Malaysia 1MDB scandal
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Former Malaysian prime minister Najib Razak after being convicted in July 2020. Photo: AP

Explainer | How 1MDB corruption scandal changed Malaysian politics

  • Former prime minister Najib Razak faces a lengthy jail sentence after being convicted in July 2020 for his role in the scandal
  • The US Department of Justice alleges US$4.5 billion was siphoned from the 1MDB state investment fund between 2009 and 2014

This explainer was updated in August 2020 after Malaysia’s former prime minister Najib Razak was convicted in July 2020 of seven charges arising from his involvement in the multibillion-dollar 1MDB scandal.

Najib was convicted on July 28, 2020 of one charge of abuse of power, three charges of money laundering and three charges of criminal breach of trust, completing a dramatic fall from grace for a man who led his country from 2009-18. During his years in charge, some US$4.5 billion was looted from the state investment fund. He was sentenced to 12 years in prison and fined US$49 million, derailing any immediate plans for a political comeback.

Although Najib has appealed and faces four more trials stemming from his role in the misappropriation of 1MDB funds, his conviction began to close the loop on a long-running saga of vast financial corruption and self-dealing that drew the gaze of the world to Malaysia.

Najib inherited a political legacy from his father and uncle who both served as prime ministers before him. Now, that legacy is in ruins. Instead he will be remembered as the face of a scandal that upended Malaysian politics, rupturing and remaking its shifting coalitions.
Former Malaysian Prime Minister Najib Razak and his wife, Rosmah Mansor. Photo: AP

How the 1MDB scandal happened

After becoming prime minister in 2009, Najib established the state-owned investment firm 1MDB as part of the government’s Economic Transformation Programme. He was also chairman of the fund and Malaysia’s finance minister.
For years, the operation of 1MDB attracted scrutiny for a lack of transparency but the criticism intensified in 2015 after leaked documents gave rise to allegations of fraud, followed by a Wall Street Journal report that US$700 million had been transferred from 1MDB to Najib’s personal accounts.

Najib’s government sought to quash investigations by the Malaysian Anti-Corruption Commission (MACC) despite five other countries, including the US, opening their own probes.

1MDB conviction: will Najib’s Umno party stand by him?

Facing criticism over the misappropriated funds, Najib in July 2015 began a purge known as “the week of long knives”, sacking several detractors, including deputy prime minister Muhyiddin Yassin, attorney general Abdul Ghani Patail and four other ministers.

During 2016 and 2017, the US Department of Justice (DOJ) filed forfeiture complaints alleging US$4.5 billion was siphoned from 1MDB between 2009 and 2014 and laundered in multiple jurisdictions including Singapore, the US and Switzerland.

Both Malaysia and the US concluded 1MDB funds were used by those involved in the fraud to buy property, jewels, a super yacht, a private jet – and even fund the Hollywood film The Wolf of Wall Street .
Financier Jho Low. Photo: SCMP Pictures

Who is Jho Low?

Financier Low Taek Jho, also known as Jho Low, was accused of masterminding the fraud. Low and two former Goldman Sachs bankers have been charged by the DOJ with money laundering in connection with 1MDB. Low has also been charged with engaging in a criminal conspiracy. He has gone into hiding but is wanted by several countries. Low has denied any wrongdoing.
Malaysian police have said Low may be hiding in the semi-autonomous Chinese city of Macau – but Beijing has denied the suggestion, insisting it does not harbour foreign criminals.

Low’s whereabouts have long been the subject of speculation, and he has been rumoured to be in other locations, including the United Arab Emirates.

He faces pending criminal cases in the US – for conspiring to violate the Foreign Corrupt Practices Act and for conspiring to make and conceal “foreign and conduit” campaign contributions in the 2012 US presidential elections.

Hong Kong, Shenzhen also harbouring 1MDB fugitives: Malaysia police

The DOJ said it had recovered US$1 billion in funds from Low, including “high-end real estate in Beverly Hills, New York and London; a luxury boutique hotel in Beverly Hills; and tens of millions of dollars in business investments that Low allegedly made with funds traceable to misappropriated 1MDB monies”.

Among the items of property linked to Jho Low that have been forfeited are: the yacht Equanimity, which has since been sold to the casino operator Genting for US$126 million; a penthouse in the Time Warner building in New York, worth US$31 million; a mansion in Los Angeles, worth US$39 million; and a bungalow in Penang, Malaysia, worth US$11.7 million.

