Africa’s stolen assets: Time to turn the screw on the enablers

Every year, an estimated $88.6bn leaves Africa in illicit capital flight. This grand larceny is facilitated by some of the world’s biggest accounting / consulting firms, whose executives know how to remain just within the law. But as the example of Malaysia shows, it is possible to bring those involved to book and recover stolen national assets. Africa should follow suit, argues Katherine Mulhern.

Illicit financial flows and the power of the advisor-enablers

African governments, which might not be truly anti-corruption minded, and advisors who facilitate corrupt practices and illicit financial flows (IFFs) to offshore centres, should take heed of the recent news from Malaysia. 

The government has announced that it has filed 22 civil suits to recover more than $23bn in assets from people and institutions that were allegedly caught up in stealing from the now-defunct 1MDB, the country’s sovereign wealth fund.

This is a problem of magnitude for Africa. Every year, an estimated $88.6bn, equivalent to 3.7% of Africa’s GDP, leaves the continent in illicit capital flight, according to UNCTAD’s Economic Development in Africa Report 2020.

For this reason, annually, Africa is a net exporter of capital. Illicit outflows exceed inflows of official development assistance, valued at $48bn, and yearly foreign direct investment, $54bn, received by African countries – the average for 2013 to 2015.

In understanding the problems of corruption in Malaysia we can seek to solve the current issues in Africa.

Malaysia’s 2018 general election proved to be a watershed moment for the Southeast Asian country. First, it represented defeat at the polls for a scion of one of the country’s leading political families – the then-Prime Minister, Najib Razak, lost to the veteran, Mahathir Mohamad, who had been a mentor to Najib. 

Mahathir’s victory was significant for two reasons. First, it represented defeat at the polls for the Barisan Nasional coalition, which had ruled the country since 1957, when Malaysia gained its independence from the British. Second, it ushered in an investigation into allegations of corruption against Najib, the consequences of which have had global repercussions.

Not long after assuming power, Mahathir’s government ordered a raid of Najib’s properties, resulting in charges against the former Prime Minister that included criminal breach of trust, money laundering and abuse of power.

He was found guilty of a number of charges of corruption, all in connection with his dealings with the country’s 1Malaysia Development Berhad (1MDB), the sovereign wealth fund established in 2009, the year when he came to power. Malaysian and American authorities claimed that $4.5bn was siphoned from the fund.

Goldman Sachs in the dock

So, what does Goldman Sachs have to do with the 1MDB scandal? Quite a lot, as it turns out. The bank was investigated by regulators in more than a dozen countries for its work in underwriting 1MDB bond issues, which garnered the bank hefty fees.

Individual bankers at Goldman Sachs were handsomely rewarded with large bonuses. Goldman has stated that former Malaysian government officials lied about how money from the bond sales would be used. 

The US Department of Justice found that the investment bank had run foul of the US Foreign Corrupt Practices Act (FCPA). Similar to the UK Bribery Act, the FCPA makes it illegal for American companies to take “facilitation payments” from foreign government officials who provide help in securing or maintaining business. 

Goldman also faced claims from Malaysian prosecutors that investors were misled about the bond sales. Legal action did not end there, as two former Goldman bankers with links to the 1MDB debacle, were criminally charged.

In the end, the Malaysian unit of Goldman pleaded guilty to breaking the FCPA rules. In October 2020, Goldman Sachs Inc. reached a deal to resolve the investigation of its actions in Malaysia’s 1MDB corruption scandal. The bank was fined a total of $2.9bn in penalties, payable to both the American Securities and Exchange Commission and the Malaysian government. For his part, the former Prime Minister received a 12-year prison sentence resulting from the money he diverted from 1MDB.

The US Department of Justice provided support to the Malaysian government in recovering almost $1.1bn in assets connected to 1MDB.  In May of this year, the Government of Malaysia filed 22 civil suits to recover more than $23bn in assets from people and institutions that were allegedly caught up in stealing from 1MDB.

