The Dark World of Finance: Part 1 “US DoJ & 1MDB Civil Suit”

The recent filing of the US Dept of Justice, in collaborations with the FBI as well as the IRS of the United States on the seizure of assets of certain individuals and parties, which relates to the funds that are allegedly being misappropriated from the Malaysian owned 1MDB Berhad, deserves some very close attention.

My approach here is to focus on financial transaction matters and not the political matters.

It is a very important lesson to learn about financial transactions, wire transfers, usage of bank accounts, usage of law firms accounts, investment bankers, offshore companies and entities, usage of arts and collectibles as covers for transferring ‘monies’, usage of money changer for remitting monies, and also of particular matter is usage of US Dollars as based of transactions or remitting monies, and so on. Lessons of this nature are very rare to come to full blown exposure and public domain, as it were used to be the channels and methods available to and used only by the wealthiest of the wealthy, and far too complicated and opaque to the common people, even those from established countries like the United States.

I hope that this article and probably a few series of this writing help those who wishes to understand more of the what I called “the Dark World of Finance”. I plan write on the subject in a series of articles, and I took this occasion to start writing on the subject since the current case is a high profile case and many people are interested to understand and make some sense about the subject. As I have indicated, I would avoid any political issues, which is not of my main interest, but lessons of politics could also be learned and deduced. But I leave that to the reader to derive and arrive at their own conclusions.

The current US Department of Justice Civil Suit for the “forfeiture of assets” related to allegedly ill gotten monies from 1MDB specifically under the “United States kleptocracy asset recovery initiative”, which is based on the law that was passed in the United States in 2010, as part of the global initiatives by the United Nations and other developed nations worldwide to combat corruptions at international level. In the case of the United States, the enforcement of this is done under the “Asset Forfeiture and Money Laundering Section (AFMLS)” of the US Department of Justice, with the FBI and other coordinating agencies (such as the IRS, State Authorities, etc).

What’s interesting about the case, which are noteworthy are as follows:

  1. That the US DOJ undertook the case even though there are no known application or request from 1MDB or Malaysian Government; which means it was done based on unilateral decision by the US DOJ. Which also means that the US, as a matter of practice could and would do actions not necessarily based on the requisition of the main party concerns. And the basis they could do this is clear: once the alleged ill gotten monies moved to the United States jurisdiction. Once they occurred, they do not need the foreign government’s concern for them to initiate any actions. This is the important underlying issue of “jurisdictions of actions”. Hence, it is important to understand that the local laws of any country, are crucial part of any movements of any monies. Understanding that, and abiding by these laws is really a critical matter for any financial transactions (legal or otherwise).
  2. The US DOJ undertook the action under a “civil action” filed at a US District Court in California, specifically invoking Title 18 of the United States Code (which is the criminal and penal code of the federal government of the United States; It deals with federal crimes and criminal procedure.) They have choices of filing under civil or criminal; and by the fact that they did it under civil and yet at the same time maintaining that the issues are still part of ongoing investigations – implied that they had chosen an easier (and less demanding proof in the courts) to first freeze the assets concerned (which are listed by the DOJ in its filings), with immediate effect; and they could use many provisions provided under the US laws to freeze those assets (which among the easiest one is the tax laws). Furthermore, Title 18 of the US Code is about criminal code, which underlie the severity of the subject matter, despite its civil filing. Furthermore, as the case could be, as it progressed and as investigation continues, it could be further affirmed by criminal proceedings. We cannot rule this out.
  3. The next issue is to understand the role of banks; after the Patriot Act and further revision of Dodd-Frank Act in the US, banks have to fully complied with disclosure and providing information to the authorities. If you read the filing by the DOJ, it is very clear that most of the “damning” information (if I may use such word), came from the bankers, mainly from US based banks (such as Goldman Sachs, which were used for the raising of the bonds for 1MDB), and various other “clearing banks” such Mellon Bank, Standard Chartered Bank, and others. We must understand that any transactions involving US Dollars must “pass through” the United States; generally through one of the US Dollars clearing bank based in New York. Hence, for example you send money from say Singapore to Switzerland in US Dollar, has to pass through a US Bank (i.e. clearing bank). Therefore, no US Dollar transaction (except through money changer) will not be “known to the US Government”. Furthermore, banks are required to record their conversations, keep all copies of emails and faxes as well as any correspondence made for any of such transactions. In short, once you deal with US Dollar, or US banks, you are already under the jurisdiction of the United States, regardless of where you are, and where you transact. The fact is, you already falls under the US jurisdictions and you submit to that law (again regardless of your citizenship and residency). Therefore, the US Government could or may take action against you, if you violate any laws of the US (or sometimes, other international laws).
  4. The other issue, which is less highlighted in the current filing is violations of other laws in the US, namely, the Money Laundering laws (which are relevant, but not fully explained in the current filings), the tax laws (which, again not clarified but I believe would further come at later stage, as part of their on going investigations), interstate transactions (within the US), and possibly few other statues of the law, such as the Securities laws (related to the bond issues by Goldman Sachs). These would depend upon co-operation by many parties, and of particular concern would be by the parties named in the current suit. In the case of legal suits, I could see clearly that the US authorities are “seeking some, if not all of these parties” to “cooperate” with the US authorities to seek leaner sentences. For example, I am sure that officers of some of the banks like Goldman Sachs would have done their “cooperation part”. This is typical of the US methods of criminal actions in the past. the question would be, who is the “big fish” that they are trying to get at? Is it Jho Low or someone else? That is something that could be seen or observe as the case runs its course. If some others named cooperated and volunteered more information, or some of the owner of the assets named are to contest the action, then there will be more revelations. But if all the parties named do not contest in the court, then the DOJ’s filing and actions for the case is then confirmed – which then allows them to move to the next stage – criminal proceedings (if any).
  5. Another issue of interest is, should the parties named contest the suit (by filing the counter motions), or simply just accede (without any contests)? In either case, what would the implications be? Let us assume that the parties file their defense (through their lawyers presumably): then the case will likely go for full trials – which is something that most would like to avoid – since many people would be subpoenaed to give their testimonies (in open or closed court, depending on ruling by the presiding judge). In such case, the possibility of Malaysian Government Official 1, could be subpoenaed as well; anyway, as far as the document goes, he is of importance in the transactions. Furthermore, what will other witnesses say during those examinations is something that is beyond control of anyone. The penalty of perjury in the United States is quite severe, and to take Fifth Amendment is not possible for non-US citizen. Therefore, logically, no defense will be made by anyone – and hence the case will be won the US DOJ hands down. But this will lead yet to other issues: what will the US DOJ do with the seized assets? Will it automatically be returned to 1MDB or Malaysian government? The answer is no. 1MDB or Malaysian government must filed in the US for claiming such assets back; otherwise, it will remain forever in the hand of the US Government. If such filing will be made, then whoever submits it, must further adduce evidence that such was the case in conformity with what the original civil filing by the US DOJ. As such, that would further condemn some parties and people related to the case. That is an issue that Malaysian Government will have to deal with, and it is not an easy matter since at least eight people named (directly or indirectly) are purportedly carrying Malaysian passports or Malaysian citizen.
  6. Lastly, in another twist, what if some Malaysian citizen individually or jointly, file a class action suit in the United States related to the case and matter. That would off course makes the case more complicated and a full blown media and negative publicity would ensure, in the US, internationally, as well as locally. So far, I have not heard of such move; but nobody could rule out this possibility. More importantly, is the role of IPIC (and Aabaar of Abu Dhabi) and the Government of Abu Dhabi in the current case is unclear. We also do not know whether this suit may also be triggered by them, since they are one the “losing party” in those purported transactions. What is known thus far is that IPIC had file an arbitration case in London for their claims against 1MDB for some of the payments via some contractual document to made good to them, which 1MDB had denied and refused to make such payment. if the current case is won by the DOJ, then it would strengthen their claims in the arbitration case against 1MDB; which if awarded to IPIC, must then be made good by 1MDB (at least based on those arbitration decision, if it is won). In short, the drama is still unfolding, and the final verdict is far from clear.