The various 1MDB trials have heard that Low referred to Najib as “Optimus Prime” in some correspondences; Low allegedly referred to himself as ‘FL’ in some chats, apparently a shorthand for the Cantonese expression “Fei Lou”, or Fat Boy.

How was Goldman Sachs involved?

Malaysia charged the investment bank in December 2018 for its role in underwriting and arranging bond sales that raised US$6.5 billion for 1MDB in 2012 and 2013. The bank earned US$600 million for its service.
The firm’s CEO David Solomon apologised to Malaysia for the role played by former employee Tim Leissner in the scandal. Leissner, a former partner for Goldman Sachs in Asia, pleaded guilty in the US to conspiring to launder money and violate the Foreign Corrupt Practices Act. He was banned for life from the securities industry and gave up ill-gotten gains of US$43.7 million as part of his settlement.
The Malaysian government rejected the apology and sought US$7.5 billion in reparations from the bank.
Roger Ng, another former Goldman Sachs employee facing charges, was arrested by Malaysian authorities. He was extradited to the US, where he pleaded not guilty to allegations he conspired to launder money and bribe government officials in Malaysia and Abu Dhabi through bond offerings that Goldman Sachs handled.
In July 2020, the bank agreed to pay the Malaysia government US$3.9 billion to settle the criminal probe over its role in the scandal. As part of the deal, Malaysia agreed to drop criminal charges against Goldman Sachs, which denies any wrongdoing.

How it changed Malaysian politics

In May 2018, Najib’s administration suffered a stunning election defeat when former prime minister Mahathir Mohamad, running on an anti-corruption platform, ended the ruling Barisan Nasional coalition’s 60 years in power.
Upon his return to office, Mahathir, who previously led the country 1981-2003, barred Najib and his wife, Rosmah Mansor, from leaving the country and reopened the probe into 1MDB that had been halted under Najib’s rule.

Properties belonging to Najib and Rosmah were raided by police and luxury items worth about US$270 million were seized, including 1,400 necklaces, 567 handbags, 423 watches, 2,200 rings, 1,600 brooches and 14 tiaras.

Following his arrest in September 2018, Najib protested his innocence, claiming the funds were donated to him by Saudi Arabia’s royal family and that the luxury items were mostly gifts to his wife and daughter.

Mahathir launches new party as Malaysia’s power struggle intensifies

Rosmah, whose spending drew comparisons to Imelda Marcos and made her a hate figure in Malaysia, faces 17 counts of money laundering although her trial was put on hold as Najib’s prosecution was given priority.

The upheaval in Malaysian politics did not end with Mahathir’s return and Najib’s exit. In February 2020, a period of infighting over the planned handover from Mahathir to Anwar Ibrahim and the make-up of the ruling coalition came to a head.

Najib’s party, the United Malays National Organisation (Umno), had been weakened by the election loss and tainted by the IMDB scandal. Mahathir and Anwar were determined to prevent Umno figures, including Najib, returning to positions of influence but other power brokers within their ruling Pakatan Harapan coalition disagreed.

After a week-long stand-off over who had the support of parliament, Muhyiddin Yassin, who had served as deputy prime minister under Najib, emerged from the wreckage as Malaysia’s eighth prime minister, leading a government that relied on Umno support.
Former Malaysian prime minister Mahathir Mohamad. Photo: EPA

What next?

It remains to be seen whether Najib will serve time in jail, as he will have recourse to appeal the sentence in the country’s two highest courts. Although his conviction forestalls any immediate political comeback, an election is expected to be called in coming months and Najib remains influential within Umno and may still have a role in determining the party’s leadership and direction.
Najib’s successor as finance minister, Lim Guan Eng, has also been charged with corruption relating to a US$1.5 billion undersea tunnel project in Penang, which was approved during his 2008-18 tenure as the state’s chief minister. Each charge against him carries a potential punishment of up to 20 years in jail and a fine if convicted.

What are the China links in Malaysia’s graft charges against Lim Guan Eng?

Lim, who served in the reformist Mahathir government after the landmark 2018 elections, has pleaded not guilty and described the allegations as retaliation for Najib’s conviction.

“This is clearly a baseless allegation and politically motivated,” he said. “I will fight in court to prove my innocence.”

It suggests that although Najib’s conviction may have been the beginning of the end of the long-running 1MDB saga, the aftershocks could ripple through Malaysian politics for months or even years to come.