Reported by Jodi Vittori and Lakshmi Kumar

Summary

Sovereign wealth funds (SWFs) have existed for more than a century, typically as state-sponsored financial institutions to manage a country’s budgetary surplus, accrue profit, and protect a country’s wealth for future generations. Yet, for economies of the Organisation of Economic Co-operation and Development (OECD), SWFs only burst into public consciousness in the mid-2000s, when widespread concerns arose that SWFs with large amounts of capital could control strategically important assets and threaten the national security of countries where they deployed their investments.

In the 1990s, SWFs held $500 billion in assets, but by 2020, they had more than $7.5 trillion in assets under management (AUM), equal to about 7 percent of the global AUM of $111.2 trillion. Globally, prior to 2010, there were only fifty-eight SWFs. Today, however, SWFs have become an increasingly fashionable type of state-owned entity to set up, and there are currently 118 operating or prospective SWFs. In the African continent alone, prior to 2000, there were only two SWFs. Since 2000, sixteen new SWFs have been set up.

What is particularly concerning about this dramatic growth is that SWFs have been established not just in countries with strong rule of law and civil liberty protections but also in countries marked by high corruption risks, insecurity, violence, and weak or absent rule of law. The chapters that follow include case studies of SWFs from Africa, Asia, Europe, and the Middle East to demonstrate that there are systemic governance issues and regulatory gaps that can enable SWFs to act as conduits of corruption, money laundering, and other illicit activities. This compilation also provides a compelling narrative that highlights the need for clear policies on the management of SWFs, lending weight to the recommendations included in the closing chapter. For SWFs to achieve their full potential, this compilation urges reform not only at the institutional level of the SWF but also across the variety of entities and jurisdictions that make up the supply chain of SWF activity.

The Model Nexus of SWFs and Corruption: 1MDB

Corruption in Malaysia’s 1MDB sovereign fund led to what the July 2016 original U.S. Department of Justice (DOJ) indictment called the “largest kleptocracy case to date.”¹ That indictment noted, “As alleged in the complaints, the members of the conspiracy—which included officials at 1MDB, their relatives and other associates—allegedly diverted more than $3.5 billion in 1MDB funds. Using fraudulent documents and representations, the co-conspirators allegedly laundered the funds through a series of complex transactions and fraudulent shell companies with bank accounts located in Singapore, Switzerland, Luxembourg and the United States.”²

The final tally of diverted funds ultimately came to $4.5 billion. Per the same DOJ indictment, the laundered assets of 1MDB “included high-end real estate and hotel properties in New York and Los Angeles, a $35 million jet aircraft, works of art by Vincent Van Gogh and Claude Monet, an interest in the music publishing rights of EMI Music and the production of the 2013 film The Wolf of Wall Street.”³Over $1 billion went into then Malaysian prime minister Najib Razak’s personal bank accounts alone. 

Chapter 3 provides a comprehensive look at what happened to the Malaysian 1MDB fund between 2009 and 2015 to provide the reader a better understanding of how sovereign wealth funds can be used for gross corruption. It examines how Najib Razak, his proxy Jho Low, advisers from Goldman Sachs bank, and other willing professionals exploited overcentralized power, weak governance, and poor accountability over Malaysian public funds to steal billions for themselves and their collaborators. It also describes how, to increase its influence in Malaysia, the Chinese government was able to use Najib Razak’s need to resolve the scandal and fund his reelection bid. The corruption was likewise exploited by other foreign actors, including royal figures and businessmen in the Persian Gulf to siphon billions for themselves in return for providing cover. The 1MDB case thus provides a useful foundation for making sense of the other cases in this compilation, and it underlines the transparency and accountability reforms required to minimize similar future abuse of citizens’ financial security by their elites.

Read full report: https://carnegieendowment.org/research/2024/06/sovereign-wealth-funds-corruption-illicit-finance-governance-risks?lang=en

Read full case study: https://carnegie-production-assets.s3.amazonaws.com/static/files/Vittori-Kumar-SWF%20(2)-1.pdf