In Leonardo DiCaprio’s acceptance speech after winning a Golden Globe in 2014 for his role in The Wolf of Wall Street, he thanked the production team for the film including his collaborators “Riz and Jho”.¹

Six months later, the US Department of Justice (DoJ) announced that these two individuals – Riza Aziz and Jho Low – were at the centre of a multi-billion-dollar corruption scandal. It claimed that Aziz had financed The Wolf of Wall Street with money embezzled from a Malaysian government-owned company called 1MDB.

The story of how these two Malaysian businessmen and their associates apparently embezzled billions to fund lavish lifestyles and Hollywood films is a plot worthy of a film of its own. It’s a story of mega-yachts, luxury properties and multi-million-dollar gambling trips. It briefly promoted Low into the world of global celebrities, earning him a reputation as a party animal.² Paris Hilton was photographed going clubbing with Low and posing topless on his yacht in Saint-Tropez.³ Low also reportedly dated the model Miranda Kerr and used money from 1MDB to buy her over $7 million worth of jewellery.⁴

But it’s not just a story of glitz and glamour. It’s also a story of major banks and New York lawyers failing to prevent the flow of billions of dollars of dirty cash. And while all of this was happening 1MDB’s finances were given a clean bill of health by some of the world’s most prestigious auditors.

At Global Witness, we have been campaigning to tackle the role of professionals who enable corruption for nearly ten years, and this is one of the largest and boldest cases we have seen. Yet while this case’s sheer size is exceptional, there is nothing unique about the ways in which those involved were able to launder the proceeds through the international financial system.

This analysis reveals for the first time the unique insights this case gives into how financial professionals enable high-level corruption. In many ways this analysis, by following one complex case in forensic detail, sheds far more light on this system than the vast range of less detailed revelations from the Panama Papers and Paradise Papers. This analysis does not try to cover the full story of the scandal, or of every bank or lawyer involved, but focuses on some of the most significant players in the 1MDB scandal to reveal insights about the state of the international financial system.

A global anti-money laundering system exists to prevent the laundering of the proceeds of crime through the international financial system. This costs banks and other financial professionals around $8 billion per year.⁵ Yet as expensive as this system is, it is not nearly as effective as it needs to be. The UN estimates that law enforcement seize and freeze less than 1% of criminal funds laundered through the international financial system.⁶

These rules are there for a reason. Behind every flow of laundered funds lies a crime, and those crimes have victims.

It now appears likely that 1MDB will fail to repay its debts, given the scale of embezzlement alleged to have taken place. If that happens, the Malaysian government will face a bill greater than the country’s annual healthcare budget.⁷ In the end, the people of Malaysia will pay the price.

So how did these Malaysian businessmen manage to launder billions of dollars from a government-owned company through the international financial system, as the DoJ alleges? Are the banks, lawyers and auditors involved the real wolves of Wall Street – willing to put morality and the law aside for their pursuit of profit – or are the rules just not fit for purpose?

This analysis will show that for the banks involved, this was not a problem of inadequate regulations - it was a clear failure of those banks to follow the rules. The existing regulations should have prevented the embezzlement of these billions of dollars, yet the banks ignored the rules, turned a blind eye, kept profitable clients and continued handling billions of dollars of dirty money despite clear warning signs. 

This does not mean that the rules are perfect. The lawyers involved handled hundreds of millions of dollars from the scheme, yet were never required by law to do any checks on that money. The auditors that gave 1MDB a clean bill of health were never required to blow the whistle despite the increasingly suspect excuses given for the whereabouts of 1MDB’s billions. 

Ultimately, this is a story where almost no one involved comes out looking good. It is a story of the failure of the system designed to prevent corruption on such an enormous scale. However, that story also shows where and how action is needed to make sure such scandals never happen again.

The scheme relied on close collaboration between those within and with influence over 1MDB, and those outside. The embezzlement revolved around those outside 1MDB creating companies that appeared to be investment opportunities for 1MDB. 1MDB then borrowed billions of dollars from investors, largely backed by the Malaysian government, to invest in these companies. Yet rather than 1MDB’s money being invested, it was instead passed through other companies the conspirators controlled to be used for their personal benefit.

