What was the purpose of the 1MDB investment fund? Who are the key players in the scandal surrounding 1MDB, and how did they allegedly embezzle billions from the fund?

The 1 Malaysia Development Berhad Investment Fund (1MDB) was founded in 2009. It was originally an investment fund for the purposes of helping the Malaysian people, but it became a de-facto financial vehicle to raise money, in fact billions of dollars, for Malaysia's political elite, particularly the former prime minister Najib Razak and his allies.

Many of the individuals who were part of the fund – including a man called Jho Low, who is seen as the key interlocutor – used this to siphon off money for political patronage and for personal greed, and they did this in a very interesting way. They gamed the international financial system by abusing their access to political power, using their standing as representatives of the Malaysian government to raise investment money to sell and guarantee bonds and to sell and buy assets. Some of this was done above-board, but other parts were done instead through a process of layering and hiding behind different shell companies, and by moving money through different sectors of the international financial markets, often through offshore banking shelters. At the same time in this process they were siphoning off funds for personal and political use. Essentially, they defrauded and stole funds along the way, not only for greed and personal interest, but also to stay in political power.

Because these funds were used for political patronage, the 1MDB scandal is the largest kleptocracy scandal to date in the world. It involves the use of political office for personal gain, and it has important lessons for those of us looking at how the financial system can be gamed.

So 1MDB was being used to fund development projects in Malaysia, but at the same time portions of that money were being siphoned into the accounts of powerful political actors and others involved in the fund?

Frankly, there were no significant gains for the Malaysian people. That was part of the fraud. Although labeled an investment fund for development, it was used for something completely different. The financial assessment will show that the losses to Malaysia are billions of dollars. The impact is not only in terms of revenue but also reputational. Different individuals and companies that were part of the scandal, along with Malaysia itself, have been downgraded in their credit ratings. There were no real gains for development, in fact it was the opposite. The only gains were for the people who abused the system and used this fund to their political and personal advantage. 

What have been the key developments in this scandal since it was revealed in 2015?

First was what we can call the stage of exposure. Without the media exposing it, this abuse would not have come to light, which speaks to the importance of investigative journalism in checking the abuse of power. The key players exposing the scandal were Clare Rewcastle Brown of Sarawak Report and The Wall Street Journal reporters Tom Wright and Bradley Hope. There has been continued exposure from 2015 until now, with the revelation of different dimensions. It's a rather complicated scandal because it involves multiple shell companies, multiple aspects of money laundering in multiple locations, and the movement of funds. These are things that have come out in the press.

The second period, between 2015 and 2017, was what I call the period of the defensive cover-up. In this period, Najib Razak and those associated with him were engaged in a process of denial of responsibility. They began to sell off the assets of the fund, to restructure it, and to settle some of its debts. This involved creating more loans, and there were efforts to try to delay and downgrade prosecutions that were emerging outside of Malaysia as a result of the exposure.

Also in this period of denial, there was a ramping up of international investigations in multiple arenas outside of Malaysia, including in the United States, Switzerland, Singapore, and the United Arab Emirates, just to name a few. Within Malaysia there was an intensive cover-up going on because Najib himself wanted to ensure that the scandal did not push him out of office. So he created this myth that 1MDB was too big to fail for the country, and he used different government companies and funds to help offset the debts from 1MDB. Many of the political elites who were critical of him he purged from his party, including the former deputy prime minister Muhyiddin Yassin, and of course he expelled Mahathir Mohamad from his party for criticizing him. Mahathir Mohamad was the Prime Minister of Malaysia from 1981 to 2003. He is back in office, which we will discuss later. In addition, this was also a very repressive time in Malaysia, as the Najib administration went after local media that tried to expose the scandal.

The third period has been since May 2018, when Najib Razak lost power. His party and coalition were in office for 61 years. Since Mahathir Mohamad returned to power, there has been a period of recovery and reckoning. Prosecutions have begun, along with financial assessments and audits, and attempts to recover funds. Many of the key players, such as Najib Razak and Jho Low, have been charged. Initially the focus was on the money trail, and then on the facilitators who were part of the cover-up. As more is exposed, we've seen an expansion of charges. There has been a careful assessment of the accounts of Malaysia, looking at debts incurred, and then a reassessment of many of the financial deals that were made to try to pay off the debts from 1MDB.

The U.S. firm Goldman Sachs helped raise billions for 1MDB, taking unusually high fees in the process. What kind of wrongdoing has Goldman Sachs been accused of? How has Goldman Sachs responded to such accusations?

