1MDB Scandal Intensifies

The following post comes from Sheri Kindel:

As reported by the Wall Street Journal, recent government investigations into 1MDB, Malaysia’s sovereign wealth fund, have uncovered a money trail with funds ending up in Prime Minister Najib’s personal bank accounts in AmBank between March 2013 and February 2015. Najib, facing the risk of criminal charges, continues to deny taking funds from 1MDB for personal gain and claims this is an act of “political sabotage” by former Prime Minister Mahathir Mohamad to remove him. 1MDB, now $11.1bn in debt, also denies providing any funds to Najib. Documents produced on the matter are the first evidence directly linking Najib to corruption surrounding the fund.

Funds flowed from SRC International Sbn Bhd, a company linked to 1MDB, into personal accounts of “Dato’Sri Mohd Najib Bin Hj Abd Razak” in Kuala Lumpur. The investigation also exposed a wire transfer of $620M from a Singapore branch of the Swiss Falcon Bank owned by an Abu Dhabi fund into Najib’s Kuala Lumpur bank account. This wire transfer occurred in March 2013 before the General Election and the signing of a joint venture between Malaysia and Abu Dhabi. Documents showed that Abu Dhabi never contributed financially to this partnership and the money was never returned to 1MDB when the project fell through in the development phase. Three other deposits were made into Najib’s various accounts and altogether, Najib received up to $700M.

These findings reach beyond Malaysia as it impacts many banks, including Wells Fargo Bank in New York. According to the documents, the wire transfers were handled through the International Branch of Wells Fargo. Regulators in Singapore, Switzerland, and now the United States are looking to increase money laundering regulations and more closely monitor suspicious transactions.

1MDB and the Importance of Sovereign Fund Governance

The following post comes from Sheri Kindel:

Since 2009, debts created by a state investment fund in Malaysia, called 1MDB, have created controversy and recent calls for Malaysia’s Prime Minister, Najib Razak, to step down. The funds were allegedly used to bankroll the prime minister’s 13th general election campaign in 2013 by making overpriced purchases from a subsidiary of Genting Group. According to the Wall Street Journal, Genting then made a donation to a charity foundation called Yayasan Rakyat 1Malaysia (YR1M). During his campaign, the prime minister announced that YR1M would donate a large sum of money to local schools which were not in a poor neighborhood but whose support would be crucial to win votes in the area.

Meanwhile, Jho Low, 33, who has been friends with the prime minister’s stepson for 16 years and persuaded Najib to set up 1MDB, has also recently been getting a lot of attention. Low became friends with Riza Aziz, the prime minister’s stepson, while studying in London and grew close to Aziz’s mother, Rosmah Mansor. Najib became chairman of the board of advisers of 1MDB, a close friend of Low’s father became a director, and two of Low’s friends became staff members.

Since then, Low bought multi-million dollar properties in the U.S. on behalf of Aziz, who is now a film producer. However, Low denies any real estate transactions for the prime minister’s family, adding he never “engaged in any wrongful conduct regarding any financial matters for the prime minister and his family.” The sale of an apartment in New York involved shell companies connected to Low and Aziz to keep the transactions at arm’s length. Reports of the purchase identified two residents of Switzerland as the property owners, but these names were traced back to a shell company owned by Low. He later declared and is still adamant that the property was bought by a trust benefiting his family, but someone involved with the purchase recalled Low saying that he was buying for a group of investors with the main investor being the family of Najib. After three years, the apartment was sold to Aziz’s shell company for cash at a value nearly 40% greater than Low’s purchase price. This wasn’t the only property deal between the two. In Beverly Hills, Low bought a mansion for $17.5M and similarly turned around and sold it to Aziz.

Irwin Winkler, an executive producer of “The Wolf of Wall Street” described Low as the face of the financing for Red Granite Pictures, a Los Angeles based film production, finance, and international sales company. Aziz publicly announced the principal financer for Red Granite was Mohamed Admed Badawy al-Husseiny, chief executive of an Abu Dhabi government-owned company, Aabar Investments. Aziz denied the use of Malaysian money in Red Granite films, and Husseiny claims his investment was “personal money.”