The first phase of the scheme involved a joint venture between 1MDB and a Saudi oil company called Petrosaudi.¹⁰ Low played a significant role in setting up the deal, organising a meeting between Petrosaudi’s co-founders and Najib on a yacht off the coast on Monaco in the summer of 2009.¹¹ In September, Low emailed his family saying “Just closed the deal with petrosaudi. Looks like we may have hit a goldmin[e].”¹²

The deal was a goldmine for Low. Under the guise of this joint venture, more than $1 billion of 1MDB funds were instead transferred to a Swiss bank account belonging to a company he owned called Good Star.¹³ 1MDB had borrowed much of this billion dollars from investors and these loans were guaranteed by the Malaysian government.¹⁴ As with the subsequent phases, this money was embezzled for the personal benefit of Low and other conspirators and never invested for the benefit of 1MDB or the Malaysian people, the DoJ says.

The second and third stages of the scheme involved another set of joint ventures, this time with Aabar, a subsidiary of the Abu Dhabi sovereign wealth fund.¹⁵ To fund these joint ventures 1MDB borrowed $6.5 billion from investors, the majority of which was ultimately backed by the Malaysian government.¹⁶ Of this, $2.6 billion was shifted out of 1MDB to the conspirators’ bank accounts.¹⁷

In the second phase, more than a billion dollars went into a Swiss bank account of a company called Aabar. However, this was not the real Aabar, it was a company registered in the British Virgin Islands with the same name, which the DoJ refers to as ‘Aabar-BVI’.¹⁸ Qubaisi and Husseiny, officials at Aabar, set up this company with the intention of making it appear as if it was related to the real Aabar – yet nothing could be further from the truth.¹⁹ In the third phase, more than a billion dollars more was diverted to a Singapore company bank account owned by an associate of Low called Eric Tan.²⁰

The DoJ's case is that the fourth phase of scheme intended, at least in part, to cover up the huge losses 1MDB had made as its money embezzled in the earlier stages of the scheme had been used to fund lavish lifestyles rather than business investments.²¹ To do this 1MDB borrowed more than a billion dollars, which it cycled repeatedly through its accounts and a series of opaque offshore companies and investment funds.²² Through these transfers it created the appearance of money flowing into 1MDB from its investments. Yet beneath this appearance, $850 million of this was diverted to Aabar-BVI and another Aabar copy registered in the Seychelles, ‘Aabar-Seychelles’.²³

The full impacts of the alleged corruption at 1MDB on the Malaysian people are yet to be fully felt, as 1MDB is still in the process of trying to resolve the financial fall-out. Yet the risks to Malaysia are huge. If 1MBD fails to repay its debts, which is likely given the scale of the alleged embezzlement, it is estimated that the Malaysian government would have to repay nearly $5 billion.³² Including interest, this would be more than the annual government budget for healthcare.³³

The impacts of this case aren’t purely financial; it has also undermined Malaysia’s democracy. The investigative site Sarawak Report has disclosed documents showing that Najib gave around $140 million to local branches of his ruling party in the run up to the 2013 election, believed to be an attempt to buy personal loyalty from within his own party. These payments came from the same personal bank accounts that had received money embezzled from 1MDB.³⁴

The fall-out from the scandal has also led to government crackdowns on the media and opposition politicians. The Malaysian government suspended two of the country’s leading financial newspapers over their reporting of the 1MDB case. Two opposition lawmakers also said that they had been issued travel bans by the government in connection with investigations into corruption at 1MDB.³⁵

The FBI has also cited potentially retaliatory or threatening acts linked to its 1MDB investigation. These included a senior Malaysian politician being arrested and charged with attempting to overthrow the government after arranging to talk to the FBI and the arrests of three Malaysian law enforcement officials investigating 1MDB.³⁶

While resisting outside scrutiny, there has been a whitewash by Malaysian authorities. The Anti-Corruption Commission cleared Prime Minister Najib of wrongdoing and the Attorney General repeatedly dismissed calls for criminal proceedings to be launched, though re-opened the investigation into 1MDB in late 2017.³⁷

Prime Minister Najib and 1MDB have consistently denied all of the allegations against them.   