So far, the above comments are made on the Civil suit by the DOJ; and I have yet explained about the transactions that were undertaken as reported in the filing. I will address this in Part 2 of this series of article.

In future series, I will also share my knowledge in this so called “Dark World of Finance” which I intend to educate about financial transactions that could go wrong.

If you want to download the DOJ filing, please do so here: DOJ USA Complaint 20July2016



In this part, I would like to point out and highlight the alleged transactions, as explained in the US DOJ Civil Suit filings. Again, I would like to do it in summarized point forms, for ease of reading and understanding.

  1. Usage of offshore companies and entities: why offshore companies, such as ones based in the British Virgin Islands (BVI) or other similar jurisdictions.
    1. Mainly because of allowance of creation of companies with some sounding names such as “finance”, “investments”, and usage of some famous names such as “Blackstone” (similar to the famous US Blackstone Group), “Aabar” (similar to Aabar of Abu Dhabi) – which in effect provide some sense of legitimacy due to those names, despite that it could just be a shell company (i.e. company without any real assets and operations).
    2. The company could operate with bearer shares (i.e. the beneficial shareholders do not need to appear on records) and it could operate by a single person from almost anywhere.
    3. These jurisdictions are tax havens – which means there are no corporate taxes involved, saved for some fees to be paid to the local authority (which could be somewhere in the range of USD3,000 to USD10,000 per year).
    4. The offshore companies are needed to provide avenues for opening of bank account under such names, and yet it could be operated singly by a person (in control of those entities).

In the case of US DOJ suit – clearly shows the massive usage of offshore companies to benefit from those items clarified above. This relates to Goodstar, Aabar BVI, Tanore Finance, Abu Dhabi Malaysia Kuwait venture, and so on. These companies and the bank accounts, as the documents explained, are all operated in such manner.

  1. Banking accounts and transfers of monies: why Anti-Money Laundry laws (or generally known as AMLA in Malaysia) are circumvented.
    1. First rule of AMLA is the source of money – it has to be legitimate. The transactions as explained in US DOJ filing clearly attacks on the subject matter. This has to rely on the officials of the money originator (like officers of 1MDB, the various offshore companies officers) – what they submitted to the originating country’s regulators (e.g. Bank Negara, MAS, etc.) as to the source of the money; and to the bank officers (compliance as well as account officers), as to what they disclose in the transmitting documents (in this case SWIFT messages as well as official emails). The main approach undertaken is either to “falsify documents” or “to legitimize documents”. The first one is possible if the banks take it on the face value (without further verification’s, which is possible), and on the second one, is to find ways to satisfy the compliance division (which is also possible).
    2. Second rule of AMLA is the usage of the money – it has to be legitimate as well. Most people thought if the money is to be invested in legal avenues, then they are legitimate. What they forget is the original mandate of the “owner” of that money. If they violates the “original mandate”, then it does not matter whether what it has been spent on, it is still illegal.

In the current case – both subjects are examined, and both had failed the test (based on the claims made by the DOJ).

  1. Why US Dollar transactions are under US jurisdictions?
    1. We must understand that all banking remittance of US Dollars must pass through one of the US Correspondence bank? Why – because US Dollars are the PROPERTY of US Government. Hence sending money from Ambank Malaysia or Deutsche Bank Malaysia to Swiss Bank in US Dollar, pass through US JP Morgan Bank (in the current case).
    2. Once US Bank is involved, those US Bank (and all parties that dealt with it) are under US jurisdictions (under US laws). Hence, they must co-operate with US authorities, and all those that deal with them must also cooperate. Due to this reason, we see all communications, such as by Deutsche Bank in Malaysia were made available to the US authorities (even though Deutsche Bank Malaysia is not under US jurisdiction directly, and for that matter the Deutsche Bank Group may have larger stake in the US than here in Malaysia). Nobody should claim that the information obtained by the US are illegitimate. They do have such jurisdictions under US laws.
    3. Once a transaction is covered under some US laws, then the rest of the US laws would apply to those transaction. There is no way to avoid it.

