For decades, American stocks, treasury bonds, real estate, and business investments have provided stable and attractive opportunities for foreign money to grow. The United States’ laws protecting an individual’s financial assets have incentivized foreign investors to trust U.S. markets, to the point where billions of dollars worth of foreign currency are entrusted to foreign wealth funds (1). These wealth funds, in turn, act as investors in American real estate, stocks, bonds, and other financial portfolios, to grow their domestic finances with common citizens' money. This system has been successful for the world economy as a whole, as foreign investors held $6.2 trillion in U.S. government bonds, $5.9 trillion of U.S. stocks, and equity holdings of roughly $6 trillion last year (1). The wealth funds that represent countries such as China and Norway are vital to the success of these American investments and are created with the hope to transfer wealth to their respective country.
Though the idea is to grow foreign national wealth in American markets, this has not been the case with a recent Malaysian wealth fund. Recent U.S. investigations on anonymously purchased, lucrative luxuries have led to a $3 billion case involving the Malaysian sovereign wealth fund and its prime minister, Najib Razak (2). The Kleptocracy Asset Recovery Initiative issued the forfeiture complaint, which revealed one of the largest money laundering cases and highlighted issues with foreign investment. The complaint stated that the “stepson, close friends, and associates of the prime minister diverted more than $3 billion from Malaysia’s sovereign wealth fund” for investment (2). Then, $1 billion of the embezzled funds from the sovereign wealth fund, 1 Malaysia Development Berhad (or 1MDB), were spent on “celebrity-studded parties,” “high-end real estate” (luxurious estates), financing movies (Wolf of Wall Street), and famous paintings (7). 1MDB served as a vessel for material spending, chasing social ranks, and entertaining “clients,” at the expense of the Malaysian government and its people.
When the dust settles and the accusations have all been leveled, those at fault will be confident that they have not done anything wrong. In the U.S. legal system, an asset forfeiture case does not result in criminal charges- only asset seizing (2). “Misinterpreting” or manipulating the flexibility of a law will allow these men to walk away with only their reputation damaged. There exists, then, a blurry line between lawful wrongdoing and justifiable punishment. In many cases such as these, it is the poor and middle class who are victims, as the wealthy are ultimately entrusted with additional financial power and autonomy.
In a technologically driven financial world, investment transparency and buyer identity have become focal points for fear of fraud and insecurity in payment. The 1MDB fund, though under investigation for money laundering, also became subject to $3.5 billion of fraud payments from an Abu Dhabi sovereign wealth fund (3). Likewise, the Malaysian parliamentary committee could not trace a $2.1 billion payment to Aabar Investments PJS Ltd., and another $1.37 billion was sent without the committee’s approval (3). Though this specific fund has a multitude of issues, this severity of financial loss is not only found in governmental entrusted funds, as even presidential candidates, banks, and insurance companies are subject to money laundering (4, 5, 6). Donald Trump, the GOP Leader and presidential candidate, is facing charges from his own real-estate students for fraud (4). Bank of America, the mega-bank on Forbes Global 2000 list, is “liable for countrywide mortgage fraud” (5). This issue is not just limited to foreign funds in the United States, but is apparently prevalent within the country as well.
The 1MDB scandal sheds light on the growing flaws in a new-age financial landscape—one where countless quantities of currency can be traded over a smart-phone or computer, without certainty of identity or confirmation. Buyer identification standards ought to increase, the sources of investment need to be understood, and tracing cash flow requires transparency. Online banking and other investment apps make it easy to transfer money, where fraud and theft can occur. In a recent research experiment, a hacker (hired by a bank) created a few simple lines of code that could have robbed $25 billion from the bank and its mobile app users (8). It’s not just an instance of app development gone wrong, but a trusting source of information in a flawed system. Electronic theft in coding is sometimes left unnoticed, just as embezzlement and other frauds are hidden under fake aliases and identities.
Though legal action and precaution are necessary, human greed and ingenuity are often the culprits in these cases. It is difficult to say what will arise in the legal field, but human nature will always persist. Leaving financial protection up to the law has not, and will not, protect against lost money, often untraceable and uncollectable. Where $1 billion in parties and luxury can make one person’s dream a reality, it can destroy numerous middle class citizens who have invested a large fraction of their assets with an entrusted investor. This Malaysian incident, then, is not only a cry for just action against embezzlers, but also a call for cultural change and systematic restructuring.
(1) Long, Heather. "Foreign Holdings of U.S. Stocks and Bonds Hit Record." CNNMoney. Cable News Network, 1 Oct. 2015. Web. 01 Aug. 2016.
(2) Story, Louise. "U.S. Targets $1 Billion in Assets in Malaysian Embezzlement Case." The New York Times. The New York Times, 20 July 2016. Web. 02 Aug. 2016.
(3) Adam, Shamim. "Malaysia's 1MDB Fund Says It May Be Victim of $3.5 Billion Fraud." Bloomberg.com. Bloomberg, 13 Apr. 2016. Web. 05 Aug. 2016.
(4) Lindseth, Nick. "Judge Tells Trump Lawyers to Prepare for Discovery in Fraud Case." Politico PRO. Politico, 2 Aug. 2016. Web. 03 Aug. 2016.
(5) Raymond, Nate. "Bank of America Liable for Countrywide Mortgage Fraud." Reuters. Thomson Reuters, 23 Oct. 2013. Web. 03 Aug. 2016.
(6) McDonald, Jay. "Insurance Fraud." Bankrate. Bankrate, Inc., n.d. Web. 04 Aug. 2016.
(7) "Wolf of Wall Street Complaint." Scribd. N.p., 20 July 2016. Web. 3 Aug. 2016.
(8) Khandenwel, Swati. "Hacker Finds Flaws That Could Let Anyone Steal $25 Billion from a Bank." The Hacker News. N.p., 17 May 2016. Web. 06 Aug. 2016.
Image: © Wee8088 | Dreamstime.com - <a href="https://www.dreamstime.com/editorial-photo-prime-minister-malaysia-najib-razak-sarawak-chief-minister-adenan-satem-feb-dato-sri-mohd-tun-tan-sri-datuk-patinggi-image71005811#res14972580">Prime Minister of Malaysia, Najib Razak and Sarawak Chief Minister, Adenan Satem</a>
Bradley Woolf is a current Junior at the University of Southern California in the Marshall School of Business. He is majoring in Business Administration with an emphasis in Real Estate Finance and minoring in Real Estate and Development. Bradley has worked in both the real estate and financial sectors, where he interned at City National Bank as an underwriter, interned at Strategic Development Advisors, and most recently as a financial advisor for New York Life. He hopes to go into commercial real estate brokerage and is attempting to gain financial experience through Global Intelligence Trust.