Low and his family are contesting the DoJ asset freezing order, with Low issuing a statement saying the US government was continuing “inappropriate efforts to seize assets despite not having proven that any improprieties have occurred.”³⁸

According to papers filed by his lawyer, Aziz “is neither alleged to have participated in any transactions involving 1MDB nor even to have knowledge of any transactions involving 1MDB — let alone knowledge of any supposed misappropriation”. The filing stated that “Mr. Aziz plainly did not engage in a money laundering transaction or any other offense”.³⁹

In March 2018, Aziz’s film production company agreed to pay the US government $60 million to settle the case. The settlement states that the payment should not be understood as “an admission of wrongdoing or liability on the part of Red Granite [Aziz’s company]”.⁴⁰

PetroSaudi has denied any wrongdoing and rejected any claims of involvement in misappropriation of funds from 1MDB.⁴¹

DiCaprio and Kerr are both co-operating with the investigation and have returned the gifts they received.⁴²

Banks are not supposed to handle criminal cash, and an international anti-money laundering system has been developed to achieve this. Internationally, standards are set by a little-known intergovernmental body called the Financial Action Task Force (FATF), with governments then expected to place requirements on banks and other professionals to prevent them from handling dirty money.

This is how it should work; banks are supposed to know who their customers are when they open an account and know who the owners and controllers of the businesses they provide accounts for are. Banks should monitor transactions to ensure that these are consistent with the information they were given when the account was opened. If they spot a suspicious transaction, they should report it to national regulators and either not perform the transaction or close the account.⁴³ This whole process is known as customer due diligence.

Banks are also expected to take greater steps to address the corruption risks posed by senior public officials, such as government ministers or senior civil servants. These officials are known as politically exposed persons (PEPs) as they present a greater risk of either being bribed or embezzling public funds because of their high-ranking positions.

Banks are required to identify if their customers is a PEP and then conduct enhanced monitoring of the account to look for suspicious transactions. These measures should also be applied to their family members and close associates.⁴⁴

This is how the system is supposed to work. Yet in this case, a group of individuals were able to shift billions of dollars out of a government-owned entity into their own bank accounts.

The first bank to handle money embezzled out of 1MDB was RBS Coutts, which at that time was ultimately majority-owned by the UK government. According to the DoJ, it handled more than a billion dollars in suspect cash linked to the first phase of the scheme, the joint venture with Petrosaudi.⁴⁵

At the outset, 1MDB was supposed to invest $1 billion in the joint venture.⁴⁶ Instead, 1MDB instructed their bank, Deutsche Bank, to make two transfers for $300 million and $700 million. These instructions only included the account numbers, and did not include the names of the accounts or their beneficiaries.⁴⁷

The bank account receiving the $300 million did belong to the joint venture.⁴⁸ However, the bank account set to receive the $700 million, held by RBS Coutts in Switzerland, actually belonged to a Seychelles company called Good Star, which Low owned.⁴⁹

RBS Coutts knew that Low was the beneficial owner of the Good Star account as he had declared this when he opened it.⁵⁰ Clearly RBS Coutts had questions about the proposed payment from a government-owned company into this account. RBS Coutts officials met with him to ask for more details on the proposed payment and Low provided them with a copy of an agreement, signed by 1MDB officials, fraudulently claiming that the transfer was an investment by 1MDB.⁵¹

RBS Coutts compliance staff also emailed Deutsche Bank requesting the name of the beneficiary of the funds, stating that they could not credit the Good Star account without it.⁵²

In response to RBS Coutts’ request, 1MDB officials told Deutsche Bank that the beneficiary was not Petrosaudi, as they had previously said, but was Good Star; fraudulently claiming it was owned by Petrosaudi.⁵³ Deutsche Bank then included the account name – Good Star - in the transfer details and the payment was released to the account at RBS Coutts.⁵⁴

Even after this payment had been processed “employees at [RBS Coutts] continued to have concerns about the size of, and justification for, the $700 million wire from a state-owned entity”, according to the DoJ, and requested further confirmation from Low and 1MDB. The Executive Director of 1MDB confirmed to RBS Coutts the false information that Low had already given the bank.⁵⁵

It is clear that the payments and justifications given were not instantly convincing to RBS Coutts. In an internal email, a member of the compliance team said; “It would be the first time in my career that I would see a case where [in] an agreement over the amount of $600 million or so the role of the parties has been confused.” RBS Coutts’ legal unit even spoke of the risk of a “total fabrication”.⁵⁶