In the current case, almost ALL TRANSACTIONS were made in US Dollars – which then made them to be automatically (by the choice of using US Dollar currency – purposely or inadvertently) to be under US jurisdiction.

  1. Monies that moved into or originate from the United States – will be clearly to be under US jurisdictions
    1. Once the monies moved to the US, whether using offshore entities or US incorporated entities – they are fully subjected to the US laws.
    2. Among the laws are Money laundry laws, RICO related laws (of the old), tax laws, interstate commerce laws (such as from companies incorporated in Delaware to invest in California), securities laws, immigration laws, etc.
    3. Another issue is regarding non-US citizen (in case of the few Malaysians), if they operated from the US but not having a residence visa –is in violation of US immigration laws; and if they are resident of the US (and a non-citizen), it does not matter whether your transactions are in the US or outside US, they all will be subjected to US tax laws and other related laws. In another word, US residency gives the US power over your transactions worldwide. This the most damning issue of US Green Card holder (or some other forms of residency) which is generally not understood by many. And for the case of a US Citizen, it is much more obvious (in the case of Al Husseiny, who is an American Kenyan).
    4. Lastly, once any monies moved into the US and moved out again – those monies are already under the US jurisdictions.

In the current case, all of the issues mentioned above, present so many issues and problems. Details of the issues could unravel as we go along.

  1. Buying of “prestigious assets” – this had always been the “foolish way” of investing.
    1. The case of using “easy money” to buy “prestige assets” in particular real estate assets has been the main modus operandi for many people. The thought is that these assets would be of value, and provide further legitimacy. That is the same modus operandi of the Brunei Amedeo (Prince Jeffri and Brunei Investment Agency debacle of 2000’s, whereby they bought the interests in New York Palace Hotel from the Helmsley’s, as well as properties in Los Angeles Beverly Hills Hotel, and Las Vegas and numerous others [I will leave this for future writings]), before that by Adnan Khasoggi (of Saudi Arabia and its debacle, he now lives in one of the New York apartment, obscured from the public, under US protection after the indictment of arms trafficking), and few other examples.
    2. Why these assets – because the lawyers would advise their clients that it can bought under “trusts”. That were the case of Pengiran Jeffri and also Adnan Khasoggi. Hence the real identities of the owners could be hidden, and with well-structured transaction, it could possibly avoid or reduce the taxes involved. US laws accepts purchase of assets under trusts (i.e. trust laws), especially with some states such as the Delaware Trust laws. The lawyers could also act as trustees and gained enormous amounts of fees from it. Furthermore, with trusts, it further shield the asset from the originating country’s concern (as in the case of Brunei).

In the current case, the assets were bought under various entities, which in general tantamount to some forms of trusts structure (i.e. the real owners are hidden from the public). It should be understood that the trust laws worked well before 2001, but it wouldn’t work anymore since then – and it wouldn’t work for the future (even though it is legal).

  1. Buying of shares in a public company
    1. Another modus operandi is to buy shares in a publicly traded company. The idea here is that you could sell these shares anywhere else in the world, through international network of brokerage. It also provide some forms of “cashable assets”, and you could receive the payment from the proceeds of those sale of shares anywhere else (outside the US).
    2. You could do this by buying the shares using some forms entities, such as Offshore Partnerships in conjunction with some other local funds. This is the classical way of investing in Silicon Valley ventures, which could also be applied for other forms of acquiring major stakes in listed companies.

In the current case, EMI is a company that could have its shares to be classified under such category.

