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DoJ's kleptocracy unit faces 1MDB test

When Malaysia set up a government-owned investment fund in 2009, the idea was to raise money for energy, real estate and tourism projects that would produce jobs for Malaysians. Instead, insiders siphoned off billions of dollars and treated themselves to penthouse apartments in New York, a luxury hotel in Beverly Hills and paintings by Monet and Van Gogh.

Malaysian taxpayers’ hopes of getting their money back rest with a US Department of Justice unit dedicated to combating official corruption. In a series of legal steps last month, federal prosecutors moved to seize more than $1bn of assets bought with funds stolen from the Malaysian sovereign fund known as 1MDB.

The legal fight for those assets is a test for the DoJ’s six-year old kleptocracy initiative, which targets ill-gotten gains that move through US financial channels. Since its 2010 launch, the programme has frozen $2.8bn stolen by foreign officials in countries such as South Korea, Equatorial Guinea, Taiwan and Honduras.

The 1MDB case represents the kleptocracy unit’s largest asset seizure and, while prosecutors detailed multiple globe-circling financial transactions in a 136-page complaint, the legal road ahead is littered with obstacles. “I can tell you from personal experience that corruption cases of any stripe are hard,” says Kendall Day, 39, who heads the DoJ’s asset forfeiture and money laundering section.

The DoJ to date has returned to its rightful owners only 5 per cent of the funds that it has intercepted. Often several years elapse before funds are repatriated. In July, for example, the US returned $1.8m to Taiwan, capping a courtroom battle that began six years earlier. “We still have more work to do on that side,” says Mr Day, whoprosecuted Jack Abramoff, the lobbyist, in a 2006 Washington corruption case.

The legal challenges involved can be daunting. Prosecutors struggle to convince foreign witnesses to testify against powerful officials. Obtaining documents from overseas also involves invoking mutual legal assistance treaties, a time-consuming process.

In many cases, including the 1MDB affair, prosecutors have difficulty unravelling the web of shell companies and other legal ruses that mask ownership. Some American judges are reluctant to hear kleptocracy cases, believing they belong in foreign courts, says Jack Blum, a Washington attorney who has been a UN anti-corruption consultant.

Raymond Baker, president of Global Financial Integrity, a non-profit research group, says the DoJ programme has helped make life harder for kleptocrats. But he says less formal methods sometimes have succeeded more quickly. In 2013, for example, Tunisia recovered $28m stolen by the wife of Zein al-Abidine Ben Ali, the dictator who had been deposed two years earlier, with a phone call.

“The governor of the central bank of Tunisia called the governor of the central bank of Lebanon. They did it on the basis of personal connections,” Mr Baker says. “Lebanon went through some minor legal gymnastics, got the money and sent it back.”

It may seem strange that US prosecutors would target foreign officials whose corrupt acts occur thousands of miles from American shores. But the volume of dirty money flowing around the world threatens the stability of US markets, officials say. More than $1tn in illicit funds flow out of the developing world annually, according to Global Financial Integrity.

Stable, liquid US financial markets are a magnet for corrupt cash. “There’s a reason kleptocrats like to put their assets in the US,” Mr Day says. “But hot money can really distort our markets and create risks for our financial institutions.”

The anti-corruption battle also dovetails with US national security interests. Corruption flourishes under the same conditions that offer comfort to organised crime or terrorists. “Criminal activity literally is a destroyer of nation states,” John Kerry, secretary of state, said in May at a London anti-corruption summit.

The 1MDB affair, which US prosecutors say involves $3.5bn in misappropriated funds, dwarfs previous cases. Mr Day’s office oversees the kleptocracy unit and a separate team that is pursuing an investigation of Goldman Sachs. The bank is being probed for potential violations of the Bank Secrecy Act in its handling of the money it raised from three 1MDB bond deals. Many of the kleptocracy unit’s cases involve staggering betrayals of public trust. Sani Abacha, the late Nigerian ruler, accumulated at least $630m in illicit assets with US links. The DoJ prosecutors won a default judgment affecting $480m two years ago, but the matter remains on appeal.

The prosecutor says the supersized 1MDB case will not be unique. “There are going to be significant foreign kleptocracy actions in the future,” he says. “People shouldn’t assume it’s an outlier.” - http://www.ft.com/