Just a few months later, Low changed the explanation for the transfer, producing new fraudulent documents claiming the transfer was in fact a loan, rather than an investment.⁵⁷

The corruption risks for these huge transfers from a state owned entity were clear, yet RBS Coutts went on to credit a further $330 million in transfers from 1MDB into the Good Star account.⁵⁸

The Singapore banking regulator fined RBS Coutts $1.7 million (2.4 million Singapore dollars) for breaches of anti-money laundering rules over 1MDB for failures in its handling of relationships with PEPs, though it placed the blame on “the result of actions or omissions of certain officers” rather than any wider systemic failings.⁵⁹

The Swiss banking regulator fined RBS Coutts $6.6 million (6.5 million Swiss francs), finding that “those responsible failed to follow up on these clear causes for concern” and instead chose to “continue with the lucrative business relationships”.⁶⁰

Swiss regulators referred RBS Coutts’ involvement to the UK banking regulator, as RBS owned it at that time, though UK regulators or law enforcement have not yet made any public statements on the case.⁶¹

RBS Coutts clearly saw reasons for suspicion, with huge sums of money being transferred from a state-owned company into Low’s account, with changing explanations for its origins. Yet as the Swiss regulator found, they were all too willing to turn a blind eye to these suspicions and ended up breaking the rules in order to keep a highly profitable client.

RBS, which at that time owned RBS Coutts, responded to the regulators’ decisions stating that; “we regret any failings in our AML processes and the length of time it has taken to detect and resolve this issue. We will donate all profits from these accounts to an industry-wide AML program run by an independent educational body to help combat financial crime to ensure Singapore remains a financial center which adheres to the highest standards." RBS added that RBS Coutts & Co had strengthened the policies and controls to prevent clients using its services to aid financial crime.⁶²

BSI also held one of Low’s personal accounts that had received large amounts of money from the Good Star account.78

After allegations about Good Star and 1MDB first surfaced in 2015, BSI officials contacted Low to ask about the flow of funds from Good Star to his account at BSI.79 Low falsely claimed to BSI that Good Star was owned by Petrosaudi, backed by a fraudulent letter from Petrosaudi’s CEO. This was despite the fact that he had previously told BSI multiple times that he owned the Good Star account.80

Compliance officers were also concerned that Low was moving large sums of money from his account through his father’s account to another account owned by Low to obscure the origin of the money in a flow of funds that BSI compliance officials deemed “not acceptable”.81

Low attempted to explain these flows as “family tradition” stating, “when good wealth creation is generated, as a matter of cultural respect and good fortune that arises from respect, we always give our parents the proceeds. This is part of our custom and culture. It is of course then up to the parents/elder to determine what to do with the funds and in this case, my father receives it as a token of gesture, respect and appreciation and decides to give it back for me”.82

To any expert in the field these explanations should seem almost comically implausible, yet despite this and his changing explanations for the ownership of the Good Star account, BSI continued to process Low’s transactions.83

These kind of money laundering failures are common for the big banks involved in corruption cases that Global Witness has looked at. Yet BSI officials went even further and actively helped Low and others carry out the fraud, according to the DoJ.

At one stage, BSI officials specifically marketed a series of investment funds to Low and 1MDB officials as vehicles to funnel money from 1MDB into the Tanore account held by Tan, one of Low’s associates.84

Later on, a banker at BSI Singapore also took on securing a fraudulent valuation of 1MDB’s investments to hide the scale of the embezzlement that had taken place (for more on this, see the section on auditors below).85

Swiss regulators effectively shut down BSI in 2016 because of “serious breaches” of regulations, ordering it be dissolved following a takeover by another bank.86 Swiss authorities also fined the bank $95 million (95 million Swiss francs) and launched criminal proceedings against it.87

The bank also had its licence revoked by Singapore’s banking regulator and fined $9.6 million (13 million Singapore dollars) for breaches including failure to conduct due diligence on high-risk accounts and monitor suspicious customer transactions.88

While there were rules in place to prevent this from happening, there is still more that could be done to improve the current anti-money laundering system. One major problem is that many banks’ transaction monitoring systems are often backwards looking, meaning that they are only able to identify suspicious transactions long after the money has changed hands. Looking at historical data can doubtlessly help spot patterns that may emerge over time, but this should be no substitute for having live systems designed to spot and stop suspicious transactions before the money is ever transferred.

