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In $540 million civil forfeiture tied to 1MDB, insight on fraudsters, lessons for AML officers

Thursday, June 22, 2017   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
bmonroe@acfcs.org
June 22, 2017

The U.S. government’s more than half a billion-dollar civil forfeiture order seeking to recover assets bought with money stolen from a Malaysian sovereign wealth fund is required reading for financial crime compliance officers, particularly those dealing with complex private equity and securities deals.

That’s because the hefty, 251-page, $540 million forfeiture complaint details the financial crime compliance vulnerabilities and tactics – including evasion by customers, support by corrupt insiders and dishonest senior management – that allowed a small cabal of individuals to pilfer $4.5 billion from the 1Malaysia Development Berhard (1MDB) in what many are calling the world’s largest fraud.

The case has also captured worldwide attention for its celebrity ties. Funds stolen from 1MDB helped finance several major motion pictures, including Hollywood A-lister Leonardo DiCaprio’s “The Wolf of Wall Street.” In recent weeks DiCaprio has turned over items given to him by a  conspirator in the scheme, including a Picasso and Marlon Brando’s Oscar statuette, to US federal prosecutors.  

In the forfeiture orders released Friday, federal investigators say the group loosened up and used the funds for more movies, two comedies: “Dumb and Dumber To,” with the rubber-faced Jim Carrey, and “Daddy’s Home,” with Will Ferrell and Mark Wahlberg.

The order also seeks to forfeit one lithograph poster created by German artist Heinz Schulz-Neudamm for the 1927 silent film “Metropolis” and the 300-foot mega-yacht, the Equanimity, which is worth north of $250 million.

The sprawling corruption scheme has also jolted many of the jurisdictions where money flowed to scrutinize the banks and individuals involved, with some banks and officials penalized or sanctioned. The United States, Switzerland, Hong Kong, Luxembourg, Singapore and Malaysia have all undertaken investigations.

“These cases involve billions of dollars that should have been used to help the people of Malaysia, but instead was used by a small number of individuals to fuel their astonishing greed,” said Acting U.S. Attorney for California’s Central District, Sandra Brown, in a statement.

“The misappropriation of 1MDB funds was accomplished with an extravagant web of lies and bogus transactions,” she said. “We simply will not allow the United States to be a place where corrupt individuals can expect to hide assets and lavishly spend money that should be used for the benefit of citizens of other nations.”

Banks used by the group or connected to the case include, Deutsche Bank, AmBank, Wells Fargo, Bank Negara, RBS Coutts, DBS, UBS, BSI, Credit Suisse and a JPMorgan Chase correspondent account.

On Thursday, Luxembourg authorities penalized Private bank Edmond de Rothschild nine million euros for AML failings tied to the 1MDB fraud, according to published reports in Malaysia citing unnamed sources.

More penalties are likely as regulators and investigators in different jurisdictions peel back their regional involvement in an international scam that lasted for years.

But while the tactics were sophisticated, the goal of the scheme was simple: get funds from the bank and governments in the form of bonds, loans and other structures, and instead of using the money to help Malaysians, grab it and spend it. Then, cook the books to make it look like the money is going to big companies that are doing the right thing with funds, or at least growing them.

‘Complex transactions, shell companies’

Over a five-year period, between 2009 and 2014, “multiple individuals, including public officials and their associates, conspired to fraudulently divert billions of dollars from 1MDB through various means,” including by defrauding foreign banks and sending foreign wires to launder the proceeds through U.S. financial institutions.

“Using fraudulent documents and representations, the co-conspirators allegedly laundered the funds through a series of complex transactions and shell companies with bank accounts located in the U.S. and abroad,” according to the complaint.

“These transactions allegedly served to conceal the origin, source and ownership of the funds, and ultimately passed through U.S. financial institutions to then be used to acquire and invest in assets located in the U.S. and overseas.”

The latest civil asset forfeiture did not sit well with 1MDB officials.

“1MDB highlights that it is not a party to the civil lawsuit nor has it been contacted by the DOJ in relation to this matter,” according to a statement put out by 1MDB Saturday. “1MDB notes that the civil lawsuit does not contain any appendices with documentary proof or witness statements to support the allegations made by the DOJ.”

The group added that it would “fully cooperate with any foreign lawful authority, subject to international protocols governing such matters and the advice of the relevant domestic lawful authorities.”

Creating shell companies, the name is the game

Critical to the scheme was outwitting bank financial crime compliance officers so the group could get the money out of 1MDB as quickly as possible using high-dollar wire transfers.

At the outset, the group created shell companies with names very similar to large, well known energy and investment firms so they could make it appear the massive wires were normal.

But in actuality, the firms were controlled by the group and had no relation to the real, more prominent companies.

The most glaring example of the move occurred in 2012.

That was when 1MDB officials and others “misappropriated a substantial portion of the proceeds that 1MDB raised through two separate bond offerings arranged and underwritten by Goldman Sachs International.”

The bonds were guaranteed by both 1MDB and the International Petroleum Investment Company (IPIC), an investment fund wholly-owned by the government of Abu Dhabi, in the United Arab Emirates (UAE).

But “beginning almost immediately after 1MDB received the proceeds of each of these two bond issues, 1MDB officials caused a substantial portion of the proceeds – approximately $1.367 billion, a sum equivalent to more than forty percent of the total net proceeds raised – to be wire transferred to a Swiss bank account belonging to a British Virgin Islands entity called Aabar Investments PJS Limited (Aabar-BVI).