Low claims that Najib is the final authority to approve or deny any 1MDB deal, transaction, and investment. Even though Low has no official role or title in 1MDB, multiple employees stated that he is regularly consulted for decisions. When asked about his involvement, Low admitted that he occasionally provided his views on various matters, but has never received compensation. Numerous documents have since emerged that tie Low to dealings with 1MDB, including a statement that finances on a deal would come from the Malysian government investment funds.

When asked about Najib, 1MDB, and the major purchases, Low declared that he is simply getting attention for being a young kid who made a lot of money and spent it partying. Najib made a public statement that Low “has never worked for 1MDB and all decisions and dealings of 1MDB was done by the management and board of directors.” Despite their declarations, there are documents establishing Low’s involvement in the prime minister’s affairs, including a joint venture project. A $700M “loan repayment” program was set up for 1MDB to pay back money loaned as part of a joint venture agreement with PetroSaudi. The money that supposedly repaid the loan was actually directed into a Swiss bank account controlled by Low. Soon after, that money was used to buy out Taib Mahmud’s UBG bank in Sarawak that failed to be sold on the open market. In 2011, 1MDB publicly pulled out of the PetroSaudi joint venture and the fund now claims the money was returned to 1MDB.

Until now, Low described himself as a friend of people with money coming from a “fairly OK family.” As the media began asking questions, Low recounted he was born with it himself. In an interview with the Wall Street Journal, Low reported that his grandfather made a fortune in mining and liquor investments in Thailand, but this wealth does not explain the vast amounts of resources spent so quickly and the power accumulated at such a young age.

1MDB’s information technology department is currently wiping clean all employees’ computers and smartphones hard drives. The company claims they are preventing the loss of information through any system breach, but skeptics claim they are dumping company records before lawyers can get their hands on them.

These events demonstrate the need for good governance controls with sovereign wealth funds and sovereign development funds. Since many funds experience a substantial amount of movement of large sums, the money must be closely monitored with purchases detailed to the board for tracking and security measures. By not tracking the money or by approving deals prematurely, cash can be spent before fund members even realize it was taken out. The trail would stop there. However, with stronger internal regulation of sovereign funds or a system of approving spending and maintaining records, individuals would be less likely to spend public money on private matters. In this case specifically, 1MDB should follow Low’s investments directly to determine where money is coming from and going to. Additionally, the fund could implement a strategy for multiple board members to sign off on deals and rotate through the members so it doesn’t seem like foul play with the same individuals working together. Low has recently acknowledged that he can no longer remain silent as to his involvement with 1MDB. With all the current news reports, Low must answer the questions he has been avoiding.

Chen: Political Inuence of Selective Tax Enforcement – Evidence from China

ABSTRACT:

Politicians can play a critical role in tax administration, but this role is rarely documented or investigated in quantitative approaches. In this paper I study VAT administration in China, which is the de jure responsibility of the State Administration of Taxation but is subject to the de facto influence of local politicians, particularly the prefectural secretaries of the Communist Party. Using the variation in turnover of secretaries between 2000 and 2007, I find that, over the tenure of the prefectural secretaries, the effective VAT rate changes in favour of capital-intensive industries, and to the detriment of labour-intensive industries. Additional evidence reveals that the favouritism towards capital intensity is not limited to VAT enforcement, but is also present for corporate income tax and access to credit. I conclude the paper by discussing several possible channels for this favouritism over the tenure of prefectural secretaries. The evidence seems to be most consistent with the explanation of corruption.

 

Available for download here.

Sahu & Gahlot: Perception about Corruption in Public Servicies – A Case of Brics Countries

ABSTRACT:

Purpose: As is increasingly recognized in academic literature and by international organizations, corruption act as major deterrent to growth and development. The aim of this paper is study the perception of general public about the corruption in BRICS countries (Brazil, Russia, India, China and South Africa). Research Methodology: This research is based on primary data i.e. questionnaire. The questionnaire were distributed in capital of each country i.e. Brasília in Brazil, Moscow in Russia, Delhi in India, Beijing in china and Pretoria in South Africa. The questionnaire was mailed and uploaded on Facebook. The questionnaire was distributed to 150 people of each country. The data is analyzed with the help of graph and tables. Findings: It was found that state authorities initiate corruption. The main causes behind corruption are Public tolerance towards corruption, Absence of political will, Dominance of personal interest over state interest, Ineffective administration, Inefficient control and punishment mechanisms and Lack of independence of the judiciary system. It was observed that Police is the most corrupt service in BRICS countries. Majority of people from Russia, China and South Africa believe that their Government is effective in fighting with corruption while people of Brazil and India don’t have faith in their Government regarding fighting with corruption. Media was found to be most trusted institution in fighting with corruption. The Judiciary should formulate strict law regarding corruption. Originality/value: This research will help Government to get idea about the thinking of general public about corruption in their country.

