Malaysia’s $6.5 Billion Scandal Almost Sank Its Democracy
The cover-up of the 1MDB affair was taking the country toward autocracy — until the people won the day.
On the first day of 2017, fugitive Malaysian financier Jho Low, the chief suspect in a $6.5 billion fraud that had split his home country in two, circulated a curious parable to his trusted contacts on Chinese messaging app WeChat: “2016 was the Perfect Storm … and the Captain simply adjusted their sails effortlessly and continued their destined journey….”
It was a remarkably nonchalant message for a man at the center of a U.S. Justice Department criminal investigation, and who had become a cartoon villain for protestors in the streets of Kuala Lumpur. But as Low bobbed along on his mega-yacht, Equanimity, he had the utmost confidence in his “captain” — Malaysian Prime Minister Najib Razak, the man believed to be Low’s partner in defrauding his own country’s public.
When the message was sent, Najib’s reign seemed unassailable. Threatened with ouster two years earlier, the so-called captain — the head of a political alliance that had ruled Malaysia for over six decades — had demonstrated his willingness to burn down Malaysian rule of law and democracy to save himself and his allies.
But today, the former prime minister and his wife are unable to leave the country. The anti-corruption agency investigation has reportedly recommended prosecution and Najib is set to be charged soon after the Eid celebrations finish. Low himself is scuttling between Macau and Taiwan, seeking to cut a deal with the new government in exchange for immunity. His approaches have been flatly rejected.
Malaysia’s institutions proved more resilient than either man had ever imagined, and descent into authoritarianism has been averted – offering a lesson not only to aspiring dictators, but to those in the United States who argue that propping up corrupt leaders is in U.S. interests.
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The party came to an abrupt end thanks to a multibillion-dollar scandal involving Najib and Low’s brainchild: a government investment fund called 1Malaysia Development Berhad (1MDB). With a nebulous mandate of promoting economic development through strategic partnerships, the fund entered into a series of huge deals with partners in Saudi Arabia and Abu Dhabi to nominally invest in energy and real estate.
The deals were, however, allegedly a smokescreen for a conspiracy to divert billions to a small cabal of conspirators on both sides of the deals; chief amongst them Najib and Jho Low. Fuelled by debt and with no substantive cash flow from its investments, the fund became a $17 billion black hole, for which Malaysians will pick up the tab for generations.
In 2016, when the U.S. Department of Justice (DOJ) seized assets worth $2 billion held by Jho Low and his associates in the United States, Switzerland, and United Kingdom These assets included a private jet, mansions in Beverly Hills and London, penthouses in New York, paintings by Monet and Van Gogh, and the rights to movies like The Wolf of Wall Street and Dumb and Dumber To, allegedly purchased using funds siphoned from 1MDB. While the Justice Department named Low as a chief conspirator in the fraud, Malaysian Prime Minister Najib Razak was referred to only as ‘Malaysian Official 1’. The DOJ case confirmed earlier headlines that over $1 billion flowed into his personal bank account in Kuala Lumpur.
Yet Low knew that he was safe as long as Najib was in power. Like many other Malaysians, he couldn’t imagine a world in which Najib, an aristocrat and head of a political alliance that had ruled uninterrupted since independence in 1957, wouldn’t prevail. Even as knowledge of the fraud spread throughout the country, Najib remained confident in his own impunity — and determined to protect himself even if it meant putting a torch to Malaysia’s democracy and rule of law.
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When Najib became prime minister in 2009, he projected the image of an energetic modernizer. His tenure coincided with the rise of another youthful reformer, U.S. President Barack Obama, who pledged to strengthen alliances as part of his “pivot to Asia” to counter China’s growing influence. Najib’s team of Western public-relations advisors sculpted his image as a pro-Western pragmatist leading a majority Muslim nation, forming his Global Movement of Moderates initiative to fight extremism. The two leaders apparently enjoyed a genuinely warm personal relationship, golfing together in Hawaii over Christmas in 2014 during a meeting brokered by a former Obama fundraiser (himself being investigated for receiving millions embezzled from 1MDB).