However, the name was given quite a bit of thought by the group, according to the complaints.

“Aabar-BVI was created and named to give the impression that it was associated with Aabar Investments PJS,” a subsidiary of the Abu Dhabi investment fund IPIC.

 But “in reality, Aabar-BVI has no genuine affiliation with Aabar or IPIC, and the Swiss bank account belonging to Aabar-BVI was used to siphon off proceeds of the 2012 bond sales for the personal benefit of officials at IPIC, Aabar, and 1MDB and their associates.”

The group also created a company called Blackstone, to make it appear linked to billion-dollar real estate giant Blackstone.

“The practice of utilizing a bank account held by an entity with a name that mimics a well-known commercial enterprise is a technique commonly employed to lend the appearance of legitimacy to transactions that might otherwise be subject to additional scrutiny by the financial institutions involved,” according to the complaint.

Beyond attempts at moniker mimicry, the group tried to play the culture card to obviate transactional tells, giving a glimpse of the dance between scammers and compliance cops.

In one amusing anecdote, when a compliance officer did question a conspirator about why millions of dollars would move into his account, then his father’s account, and then back out again quickly to other people, the person replied that the frenetic funds transfers were a “cultural norm” to “respect and honor” a patriarch by giving him the money first, and letting him dole it out to relatives and associates as he sees fit.

One compliance officer at Swiss private bank BSI, looking at transactions between the group and a relative, stated they were “nebulous to say the least and not acceptable in compliance’s view,” according to the complaints.  

In another instance, when a Deutsche Bank officer was requesting quarterly financials, the unnamed “1MDB Officer 4,” hemmed and hawed, saying he was “forbidden to provide soft copies of bank documents” for a certain account. In a second instance when a bank officer asked for financials, the Officer 4 stated 1MDB had suffered a “server breakdown and all files were lost.”

Let’s agree(ment) to disagree

The group also routinely lied about the nature of the transactions and wires away from 1MDB.

They muddied the money trail using convoluted and opaque securities transactions, bloated valuations, supposed bond and options sales and fictitious loan and repurchase agreements – accords that fooled and pacified some of the biggest banks and auditors in the world, including Deutsche Bank, Credit Suisse, KPMG, Deloitte and others.    

To explain certain money movements when asked by compliance staffers, or in a review of a particular wire, the group in some cases would create flimsy cover stories by drafting various “agreements.”

The complaints note the speedy creation of fictitious investment agreements, options agreements, contribution agreements, and in one instance, to really confuse any analysts, the group created a “Mudharabah agreement,” which is a Sharia-compliant investment and profit-sharing agreement.

The group didn’t always have to work so hard to woo bank staffers. One top official at Falcon Bank actively helped the group and, in a recorded conversation, noted that the documentation from fraudsters was “absolutely ridiculous” and was “gonna get everybody in trouble," according to the complaint.

“This is done not professionally, unprepared, amateurish at best,” he said, referring to the documentation tied to some of the larger wire transfers. “The documentation they’re sending me is a joke.”

“How can you send hundreds of millions of dollars with documentation, you know, nine million here, twenty million there, no signatures on the bill, it’s kind of cut and paste. . . . I mean it’s ridiculous!”

He then instructed a lower ranking bank staffer to tell one of the main fraudsters, “tell him, look, you either, within the next, you know, six hours produce documentation, which my compliance people can live with, or we have a huge problem.”

Beg, borrow and, most importantly, steal

Finagling the financials and shuttering important details behind shell operations was central to the fraud, according to federal investigators.

The complaints detail that in 2014, the co-conspirators misappropriated approximately $850 million in 1MDB funds “under the guise of repurchasing certain options that had been given in connection with a guarantee of 2012 bonds.”

As well, 1MDB had borrowed a total of $1.225 billion from a syndicate of banks to fund the buy-back of the options, but rather than using the enormous sum to purchase the options, some $850 million “was instead diverted to several offshore shell entities,” according to the complaint.  

From there, the $850 million stolen in 2014, in addition to money stolen in prior years, “were used, among other things, to purchase a 300-foot luxury yacht valued at over $260 million, certain movie rights, high-end properties, tens of millions of dollars of jewelry, and artwork.”

A portion of the diverted loan proceeds “were also allegedly used in an elaborate, Ponzi-like scheme to create the false appearance that an earlier 1MDB investment had been profitable,” according to investigators.

In 1MDB aftershocks, regulators hit banks on AML

Prior to the most recent Rothschild penalty, the 1MDB case has sparked money-laundering investigations in at least six countries including Switzerland, Singapore and the United States.

As part of a broad review into 1MDB-related transactions, Singapore shut down the local units of Switzerland’s BSI Bank and Falcon Bank due to AML failures and improper conduct by senior management, has frozen millions of dollars tied to linked entities and banned several private bankers.

As well, Singapore’s central bank in recent weeks penalized Credit Suisse and United Overseas Bank (UOB) a total of more than $1 million for breaching anti-money laundering rules in transactions related to 1MDB.

Last year, the increasingly aggressive regulator fined DBS, UBS, Standard Chartered and private bank Coutts for failures related to Singapore’s AML laws in connection to 1MDB transactions, according to regulatory and published reports.

But in order to find those connections to different global banks, investigators had to untangle a “global labyrinth of multi-layered financial transactions,” said IRS Criminal Investigations Deputy Chief Don Fort. 


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