Recent developments demonstrate that regulators are focused on allegations of corruption in sovereign wealth funds. Global investigations reflect increasing cooperation among foreign governments to identify illegal conduct by the funds and their advisors. Financial institutions that deal with sovereign wealth funds should anticipate that their relationships may become the focus of regulatory inquiries and should ensure that their compliance programs appropriately facilitate the high level of diligence expected by international sanctions and anti-corruption regimes.
On January 30, 2016, the Swiss attorney general's office announced that $4 billion may have been misappropriated from state-owned companies in Malaysia through transfers involving Swiss financial institutions. Two days later, the Monetary Authority of Singapore announced that they had seized a "large number" of bank accounts in connection with their investigation of possible money-laundering involving the Malaysian state investment fund, 1Malaysia Development Berhad, or 1MDB for short. Both the Swiss and Singapore governments noted that they were cooperating with U.S. authorities in their investigations.
The global scrutiny of 1MDB began last year when the Wall Street Journal reported that $700 million from 1MDB was diverted into the personal accounts of Malaysian Prime Minister Najib Razak. A few months after the article was published, reports surfaced that the U.S. Government was investigating the role that U.S. institutions may have played in advising 1MDB.
This is not the first time U.S. regulators have investigated allegations of corruption associated with foreign sovereign wealth funds. In 2011, the U.S. Securities and Exchange Commission sent letters of inquiry to hedge funds, banks, and private equity firms requesting information about the firms ' interactions with sovereign wealth funds. These inquiry letters resulted in numerous investigations. U.S. regulators have embraced the use of "industry sweeps " resulting in expansive investigations. Although the sweep's initial focus may be limited, the SEC may broaden its focus to include varying practices and geographies within a targeted industry. Financial firms' interactions with sovereign wealth funds will likely continue to be a focus of U.S. regulatory interest.
Given the allegations of corruption and misappropriation of funds at 1MDB, it is likely that U.S. regulators will seek information from any firm associate d with 1MDB to determine whether dealings with the sovereign wea lth fund were appropr iate. Investments in state-owned companies in Malaysia may also be subje ct to enhanced scrutiny .
RK&O clients should closely examine their business dealings in Malaysia, in particular, any involvement with 1MDB or any other state-owned company. Although the Swiss authorities announced the names of four Malaysian and Saudi Arabian companies that may have been involved in money-laundering, it is possible that this list may expand. More broadly, clients should closely examine a ny ongoing relationship with a sovereign wealth fund. All aspects of sovereign wea lth fund relationships should be closely monitored, including sourcing investments from sovereign wealth funds, joint ventures with sovereign wealth funds and any requests from the sovereign wealth fund, such as internship placements and consultant recommendations .