Why is Goldman Sachs suing Malaysia over 1MDB scandal?

The United States investment bank Goldman Sachs has sued Malaysia in a London arbitration court amid rising tension over a settlement deal reached in connection with the bank’s role in the multibillion-dollar corruption scandal at state fund 1MDB.

Three years ago, New York-based Goldman Sachs agreed to pay $3.9bn to settle Malaysia’s criminal probe over the bank’s role in the scandal.

But the deal has been mired in disputes and this week Goldman filed for arbitration at the London Court of International Arbitration.

On Thursday, Malaysia’s 1MDB task force chairman Johari Abdul Ghani described the bank’s move to arbitration as “premature”, because the “parties are still considered to be in the amicable good faith discussions stage”.

Authorities in Malaysia and the United States say $4.5bn was stolen from the now-defunct fund in an elaborate scheme that spanned the globe and implicated former Malaysian Prime Minister Najib Razak, Goldman executives and senior officials elsewhere.

Najib is now serving a 12-year prison term for his part in the scandal, while Goldman Sachs’s former partner and Southeast Asia chief Tim Leissner agreed to work with prosecutors in the US after pleading guilty in 2018 to money laundering and bribery charges.

His Malaysian-based former colleague, Roger Ng, was sentenced to 10 years in prison on similar charges after he pleaded not guilty.

What was 1MDB?

1Malaysia Development Berhad was a state investment fund established in 2009 with the help of a young Malaysian financier named Jho Low.

Najib, who became Malaysia’s prime minister that year, co-founded the fund and chaired its advisory board until 2016.

1MDB was supposed to fund development projects.

How did billions go missing?

1MDB raised billions of dollars in international bond markets between 2009 and 2014.

But the US Department of Justice (DoJ) said some $4.5bn was diverted to offshore bank accounts and shell companies. Malaysian authorities say billions more remain unaccounted for.

The US has said the 1MDB case was its largest ever kleptocracy investigation.

The money was used to buy high-end properties, art, jewellery and a luxury yacht, as well as to finance the 2013 Hollywood film The Wolf of Wall Street, according to the DoJ. Some of it was said to have ended up in Najib’s private bank accounts.

Jho Low has been charged in Malaysia and the United States for his role in the scandal. His whereabouts remain unknown but he has denied wrongdoing in statements through lawyers.

Najib was not named in the DoJ’s investigation but was alluded to as “Malaysian Official 1”, according to Malaysian and US sources.

There was outrage in Malaysia as the scandal unfolded, and the scale of the corruption contributed to Najib’s defeat in the 2018 election, which resulted in his United Malays National Organisation (UMNO) losing power for the first time since independence.

Najib is now in jail serving a 12-year sentence for a case linked to 1MDB and faces several other trials related to the fund.

What was Goldman’s role in 1MDB?

Goldman underwrote the 1MDB bonds in international markets.

The sales raised billions for the fund, and also earned the Wall Street investment bank some $600m in fees and secured large bonuses for some of its executives.

The bond sales were investigated by regulators in at least 14 countries, and Malaysia filed charges in December 2018 against three Goldman Sachs units for misleading investors.

Goldman has claimed certain members of the former Malaysian government as well as 1MDB officials lied about how proceeds from the bond sales would be used.

Has Goldman or any of its bankers faced court?

In 2020, Goldman agreed to settle with the DoJ for $2.9bn, and its Malaysian unit pleaded guilty to a corruption charge.

Leissner was arrested and charged in the US in 2018 for conspiring to launder money and violate an anti-bribery law.

He pleaded guilty and agreed to cooperate with prosecutors.

Leissner has not been sentenced and, according to media reports, remains free on $20m bail.

Roger Ng, Goldman’s former top investment banker for Malaysia, was extradited to the US to face similar charges.

He was sentenced to 10 years in prison in the US earlier this year and brought back to Malaysia in October to help with local investigations.

What agreement did Malaysia and Goldman Sachs reach?

Goldman Sachs has denied wrongdoing since the scandal broke.

The New York-based bank reached a settlement with Kuala Lumpur in 2020, just days before a court in Kuala Lumpur was due to announce a verdict against Najib in the first of his 1MDB-linked cases.

Under the $3.9bn deal, Goldman Sachs would make a $2.5bn cash payout and guarantee to return at least $1.4bn in assets linked to 1MDB bonds.

In return, Kuala Lumpur agreed to end all criminal proceedings against the bank.

Under the terms of the deal, Goldman was also supposed to make a one-time interim payment of $250m if Malaysia had not received at least $500m in assets and proceeds by August 2022.

Why is Goldman now suing Malaysia?

The dispute centres on whether Malaysia had recovered at least $500m as of August 2022 and whether any interim payment was due.

The two sides have been in talks, but Goldman filed for arbitration with the London Court of International Arbitration this week. It says arbitration is necessary if the two sides are unable to resolve the dispute.

Malaysia says its understanding was that the two sides were still talking and the move was “premature”.

What is the Malaysian government’s position on the deal?

The agreement was announced during the short-lived government of Prime Minister Muhyiddin Yassin, a veteran politician and one-time UMNO member who left the party amid the 1MDB scandal.

In November 2022, Anwar Ibrahim became prime minister at the head of a sprawling coalition that also include UMNO.

He has indicated he wants to review the settlement in an effort to recoup more of the lost funds.

Last month, he told a business conference in Singapore that his government wanted to find a solution.

“We are a small nation, but you can’t take us for a ride,” Anwar told delegates, calling the settlement unfair and promising to “take a tougher line”.