Goldman Sachs was responsible for selling and preparing a bond of $6.5 billion for 1MDB. Just to step back here for a moment, take note of the sheer amount of money that's involved – multiple billions of dollars, not only in terms of assets that the U.S. Department of Justice has found to be misappropriated, but also the amount of funds that are involved in the investment fund and the bonds themselves.

For this “service” that the Goldman Sachs employees provided, with Tim Leissner believed to be the key individual, the firm received funds of $600 million. This is not a small amount by any estimate, and it is seen to be well over market rate. Now Goldman Sachs has faced two sets of charges. First, there are charges in the United States where the general practice of dealing with white collar crime is largely through fines. The strategy is to go after the bottom line, hoping that this will actually change behavior. In fact, this hasn't necessarily shifted behavior and how banks and investment companies operate. In the United States, Goldman is facing charges for money laundering, and they pled guilty to this violation of the Foreign Corrupt Practices Act and paid fines.

In Malaysia, the Mahathir government is going after Goldman for misappropriation of funds, making false statements, and bribing officials. This actually involves jail time as opposed to fines, and at the same time the Malaysian government has filed a civil case against Goldman Sachs, asking for $7.5 billion dollars in “reparations.” The Malaysians feel that the scandal has done very serious damage to the country and that Goldman's role wasvery significant.

Goldman's response was that its employees have been affected financially. Senior management reportedly received lower bonuses last year. In January of this year, Goldman apologized to the Malaysian people without providing any refund. What we do not see is any real sense of meaningful acceptance of responsibility on the part of Goldman Sachs for working in alliance with those in power in Malaysia to game the system for their advantage and to make a profit from that. This speaks again to one of the challenges of how the international financial system works, with elites who use these things to their advantage and apparently lacking a strong sense of ethics or moral foundations. An apology is quite small compared to the damage that has been caused as a result of this scandal.

As I understand it part of Goldman's response has been to say that these were primarily the actions of rogue employees, especially Roger Ng, and as you said, Tim Leissner. So those two are facing criminal charges. But Goldman is then facing a court case that could force it to pay massive amounts of money in reparations to Malaysia?

That is what is happening with the civil case that has been filed in the United States against Goldman Sachs for $7.5 billion worth of damage. There is a criminal case and charges against employees, as well as the civil case against Goldman as an institution. One is about prison time and the other is about the financial bottom line, but I think there's another thing that's equally important. The filing of the civil charges by Malaysia on behalf of the Malaysian people speaks to the need to have accountability for those who are involved in white collar crime and for those who facilitate it. The reality is that while Goldman Sachs may blame rogue employees, this was $600 million. There has to be some sense of responsibility given the amount of fees that were taken, as well as the amount of funds that were involved. But there hasn’t been a meaningful sense of responsibility to date, and this speaks to how the organization is being run.

To what extent did this scandal contribute to the historic defeat of Malaysia’s ruling party and Prime Minister Najib Razak in elections last year? How has the new Prime Minister Mahathir Mohamad been dealing with the consequences of the 1MDB scandal?

There are two things that 1MDB did leading to the historic defeat of Najib’s coalition. The first was the split within Malaysia's ruling party, and this brought Mahathir Mohamad back into office since he was a critic of Najib. Mahathir played an important role of pulling votes in a polarized political situation, and allowed the opposition to win the election. This dominant party split was triggered by 1MDB, and particularly by elites in the system who saw the excesses of greed of Najib, his wife, and those around them as just wrong.

The second factor was how 1MDB affected the views of the electorate. The issues of corruption, embezzlement, and others triggered a response in the opposition, particularly in urban areas and in the business sectors that were more familiar with what happened. It didn't necessarily affect Najib’s traditional rural base, but it did have an impact in another way. 1MDB was seen as shaming the country and tainting the administration, even as many people could not understand the ins-and-outs of different shell companies and the complexities of it all.

Mahathir’s response has been to engage initially in exposure. Right after the election they raided the former prime minister's house, and found 72 bags of cash and over 400 Birkin bags, giving the sense that his wife was the new Imelda Marcos of Southeast Asia. These funds showed the excesses of the previous administration – for goodness sake, they found over $36 million in the apartment.