Another major problem is that banks frequently report transactions as suspicious to national regulators and process the transaction anyway. This is because in many jurisdictions, reporting a suspicious transaction gives the institution a defence against money laundering offences.

This system allows banks a legal defence to continue handling suspect cash, while failing to provide regulators with information that would be useful enough to be able to investigate. Much more needs to be done to stop banks processing transactions when they do have suspicions, and to improve the quality of the reports they are required to make.

In the end, this is a problem of incentives. There are regulations to require banks not to handle dirty cash, yet they do, time and again. Banks could put in place systems that would be far more effective, yet they do not.

One reason why they don’t could be because it is not currently worth their while. In this case, regulators fined the banks involved $122 million for handling $4.5 billion of suspicious funds.115 The risks of getting caught and the fines they expect to face simply do not outweigh the costs of turning away potentially lucrative business.

Larger banking fines could help prevent them just being treated as the cost of doing business, yet this alone is unlikely to truly re-shape banks’ behaviour. This is because fines don’t affect the bank’s management who failed to prevent the bank handling dirty money.

To change banks’ practices, the incentives for those at the top need to change by holding senior managers accountable for their bank’s actions. Most of the time, this does not happen.116

In this respect, the actions of Singapore regulators and law enforcement in this case are a rare example of good practice, with bank staff involved facing personal criminal prosecutions for their actions.

Three BSI bankers were found guilty of criminal offences in Singapore, including forging documents, failing to disclose suspicious transactions, deception and money laundering offences. Two received small fines and brief jail sentences, with the third sentenced to four and a half years in prison and a lifetime ban by the Malaysian financial regulator for his role in the case.117 Falcon’s Singapore branch manager pleaded guilty to a range of charges including failing to report suspicious transactions and was sentenced to 28 weeks in jail and fined $89,000 (89,000 Singapore dollars).118

Prosecuting those responsible is a vital step, yet these prosecutions are only for those who were involved in the most flagrant breaches of anti-money laundering rules and only for middle managers, not the bank’s executives. A bank’s senior executives are responsible for the whole bank’s actions and have the responsibility to make sure it has systems in place to prevent it from handling dirty money. Rules need to be changed to make it easier to hold senior banking executives personally liable for their banks failure to prevent them handling criminal funds.

Banks weren’t just involved in the 1MDB case by providing accounts. They also raised billions of dollars in loans to 1MDB that were fraudulently taken by Low and his associates.

Goldman Sachs did the biggest part of this business. Over the course of 12 months in 2012 and 2013, Goldman Sachs raised $6.5 billion in three sets of bond offerings for 1MDB.¹¹⁹ An astonishing $2.6 billion of this was allegedly embezzled into the Aabar-BVI and Tanore accounts, 40% of the total raised.¹²⁰

According to the DoJ, the documents provided to prospective investors by Goldman Sachs “contained misleading statements and omitted material facts necessary to make its representations not misleading."¹²¹ This included not disclosing that funds would be transferred to Aabar-BVI, and on to individuals including Husseiny, Qubaisi, 1MDB officials and Najib.¹²²

All of the bond offerings produced by Goldman Sachs were vague about how the funds would be used. The first stated that funds could be used for “other corporate purposes”, and the third that the joint venture to be funded “does not have any specific investment, merger, stock exchange, asset acquisition, reorganization, or other business combination under consideration or contemplation.”¹²³

While the lack of a clear plan for what to do with the money raised should have been a concern to investors, the cost of Goldman Sachs’ services should have been a concern to 1MDB. Goldman Sachs earned nearly $600 million in fees and commissions for issuing the bonds, 9% of the total raised.¹²⁴ The usual fee for such a deal would typically be around $1 million for each round, 0.5% of the fee Goldman earned.¹²⁵

In order to meet 1MDB’s objectives of raising the funds as quickly as possible, Goldman agreed to buy the bonds from 1MDB for later sale to investors. This meant 1MDB could raise the money almost instantly, but Goldman took on greater risk while it held the bonds. Goldman later said this higher risk justified the high fees they charged.¹²⁶

