By Murray Hiebert & Lance Jackson —
The U.S. Department of Justice (DOJ) on July 20, 2016, filed its single largest civil forfeiture case to date in a case that seeks the recovery of more than $1 billion in assets allegedly acquired with funds embezzled from the Malaysian government’s state investment fund known as 1Malaysia Development Berhad (1MDB). The case stems from an investigation by the Kleptocracy Asset Recovery Initiative, a partnership between DOJ and various U.S. federal law enforcement agencies. The initiative aims to recover proceeds of foreign official corruption and, where appropriate, put these proceeds to use for the benefit of the people of the country harmed by the abuse of public office.
Thus far, the DOJ’s case is caught in lengthy court proceedings to determine the true ownership of assets. A federal judge struck down a motion to protect the assets of Malaysian businessman Low Taek Jho, who, according to DOJ lawsuits, played a central role in defrauding 1MDB. Relatives of Low sought to protect $650 million in assets from seizure by DOJ, including a $100-million interest in EMI Music Publishing Group, a $35 million Bombardier jet, and a $200-million stake in the Park Lane Hotel in New York.
A significant chunk of 1MDB’s funds allegedly came from foreign investors, but in a press conference Attorney General Loretta Lynch said 1MDB is “wholly owned” by the Malaysian government and that the ultimate goal of the civil complaint was to benefit Malaysia by returning the assets to “the government of Malaysia and the Malaysian people.” Setting aside the monetary value of the seizure, DOJ has faced similar challenges before. In 2015, the U.S. government returned a little over $1 million in forfeited assets to the government of South Korea. The money was allegedly stolen from Korean public coffers and laundered in the United States by former president Chun Doo Hwan in the 1990s. In 1997, 10 years after Chun finished his term as president, he was convicted in Korea of accepting more than $200 million in bribes from Korean corporations. The DOJ returned the funds to the Korean minister of justice following Chun’s conviction.
Malaysia’s situation is a bit more complicated. Returning the funds directly to the government is problematic because the DOJ’s lawsuit claims that $681 million siphoned from 1MDB was transferred to accounts of a “high-ranking official in the Malaysian government who also held a position of authority with 1MDB.” The lawsuit never names the official, but speculation that the official in question is Prime Minister Najib Razak is widespread, even within the Prime Minister’s department.
DOJ is unlikely to return the funds directly to the Malaysian government, while Najib is still in office. In addition to being prime minister, he also serves as finance minister. Returning the funds to the Malaysian government would only be an option if Najib’s ruling coalition were toppled in an election or if he was replaced as head of coalition. But neither option appears likely in the near future.
Should Najib stay in power for the foreseeable future, the DOJ could explore repatriating the funds without ceding control of the money to the Malaysian government. In 2007, for example, DOJ returned $115 million of misappropriated funds to Kazakhstan through the BOTA Foundation, which was established by the World Bank and administered by several well-known international development organizations. BOTA was formed in direct response to the DOJ civil forfeiture case.
In the BOTA case, the DOJ sought to seize funds Kazakh political elites allegedly extracted from U.S. oil companies as bribes. Eventually, the case was settled with a memorandum of understanding (MOU) between the U.S. government, the Kazakh government, and the Swiss government, because the funds were held in a Swiss bank. The MOU established BOTA as an organization independent from the Kazakh government and authorized the foundation to use the seized funds to help impoverished youth in Kazakhstan.
Of course, Malaysia is much more developed than Kazakhstan and does not receive development assistance from the World Bank. In addition, if a BOTA-type foundation was established in Malaysia, it would still require cooperation with the Malaysian government. At the very least, the government would need to agree not to interfere with or put pressure on the foundation’s operations. Considering that Najib has repeatedly denied any wrongdoing in association with the 1MDB fund, allowing an independent agency to repatriate the money probably would put him in an awkward political position.
Even if the DOJ encounters resistance from the Malaysian government, it would still not be in uncharted territory. The DOJ is currently negotiating the repatriation of $850 million, its second largest seizure attempt after 1MDB, to Uzbekistan. The funds were seized in association with alleged government corruption in Uzbekistan’s telecom sector.
Similar to Malaysia’s case, the government official involved remains unnamed. However, the official is widely believed to be Gulnara Karimova, daughter of recently deceased Uzbek president Islam Karimov. While the DOJ has declined to comment on the progress of the negotiations with Uzbekistan to repatriate these funds, according to reports by Radio Free Europe, Uzbek officials have said there has been little progress in the talks. An Uzbek businessman who was jailed for four years in 2005 after forming a political opposition party has suggested that DOJ should hold these funds in a trust pending political reforms in Uzbekistan.
The United States has far deeper political, economic, and security relations with Malaysia than it does with Uzbekistan. Thus, it is difficult to imagine a scenario in which negotiations would devolve to the point where a trust would need to be considered by the two governments. However, the option of locking the funds in a trust would give the DOJ a strong fallback position, should it start settlement negotiations with Malaysia.
Because 1MDB is a strategic development company that was to fund development projects that would benefit the Malaysian people, a more far-fetched idea might be for DOJ to establish an independent foundation that could open offices in Malaysia where the country’s 30 million citizens might go to get their share of the proceeds, say, about $30 per person.
Mr. Murray Hiebert is a senior adviser and deputy director of the Southeast Asia Program at CSIS. Follow him on twitter @MurrayHiebert1. Mr. Lance Jackson is a researcher with the Southeast Asia Program.
Murray Hiebert serves as senior associate of the Southeast Asia Program at CSIS.