According to Reuters, the government is seeking to recover $800m from J.P. Morgan (Switzerland) Ltd, $1.11bn from Deutsche Bank (Malaysia) BhD, and $1.03bn from a unit of Coutts – in addition to interest payments from all these firms.   

Role of advisor-enablers

The Goldman scandal – along with others involving various global consultancies and accounting firms – has brought into focus the role of  advisor-enablers and their interactions with governments, especially in developing countries. 

These institutions undertake a range of activities, from setting up bank accounts for governments to advising them on consultancy contracts, from creating tax structures to underwriting bond sales. 

Criminal authorities globally have struggled to bring enforcement actions against state actors that steal from their own people. Although regulatory and anti-money laundering regimes have helped in certain instances, clever advisors are constantly finding ways to circumvent legal and regulatory frameworks, while remaining within the boundaries of what is technically legal.

At issue is a key question: how can major auditing and advisory firms and financial institutions be made more accountable? They are very careful to always act within the letter of the law, but their actions raise questions about their business practices, whether there could be conflicts of interest, and the extent to which some actions could be viewed as violating the spirit, if not the letter of the law. 

Although regulatory and anti-money laundering regimes have helped in certain instances, loopholes remain.

For example, the UK’s competition regulator, the Competition and Markets Authority (CMA), proposed that the ‘Big Four’ accountancy firms’ auditing divisions function more independently from their consulting and tax services; the recommendations did not call for their break-up.

The report and proposals came on the heels of a number of scandals that rocked various accounting firms. Government actions to follow up have, in the view of some, not gone far enough. 

While reform is necessary, concurrently there should be enforcement claims, such as the ones launched by the Malaysian government. Many argue that as well as the principals, their agents, consultancy firms and financial institutions should be pursued for the recovery of stolen assets. Corrupt leaders and other influential figures have been and are pursued to recover desperately needed public resources. 

It is clear that those who have gained from corruption need help in carrying out the theft of their ill-gotten gains and, importantly, in squirrelling them away in overseas jurisdictions, often using ‘legal’ structures.  

It is also clear that world-class experts within advisory firms should often be able to identify corrupt transactions being conducted by the principals behind the corruption. So why should they not be subject to enforcement actions? 

The short answer is that they should be. Benefits would include helping to clean up large-scale financial transactions, keeping large amounts of money onshore and in national coffers so that countries benefit, and reducing the opportunity for political elites to steal with both ease and impunity. Pursuing advisor-enablers, where appropriate, would serve as an important deterrent to grand corruption.

Working to return assets

 Large-scale civil enforcement and asset return provides an effective tool to enforce against these advisors. Restitution, the organisation I run, reviews claims portfolios, which include both assets stolen by bad actors, and related cases against their advisor-enablers.

We work with governments across different jurisdictions to return assets hidden in opaque structures to their country of origin and ensure that these returned funds are used productively and in a clean fashion.

 But it can take years and can be a complex process fraught with deliberate mechanisms put in place to make it difficult to track and to apply. Hence the need to make it harder at source, and put in place the necessary disincentives for potential bad actors. 

 In the context of Restitution, which would develop multiple claims portfolios in multiple jurisdictions, the possibility of targeting advisor-enablers creates additional leverage against the bad actor defendants to drive significant settlements. 

 The threat of these types of claims across multiple jurisdictions means that advisor-enablers will be motivated to settle and, importantly, in the medium term, to pay careful attention to the actions flowing from their services.

For consultancy firms that are publicly owned and report to investors in particular, the reputational and economic damage a large settlement can cause would be enough to change the approach of some.

As a result, this will help not only to return state patrimony to African countries but in creating incentives for global financial centres to be cleaner. 

Katherine Mulhern is the CEO of Restitution, which is dedicated to assisting clean, democratic governments in their fight against corruption by providing funding and support for civil enforcement and asset recovery.