 

Available for download here.

Bujko, Fischer , Krieger & Meierrieks: How Institutions Shape Land Deals – The Role of Corruption

ABSTRACT:

Large-scale land acquisitions, or “land grabs”, concentrate in developing countries which are also known for their corruption-friendly setting caused by a weak institutional framework. We argue that corrupt elites exploit this given institutional set-up to strike deals with international investors at the expense of the local population. Using panel data for 157 countries from 2000-2011, we provide evidence that these land deals indeed occur more often in countries with higher levels of corruption.

 

Available for download here.

Carson & Mota Prado: Brazilian Anti-Corruption Legislation and its Enforcement – Potential Lessons for Institutional Design

From the Introduction:

Over the past few decades corruption has emerged as a major issue in the global development discourse as policymakers and academics have increasingly focused on the political economy factors that promote or hinder inclusive, sustainable growth. No longer dismissed as innocuous grease speeding the wheels of inefficient bureaucracies (Huntington, 1968), corruption is now recognized widely as a force that undermines economic expansion and equality, accountable and transparent governance, and social cohesion (Bardhan, 1999; Gray and Kaufman, 1998; Mauro, 1995). While earlier investigations into the causes of corruption focused on societal and cultural factors, more recently, the rational actor model and new institutional economics have emphasized the role of institutional incentives on corrupt behaviors (Rose-Ackerman,
1999), suggesting they may be curtailed or fostered through institutional arrangements and reforms.

Building on this framework, we investigate Brazil’s struggle against corruption and the
institutional lessons revealed therein. Since returning to a democratic system in 1985, enacting a new constitution in 1988, and holding direct elections in 1989, Brazil has been plagued by corruption scandals. While the country outperforms many of its regional and developmental peers on various corruption-related indicators, corruption remains a problem in many areas of public life, most notably in regional and state governments, political parties, and parliament, as well as public procurement at all levels of government (Melo, 2013). In addition, many of the metrics capturing corruption have remained relatively stable since the transition to democracy in the late 1980s, and persistent and repeated scandals reveal continued and widespread corruption in various public institutions (Carson and Prado, 2014).

In this paper, we examine those reforms and institutions that have, anecdotally and empirically, proven potent in combating corruption in Brazil. Specifically, there has been significant progress associated with the systems of oversight and investigation (Speck, 2011; Arantes, 2011) but very little progress associated with punishment (Avritzer, 2011; Filgueiras, 2011; Taylor, 2009). Highlighting the interrelationships among state accountability institutions in these arenas, we argue that the duplication of oversight and investigative functions among various governmental entities has strengthened their collective impact. After reviewing the literature condemning the inefficiencies conventionally associated with institutional multiplicity, we examine the theoretical and empirical advantages of functional overlaps in the context of corruption, in which public power is used to secure private benefits. We then explore the instances of
institutional multiplicity in Brazil’s systems of corruption oversight (National Audit Court, Office of Comptroller General, media, civil society) and investigation (Public Ministry, Federal Police Department, Comptroller General). We contrast the successes achieved in oversight and investigation by these competing institutions with the obstacles encountered at the punishment stage of enforcement in which a single institution – the judiciary – has authority.

We conclude by arguing that our analysis of the Brazilian experience reveals the advantages in pursuing alternative institutional avenues through institutional multiplicity, in developing strategies to reduce corruption across contexts. We emphasize how functional institutional overlaps allow for compensation, collaboration and competition among various governmental entities and have bolstered anti-corruption efforts in Brazil. We argue that the country’s experience suggests that institutional multiplicity provides unique advantages in combatting a complex governance challenge like corruption.

 

Available for download here.