This friendship was one reason why the Justice Department seizure of assets held by his family and associates blindsided Najib and temporarily upended Malaysia’s foreign policy. Najib’s press secretary accused the United States of imperial overreach, calling the indictment “unnecessary and gratuitous” and tantamount to “domestic political manipulation and interference.” Najib dropped any pretense of domestic reform and began to appeal to his supporters’ basest political sentiments, racial and religious supremacy, directed against Malaysia’s ethnic Chinese population. At a fundraising dinner for his party, he even called on his supporters to be “brave” like Islamic State fighters.
At the same time, he jetted off to China in search of a bailout for 1MDB, which had begun defaulting on its debts. “The stories about 1MDB monkey business and the DOJ indictment caused huge capital flight from Malaysia, leaving a foreign investment vacuum that China saw as an opportunity to further cement its strategic presence” said James Chin, director of the Asia Institute at the University of Tasmania. China had already been ramping up its investments in Malaysia under Najib’s administration as part of Xi Jinping’s Belt and Road Initiative.
Najib inked a number of new deals with Chinese state-owned firms including the construction of a $13 billion high-speed rail line and purchase of 1MDB’s dubiously overvalued power and land assets. The price of this neighborly “goodwill” was a tacit shift in Malaysia’s foreign policy toward China, and coincided with unprecedented levels of encroachment by Chinese vessels into Malaysian waters in the South China Sea.
“In effect, China took for itself all the benefits and left us with all the liabilities” argues Dennis Ignatius, a former Malaysian ambassador. “If Najib had won the election “we would have become so indebted to China that our independence and territorial integrity would have been seriously compromised.”
As 1MDB publicly unraveled, Najib targeted Malaysian democracy itself. In 2015, leaked documents first surfaced revealing deposits into his accounts. By this point, Malaysian authorities had been quietly building a case against Najib for some time, and were in the final stages of preparing for his arrest. Najib got wind of their intentions and launched a purge, dismissing Attorney General Abdul Gani Patail and senior officers of the Malaysian Anti-Corruption Commission.
They were replaced with bumbling placemen who would later clear Najib of all charges. Soon after the purge, Kevin Morais, a state prosecutor alleged to be one of the leakers, was kidnapped and found buried in cement in an oil drum outside Kuala Lumpur. His exact role remains mysterious, but his gruesome murder sent shockwaves through the civil service.
As law enforcement in the United States, Singapore, Switzerland, and Luxembourg announced investigations and froze billions in assets allegedly stolen from 1MDB, Najib’s new attorney general, Apandi Ali claimed that they must be mistaken. Letters for legal cooperation went unanswered. There was, apparently, no money missing from 1MDB. Malaysia didn’t want this money back, because to do so would be to admit a crime had been committed.
After his assault on the law, Najib went after the media, introducing and enforcing new laws, including a Trump-inspired ban on fake news, ahead of the May 2018 general election that criminalized dissemination of any story Najib’s ministers deemed as fake. He also furnished himself with powers to effectively declare martial law in the event of an ill-defined “security crisis”.
Finally, he went after the voting system itself, re-delineating an already gerrymandered electoral map in the hopes of eliminating any possible ouster by the ballot box.
As the country drifted toward the general election on May 9, most commentators predicted another grubby win for Najib’s incumbent coalition. “Najib’s campaign strategy relied on a set-piece battle where he thought he’d shaped the battlefield ahead of the election with factors like the gerrymandering, the fake news law and weekday polling” says Ben Sufjan, Director of the Merdeka Center, Malaysia’s leading polling group.
Had Najib won the election, he would have taken the country into unchartered authoritarian territory. He was in so deep that his options were dictatorship, exile, or prosecution. The election would have been the funeral for a Malaysian democracy that was already looking in terminal decline. Yet that evening, Lazarus-like, it would spring back to life.
