support Malaysia’s development were redirected and spent on high value goods including art and jewellery as well as real estate.
1MDB is a good (ish) news story from the point of view of international cooperation. Countries like the US and Singapore have successfully recovered and returned over a billion dollars to Malaysia. Cyprus revoked Low’s Cypriot passport, while an Australian fund manager which managed 1MDB funds has been liquidated. Funds in a Credit Suisse branch in Hong Kong have been linked to 1MDB, while Luxembourg, the Seychelles and Switzerland have all commenced investigations into corporate structured linked to 1MDB in their jurisdictions.
In late 2024, the now insolvent 1MDB commenced legal proceedings against Amicrop Group in the British Virgin Islands, accusing the corporate services provider (and its CEO personally) of facilitating billions in fraudulent transactions over a five year period.
The 1MDB setup was complex and sophisticated and a financial crime analyst in any single bank would be unlikely to put a jigsaw like this together, but as the fallout from 1MDB rumbles on, there are some key controls you can check to ensure you understand your customers, giving you the best chance of conducting valid smell tests.
Does that PEP’s source of wealth make sense? No, really though, does it? Many banks banked Najib and Low, not to mention the other PEPs and RCAs involved across multiple jurisdictions. If your PEP EDD is a tick-the-box, you’re unlikely to have the depth to know when something is off.
The Neverending Story of misuse rears its head again. When you see a structure chart full of high-risk jurisdictions, are you asking why they’re being used? Do you assume it’s about tax efficiency, or do you ask the questions? How sure are you that the UBO is in fact the UBO, and not just a paid nominee?
Private and wealth banking have the benefit of close relationships with their customers. Does the source of wealth make sense and have we verified it? Do transactions make sense? Is there even one unusual inbound or outbound? Depth and breadth are vital to KYC on ultra-high net worth individuals, and much like PEP EDD, ticking the boxes isn’t enough anymore.
If you bank SWFs, you should do some KYC and Know Your Country. What’s the background to the SWF? What are its governance processes? Who’s auditing? Can we locate its reports and filings? Can deals be validated by checking partners through OSINT, and can we track investments to their finalisation? Does it all look too good to be true?
It’s not all about the customers. 1MDB made it clear that a firm’s internal processes need to be top notch. Oversight of senior staff, internal bribery and corruption checks, internal fraud reporting and strong compliance cultures are not nice-to-haves. They’re 100% necessary to protect your firm.
One single transaction is unlikely to unwrap a scandal like 1MDB, but keeping an eye on transactions means your firm can spot the outliers and see when customers deviate from their own behaviour and the behaviour of peers who have traditionally been similar. This offers a chance to see unusual activity and consider if it makes sense or not.
Doing a controls review, and critically looking at these ones in particular, doesn’t mean that your due diligence teams will find the next 1MDB. But it does mean you have a stronger chance of understanding unusual activity and reporting it as necessary. It’s possible that several SARs filed by banks through the early years of 1MDB have helped law enforcement internationally to recover the funds— and that’s what it’s all about.
If you bank high risk customers with global links and want fresh eyes on controls like these, drop us a line at DCM and find out how we can help.
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