Najib Razak and the Neverending 1MDB Scandal

In the heatwave before another bout of regional smog from forest fires, many Malaysian conversations this year have been especially subdued and resigned in tenor, only briefly lifted by a thrilling Olympic summer that was half a world away in Rio de Janeiro.

The seemingly endless saga of billions of public money gone missing, linked to a state development fund controlled by Malaysia’s Prime Minister Najib Razak, was sidelined by Malaysians celebrating the nation’s best Olympics showing ever, with five medals and thrilling badminton matches that enthralled otherwise bitter political rivals.

But the Southeast Asian nation crashed back to reality soon after Rio’s closing ceremonies. Two key protagonists, in what some civil society leaders are calling a “national tragedy” of Olympian proportions, were summoned to a U.S. court on August 22. Prime Minister Najib’s stepson Riza Aziz and young Malaysian tycoon Low Taek Jho, better known as Jho Low, have been named as defendants in a civil lawsuit first announced by the United States’ Department of Justice (DOJ) a month earlier on July 20.

The DOJ civil action seeks the largest forfeiture in U.S. history, seizing $1 billion in assets tied to the state fund known as 1Malaysia Development Berhad (1MDB) overseen by the Malaysian prime minister. According to the DOJ complaint, there was an “international conspiracy” to launder over $3.5 billion in 1MDB funds, allegedly misappropriated through various international financial institutions and jurisdictions such as Singapore, Luxembourg, Switzerland, and the U.S., which has since sparked off a series of ongoing investigations in these countries. In an earlier, unprecedented move in May, neighboring financial center Singapore shut down the local branch of a private Swiss bank, BSI, because of its links to the troubled 1MDB and alleged money laundering. As the U.S. Federal Bureau of Investigation (FBI) deputy director Andrew McCabe said at the July 20 press conference, “the Malaysian people were defrauded on an enormous scale.” He added that the inquiry was ongoing.

At the heart of the DOJ’s 136-page filing is the central figure of “Malaysian Official 1,” or “MO1,” a thinly veiled reference to the Malaysian prime minister. The money laundering case outlined by the DOJ detailed how “MO1” received $731 million from 1MDB. Swirling around the “MO1” figure, the DOJ papers explain with some detail a litany of alleged failures in financial governance that enabled a multi-billion dollar heist of Malaysian money, which was laundered through an intricate web of global money transfers and purchases: New York and London properties, a private jet, paintings by Monet and Van Gogh, Las Vegas gambling debts in the millions, and the financing of a Hollywood movie about large-scale financial corruption, The Wolf of Wall Street. Several big banks such as Goldman Sachs, Deutsche, RBS Coutts, Singapore’s DBS, and Malaysia’s AmBank lead the mentions in the DOJ complaint.

In the latest episode of the 1MDB scandal, a key figure in the investigations, Khadem al-Qubaisi, was reportedly arrested by Abu Dhabi authorities in mid-August. The Arab financier had been barred from leaving the United Arab Emirates in April, and his assets were frozen. The DOJ lawsuits sought to freeze $100 million worth of real estate al-Qubaisi allegedly bought with funds from 1MDB. The Abu Dhabi resident, known for his nightclubs and party life, was being investigated by U.S. authorities tracing a $470 million money trail that stretched from Malaysia to Abu Dhabi, and then to the tax haven of the British Virgin Islands.

With this torrent of financial details alleging a massive defrauding of the Malaysian people, sparked over a year ago by the crusading anti-corruption website the Sarawak Report and further amplified by investigations into the money trail by The Wall Street Journal, the mix of shame, disgust, and outrage has been hard to stomach, lamented Marina Mahathir. The prominent civil society activist, well-known Muslim liberal, and outspoken daughter of Malaysia’s longest-serving prime minister, Dr. Mahathir Mohamad, said she has found a coarsening of Malaysian sensibilities she partly blames on the political implications of the 1MDB scandal.

"When you're ruled by a bunch of scoundrels, to put it gently, then down the line people also think… that it's okay to be like that,” Marina said one evening in Bangsar, a central Kuala Lumpur precinct that was transformed during her father’s prime ministership in the 1990s from a gritty working-class enclave into a new Malaysian middle-class playground of restaurants, boutiques, and bistros.

“So 1MDB [scandal] is huge, there's nothing comparable to that. But then you add the guy in the sports ministry, who allegedly managed to siphon off 100 million [ringgit, about $25 million] or something crazy like that. All the way down to all sorts of petty little things like the policeman taking his little bits, that's been going on for a long time,” she said. “There's a sense now of the law doesn't matter, the law doesn't affect everyone equally, not affecting those at the top at all it seems.