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As polling day neared, it became increasingly clear that Najib’s usual tricks weren’t working. The long-term power of his party had also brought with it a fatal inertia.
With crowds flocking to opposition campaign gatherings, the government resorted to cynically suppressing voter turnout: polling day was called on a weekday; postal votes didn’t arrive; and a strict deadline of 5 p.m. was called while hundreds still waited in line to vote. In some areas, voters were even rejected because they didn’t meet an arbitrary and newly invented “dress code.”
None of this was enough to save him. Najib believed the complexity of the 1MDB fraud made it incomprehensible to most voters in the key swing seats. Yet he was up against the wily Mahathir Mohamad, a 92-year-old political veteran who boiled it down to “Najib is not a rich man — he steals money,” and scathingly referred to Najib’s loyalists as farmyard animals receiving dedak, or chicken feed, from their master.
1MDB became a lightning rod and an indelible symbol of grand corruption. Najib’s fate was sealed. It was a stunning victory for the opposition coalition.
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The first couple’s downfall was humiliating. After a bungled attempt to fly out the country on a private jet was thwarted, they were effectively under house arrest. Days later, police launched dawn searches of their properties in Kuala Lumpur. Photos, probably taken by police and leaked on social media, showed the shattered pair slouched in armchairs, dressed in their fine silks, as officers broke open a series of safes. In scenes reminiscent of Ferdinand and Imelda Marcos’s downfall, inside was $28 million in cash (in 26 different currencies) and $50 million in luxury items including 284 boxes of designer handbags (Najib’s wife, Rosmah, was infamous for her purchase of a $200,000 Hermès Birkin bag). But unlike the former first couple of the Philippines, Najib and Rosmah weren’t agile enough to get out of Dodge.
Across the border, Low slipped out of Thailand. With the Equanimity now impounded in Bali and his captain under unofficial house arrest, Low’s world has collapsed on him — leading to his recent hints he might flip on his old boss.
The new government quickly reappointed the original 1MDB task force that was disbanded by Najib. With a new and highly cooperative jurisdiction in Malaysia, the full and ugly scale of the 1MDB fraud is likely to be revealed. Mahathir is already talking of revising the country’s deals with China, struck during the era of blatant corruption. Nationalist press in Beijing are warning Mahathir of the price Malaysia will pay “if it fails to adhere to the spirit of the contract”.
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The lessons of 1MDB aren’t confined to Malaysia. In the wake of the 2007-2008 global financial crisis, investors flocked to growth markets in Asia and Latin America, where confidence was high and governments flush with money. 1MDB and Brazil’s Petrobras scandal will go down as the two iconic corruption cases that exposed the rot within globalization. But the brave officers of anti-corruption commissions and citizens at the ballot box ultimately brought down prime ministers and presidents.
In Malaysia’s case, they had a little help from the United States, specifically from a controversial program within the Department of Justice called the Kleptocracy Asset Recovery Initiative which continued its civil action even after Najib quashed the domestic 1MDB investigation. The State Department reportedly tried to stifle the DOJ action against Najib. That it failed has been only positive for the reputation of the United States at a time when its image has been badly tarnished worldwide.
While President Donald Trump has talked scathingly of the DOJ’s foreign corruption agenda (and influential figures like donor Eliot Broidy were reportedly in talks with Jho Low to attach a $75 million success fee if he could end the 1MDB investigation), the 1MDB case is a striking instance of how anti-corruption can pay off not only morally, but geopolitically for the United States.
With a fresh administration in Malaysia, the DOJ is now able to repatriate the $2 billion in assets that were seized and help plug the 1MDB debt, stabilizing the new government. After a three-year interlude, they can also resume working with their Malaysian counterparts. In the meantime, the new administration has tugged the country away from the seemingly inevitable gravity of China’s orbit.
Najib’s fall is a reminder that tyrants are not invincible, and that U.S. interests, in the long term, are best served by supporting those fighting for the rule of law, financial transparency, and anti-corruption efforts than by short-term alliances with strongmen.