Do Financial Institutions Know Their Customers?

The United States government has filed civil lawsuits against numerous entities and individuals to recover various assets “involved in and traceable to an international conspiracy to launder money misappropriated from 1Malaysia Development Berhad (“1MDB”), a strategic investment and development company wholly-owned by the government of Malaysia.”[i] According to one suit that was filed in June 2017:

1MDB was ostensibly created to pursue investment and development projects for the economic benefit of Malaysia and its people, primarily relying on the issuance of various debt securities to fund these projects. However, over the course of an approximately five-year period, between approximately 2009 and at least 2014, multiple individuals...conspired to fraudulently divert billions of dollars from 1MDB through various means.The funds diverted from 1MBD were used for the personal benefit of the co-conspirators and their relatives and associates...1MBD maintained no interest in these assets and saw no returns on these investments.[ii]

The following are some ways the funds were spent, which were described in the lawsuits:

• Millions of dollars were used to fund the movie The Wolf of Wall Street starring Leonardo DiCaprio. Funds were also used to invest in Dumb and Dumber To and Daddy’s Home.
• Millions of dollars were spent to purchase collectibles, from movie posters to famous works of art. Some of the art was given to other individuals. Leonardo DiCaprio received “a $3.2 million Picasso painting and a $9 million Jean-Michael Basquiat collage.”[iii]
• $50 million was used to purchase the Walker Tower Penthouse 1, which “set a record for the most expensive apartment ever sold in downtown Manhattan.”[iv] (This is not the same penthouse that was used in The Wolf of Wall Street scene when they held a man over the balcony by his legs and threatened to drop him. Prior to the film’s theatrical release, the penthouse from the movie was listed for a measly $6.5 million.)[v]
• $31 million was used to purchase a Beverly Hills mansion. Click this link to watch a video about the property’s design and amenities.
• More than $250 million was spent to purchase the Equanimity—a 300-foot luxury mega-yacht. Click this link to watch a video of the vessel at port. Just in case you are wondering, this yacht is over twice the size of the 145-foot yacht that sunk off the Italian coast in The Wolf of Wall Street

These are only a few of the assets that were purchased with the billions of dollars diverted from the Malaysian government. This was a spending spree of epic proportion that involved multiple individuals and entities.

The lawsuits related to this scheme contain details about how the money flowed from one entity to another. From these details, we can learn how shell companies are used and the role financial institutions and law firms play in orchestrating these transactions. For example, the government describes how 1MDB officers diverted the first $700 million from 1MDB, including details about the actual communications (phone conversations and emails) between the 1MDB officers and bank employees. The filings have many more examples of how funds were diverted and used. Financial institutions should be aware of their responsibilities to perform customer due diligence, which is often referred to as “know your customer” and is usually part of a financial institution’s anti-money laundering programs. We can all develop procedures to mitigate the risk of someone using our organization to launder money.

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[i] https://www.justice.gov/opa/press-release/file/973671/download, p. 7.

[ii] Id.

[iii] https://news.artnet.com/art-world/leonardo-dicaprio-gives-pack-jho-low-picasso-basquiat-996377

[iv] https://ny.curbed.com/2016/3/17/11253650/walker-tower-penthouse-price-cut

[v] http://www.nydailynews.com/life-style/real-estate/