Largest civil asset recovery case in US of this kind
On July 20, 2016, the US Department of Justice filed a civil forfeiture case in California to recover assets of more than $1 billion in alleged proceeds of crime resulting from fraud allegedly committed by individuals associated with the Malaysian government’s 1Malaysia Development Berhad (“1MDB“).
According to the civil complaint, proceeds of crime were funneled through the US financial system (banks) and allegedly parked in expensive real estate in the US and London, and used to buy a Canadian Bombardier jet ($34,000,000) and expensive works of art ($200,000,000), and used to finance the film “The Wolf of Wall Street”, to pay for VIP high rollers to gamble in Las Vegas ($25,000,000), to buy expensive diamonds ($3,000,000), and perhaps even to finance the Omnia nightclub in Las Vegas (summary here and copies of email evidence and more detailed fascinating story here).
Bank assets and real estate frozen globally
Bank accounts in multiple countries in the names of individuals and private companies were frozen, likely pursuant to a Mareava injunction, while the investigation continues and the trail of funds can be ascertained, which may take a year. In July 2016, the Singapore MAS seized $240 million in connection with 1MDB, half of which was held by Jho Taek Low (see below).
The essence of the civil complaint is that a few politically exposed persons (“PEP“) from Malaysia, the US and the United Arab Emirates raised funds through bond issuances for Malaysia intended to grow its economy and diverted the funds raised for their personal use or for the use of private companies they legally owned or beneficially controlled. While the allegations are based on criminal activities, no criminal complaint was filed although the alleged criminal conduct is being used for the basis of the civil asset recovery.
One of the key PEPs is Khadem Al Qubaisi, the former director of the International Petroleum Investment Company, Abu Dhabi’s sovereign-wealth fund. He was also the Chairman of a company called Hakkasan Ltd., which owns the Omnia nightclub in Las Vegas. He was arrested last week in Abu Dhabi and his assets are frozen. Investigations may be looking into whether part of the alleged proceeds of crime from the 1MDB capital raising activities may have been used to finance the Omnia nightclub.
Jho Taek Low
People in Asia believe part of the alleged proceeds of crime may have been used to finance a luxury yacht currently in Hong Kong worth $160 million, once used to hold a party for Leonardo diCaprio. The 300-foot yacht, “Equanimity,” is said to be owned by Jho Taek Low. News reports say that the yacht is being put up for sale in Hong Kong by one of Low’s private companies.
Jho Taek Low, a Malaysian PEP, originally based in Hong Kong, is one of the alleged actors involved in the 1MDB scandal named in the US civil forfeiture case. The South China Morning Post reported that Low has begun to sell expensive pieces of art. He allegedly runs several companies, Jynwel Capital, Batumba Investments Limited Hong Kong, Good Star Limited and Wynton Capital. According to some reports, he allegedly used part of the alleged proceeds of crime to arrange for expensive diamond purchases for Malaysian PEPs.
The organizations that received the alleged proceeds of crime include the United Nations. The UN agency, IRIN, said that it received over $2 million from Low’s organizations. It will have to return the funds if it was proceeds of crime from 1 MDB, since it belongs to the people of Malaysia. According to news reports, a UN foundation used Low’s $160 million luxury yacht to hold a lavish party for fund-raising. According to other news reports, the funds for IRIN were part of a beneficial structuring arrangement whereby the true beneficiary was IRIN but the funds were paid to a UK organization called Overseas Development Institute and given to IRIN. The ODI said that it performed due diligence in respect of Low’s organization and that it was comfortable that the source of funds was legitimate, confirming that it acted as a beneficial “conduit” for the flow of funds paid to IRIN. The UN Foundation received a further $3 million from Low’s organizations, also possibly proceeds of crime that will have to be returned if they are owned by the people of Malaysia. The UN Foundation told the a media organization it would be willing to take additional funds from Low’s organization.
“Recycle cash well”
In a PetroSaudi Powerpoint connected to the IMBD scandal that was allegedly used to raise the initial funds … the final step of the plan was to “recycle cash well.”
When the first 1MDB funds were allegedly paid out to a company controlled by Low, his colleagues allegedly posted on Facebook that it was “raining Cristal haha!” (i.e., champagne) in Las Vegas.
Unanswered questions on anti-money laundering law
Some of the funds were deposited into a New York law firm trust account and from there appear to have been used for purposes unrelated to the practice of law, namely allegedly for payments to be made for, inter alia, $25,000,000 for gambling in Las Vegas, $3,000,000 for jewelry, and millions of dollars for real estate. Generally speaking, law firms do not act as bankers for clients. When they do, those transactions are not protected by privilege. Moreover, if a law firm acts solely as a bank for a client, arguably, it seems it may become an unlicensed deposit-taking institution (which is a problem in and of itself), subject to banking regulations and therefore, may be subject to federal reporting obligations in respect of the Bank Secrecy Act.
An unanswered question in the investigation is how it is that these well-known PEPs were able to secure so many banking relationships all over the world and open accounts at Las Vegas casinos, when PEP law would have operated to have prevented this from happening. No bank or casino would have been able to satisfy anti-money laundering law in respect of beneficial ownership and the source of funds of the PEPs as having been earned and traceable to transparent business activities. It’s not just normal anti-money laundering law at play but also more onerous obligations of beneficial ownership confirmation and PEP law.
The legal basis for the claim
The legal basis for the civil asset recovery action is a civil action in rem to forfeit assets in other countries, as well as the US, involved in and traceable to money laundered in the US pursuant to 18 U.S.C. §981(a)(1)(C), on the ground that it was derived from violations of US law, and pursuant to 18 U.S.C. §981(a)(1)(A). The US claims jurisdiction pursuant to 28 U.S.C. §§1345 and 1355.
The legal basis also is that the defendants’ asset are property that constitute or are derived from proceeds traceable to one or more violations of foreign criminal offenses involving fraud by or against a foreign bank, wire fraud, international transportation or receipt of stolen property or fraudulently obtained property, receipt of stolen money, and misappropriation of public funds by or for the benefit of a public official and is capable of forfeiture under 18 U.S.C. §981(a)(1)(C).
Harm was to US financial system
The action is interesting from a number of perspectives, including that it is just a civil, as opposed to a criminal, action. No American natural or legal person was harmed by the alleged money laundering scheme. The basis of the action is that the US financial system was used to launder money and it – the financial system – was harmed by virtue of the fact that it was used (and abused) for money laundering purposes.
FBI – We will “deny money launderers safe haven wherever they may be” .. including Canada?
The action is also interesting because the US government said it would: ”be relentless in efforts to deny money launderers the proceeds of their crimes” wherever they may be (including Canada?) and to ensure they have “no safe haven”. The US government went on to say: “public corruption, no matter where it occurs, is a threat to a competitive global economy … we cannot allow billions of dollars to be laundered through US financial institutions without consequences,” explaining that the FBI is working with foreign countries to return stolen assets.
By virtue of the correspondent banking system, every dollar wired (including to Canada) goes through the US financial system, ergo, it seems that the US government is poised to enter into the realm of civil asset recovery involving any country if the dollar volumes are high enough.