“You get this feeling of anarchy sometimes, for those of us who think of ourselves as upright citizens, [wondering] why are people being like this? I think it's because there's this general atmosphere that at the top there's lawlessness, and therefore what's the rest of us to do but to just follow,” Marina said, noting that a culture of impunity was becoming pervasive along the corridors of power. “It's that aspect of incredible greed, and then getting away with it.”

While agreeing that there are a raft of socioeconomic reforms that the Najib government has raised that need implementing, Marina agreed formulating and grappling with urgent policy questions have become “very difficult” because of a compromised leader in the wake of the 1MDB scandal.

“There's a general lack of trust in our leadership,” she stressed. “Maybe it's not so much related to 1MDB as it is to other things, where people say outrageous things and they've not been reprimanded by our so-called leaders, gotten away with it, and then they repeat it. So many cases where minorities particularly, but not just them, feel there's been injustice. All these little things add up. There's a great lack of trust in the government, so whatever they say, whatever good they might to do, is met with a lot of cynicism and mistrust.”

For Ibrahim Suffian of the independent polling agency, the Merdeka Center, this burgeoning mistrust of the Najib government has been made worse by a growing despair among Malaysians about an immovable leader, unable to be punted from power.

“There's a kind of suspended reality in Malaysia, not like the laws of physics where what goes up must come down -- it doesn't always work this way here,” he said, one smoky afternoon at his Kuala Lumpur headquarters. “You can bend the rules of political physics in Malaysia, not forever but for awhile.”

“There's a sense of apathy, of ‘nothing can be done,’ partly because of the opposition being fragmented. It’s a dynamic situation, with the government also working hard to reduce the effectiveness of the opposition whether through harassments, (corrupt) incentives, things like that.

“For the average man or woman on the street, they are concerned. Even opposition supporters have asked, ‘why doesn't my leader raise the issues over 1MDB?’, when he’s supposed to be an ulama, a religious guy who should decide on what is right and wrong. All of this affects the political eco-system, where the leaders are being judged on how they respond to this issue.”

The Merdeka Center director said there was a “log jam” in Malaysian politics right now, where the prime minister is unassailable inside his ruling party, UMNO, while his opponents are divided over motives and means to dislodge a leader who should be vulnerable and deeply damaged by a globe-spanning financial scandal.

The political opposition once led to near-victory in the bitterly contested 2013 federal elections by former deputy prime minister Anwar Ibrahim is no longer the cohesive coalition it was three years ago. The then-opposition coalition Pakatan Rakyat led by Anwar, who has since been jailed for alleged sodomy, did astonishingly well in the 2013 polls, winning the overall popular vote despite widespread reports of electoral fraud, gerrymandering, and electoral malapportionment. The opposition coalition failed to win the government, despite a popular vote for change. Najib’s coalition returned to power with a majority of parliamentary seats.

In focus-group surveys and discussions since the bruising 2013 polls, the dismay and occasional flashes of palpable anger with Najib’s ruling party were partly driven by the crushing costs of living, economic uncertainty, and unemployment fears. While the issue of 1MDB’s scandals had become well-known--even deep in the Borneo state of Sarawak’s rural interiors, Ibrahim says, “ordinary villagers have asked about 1MDB and how this endangers the government’s finances”--there was a need for the new, ethnic Malay party known as Parti Pribumi Bersatu to break the political stalemate inside the Malay heartland that sustains Najib’s UMNO party.

“Malaysia is a semi-authoritarian place that is in need of urgent structural reform, but it can't be reformed from the outside,” said Ibrahim. “You can't just do procedural reform because of the ruling party's long hold on power and its vested interests, that's part and parcel of the impediments to any reform. They refuse to reform because it will take away the gravy train.”

The new party Bersatu is helmed by two prominent UMNO leaders expelled from the party by Najib following last year’s revelations on the alleged multi-billion dollar swindle at 1MDB. Then-Deputy Prime Minister Muhyiddin Yassin and a state premier, Mukhriz Mahathir, led the charge within UMNO, demanding answers to the thorny questions that have arisen in the wake of the 1MDB scandal. Both Muhyiddin and Mukhriz, who is a son of Dr. Mahathir, were expelled from the ruling UMNO party, along with several other leaders.

"Some people like [civil society leader and former political prisoner] Kua Kia Soong have spoken out against Bersatu's Malay-only membership, that's it's unhelpful to a new Malaysia,” Ibrahim said. But, he added, the new party “is reflective of the political realities right now.”