The combination of Goldman’s unusually high fees and the speed with which the money was shifted out of 1MDB raises questions about whether Goldman was aware, or should have been aware, of the plans to siphon off the money. For example in the case of the third bond, even before the bonds were issued, 1MDB officials and Low had already arranged to move funds through the overseas investment funds to the Tanore account.¹²⁷

This is not the first time Goldman Sachs has used bonds to raise funds in questionable circumstances in Malaysia. The year before, Global Witness lambasted the investment bank for appearing to ignore corruption risks and conflicts of interest in order to underwrite $1.6 billion in bonds for the Government of Sarawak, a Malaysian state on the island of Borneo.¹²⁸

The Wall Street Journal has reported that the DoJ, Federal Reserve, Securities and Exchange Commission, New York State’s Department of Financial Services and Singapore regulators are all examining aspects of Goldman’s role in the 1MDB case, including whether it had any reason to suspect funds would be misused.¹²⁹

In response to the allegations, Goldman stated that it had no way of knowing the funds would be embezzled and that they have “found no evidence showing any involvement by Jho Low in the 1MDB bond transactions”.¹³⁰ This statement appears to contradict emails discussing the bond offerings quoted in the DoJ case in which a senior Goldman director refers to Low as the “the 1MDB Operator or intermediary in Malaysia.”¹³¹

Banks are not the only institutions that provide accounts to hold and move money around, lawyers do too.

Lawyers in the US are not required to do customer due diligence on their clients in the same way that banks do and don’t have to investigate client conduct unless they believe their client is engaging in illegal activity.¹³² When lawyers hold accounts for their clients, the banks that hold these accounts in turn only have to do checks on the law firm, not its clients. So, neither the bank nor the law firm are required to do checks on the clients using these accounts.

The result is “a way of getting money into the US system without going through the anti-money-laundering safeguards,” said Elise Bean, former chief counsel to a Senate subcommittee that investigated money laundering and corruption, describing it as “a pretty darn big loophole.”¹³³

Low used this loophole to shift approximately $368 million from his Good Star account in Switzerland into the US, through the law firm Shearman and Sterling’s client account, the DoJ allege.¹³⁴

Low held funds in the client account for over a year, and used it to purchase luxury properties including L’Ermitage, the Park Laurel Condominium and the Time Warner Penthouse, as well as his private jet.¹³⁵ Low’s use of the client account was not restricted to high value purchases; he also used it for gambling expenses and renting private yachts and jets, including transferring $25 million to accounts at Caesars Palace and the Venetian Casino in Las Vegas and spending over $4 million on private jet rental.¹³⁶

Aziz also used a Shearman & Sterling client account to buy three properties in New York, Beverly Hills and London worth $94 million using funds from 1MDB.¹³⁷ Low used another firm’s client account, DLA Piper, to buy a $200 million stake in the Park Lane Hotel in New York.¹³⁸

One New York attorney described the size of the deposits as unusually “ridiculous”, while other attorneys were reported saying the huge deposits should have raised suspicions.¹⁷³

This isn’t the first time that US lawyer client accounts have been used to shift corrupt funds into the US. Teodorin Obiang, son of the President of Equatorial Guinea, shifted millions of dollars of his country’s money into the US through lawyers’ client accounts and used these to pay his personal bills and expenses.¹³⁹

There is no law requiring US lawyers to conduct due diligence and therefore, unlike the banks involved, there is no suggestion either Shearman and Sterling or DLA Piper broke anti-money laundering rules. However, the American Bar Association’s voluntary code of practice recommends that “any time lawyers ‘touch the money’ they should satisfy themselves as to the bona fides of the sources and ownership of the funds in some manner."¹⁴⁰

Given the highly questionable nature of the funds moving through these accounts, this raises questions about whether these firms did follow the association’s voluntary code of practice and what if any checks they did on the funds moving through their accounts.

