yellow-submarineAl Brodax died in late November. If that name does not conjure up images of Apple Bonkers, Snapping Turks, the dreaded Flying Glove and Blue Meanies, let me explain why it should. Brodax was the producer of the film version of Yellow Submarine. The reason he was the producer was somewhat odd. The Beatles had made two films, A Hard Day’s Night and Help, for United Artists but after these two cinematic efforts they had lost interest in this genre. Brodax presented the final film as an option to them to fulfill their contractual obligation, in a manner that would require virtually no participation from the lads from Liverpool. For this stroke of insight, we are all enriched.

Enrichment is the theme for today’s post as it is personal and illegal enrichment which seems to be the continuing message from the 1MDB scandal involving the disgraced Malaysian sovereign wealth fund. In an article in the Wall Street Journal (WSJ), entitled “Abu Dhabi Sovereign-Wealth Fund Gets Entangled in 1MDB Scandal”, Bradley Hope and Nicolas Parasie reported on how the 1MDB scandal continues to expand across the globe and ensnare more people and entities.

Recently, the International Business Times reported that the Monetary Authority of Singapore (MAS) has issued a proposed ban on the former top dealmaker for Goldman Sachs in Southeast Asia, Tim Leissner, for his role in the scandal. Leissner was the Goldman Sachs client relationship manager for 1MDB and headed up three major bond issuances raising over $6bn for the wealth fund. However, it was not these activities that caused MAS to act to ban Leissner. It was his issuance of an unauthorized letter, sent on Goldman Sachs letterhead, providing a reference to a financial institution in Luxemburg for a person who has become associated with the scandal, Mr. Jho Low. The letter attested that Goldman Sachs had performed due diligence on Low and no red flags appeared in his background. According to the MAS, “These statements were untrue and were made by Mr Leissner with Goldman’s knowledge or consent.”

The WSJ piece reported on how the Abu Dhabi sovereign wealth fund, IPIC, was involved in transferring monies out of 1MDB to various shell companies across the globe. It all began in 2009 “the emirate would invest $1 billion in Malaysia’s real-estate, hospitality and energy businesses via the 1MDB state fund. Abu Dhabi handed the energy part of this plan to IPIC. Instead of contributing money, however, IPIC supplied a guarantee on $3.5 billion of 1MDB bonds, making them easier to sell.” In exchange for its guarantee, “1MDB agreed to pay $1.4 billion of what was called “collateral” to IPIC’s Aabar unit.” According to sources familiar with the transaction, it was done without IPIC Board approval.

You might see where this is going as the WSJ reported, “The $1.4 billion of 1MDB money never reached Aabar, the Justice Department said, but instead was paid to a firm with a name nearly identical to Aabar’s that Mr. Al Qubaisi and Aabar’s CEO, an American named Mohamed Badawy Al Husseiny, had set up in the British Virgin Islands. From that offshore firm, the Justice Department alleged in its July lawsuits, the diverted 1MDB cash was distributed to intermediaries, which sent it on to still other intermediaries, until hundreds of millions of dollars reached Mr. Najib, his stepson and others.”

Also most interesting was the flow of the money, as illustrated below:

From Blackstone Asia Real Estate Partners, the US “Justice Department alleged in its July lawsuits, the diverted 1MDB cash was distributed to intermediaries, which sent it on to still other intermediaries, until hundreds of millions of dollars reached Mr. Najib, his stepson and others.

One of the others cited by the Justice Department was Jho Low, a Najib confidant who had helped to set up 1MDB. U.S. prosecutors have described Mr. Low as in the thick of the alleged fraud, helping orchestrate schemes to siphon away money.”

Just as Yellow Submarine was described by film critic Roger Ebert as “a music-based animation film for the ages” and “a freedom of color and invention that never tires” I agree with the WSJ that “Far from just a Malaysian affair, the 1MDB scandal is unfolding as potentially one of the largest international financial swindles ever.” Equally important, the 1MDB continues to provide many significant lessons for the anti-corruption and anti-money laundering (AML) compliance practitioners.

From the Leissner affair and Goldman Sachs the critical element is that any self-certification is circumspect and must be tested. Simply because someone from a reputable company uses a third party or has a relationship with a customer does not mean you can accept their word on either due diligence or a lack of red flags around the individual or third party.

The adventures of IPIC and its representatives in the 1MDB scandal provide another yet equally important lesson. That involves names of entities. You simply cannot take an entity’s name at face value, even if that name is so similar to an entity you are very familiar with in business. If you ask most US businessmen about Blackstone they would immediately think of Blackstone Group LP, a well-known US private equity firm. This is even if there is an entity named something close which is called Blackstone Asia Real Estate Partners.

These new wrinkles to the 1MDB matter also make clear that it is more than simply performing due diligence once or obtaining some type of certification on a one-time basis. The stepson of the Malaysian Prime Minister who is at the center of the 1MDB scandal, Riza Aziz, was one of the producers of the hit film, The Wolf of Wall Street. With this new information available it would appear any entity connected to this production and more importantly profits from it may come under government scrutiny. The key is to demonstrate not only compliance with relevance due diligence but that the effort is ongoing and those efforts are documented.

So as my two favorite podcasters, John Champion and Key Ray, might say, the 1MDB scandal, with an assist from Al Brodax, continues to provide “bonk bonk on the head” lessons for the compliance practitioner. If you do not understand the reference, go watch Yellow Submarine.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

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