Indeed, Bersatu is widely seen as the fraying UMNO’s greatest challenge in a precarious political environment where loyalties have been allegedly bought in a souring economy. Mahathir is also seen as the svengali behind Bersatu’s performance so far, and the 91-year-old former prime minister has been duly targeted in numerous editorials in the licensed mainstream media, accused of ruining the Malay electorate, culture, and economic security.

Despite being under pressure, the government still has a firm hold on power and economic resources. The opposition might have public support, but fragmentation is a problem. “Public opinion may not be on its side, but if the opposition is fragmented and can't mobilize the public for the general elections, what can dislodge this log-jam right now?” asked Ibrahim.

Multiracial parties, like PKR, can’t draw as many votes as Malay parties like UMNO, Ibrahim said. And others, like the Islamist party Pas, are staying cautious; Pas is “being opportunistic and going with both sides, not taking a principled stand (over 1MDB),” Ibrahim explained.

The new Bersatu party, despite being Malay-only, may be more of a “threshold” party, able “to swing disaffected UMNO supporters, while acting in concert with others in the opposition.” It may, Ibrahim said, be hoping “to offer new leadership to Malays, but not to supplant Pas or PKR.”

“The Muhyiddin-Mahathir party provides the cherry atop the cake, allowing them (the opposition) to cross the threshold. But still needs to ride on the pre-existing bulk of opposition voters, which they have to bring over from Pas,” he explained. “The politics is developing, but quietly.”

“The DOJ report has jolted the political elite on both sides,” Ibrahim said. Najib’s ruling coaition, he said, may be asking itself not just whether Najib has become a liability but how the scandal will impact their electoral prospects. This likely internal questioning aside, “the opportunities to act are very limited.”

The opposition is “fragmented and tired out fighting each other. To some extent, they feel there's an opportunity now, an influx of new leaders from the Muhyiddin side,” Ibrahim said. “There is a decent sized base (of support), and with Mahathir-Muhyiddin involved, the opposition might be able to swing enough disaffected Malay votes to win power. Because the swing required for the marginal seats to change hands is only 2 to 3 percent.”

Regardless of the small percentage needed for seats to change hands, because of malapportionment, gerrymandering, and other distortions in the electoral landscape, a big swing of votes would still be needed for the opposition to win the government.

"Yes, you need to get a bigger proportion of the popular vote, from the previous 52 percent [which the opposition coalition won in 2013] to about 55 to 56 percent in order to win the parliamentary majority,” Ibrahim said. “You can change the boundaries, rejig the electorates, move voters around, but voters can make up their own mind.”

However, even should it win over voters, the opposition faces another hurdle. Prominent civil society leaders such as Ambiga Sreenevasan warn that the “draconian” new National Security Council Act (NSC) may prevent any possible removal of Najib through the electoral process, and forestall a change in government. The NSC law, which came into effect in August, enables the prime minister to suspend parliamentary democracy in vaguely specified zones he can declare “security areas” -- potentially putting the whole nation under quasi-military rule. Civil society leaders and prominent lawyers have lambasted the NSC law as “excessive,” saying that it puts Malaysia on the “path to dictatorship” under Najib.

Even the government’s own human rights commission chief, Razali Ismail, admitted in public that “the apprehensions of many Malaysians against the said Act are not unfounded as we all know that national security has long been one of the preferred tools by which many governments, even democratic ones, resort to controlling the free flow of information and ideas.”

For Sreenevasan, the former president of the Malaysian Bar Council and icon of the electoral reform movement Bersih2.0, the new NSC law is a brazen tool to foil a particular leader’s enemies. She said Najib feared prosecution if he relinquished power amid the 1MDB scandal.

“The prime minister will not move probably because he thinks he has no choice. When we protest, it’s not so much for Najib’s ears as he knows most people want him to step down. We’re appealing to the other ministers in the cabinet. If they don’t anything about this (1MDB scandal), then they are complicit,” Sreenevasan said. “And so far all I’ve heard from them have been noises in favor of the prime minister and 1MDB. Either they’re silent, in a sin of omission, or they’re just saying what Najib wants them to say. They’re compromising the country.”

Sreenevasan questions how Najib, under siege, can perform his duties. “How is he going to deal with the Unites States, for starters, or any other country? He’s completely preoccupied with this 1MDB issue. He’s not making decisions in the interests of the nation, but in his own interests. With the National Security Council Act now enforced, Najib is all powerful,” she said.

Under the NSC law, Najib “can unilaterally declare any area in the country a security area. Once it becomes a security area, it becomes a legal black hole. Anything can go on there, and there is no accountability,” Sreenevasan explained. “For example, they can do away with inquests if someone dies within that security area. They can seize, they can arrest without warrant, they can torture. You’re allowing both the army and the police to act together. So you’re creating a monster.”

