Is 1MDB a defining moment for South East Asia or merely another bump in the road? In this article, first published in Thomson Reuters Regulatory Intelligence on February 4, partner Brian G. Burke (New York & Shanghai-Litigation), senior associate Mathew Orr (London-Litigation) and associate Rishikeesh Wijaya (Singapore-Litigation) consider this important question and the potential consequences for those doing business in the region.
May 9, 2018 will be remembered by Malaysians as a historically significant date for the country. It marked the first time since Malaysia’s independence in 1957 that the ruling Barisan Nasional coalition had lost its parliamentary majority, and with it, the control of government. Just over two years later, on July 28, 2020, then-leader of that coalition, former Prime Minister Najib Razak, was sentenced to 12 years’ imprisonment and a fine of RM 210 million (USD 49 million) after being convicted for abuse of power, money laundering and criminal breach of trust following a marathon trial that lasted over a year.
Mr. Razak’s downfall was due, at least in part, to his role as Chairman of the Advisory Board of 1Malaysia Development Berhard (1MDB), a sovereign wealth fund designed to promote long-term economic development by forging global partnerships and promoting foreign direct investment. Since its creation in 2009, the fund and those connected to it have faced ever-increasing scrutiny over the alleged misuse of funds. Allegations made in several national and international newspapers in 2015 ultimately led to multiple investigations being initiated by domestic and foreign enforcement agencies. These ripples, in turn, caused a wave of investigations and enforcement outcomes—and ensuing scandals and headlines—that reached shores the world over.
The events surrounding the 1MDB affair are credited with triggering a seismic shift in both public and political attitudes towards financial crime in Malaysia and the wider region of South East Asia. Once-in-a-generation power swings within Malaysia’s government have reoriented the country toward combatting financial crime generally, and bribery and corruption in particular. Muhyiddin Yassin, the country’s Prime Minister since March 2020, is tasked with meeting the electorate’s expectations and restoring the reputations of public and private institutions, and indeed, the country itself. All eyes are watching to see whether he can meet the moment.
Further evidence of this newfound resolve can be found in the National Anti-Financial Crime Centre Act 2019, which came into effect in early 2020, and aims to coordinate and consolidate the strengths of Malaysia’s enforcement agencies, including its anti-corruption body (the Malaysian Anti-Corruption Commission), the central bank and financial regulator, and local police.
Amendments to the Malaysian Anti-Corruption Commission Act 2009 (MACC Act) also have far-reaching consequences. Most significantly, section 17A of the MACC Act, which took effect on June 1, 2020, expands the scope of liability against both corporations and individuals for corruption offenses. In a number of respects, section 17A goes even further than its source of inspiration—the U.K.’s Bribery Act 2010—particularly with respect to holding both companies and senior executives accountable for failing to prevent bribery offenses.
Through section 17A and the introduction of the “MACC Guidelines,” which provide guidance on the implementation of appropriate internal control measures to combat corruption, Malaysia joins other countries in the region, such as Thailand, in strengthening its anti-corruption laws.
Looking ahead, it remains to be seen whether Malaysia will introduce a system of deferred prosecution agreements (DPAs) for corporations, like its neighbor Singapore did in 2018. The introduction of DPAs would further strengthen the existing enforcement toolbox and could incentivize self-reporting and cooperation.
The events surrounding 1MDB also have led to increased scrutiny of those whose services may be used as a means to accomplish financial crime.
In July 2020, Goldman Sachs reached a USD 3.9 billion settlement with the Malaysian Government over its alleged role in assisting 1MDB in the sale of bonds worth USD 6.5 billion in 2012 and 2013. Under the settlement, all criminal and regulatory proceedings against the bank in Malaysia were discontinued.
In October 2020, Goldman Sachs reached separate agreements with U.S., U.K., Hong Kong and Singaporean authorities totaling nearly USD 3 billion to resolve various allegations of wrongdoing, including claims under the U.S. Foreign Corrupt Practices Act 1977 (FCPA), arising from transactions related to 1MDB. In addition, several former senior executives of the bank, including those based in Malaysia, have either pleaded guilty to criminal charges or are facing trial in the U.S.
The resolutions reached by Goldman Sachs serve as a salutary lesson for those operating in the financial services sector. Regulators and law enforcement agencies continue to focus on the institutions by which financial crimes occur—often unwittingly—and are keen to stress the importance of having robust anti-financial crime mechanisms that are implemented and monitored in all business areas in accordance with legal and regulatory frameworks.
The raft of investigations arising from the 1MBD scandal also reflects a growing appetite for enforcement actions against financial institutions in South East Asia. The Monetary Authority of Singapore (MAS) recently emphasized that “rigorous investigation and tough enforcement are necessary to deter financial misconduct, protect consumers and maintain investor confidence.” Between January 1, 2019 and June 30, 2020, MAS imposed a total of SGD 11.7 million in civil penalties compared to SGD 698,000 in the previous reporting period—a staggering 16-fold increase. The MAS also secured nine criminal convictions against individuals compared to only one conviction in the previous reporting period. Similarly, the Securities Commission of Malaysia reported an increased use of enforcement tools with 99 administrative actions in 2019 compared with an average of 39 administrative actions for each of the preceding five years.
The resolutions reached by Goldman Sachs also highlight a growing trend of increased cross-border cooperation among regulators and law enforcement agencies. While formal settlements were reached with U.S., U.K., Hong Kong, Malaysian and Singaporean authorities, the broader 1MDB investigation involved authorities and regulators from other countries, including France, Switzerland and Luxembourg. International coordination should now be accepted as the norm rather than the exception, especially in the context of financial crime given the inter-connectedness of the essentially borderless global financial system.
Foreign enforcement authorities may also act in relation to conduct in South East Asia (and elsewhere) even if the underlying conduct escapes the attention of local regulators and law enforcement agencies. It should come as no surprise that enforcement authorities in South East Asia may initiate their own investigations after actions by foreign bodies, which may vary in scope and focus. Recent examples in the region include investigations following enforcement actions against Airbus and Rolls-Royce.
The events surrounding 1MDB, and the resulting investigations and enforcement actions—not to mention the unwelcome headlines—should make financial institutions acutely aware of the need for coordinated global strategies to address internal and external investigations, above and beyond the existence of an effective compliance program.
South East Asia continues to offer corporations a wealth of opportunities. Most nations in the region continue to seek global partnerships and foreign direct investment where it can be found, a trend that will doubtless continue for years to come. The potential for economic growth in developing economies, such as Vietnam, Myanmar, Cambodia and Laos, is significant. However, as the events surrounding 1MBD highlight, these opportunities do not come without risk, particularly for those whose services are required to facilitate such growth.
Whether the 1MDB affair is remembered as a defining moment for the region or merely a bump in the road remains to be seen—it was not the first corruption scandal and it is unlikely to be the last. However, it does appear that there is an appetite for real change, at least in Malaysia, and those doing business in the region should take note.
First published on Thomson Reuters Regulatory Intelligence on February 4, 2021.