1MDB scandal

Background of 1MDB

1MDB was a Malaysian state investment fund set up in 2009 by then-Prime Minister Najib Razak
with the purpose of promoting economic development through global partnerships and foreign
direct investment. The fund was intended to attract foreign investments and initiate projects to
drive economic growth in Malaysia.

Key Events and Allegations

1. Formation and Early Investments:

o Initially, 1MDB raised funds through bond issues and investments, including joint
ventures and real estate projects. The fund's operations and financial practices
soon came under scrutiny due to lack of transparency and mounting debt.

2. Suspicious Transactions and Money Laundering:

o Investigations revealed that billions of dollars were diverted from 1MDB to

personal accounts and shell companies. These funds were used to purchase
luxury real estate, artworks, and other high-value assets. It was reported that
approximately $4.5 billion was misappropriated from 1MDB.

3. Involvement of High-Profile Figures:

o The scandal involved several high-profile individuals, including Malaysian Prime

Minister Najib Razak, financier Jho Low, and various officials and bankers. Najib
was accused of diverting $700 million into his personal bank accounts.

4. Global Investigations:

o The scandal triggered investigations in multiple countries, including the United

States, Switzerland, Singapore, and others. The U.S. Department of Justice (DOJ)
launched a civil forfeiture case, seeking to recover more than $1 billion in assets
linked to the misappropriated 1MDB funds.

5. Legal and Political Repercussions:

o In Malaysia, the scandal led to widespread public outrage and political upheaval.
In the 2018 general elections, Najib's ruling party was defeated, and he was
subsequently arrested and charged with corruption, abuse of power, and money
laundering related to the 1MDB scandal.

o In July 2020, Najib was found guilty on seven charges related to the 1MDB scandal
and sentenced to 12 years in prison.
Corporate Governance and Risk Management Failures

The 1MDB scandal exposed significant failures in corporate governance and risk management:

• Lack of Oversight: There was inadequate oversight by the board of directors and other
regulatory bodies, allowing unchecked financial transactions.

• Weak Internal Controls: Internal controls were insufficient to prevent fraudulent

activities and the misappropriation of funds.

• Conflict of Interest: Key figures involved in the scandal, including the Prime Minister,
had significant influence over the fund's operations, leading to conflicts of interest and
lack of accountability.

• Transparency Issues: The operations and financial dealings of 1MDB were shrouded in
secrecy, making it difficult to detect and prevent fraud.
 Sime Darby Berhad - Corporate Governance and Risk Management
Failures

Background of Sime Darby Berhad

Sime Darby Berhad is a diversified multinational involved in sectors such as plantations,

property, industrial equipment, motors, and logistics. Established in 1910, it grew to become
one of the largest companies in Malaysia and a key player in the country's economic
development.

Key Events Leading to Governance and Risk Management Failures

1. Expansion and Diversification:

o During the 2000s, Sime Darby undertook aggressive expansion and

diversification, particularly in its energy and utilities division, which included
large engineering projects such as the Bakun Dam project in Sarawak, Malaysia,
and the Maersk Oil Qatar (MOQ) project.

2. Project Mismanagement:

o The company faced significant project mismanagement issues, particularly in its

energy and utilities division. Projects were delayed, costs overran, and there
were contractual disputes, leading to substantial financial losses.

3. Financial Losses:

o In 2010, Sime Darby announced that it had incurred a total of RM2.1 billion
(approximately USD 526 million) in losses due to cost overruns and delays in its
key projects. This disclosure shocked the market and raised concerns about the
company's governance and risk management practices.

Corporate Governance Failures

1. Board Oversight:

o The board of directors was criticized for failing to provide adequate oversight of
the company's operations, especially the risky ventures in the energy and
utilities sector. There were concerns about the lack of effective monitoring and
control mechanisms at the board level.

2. Internal Controls:

o The internal control systems were found to be weak, which allowed for the
mismanagement of projects and the accumulation of significant losses. There
was inadequate risk assessment and monitoring of ongoing projects.

