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The scandal that is shaking Malaysia’s financial sector

Malaysia's prime minister Najib Razak, 1MDB, and several international banks are under scrutiny for alleged corruption and anti-money laundering violations.

August 01, 2016 | Amandeep Ahuja

The scandal surrounding Malaysia’s 1MDB state development fund is making an impact on the country’s economy and banking system. Billions of dollars from the fund went missing, the role of the government and high-ranking officials in the fight against illicit financial flows is increasingly being questioned.

 

In 2008, Malaysia’s prime minister, Najib Razak, set up the 1MDB fund as a strategic development company to boost the local economy. However, in early 2015, $11 billion went missing from the fund, and the amount was later detected in the personal bank account of the prime minister. The controversy has raised questions about the future of finance in Malaysia as investor scepticism rises amidst pressures emanating from the scandal.

The controversy was further fuelled when the Wall Street Journal (WSJ) published investigatory findings in 2015 showing that around $700 million from the fund had moved from 1MDB into Najib’s personal bank accounts. A Malaysian parliamentary probe then found out that over $4 billion was involved in the embezzlement. Authorities in Abu Dhabi, Switzerland, Hong Kong, Singapore and the US later made their own investigations into the scandal. In the American fight against illicit financial flows, the US Department of Justice is now involved in one of the largest ever asset seizures, having already frozen more than $1 billion in assets that have allegedly been stolen from the state investment fund.

In the midst of the probe, DBS, UBS, and Standard Chartered were found to have not implemented adequate anti-money laundering controls. According to the Monetary Authority of Singapore (MAS), these banks failed to detect the usage of their institutions as channels for these illicit transactions, potentially increasing investor skepticism about the safety of their funds in the region. While all three banks have reiterated that suspicious funds transfers were reported as soon as they were detected, questions were raised as to why the detection took so long – approximately four years after the earliest transactions.

The issue of illicit financial flows has plagued Asia for a long time where the exit of hundreds of billion dollars from the continent every year – primarily through trade invoice fraud (i.e., deliberately misreporting the value of a commercial transaction to move money across borders) – marks the biggest loss in the economic growth of the region. Global illicit flows reached $1.1 trillion in 2013 – according to a Global Financial Integrity Report – and Asia accounted for about 40% of the figure, growing between 2004 and 2013 at the fastest rate of 8.6%. Malaysia has also been part of the group of countries from which vast amounts of money are lost through tax evasion, crime, and corruption, contributing largely to Asia’s position as the number one spot for illicit flows. All countries involved in the probe, including Singapore, are being urged to enforce stricter anti-money laundering laws. More stringent laws coupled with hefty fines for non-complying banks would likely prompt them to put in place the right measures to detect suspicious funds flow.

The scandal is now casting doubts over the transparency of Malaysia’s financial sector. Investors are now sceptical about the safety of their funds, questioning the liquidity of government funds and finances in the event of a full seizure of assets amounting to billions of dollars. Coupled with low commodity and oil prices, the financial sector of Malaysia is likely to face a more challenging year.




Categories:

Governance, Malaysia, Risk and Regulation, Warehousing and Distribution Management

Keywords:1MDB, DBS, UBS, StanChart, MAS, Corruption, Money Laundering