Subsequently there has been a prosecution process. For Americans looking at 1MDB, the Mueller investigation against Trump is a good comparison. Both have been long processes, involving multiple trials, multiple different types of cases, and a whole series of investigations. In the last nine months in Malaysia, we've seen many of the key players charged, and now they are facing trials. There have been some technicalities and delays in the trials, but generally they are moving forward. They'll be happening this year; there will be multiple trials against Najib who has had over forty charges against him. This has been a process of using the rule of law to address the scandal, and working with international investigators collaboratively to recover some of the assets and to develop the cases against the players involved. This has been the focal point of the Mahathir government so far, in terms of issues of corruption. For many Malaysians, they would like it to go beyond 1MDB, because Malaysia has many other corruption scandals, but essentially it has been an anchor for the administration and a very important one.

The second thing the government has done is to try to address some of the financial costs of 1MDB, and to look at some of the deals that were made to bring in money to the country to help pay off 1MDB debts. So this involves changing relationships with foreign countries, including China.

Najib Razak was scheduled to go on trial last month, but this has been delayed pending an appeal. How might the trial and potential conviction of a former Prime Minister affect Malaysian politics? 

It's not going to be one trial, but four or five. There are multiple cases against him, and they involve different companies and different activities of 1MDB. One involves the money trail, the companies that were shifted and funds that came in. The first trial concerns a smaller amount of funds of roughly $40 million, and then another trial involves funds that went into Najib’s personal bank account of around $600 million dollars. I expect this to be a drawn-out process of at least two years.

Not just Najib Razak is going to trial. His wife has also been charged, so there will be multiple cases against these elites. Many of the actors in 1MDB have been charged, including the bankers and others who were involved in the cover-up or in making false statements. It's similar to the Mueller investigation in that it involves multiple actors, but in this case the prime minister is the focal point of the charges. It is too early to speculate on the verdict or sentencing because there are so many cases and so many trials involved.

This has become a politicized trial in that it involves the abuse of office. At the same time Najib’s response has been to use social media to create the sense that he has been victimized, trying to make appeals using a lot of racialized discussions. He claims that he did nothing wrong because he was helping his political base, and of course some of his base is loyal to him because this particular narrative has traction.

But these cases are going to reveal some of the key aspects of how funds were misappropriated, and for the first time a former prime minister in Malaysia is under the spotlight in such a way that there could be accountability. This is also a test for the new government and its ability to carry out these trials in a professional way. So far, despite delays, they are following the process quite diligently and that is important.

Jho Low, a financier alleged to have masterminded the 1MDB fraud, is believed to be hiding in China. Additionally, The Wall Street Journal reported in January that China offered to bail out 1MDB and help shut down investigations into it if Malaysia would approve additional Belt and Road projects. What interest does China have in protecting 1MDB, and what implications could this have for China-Malaysia relations?

The Chinese government was very close to Najib Razak, and after 2015 they became even closer. The Chinese used Najib’s vulnerability financially, and he used his relationships in China when the U.S. Department of Justice began charges involving 1MDB, although at that time he was not personally named in any charges.

Due its location, Malaysia is a geopolitically important country within the context of Southeast Asia, not just for defense and trade, but also for the country’s economic vibrancy. It's very critical for the Chinese in terms of their expansion of political power, so this was an opportunity. The Belt and Road Initiative has been a vehicle to bring in funds for infrastructure, and many of these projects were perceived to be considerably padded with funds that could be potentially siphoned off to help pay the 1MDB debts. More broadly, China was seen to be using its financial power advantageously, getting not just economic advantages but also political leverage with the previous government.

After May last year, the new government decided to review these projects and eventually they decided to cancel some of them. This involved some cost to the Malaysians, becausethe previous government had made financial commitments that needed to be restructured. It has also exposed the Chinese government, showing how they’ve operated. There have been allegations against the Chinese government over using political influence to buttress the previous Malaysian government in ways involving less than above-board financial deals.

Thus, the China-Malaysia relationship has moved from “buddy buddy, let's make money” to a situation that is a little more tense, and Malaysia is now seen as one of the few countries to really challenge some of the initiatives within the context of Belt and Road. My sense is that this is a short-term problem, because they are likely to reach some sort of accommodation. But there may not be as much accountability in terms of Chinese business deals in Malaysia. There is likely to be some new relationship that emerges after a time, because there is a recognition in the financial community in Malaysia that China is very important for Malaysia's long-term economic vibrancy and growth. The new government is aware of this.

This scandal also affects relations with Saudi Arabia and others, because 1MDB was international in scope. It involved multiple countries, and many relationships will be impacted.