3. Transparency and Reporting:

o Transparency issues emerged, with delayed reporting of the financial difficulties

and project overruns. This lack of timely and transparent communication
hindered the board’s and stakeholders’ ability to respond effectively to emerging
risks.
 4. Management Accountability:

o Key executives and managers responsible for the troubled projects were not held
accountable in a timely manner, exacerbating the financial impact on the
company. It was only after the losses became public that the company took
corrective actions.

Risk Management Failures

1. Risk Assessment and Management:

o The company failed to adequately assess and manage the risks associated with
its large-scale projects. The energy and utilities projects were particularly
complex and high-risk, but the company did not have sufficient risk mitigation
strategies in place.

2. Project Management Practices:

o There were significant deficiencies in project management practices, including

poor planning, inadequate risk analysis, and lack of contingency planning. These
shortcomings led to project delays and cost overruns.

3. Crisis Management:

o The response to the emerging financial crisis was slow and ineffective. The
company did not have robust crisis management protocols to address and
mitigate the impact of project failures and financial losses.

Reforms and Restructuring

1. Leadership Changes:

o Following the financial debacle, Sime Darby underwent leadership changes,

including the resignation of the Group Chief Executive. New leadership was
brought in to steer the company through its restructuring phase.

2. Strengthening Governance:

o The company took steps to strengthen its corporate governance framework,

including improving board oversight and enhancing the role of the audit and risk
committees.

3. Improving Risk Management:

o Sime Darby implemented more rigorous risk management practices, including

better risk assessment processes, enhanced internal controls, and stricter
project management protocols.

4. Restructuring Operations:

o The company restructured its operations to focus on its core competencies and
divested non-core and underperforming assets. This strategic refocus was
aimed at stabilizing the company's financial position and improving operational
efficiency.
 Transmile Group Berhad - Financial Misreporting

Background of Transmile Group Berhad

Transmile Group Berhad was established in 1993 and quickly grew to become a significant
player in the air cargo industry, providing air freight transportation services across Asia. The
company was listed on Bursa Malaysia, the Malaysian stock exchange, and attracted significant
investor interest due to its rapid growth and expansion.

Key Events Leading to the Scandal

1. Rapid Expansion:

o Transmile expanded rapidly, reporting strong revenue growth and profitability.

The company entered into various contracts and acquisitions, increasing its
market presence and operational scope.

2. Financial Misreporting:

o Between 2004 and 2006, Transmile's management engaged in financial

misreporting, inflating the company’s revenue and profits. It was later
discovered that the company had overstated its revenue by RM530 million
(approximately USD 150 million) and its profits by RM389 million (approximately
USD 110 million).

3. Discovery and Disclosure:

o In 2007, an audit by the newly appointed auditors, Deloitte, revealed

discrepancies in Transmile's financial statements. The auditors found
irregularities in revenue recognition and questioned the authenticity of certain
sales transactions.

o Following the audit, Transmile's board of directors launched an internal

investigation, leading to the disclosure of financial misstatements.

Corporate Governance Failures

1. Lack of Oversight:

o The board of directors and audit committee failed to exercise adequate oversight
over the company’s financial reporting processes. There were lapses in
monitoring and controlling the actions of senior management.

2. Internal Controls:

o Internal controls were insufficient to prevent or detect fraudulent activities. The

company lacked robust systems to ensure accurate financial reporting and
compliance with accounting standards.
 3. Management Accountability:

o Senior executives, including the CEO and CFO, were implicated in the financial
misreporting. There was a lack of accountability at the top management level,
which facilitated the continuation of fraudulent practices.

4. Auditor’s Role:

o Prior to Deloitte's involvement, the previous auditors failed to detect the

irregularities, raising concerns about the effectiveness of external audits in
identifying fraud and misreporting.