  1. Buying of Arts and Collectibles
    1. Another familiar modus operandi is buying of arts and collectibles. For example, in the Amedeo case (Pengiran Jeffri), a total of 300 Amedeo Modigliani paintings and 7 Picasso’s were among the items purchased. The total value of the arts were anywhere in the range of USD500 to 700 million (in the 90s).
    2. Arts are transferable, could be used as collateral for further investments, and they could also be hidden from any concerned authorities. Arts supposed to provide a perfect cover for many years of the past. But since 9/11, all auction houses are forced to cooperate with the authorities. And as a clear example, in the current case, Christie’s officers were cooperating with the US authorities.
    3. Very rare people would move arts physically, and most were kept in safe custody of the banks. The reason being, the insurance involved in physical movement are too high and costly. Furthermore, insurance terms demanded that they are being kept in “safe forms”, otherwise you would lose the insurance coverage (if they are insured).

In the current case, it involves at least seven paintings of high value. All of them, it seems are seized by the Swiss authorities, which means that the “safe keepers” are now holding it on behalf of the US authorities.

  1. Last but not least – paying of gambling debts at casinos.
    1. This is again a very old and classical method of paying off monies or transferring monies either for your own account or to someone else account. The modus is quite simple: a person goes into a casino (pre-arranged) to gamble, and purposely lose lots of money in the casino. And mind me, only very STUPID people would go and lose millions of millions in a casino within a short span of time. And they would openly declare and make known that they have lost monies in the gambling. This gambling is not as you would imagine to be done at open gambling tables, but rather in private rooms similar to “casino royale” type. But even then, it might not even have taken place at all. Anyway who knows what happened, and who could be a witness to such?
    2. The proceeds from those “losses” are in fact, will be passed by the casino owner to the designated party through some other series of transactions. The casino owner off course would take some cut from it; the normal rate is at least 30% of the amount. How the casino delivers the money to the intended party is off course another mystery.

In the current case, it is stated that 3 people had gambled at two casinos in Las Vegas, and had lost somewhere around 20 over million US Dollars within a span of a short time (i.e. they had gambled intensely over few days, if they took small bets, or they had taken large bets stupidly). In any case, no stupid person want to lose so much money – at least for the pride (if not for the money). Which brings the other possibility of monies going to pay off someone else. Nobody knows for now; but for the US authorities, this information is not out of their reach.

In conclusion: whatever that had been alleged in the US DOJ court filing against the people concerned, had demonstrated to me the pure amateur and hubris of them. The acts that were done and orchestrated mainly out of the US and in US Dollars – which means they entered voluntarily into US jurisdictions – and the full brunt of its laws. To get be able to get out of these laws (if they are innocent), is an uphill task as in the case Sheikh Yassin Kadi vs. the US Treasury, it took him 13 years to clear his name, and the freeze on his assets (which he got the final clearance in December 2014), after fighting those years in the US courts and Swiss courts.

Furthermore, if the methods used by them are true (as alleged), then it further confirms the lack of experience (or acts of desperation), poor legal advice (by their legal counsels if any), lack of understanding of international financial transactions, or for that matter, they might had even walked into a trap laid for them. We don’t know which one is true, until we could learn more from the case.

For now, we have to wait and see what will happen next.

This is the end of Part 2. The series will continue…

1 comment

Add Yours
  1. Daniel Pillai

    Keep up the good work. For once I have a clear picture of what 1MDB is and where we are. I wish our government sets up an advisory comprising of people like you, Dr.Wan. With all the resources Malaysia has been blessed with, we can become a model nation for others. A nation built on great values – honesty, understanding, sharing and maturity – where people can live in peace, harmony and satisfaction. Not how much but how well.

    I enjoyed your articles every bit. Structured very well for readers to follow with clarity. I am not an economist, just a marketing management guy, yet I could follow. I will continue to read your articles and share with my friends. I hope somebody will talk to YB Najib that between political survival and people’s lives, he must choose people’s lives. Let our Maker be his judge.

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