And yet it will be a supremely well-resourced monster. About half of Malaysia’s economy and stock market is ultimately controlled by the federal government’s Ministry of Finance Incorporated (MOF Inc). Najib is also the finance minister in Malaysia, and the recent centralization of traditional means to dispense patronage in the political system has made him even more powerful than the much-criticized authoritarianism of previous prime minister Mahathir. According to Malaysia’s leading political economist, Professor Edmund Terence Gomez of Universiti Malaya, Najib has consolidated in his office huge swathes of the economy that was originally “nationalized” in the aftermath of the Asian Financial Crisis (AFC) of the late 1990s.

Key ethnic Malay tycoons and their empires, established with the help of then-prime minister Mahathir’s vision of an ethnic Malay capitalist class of big business leaders, crashed during the AFC, heavily indebted and insolvent in the credit crisis. Many of the businesses were bought and bailed out by the government and held as part of MOF Inc’s portfolio of investments. Today, according to recent research by Gomez and his team, the government’s share of the stock market has increased from 43.7 percent to over 47 percent, indicating an increase in government control of Malaysia’s largest companies. At RM51.7 billion ($12.8 billion), state-owned enterprise acquisition values, or the government’s investments in private companies, dwarf its disposals at RM29.5 billion ($7.4 billion).

Gomez’s research was commissioned by the independent Institute for Democracy and Economic Affairs (IDEAS) think tank. As the chief executive of IDEAS, Wan Saiful Wan Jan, suggested in his newspaper column about the research on the Malaysian government’s outsized role in the economy, a prime minister enveloped in an apparently uncontrollable and still unwinding financial scandal may prove hard to dislodge when he controls much of the economy through a powerful state-owned enterprise such as MOF Inc. The irony of Najib’s stranglehold on the economy, and the levers of political patronage which have kept UMNO party leaders loyal to Najib throughout the 1MDB crisis, may not be entirely lost on Mahathir. After all, as Wan Saiful wrote, “Mahathir started this practice and it is likely to continue until someone who believes in good governance and separation of powers takes over as prime minister.”

There’s a reason the prime minister -- whether Mahathir or Najib -- typically doesn’t want to appoint someone else as the finance minister, Wan Saiful explained. “The reason is, the finance minister is also the head of a super-structure called the Ministry of Finance Incorporated (MOF Inc). This is a huge and powerful SOE. We found that MOF Inc controls 64 subsidiaries, and has shares in two associate companies and two minority companies.”

“More importantly, it holds the golden share in 32 companies, a power that none of the other GLICs (government-linked investment companies) hold. By holding the post of finance minister, the person controls a huge amount of corporate power, unrivalled by anybody else in the country,” he wrote.

According to Gomez’s research project, the ruling party UMNO’s hold on the economy has actually greatly diminished since Mahathir’s era. In 1996, there were 29 UMNO-linked people who held important posts in 120 companies, yet by 2013 under Najib, just 12 UMNO leaders and former leaders held positions in only 10 companies.

For Gomez, however, there has been a qualitative change in the nature of Malaysian politics since Mahathir’s era, which is reflected in how Malaysia’s racialized politics has been conceived: “Najib is not interested in creating Malay capitalists in the way Mahathir did,” Gomez said. “Unlike Mahathir who as prime minister was deeply involved in the idea of using business as a mechanism to generate economic growth while at the same time making sure this was done by Malays, Najib doesn't have that kind of thinking. Although he initially talked about privatization, he later changed his stance.”

In the searing heat expected as the American DOJ civil action takes it course, with key protagonists closely linked to Najib summoned to defend themselves in U.S. courts, there are few options left open to saving a prime ministership that launched itself with great modern fanfare in 2009. With the next general election due by 2018, and elections planning in Malaysia usually taking a year to finesse and implement, few expect Najib to survive another two years as the ignominy of the 1MDB scandal continues to mount--and the threat of jail arises.

But with many assets frozen in various ongoing investigations worldwide, unable to contribute to what would be an expensive re-election campaign, Najib’s option to rush to a snap poll appears to have faded considerably over the summer since the DOJ civil suit. A negotiated exit from the prime minister’s office is still the current speculation, with current Deputy Prime Minister Zahid Hamidi seen as the firm favorite in taking over and negotiating favorable terms. Zahid is popular inside the nervous UMNO party, where the souring economy of poor oil prices and flat commodities markets have limited the party’s largesse for its rural heartland. Zahid’s warm ties with the Pentagon and the American national security establishment are seen as positives at a time of unease over China’s moves in the South China Sea, and the boldly encouraged bailouts of 1MDB’s debts by the current compromised prime minister.