Risk Management Failures

1. Revenue Recognition:

o Transmile manipulated revenue recognition policies, booking sales that did not
occur or were not finalized. This practice significantly distorted the company’s
financial health and performance metrics.

2. False Invoicing:

o The company created false invoices and sales documents to support the
inflated revenue figures. These fraudulent documents were used to mislead
auditors and investors.

3. Operational Risks:

o The company did not adequately assess and manage operational risks
associated with its expansion and revenue generation processes. This lack of
risk management contributed to the perpetuation of fraudulent activities.

Impact and Consequences

1. Financial Impact:

o Following the disclosure of the scandal, Transmile's share price plummeted,

eroding shareholder value. The company faced significant financial losses and
struggled with liquidity issues.

2. Legal Actions:

o Regulatory authorities, including the Securities Commission of Malaysia,

initiated investigations into the scandal. Senior executives were charged with
various offenses, including fraud and false accounting.

o The CEO and other key executives were prosecuted, leading to convictions and
substantial fines.
3. Reputation Damage:

o The scandal severely damaged Transmile's reputation, leading to a loss of trust

among investors, customers, and business partners. The company struggled to
recover from the reputational fallout.

4. Corporate Reforms:

o In response to the scandal, there were calls for stronger corporate governance
reforms in Malaysia. Regulatory bodies introduced stricter guidelines and
standards for financial reporting and corporate governance to prevent similar
occurrences.
 Malaysia Airlines Berhad (MAB)
Flight MH370 Disappearance & Flight MH17 Tragedy

Financial and Operational Struggles

Pre-existing Issues:

• Before the tragedies, Malaysia Airlines had already been grappling with financial
difficulties. The airline faced stiff competition, high operational costs, and overcapacity
in the market. Losses were mounting, and there were ongoing efforts to restructure and
stabilize the company.

Post-Tragedy Financial Crisis:

• The dual tragedies of MH370 and MH17 accelerated the financial decline of Malaysia
Airlines. Passenger numbers plummeted, and the airline incurred substantial financial
losses. The brand’s reputation suffered significantly, and the company struggled to regain
consumer trust.

Corporate Governance and Risk Management Failures

Crisis Management:

• The response to the MH370 disappearance highlighted deficiencies in crisis management

and communication. There was criticism regarding the delayed and often confusing
information provided to families and the public, underscoring the need for better crisis
communication protocols.

Operational Risk Management:

• The downing of MH17 exposed gaps in the airline's risk assessment and route
management, particularly regarding flights over conflict zones. This incident underscored
the importance of robust risk assessment procedures and real-time threat monitoring.

Restructuring and Recovery Efforts

Khazanah Nasional’s Intervention:

• In response to the crises, Khazanah Nasional, Malaysia’s sovereign wealth fund and the
majority shareholder of Malaysia Airlines, initiated a major restructuring plan in 2014. The
plan aimed to turn around the airline’s fortunes and restore its financial health.

Key Elements of the Restructuring Plan:

1. Privatization:

o Malaysia Airlines was delisted from the stock exchange and became a wholly-
owned subsidiary of Khazanah Nasional to facilitate a more flexible and focused
restructuring process.

2. Leadership Changes:
 o Christoph Mueller, a turnaround specialist, was appointed as the CEO to lead the
restructuring efforts. He implemented several strategic changes aimed at
revitalizing the airline.

3. Operational Overhaul:

o The restructuring plan involved cutting unprofitable routes, reducing workforce

size, and renegotiating contracts to lower operational costs. The focus was on
creating a leaner, more efficient operation.

4. Rebranding and Service Improvement:

o Malaysia Airlines undertook a rebranding effort to rebuild its image and regain
passenger trust. This included improving customer service, enhancing safety
protocols, and modernizing the fleet.

5. New Business Strategy:

o The airline adopted a new business strategy focused on profitability and

sustainability, including partnerships with other airlines, cost optimization, and
exploring new revenue streams.