In response to the allegations in the DoJ’s case, Shearman & Sterling issued a statement saying that it “did not know and had no reason to believe that any funds transferred to Shearman & Sterling were the proceeds of unlawful activity. It is common practice for law firms to receive substantial funds from clients for disbursement in connection with real estate closings, as was the case here.”¹⁴¹

DLA Piper stated, “As a large, global law firm, we are routinely involved in cross-border transactions and are occasionally called upon to hold client funds needed for the transaction. When we do, we have policies and procedures in place to ensure that we are fully compliant with all legal and ethical obligations and standards.”¹⁴²

The problems of US lawyers not having to do anti-money laundering checks are not restricted to client accounts. An undercover investigation by Global Witness in 2016 exposed the role lawyers can play in advising how to move suspect funds into the US.

Wearing a hidden camera, an investigator posing as an adviser to a foreign government minister met with 13 New York law firms. He asked the lawyers how to anonymously move large sums of money that should have raised suspicions of corruption. In all but one case, the lawyers provided suggestions on how the minister might get the money into the US without detection.¹⁴³

FATF, the international anti-money laundering standard setting body, highlighted these risks in its 2016 assessment of the US. It found that lawyers were not applying basic or enhanced due diligence processes, describing this as a “serious gap”.¹⁴⁴ It went on to note that it is also was not clear whether lawyers were complying with the ABA’s voluntary guidelines, as they are not enforceable, and  recommended that anti-money laundering rules be imposed on lawyers “as a matter of priority”.¹⁴⁵

In response to the issues raised by Global Witness’ investigation and the FATF recommendation, the American Bar Association has reportedly prepared a new ‘Model Rule of Professional Conduct’ that would impose basic customer due diligence requirements on lawyers.¹⁴⁶ If adopted, this would mean that lawyers who did not conduct anti-money laundering checks on their client accounts could be subject to disciplinary action – unlike the current voluntary code of conduct.

While such efforts to improve standards within the industry could be an important step forwards, this would leave responsibility for compliance and enforcement in the hands of state bar associations.¹⁴⁷ The question of whether they would actually do this is an issue that is “unresolved” according to one member of the ABA Task Force that developed the new proposed Model Rule.¹⁴⁸ In addition, the Model Rule is only a model, with no requirement that state bar associations adopt its recommendations into their rules.

The only way to ensure that this ‘darn big loophole’ is closed is through federal regulation, with the US passing legislation requiring lawyers to conduct these anti-money laundering checks on their clients that is then enforced by US regulators.

Despite it being more than eight years since the first money was allegedly embezzled out of 1MDB, many investigations into the role of banks in the case still remain unresolved.

The criminal charges brought by Swiss authorities against BSI and Falcon have not yet been brought to court and there has been no apparent conclusion to the reported investigations by almost every conceivable US authority into Goldman Sachs role in the case. There is still no news as to whether the UK authorities are investigating the role of RBS and Standard Chartered head offices for the money laundering offences of their foreign branches. All of these investigations need to be pursued effectively so that those responsible can be held to account.

Above all else, this case is a lesson in why more reform is urgently needed. The system did not work. A well-connected group managed to launder billions of dollars out of a government owned company. The people of Malaysia are now set to pay the price, both to cover 1MDB’s enormous debts and with the country’s democracy deeply damaged.

It was all too easy for those involved to use banks and lawyers to launder their funds. This is not new to Global Witness – it is a systemic problem that enables corruption on a vast scale all around the world. This corruption keeps dictators in power while keeping tens of millions of people in poverty.

This case demonstrates all too clearly why the rules need to change, making it harder to launder the proceeds of corruption, and making it harder to be corrupt in the first place. The two most urgent areas where action is needed are to address the risks posed by banks and lawyers.

For lawyers in the US the rules simply do not exist, leaving a vast hole in the anti-money laundering regime for one of the most attractive destinations in the world for corrupt cash.

For banks, the rules do already exist, yet they are routinely violated. The penalties for violating them are clearly not sufficient to change their behaviour, and those at the top of banks that handle dirty money need to be held to account. Without this change, senior executives will continue to see fines for money laundering failures as just the cost of doing business, and a price worth paying for taking dirty cash. All jurisdictions, but particularly those home to the headquarters of the world’s largest banks like the US and UK, should change the rules to ensure senior executives face serious fines, or jail, if the banks they lead flout the rules.

Unless the lessons of this case are learnt, it is only a matter of time until another group of enterprising and well-connected conspirators are able to defraud billions of dollars of government money for their own private gain.